-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQwPh2I9usMS0pu3Yq4oeZKw/RHGHmSx9doDeTgrYYw/RvwAm7WhO6wIbrZBijWB oqRgJ18aC9cpPLLTbSLH8Q== 0000071304-98-000025.txt : 19980817 0000071304-98-000025.hdr.sgml : 19980817 ACCESSION NUMBER: 0000071304-98-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBRIDGE ELECTRIC LIGHT CO CENTRAL INDEX KEY: 0000016573 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041144610 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-07909 FILM NUMBER: 98688414 BUSINESS ADDRESS: STREET 1: ONE MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6172254000 MAIL ADDRESS: STREET 1: P O BOX 9150 CITY: CAMBRIDGE STATE: MA ZIP: 02142-9150 10-Q 1 CAMBRIDGE ELECTRIC LIGHT COMPANY FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549-1004 Form 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 2-7909 CAMBRIDGE ELECTRIC LIGHT COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1144610 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Main Street, Cambridge, Massachusetts 02142-9150 (Address of principal executive offices) (Zip Code) (617) 225-4000 (Registrant's telephone number, including area code) (Former name, address and fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ x ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock August 1, 1998 Common Stock, $25 par value 346,600 shares The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this Form with the reduced disclosure format. PART I - FINANCIAL INFORMATION Item 1. Financial Statements CAMBRIDGE ELECTRIC LIGHT COMPANY CONDENSED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 ASSETS (Dollars in thousands) June 30, December 31, 1998 1997 (Unaudited) PROPERTY, PLANT AND EQUIPMENT, at original cost $165,546 $163,914 Less - Accumulated depreciation 68,356 63,706 97,190 100,208 Add - Construction work in progress 2,244 757 99,434 100,965 INVESTMENTS Equity in nuclear electric power companies 10,375 9,849 Other 5 5 10,380 9,854 CURRENT ASSETS Cash 468 521 Accounts receivable Affiliates 2,829 2,743 Customers 12,051 12,483 Unbilled revenues 1,085 3,047 Prepaid taxes - Income 746 1,192 Property - 1,697 Inventories and other 2,122 1,977 19,301 23,660 DEFERRED CHARGES Regulatory assets 72,126 70,466 Other 3,165 2,176 75,291 72,642 $204,406 $207,121 See accompanying notes. CAMBRIDGE ELECTRIC LIGHT COMPANY CONDENSED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 CAPITALIZATION AND LIABILITIES (Dollars in thousands) June 30, December 31, 1998 1997 (Unaudited) CAPITALIZATION Common Equity - Common stock, $25 par value - Authorized and outstanding - 346,600 shares, wholly-owned by Commonwealth Energy System (Parent) $ 8,665 $ 8,665 Amounts paid in excess of par value 27,953 27,953 Retained earnings 12,372 11,607 48,990 48,225 Long-term debt, including premiums, less maturing debt and current sinking fund requirements 7,302 17,402 56,292 65,627 CURRENT LIABILITIES Interim Financing - Notes payable to banks 29,750 19,000 Advances from affiliates 1,535 11,290 Maturing long-term debt 10,000 - 41,285 30,290 Other Current Liabilities - Current sinking fund requirements 100 100 Accounts payable Affiliates 3,921 4,144 Other 7,545 8,076 Accrued local property and other taxes 22 1,706 Accrued interest 430 460 Other 6,465 3,830 18,483 18,316 59,768 48,606 DEFERRED CREDITS Accumulated deferred income taxes 15,399 15,135 Purchased power contracts 61,695 66,223 Unamortized investment tax credits and other 11,252 11,530 88,346 92,888 COMMITMENTS AND CONTINGENCIES $204,406 $207,121 See accompanying notes. CAMBRIDGE ELECTRIC LIGHT COMPANY CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Dollars in thousands) (Unaudited) Three Months Ended Six Months Ended 1998 1997 1998 1997 ELECTRIC OPERATING REVENUES $27,155 $30,048 $54,726 $63,113 OPERATING EXPENSES Electricity purchased for resale, transmission and fuel 15,755 19,655 30,781 42,862 Other operation and maintenance 6,272 8,548 11,400 14,611 Depreciation 2,129 1,119 3,630 2,238 Taxes - Income 940 (283) 2,781 136 Local property 760 757 1,525 1,534 Payroll and other 181 202 384 464 26,037 29,998 50,501 61,845 OPERATING INCOME 1,118 50 4,225 1,268 OTHER INCOME 344 587 749 1,025 INCOME BEFORE INTEREST CHARGES 1,462 637 4,974 2,293 INTEREST CHARGES Long-term debt 361 407 722 837 Other interest charges 446 477 888 854 807 884 1,610 1,691 NET INCOME 655 (247) 3,364 602 RETAINED EARNINGS - Beginning of period 14,316 10,082 11,607 9,233 Dividends on common stock (2,599) (589) (2,599) (589) RETAINED EARNINGS - End of period $12,372 $ 9,246 $12,372 $ 9,246 See accompanying notes. CAMBRIDGE ELECTRIC LIGHT COMPANY CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Dollars in thousands) (Unaudited) 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,364 $ 602 Effects of noncash items - Depreciation and amortization 3,882 2,238 Deferred income taxes and investment tax credits, net 392 (808) Earnings from corporate joint ventures (564) (644) Dividends from corporate joint ventures 38 91 Change in working capital, exclusive of cash and interim financing 4,473 (1,164) Transition costs deferral (6,322) - All other operating items 161 (180) Net cash provided by operating activities 5,424 135 CASH FLOWS FOR INVESTING ACTIVITIES Additions to property, plant and equipment (3,773) (1,886) CASH FLOWS FROM FINANCING ACTIVITIES Payment of dividends (2,599) (589) Proceeds from short-term borrowings 10,750 8,875 Payments to affiliates (9,755) (2,200) Long-term debt issue refunded - (4,260) Sinking funds payments (100) (100) Net cash provided by (used for) financing activities (1,704) 1,726 Net decrease in cash (53) (25) Cash at beginning of period 521 143 Cash at end of period $ 468 $ 118 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 1,552 $ 1,738 Income taxes $ 1,277 $ 883 See accompanying notes. CAMBRIDGE ELECTRIC LIGHT COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (1) General Information Cambridge Electric Light Company (the Company) is a wholly-owned subsid- iary of Commonwealth Energy System. The parent company is referred to in this report as the "System" and together with its subsidiaries is collec- tively referred to as "the system." The System is an exempt public utility holding company under the provisions of the Public Utility Holding Company Act of 1935 and, in addition to its investment in the Company, has interests in other utility and several nonregulated companies. The Company has 146 regular employees including 110 (75%) represented by a collective bargaining unit. Upon expiration of the existing collective bargaining agreement on September 1, 1998, a new agreement, which has already been ratified, will become effective through March 1, 2001. Employee relations have generally been satisfactory. On May 27, 1998, the System announced that three of its subsidiary companies (Commonwealth Electric Company, Canal Electric Company and the Company) have selected affiliates of Southern Energy New England, L.L.C., an affiliate of The Southern Company, to buy substantially all of their non- nuclear electric generating assets in conjunction with electric industry restructuring in Massachusetts. (2) Significant Accounting Policies (a) Principles of Accounting The Company's significant accounting policies are described in Note 2 of Notes to Financial Statements included in its 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows these same basic accounting policies but considers each interim period as an integral part of an annual period and makes allocations of certain expenses to interim periods based upon estimates of such expenses for the year. The unaudited financial statements for the periods ended June 30, 1998 and 1997 reflect, in the opinion of the Company, all adjustments (consisting of only normal recurring accruals, except for a one-time charge recorded in June 1997 as described in Management's Discussion and Analysis of Results of Operations)necessary to summarize fairly the results for such periods. In addition, certain prior period amounts are reclassified from time to time to conform with the presentation used in the current period's financial statements. Income tax expense is recorded using the statutory rates in effect applied to book income subject to tax recorded in the interim period. The results for interim periods are not necessarily indicative of results for the entire year because of seasonal variations in the consump- tion of energy. CAMBRIDGE ELECTRIC LIGHT COMPANY (b) Regulatory Assets and Liabilities The Company is regulated as to rates, accounting and other matters by various authorities including the Federal Energy Regulatory Commission (FERC) and the Massachusetts Department of Telecommunications and Energy (DTE). Based on the current regulatory framework, the Company accounts for the economic effects of regulation in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." The Company has established various regulatory assets in cases where the DTE and/or the FERC have permitted or are expected to permit recovery of specific costs over time. Similarly, the regulatory liabilities established by the Company are required to be refunded to customers over time. In the event the criteria for applying SFAS No. 71 are no longer met, the accounting impact would be an extraordinary, noncash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS No. 71 include: 1) increasing competition that restricts the Company's ability to establish prices to recover specific costs, and 2) a significant change in the current manner in which rates are set by regulators from cost-based regulation to another form of regulation. These criteria are reviewed on a regular basis to ensure the continuing application of SFAS No. 71 is appropriate. Based on the current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its regulatory assets including those related to generation, are probable of future recovery. As a result of electric industry restructuring, the Company discontinued application of accounting principles applied to its investment in electric generation facilities effective March 1, 1998. The Company will not be required to write off any of its generation-related assets, including regulatory assets. These assets will be retained on the Company's Balance Sheets because the legislation and DTE's plan for the restructured electric industry specifically provide for their recovery through a non-bypassable transition charge. The principal regulatory assets included in deferred charges were as follows: June 30, December 31, 1998 1997 (Dollars in thousands) Maine Yankee unrecovered plant and decommissioning costs $32,595 $34,908 Connecticut Yankee unrecovered plant and decommissioning costs 26,839 28,566 Yankee Atomic unrecovered plant and decommissioning costs 2,261 2,749 Postretirement benefits costs 3,414 3,596 Transition costs 6,329 - Other 688 647 $72,126 $70,466 The regulatory liabilities, reflected in the accompanying Balance Sheets and related to deferred income taxes, were $2.9 million and $3 million at CAMBRIDGE ELECTRIC LIGHT COMPANY June 30, 1998 and December 31, 1997, respectively. In November 1997, the Commonwealth of Massachusetts enacted a comprehen- sive electric utility industry restructuring bill. On November 19, 1997, the Company, together with Commonwealth Electric Company (Commonwealth) and Canal Electric Company (Canal), filed a restructuring plan with the DTE. The plan, approved by the DTE on February 27, 1998, provides that the Company and Commonwealth, beginning March 1, 1998, initiate a ten percent rate reduction for all customer classes and allow customers to choose their energy supplier. As part of the plan, the DTE authorized the recovery of certain strandable costs and provides that certain future costs may be deferred to achieve or maintain the rate reductions that the restructuring bill mandates. The legislation gives the DTE the authority to determine the amount of strandable costs that will be eligible for recovery. Costs that will qualify as strandable costs and be eligible for recovery include, but are not limited to, certain above market costs associated with generating facilities, costs associated with long-term commitments to purchase power at above market prices from independent power producers, and regulatory assets and associated liabilities related to the generation portion of the electric business. The cost of transitioning to competition will be mitigated, in part, by the sale of the system's non-nuclear generating assets. The sale is expected to be completed by year-end 1998 pending receipt of the necessary regulatory approvals. The net proceeds from the sale of these assets will be used to mitigate transition costs. The system's ability to recover its transition costs will depend on several factors, including the aggregate amount of transition costs the system will be allowed to recover and the market price of electricity. Management believes that the system will recover its transition costs. A change in any of the above listed factors or in the current legislation could affect the recovery of transition costs and may result in a loss to the system. For additional information relating to industry restructuring, see the "Industry Restructuring" section under Management's Discussion and Analysis of Results of Operations. (2) Commitments and Contingencies (a) Construction Program The Company is engaged in a continuous construction program presently estimated at $24.8 million for the five-year period 1998 through 2002. Of that amount, $7 million is estimated for 1998. As of June 30, 1998 the Company's actual construction expenditures amounted to approximately $3.8 million including an allowance for funds used during construction. The Company expects to finance these expenditures on an interim basis with internally-generated funds and short-term borrowings which are ultimately expected to be repaid with the proceeds from sales of long-term debt securities. The program is subject to periodic review and revision because of factors such as changes in business conditions, rates of customer growth, effects of inflation, maintenance of reliable and safe service, equipment delivery schedules, licensing delays, availability and cost of capital and environmental regulations. CAMBRIDGE ELECTRIC LIGHT COMPANY Item 2. Management's Discussion and Analysis of Results of Operations The following is a discussion of certain significant factors which have affected operating revenues, expenses and net income during the periods included in the accompanying Condensed Statements of Income. This discussion should be read in conjunction with the Notes to Condensed Financial Statements appearing elsewhere in this report. A summary of the period to period changes in the principal items included in the Condensed Statements of Income for the three and six months ended June 30, 1998 and 1997 and unit sales for these periods is shown below: Three Months Six Months Ended June 30, Ended June 30, 1998 and 1997 1998 and 1997 Increase (Decrease) (Dollars in thousands) Electric Operating Revenues $(2,893) (9.6)% $(8,387) (13.3)% Operating Expenses - Electricity purchased for resale, transmission and fuel (3,900) (19.8) (12,081) (28.2) Other operation and maintenance (2,276) (26.6) (3,211) (22.0) Depreciation 1,010 90.3 1,392 62.2 Taxes - Federal and state income 1,223 432.2 2,645 1,944.9 Local property and other (18) (1.9) (89) (4.5) (3,961) (13.2) (11,344) (18.3) Operating Income 1 068 2,136.0 2,957 233.2 Other Income (243) (41.4) (276) (26.9) Income Before Interest Charges 825 129.5 2,681 116.9 Interest Charges (77) (8.7) (81) (4.8) Net Income $ 902 365.2 $ 2,762 458.8 Unit Sales (MWH) Retail 13,222 4.3 18,355 2.9 Wholesale (6,101) (15.2) (29,350) (24.1) Total unit sales 7,121 2.0 (10,995) (1.5) The following is a summary of unit sales for the periods indicated: Unit Sales (MWH) Three Months Six Months Period Ended Total Retail Wholesale Total Retail Wholesale June 30, 1998 357,159 323,209 33,950 736,056 643,513 92,543 June 30, 1997 350,038 309,987 40,051 747,051 625,158 121,893 CAMBRIDGE ELECTRIC LIGHT COMPANY Operating Revenues, Electricity Purchased For Resale, Transmission and Fuel Operating revenues for the first six months of 1998 decreased approximately $8.4 million or 13.3% due to decreases in electricity purchased for resale, fuel ($889,000) and transmission charges ($386,000). The decrease in electricity purchased for resale of $10.8 million reflects lower fuel costs and a $6.3 million deferral of costs in conjunction with the Company's restructuring plan as approved by the Massachusetts Department of Telecommunications and Energy (DTE). The decrease in operating revenues for the current quarter of $2.9 million or 9.6% reflects a $3.5 million deferral. The decrease in operating revenues for both current periods was offset somewhat by increases in retail unit sales. As a result of industry restructuring, the Company has unbundled its rates, provided customers with a ten percent rate reduction as of March 1, 1998 and has afforded customers the opportunity to purchase generation supply in the competitive market consistent with the electric industry restructuring legislation further discussed below. Delivery rates are composed of a customer charge (to collect metering and billing costs), a distribution charge, a transition charge (to collect stranded costs), a transmission charge, an energy conservation charge (to collect costs for demand-side management programs) and a renewable energy charge. Electricity supply services provided by the Company include optional standard offer service and default service. Amounts collected through these various charges will be reconciled to actual expenditures on an on-going basis. The increase in retail sales for both current periods reflects increases in sales to commercial and industrial customers, while for both periods the decrease in wholesale sales was due primarily to a decrease in sales to ISO - New England (formerly the New England Power Pool). Operating Expenses For the current quarter and first half of 1998, operation and maintenance decreased $2.3 million (26.6%) and $3.2 million (22%), respectively, due primarily to the absence of a one-time charge ($2.5 million) related to the personnel reduction program initiated during the second quarter of 1997. Also contributing to the decrease in both the current quarter and first half of 1998 were labor savings realized from the aforementioned personnel reduction program (approximately $400,000 and $450,000, respectively) and lower insurance and benefits costs. Depreciation expense increased reflecting the treatment allowed for production plant pursuant to the electric industry restructuring legislation. The increase in federal and state income taxes was due to a higher level of pretax income. Other Income and Interest Charges The deceases in other income during the current quarter was primarily due to a lower rate of return relative to steam production for an affiliated steam company ($105,000). The decrease in interest charges for the current three and six-month periods reflects lower long-term interest costs ($46,000 and $115,000, respectively) offset, in part, during the six-month period by an increase in short-term interest costs ($53,000) that reflects a higher average level of short-term borrowings. CAMBRIDGE ELECTRIC LIGHT COMPANY Industry Restructuring On November 25, 1997, the Governor of Massachusetts signed into law the Electric Industry Restructuring Act (the Act). This legislation provided, among other things, that customers of retail electric utility companies who take standard offer service receive a 10 percent rate reduction and be allowed to choose their energy supplier, effective March 1, 1998. The Act also provides that utilities be allowed full recovery of transition costs subject to review and an audit process. The rate reduction mandated by the legisla- tion increases to 15 percent effective September 1, 1999 for customers who continue to take standard offer service. It is likely that a statewide referendum will appear on the ballot in November of this year that is seeking to repeal the legislation. Management is unable to predict what the ultimate outcome of this challenge will be. The Company, together with Canal and Commonwealth, filed a comprehensive electric restructuring plan with the DTE in November 1997, that was substantially approved by the DTE in February 1998. The divestiture of the Company's non-nuclear generation assets and the entitlements associated with its purchased power contracts is an integral part of the Company's restructuring plan and is consistent with the Act. While the Company is encouraged with the treatment afforded net non-mitigable transition costs (which, for the Company, are primarily the result of above-market purchased power contracts with non-utility generators) by the legislation and the DTE, the mandated rate reduction has had a significant impact on cash flows of the Company. However, the successful results of the generation auction, as discussed below, could significantly reduce the impact that the rate reductions will have on future cash flows. In March 1997, the Company, together with Canal and Commonwealth, had submitted a report to the DTE that detailed the proposed auction process for selling their electric generation assets and the entitlements associated with purchased power contracts. The auction process provided a market-based approach to maximizing stranded cost mitigation and minimizing the transition costs that retail customers will have to pay for stranded cost recovery. A request for bids from interested parties was issued last August and an Offering Memorandum followed in October. Potential bidders examined all pertinent information related to the generating facilities and purchased power contracts in order to prepare and submit their first round of bids in mid- December. Final binding bids were submitted on May 8, 1998. On May 27, 1998, the System announced that three of its subsidiary companies (Commonwealth, Canal and the Company) had selected affiliates of Southern Energy New England, L.L.C., an affiliate of The Southern Company of Atlanta, Georgia, to buy substantially all of their non-nuclear electric generating assets for approximately $462 million (subject to certain adjustments at closing). These facilities represent 984 megawatts (mw) of electric capacity and have an approximate book value of $79 million. The plants being sold include: Canal Unit 1 (566 mw) and a one-half interest in Canal Unit 2 (282.5 mw) located in Sandwich, MA and owned by Canal Electric; the Kendall Station facility (67 mw) and the adjacent Kendall Jets (46 mw), located in Cambridge, MA and owned by the Company; five diesel generators (13.8 mw) in Oak Bluffs and West Tisbury on the island of Martha's CAMBRIDGE ELECTRIC LIGHT COMPANY Vineyard that are owned by Commonwealth Electric, and a 1.4 percent joint- ownership interest (8.9 mw) in Wyman Unit No. 4 located in Yarmouth, ME, also owned by Commonwealth Electric. The Company continues to evaluate bids related to the purchased power contracts. Also, the Company is evaluating the disposition of the Blackstone Station generating unit (15.3 mw) located in Cambridge, MA which is subject to a right of first offer held by Harvard University on any divestiture of the facility. On July 31, 1998, a formal divestiture filing was submitted to the FERC and the DTE that requests approval of the sale of the Company's generating assets and further proposes (subject to completion of the sale) that the current 10 percent rate reduction increase, effective January 1, 1999, to 15.2 percent. In addition, the Company proposes to increase the retail price of standard offer service, starting January 1, 1999, from the present rate of 2.8 cents per kilowatthour (kwh) to 3.5 cents. At the same time that the price for standard offer service is increased, the transition charge for the Company's customers will decline from 2.73 cents per kwh to 1.56 cents. These proposed changes are intended to further reduce the cost of electricity to customers, to make the market increasingly more attractive for independent power suppliers to sell electricity directly to consumers, and to reduce the Company's cost deferrals associated with the pricing of standard offer service. The required approvals of the sale and rate structure are expected to be received by year-end 1998. Year 2000 The Company has been involved in Year 2000 compliancy since 1996. A complete inventory and review of software, information processing, delivery systems and operational components for certain facilities has been completed, and work continues on computer systems wherever necessary. While some computer systems have already been updated, tested and placed in production, the Company expects to complete the balance of the modifications by mid-1999. Costs associated with Year 2000 compliancy are being expensed as incurred. The total cost of this project is expected to be funded with internally generated funds. Management believes that with appropriate modifications, the Company will be fully compliant regarding all Year 2000 issues and will continue to provide its products and services uninterrupted through the millennium change. Failure to become fully compliant could have a significant impact on the Company's operations. New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts possibly including fixed-price power contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently CAMBRIDGE ELECTRIC LIGHT COMPANY in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and may be implemented as of the beginning of any fiscal quarter after issuance but cannot be applied retroactively. SFAS No. 133 must be applied to derivative instruments and certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 and, at the Company's election, before January 1, 1998. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing of its method of adopting SFAS No. 133. Forward-Looking Statements This discussion contains statements which, to the extent it is not a recitation of historical fact, constitute "forward-looking statements" and is intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. A number of important factors affecting the Company's business and financial results could cause actual results to differ materially from those reflected in the forward-looking statements or projected amounts. Those factors include developments in the legislative, regulatory and competitive environment, certain environmental matters, demands for capital and the availability of cash from various sources. CAMBRIDGE ELECTRIC LIGHT COMPANY PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company was an intervenor in an appeal at the Massachusetts Supreme Judicial Court (SJC) filed by the Massachusetts Institute of Technology (MIT) involving a DTE decision approving a customer transition charge (CTC) for the recovery of stranded investment costs. By its terms, the CTC was terminated on March 1, 1998, coincident with the retail access date established by the Massachusetts Legislature in the Electric Industry Restructuring Act. On September 18, 1997, the SJC remanded the CTC matter to the DTE for further consideration. The SJC stated that, although recovery of prudent and verifiable stranded costs by utility companies is in the public interest and consistent with the Public Utility Regulatory Policies Act, the insufficiencies of the DTE's subsidiary findings precluded the SJC from undertaking a meaningful review of the DTE's calculations that formed the basis of the CTC. The DTE is in the process of determining whether to hear additional evidence in the remand or to rely on the record and pleadings already filed. On January 16, 1998, the Company had submitted to the DTE a customer exit charge rate tariff and sought a finding that the tariff would apply to MIT. On July 23, 1998, the DTE issued a ruling which rejected the form of customer exit charge rate tariff, but opened a new investigation into whether MIT should be required to pay an exit charge, and, if so, what the amount of the exit charge should be. Also, the DTE's investigation includes whether this case should be joined with the remand proceeding currently before the DTE. This issue is discussed more fully in the Company's 1997 Annual Report on Form 10-K. At this time, management is unable to predict the ultimate outcome of this proceeding. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule. Filed herewith as Exhibit 1 is the Financial Data Schedule for the three months ended June 30, 1998. (b) Reports on Form 8-K A report on Form 8-K was filed June 5, 1998 for an event first reported May 27, 1998 regarding the sale of the Company's generating assets. CAMBRIDGE ELECTRIC LIGHT COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAMBRIDGE ELECTRIC LIGHT COMPANY (Registrant) Principal Financial and Accounting Officer: JAMES D. RAPPOLI James D. Rappoli, Financial Vice President and Treasurer Date: August 14, 1998 EX-27 2 FINANCIAL DATA SCHEDULE - JUNE 30, 1998
UT This schedule contains summary financial information extracted from the balance sheet, statement of income and statement of cash flows contained in Form 10-Q of Cambridge Electric Light Company for the six months ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 0000016573 CAMBRIDGE ELECTRIC LIGHT COMPANY 1,000 DEC-31-1998 JUN-30-1998 6-MOS PER-BOOK 99,434 10,380 19,301 75,291 0 204,406 8,665 27,953 12,372 48,990 0 0 7,302 31,285 0 0 10,100 0 0 0 106,729 204,406 54,726 2,781 47,720 50,501 4,225 749 4,974 1,610 3,364 0 3,364 2,599 722 5,424 0 0
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