-----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, LFXn++zy9h4gHlvM40G/vomno6e0A6ALq4wJlSt4QjG9blf2lBvhWn/sKjK3MBKe C/Y6OOTiYQ1IYkkySh44Zg== 0000071304-99-000022.txt : 19990518 0000071304-99-000022.hdr.sgml : 19990518 ACCESSION NUMBER: 0000071304-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626143 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 CAMBRIDGL 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 March 31, 1999 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 May 1, 1999 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 MARCH 31, 1999 AND DECEMBER 31, 1998 ASSETS (Dollars in thousands) March 31, December 31, 1999 1998 (Unaudited) PROPERTY, PLANT AND EQUIPMENT, at original cost $141,381 $140,642 Less - Accumulated depreciation 48,245 47,179 93,136 93,463 Add - Construction work in progress 1,039 937 94,175 94,400 INVESTMENTS Equity in nuclear electric power companies 9,849 9,906 Other 5 5 9,854 9,911 LONG-TERM RECEIVABLE - AFFILIATE 29,837 29,429 CURRENT ASSETS Cash 447 778 Advances to affiliates 18,345 27,450 Accounts receivable - Affiliates 537 1,729 Customers 10,665 10,774 Unbilled revenues 2,951 3,489 Prepaid taxes 858 1,410 Inventories and other 1,140 1,076 34,943 46,706 DEFERRED CHARGES Regulatory assets 65,450 70,372 Other 5,867 6,112 71,317 76,484 $240,126 $256,930 See accompanying notes. CAMBRIDGE ELECTRIC LIGHT COMPANY CONDENSED BALANCE SHEETS MARCH 31, 1999 AND DECEMBER 31, 1998 CAPITALIZATION AND LIABILITIES (Dollars in thousands) March 31, December 31, 1999 1998 (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 11,864 16,182 48,482 52,800 Long-term debt, including premiums, less maturing debt and current sinking fund requirements 7,301 7,301 55,783 60,101 CURRENT LIABILITIES Interim Financing - Maturing long-term debt - 10,000 Other Current Liabilities - Current sinking fund requirements 100 100 Accounts payable - Affiliates 23,448 23,257 Other 8,143 8,328 Other 8,486 9,406 40,177 41,091 40,177 51,091 DEFERRED CREDITS Purchased power contracts 55,685 57,465 Regulatory liabilities 64,785 65,124 Accumulated deferred income taxes 15,718 15,328 Unamortized investment tax credits and other 7,978 7,821 144,166 145,738 COMMITMENTS AND CONTINGENCIES $240,126 $256,930 See accompanying notes. CAMBRIDGE ELECTRIC LIGHT COMPANY CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Dollars in thousands - unaudited) 1999 1998 ELECTRIC OPERATING REVENUES $27,372 $27,571 OPERATING EXPENSES Electricity purchased for resale, transmission and fuel 19,137 15,026 Other operation and maintenance 6,183 5,128 Depreciation 832 1,501 Taxes - Income (149) 1,841 Local property 633 765 Payroll and other 160 203 26,796 24,464 OPERATING INCOME 576 3,107 OTHER INCOME 395 405 INCOME BEFORE INTEREST CHARGES 971 3,512 INTEREST CHARGES Long-term debt 292 361 Other interest charges 751 442 1,043 803 NET INCOME (LOSS) (72) 2,709 RETAINED EARNINGS - Beginning of period 16,182 11,607 Dividends on common stock (4,246) - End of period $11,864 $14,316 See accompanying notes. CAMBRIDGE ELECTRIC LIGHT COMPANY CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Dollars in thousands - unaudited) 1999 1998 OPERATING ACTIVITIES Net income (loss) $ (72) $ 2,709 Effects of noncash items - Depreciation and amortization 785 1,501 Deferred income taxes and investment tax credits, net 83 120 Earnings from corporate joint ventures (184) (306) Dividends from corporate joint ventures 241 - Change in working capital, exclusive of cash, advances to affiliates and interim financing 1,413 (460) Transition costs deferral 3,755 (2,780) All other operating items (152) 1,187 Net cash provided by operating activities 5,869 1,971 INVESTING ACTIVITIES Payments from affiliates 9,105 - Additions to property, plant and equipment (inclusive of AFUDC) (1,059) (981) Net cash provided by (used for) investing activities 8,046 (981) FINANCING ACTIVITIES Payment of dividends (4,246) - Retirement of long-term debt (10,000) - Proceeds from short-term borrowings - 6,225 Payments to affiliates - (7,220) Net cash used for financing activities (14,246) (995) Net decrease in cash (331) (5) Cash at beginning of period 778 521 Cash at end of period $ 447 $ 516 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 610 $ 1,038 Income taxes $ 379 $ 895 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). The Parent, together with its subsidiaries, is collectively referred to as "COM/Energy." The Parent 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. In December 1998, the Parent signed an Agreement and Plan of Merger with BEC Energy, the parent company of Boston Edison Company, that will create an energy delivery company, that includes the Company, serving approximately 1.3 million customers located entirely within Massachusetts including more than one million electric customers in 81 communities and 240,000 gas customers in 51 communities. The Company has 101 regular employees including 75 (74%) represented by a collective bargaining unit with a contract that expires on March 1, 2001. Employee relations have generally been satisfactory. In response to the significant changes that have taken place in the utility industry, the Company sold substantially all of its generating assets in 1998 to focus on the transmission and distribution of energy and related services (see Note 2(c)). (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 1998 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 March 31, 1999 and 1998 reflect, in the opinion of the Company, all adjustments (consisting of only normal recurring accruals) 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. (b) Regulatory Assets and Liabilities The Company is regulated as to rates, accounting and other matters by CAMBRIDGE ELECTRIC LIGHT COMPANY 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 a 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: March 31, December 31, 1999 1998 (Dollars in thousands) Maine Yankee unrecovered plant and decommissioning costs $30,004 $30,646 Connecticut Yankee unrecovered plant and decommissioning costs 24,291 25,185 Yankee Atomic unrecovered plant and decommissioning costs 1,389 1,634 Transition costs 5,828 9,149 Postretirement benefits costs 3,224 3,120 Other 714 638 $65,450 $70,372 CAMBRIDGE ELECTRIC LIGHT COMPANY The regulatory liabilities, reflected in the accompanying Condensed Balance Sheets, were as follows: March 31, December 31, 1999 1998 (Dollars in thousands) Regulatory liability related to sale of generating assets $60,303 $61,040 Deferred income taxes 2,374 2,402 Demand-side management deferral 2,108 1,682 $64,785 $65,124 The regulatory liability related to the sale of generating assets was established pursuant to the Company's divestiture filing that was approved by the DTE in which the Company agreed to use the net proceeds from the sale of its generating assets and its share of the net proceeds from affiliate Canal Electric Company's (Canal Electric) sale of generating assets to reduce transition costs that are billed to its retail electric customers over the next several years as a result of electric industry restructuring. The Company's share of the net proceeds from the sale of Canal Electric's generating assets ($9.4 million) has been classified as a long-term receivable - affiliate on the accompanying Condensed Balance Sheets. In November 1997, the Commonwealth of Massachusetts enacted a comprehen- sive electric utility industry restructuring bill. On November 19, 1997, the Company, together with affiliates Commonwealth Electric Company (Commonwealth Electric) and Canal Electric, filed a restructuring plan with the DTE. The plan, approved by the DTE on February 27, 1998, provides that the Company and Commonwealth Electric, 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 reduction 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. (c) Divestiture of Generation Assets The cost of transitioning to competition will be mitigated, in part, by the sale of COM/Energy's non-nuclear generating assets. On May 27, 1998, COM/Energy agreed to sell substantially all of its non-nuclear generating assets (984 MW) to affiliates of The Southern Company of Atlanta, Georgia. The sale was conducted through an auction process that was outlined in a restructuring plan filed with the DTE in November 1997 in conjunction with the state's industry restructuring legislation enacted in 1997. The sale was approved by the DTE on October 30, 1998 and by the FERC on November 12, 1998. Proceeds from the sale of the Company's Kendall Station generating assets, after construction-related adjustments at the closing that occurred on December 30, 1998, amounted to approximately $58.2 million or 8.2 times their book value of approximately $7.1 million. The proceeds from the sale, CAMBRIDGE ELECTRIC LIGHT COMPANY net of book value and transaction costs amounted to $49.3 million and will be used to reduce transition costs related to electric industry restructur- ing that otherwise would have been collected through a non-bypassable transition charge. No gain was recorded on the sale of these generating assets because the Company is obligated to reduce its transition costs by the net proceeds of the sale. The Company has determined that this transaction was not a taxable event because it provided no economic benefit to the Company. COM/Energy established Energy Investment Services, Inc. as the vehicle to invest the net proceeds from the sale of Canal Electric's generating assets and a portion of the proceeds from the Company's sale of generating assets ($20.4 million). These proceeds will be invested in a conservative portfolio of securities that is designed to maintain principal and earn a reasonable return. Both the principal amount and income earned will be used to reduce the transition costs that would otherwise be billed to customers of the Company and Commonwealth Electric. (3) Commitments and Contingencies (a) Construction Program The Company is engaged in a continuous construction program presently estimated at $59.2 million for the five-year period 1999 through 2003. Of that amount, $7.8 million is estimated for 1999. As of March 31, 1999, the Company's actual construction expenditures amounted to approximately $1.1 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 the issuance 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, availability and cost of capital and environmental factors. 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 months ended March 31, 1999 and 1998 and unit sales for these periods is shown below: Three Months Ended March 31, 1999 and 1998 Increase (Decrease) (Dollars in thousands) Electric Operating Revenues $ (199) (0.7)% Operating Expenses - Electricity purchased for resale, transmission and fuel 4,111 27.4 Other operation and maintenance 1,055 20.6 Depreciation (669) (44.6) Taxes - Federal and state income (1,990) (108.1) Local property and other (175) (18.1) 2,332 9.5 Operating Income (2,531) (81.5) Other Income (10) (2.5) Income Before Interest Charges (2,541) (72.4) Interest Charges 240 29.9 Net Income $(2,781) (102.7) Unit Sales (MWH) Retail 7,548 2.4 Wholesale (6,008) (10.3) Total unit sales 1,540 0.4 The following is a summary of unit sales (in MWH) for the periods indicated: Unit Sales (MWH) Three Months Ended Total Retail Wholesale March 31, 1999 380,437 327,852 52,585 March 31, 1998 378,897 320,304 58,593 CAMBRIDGE ELECTRIC LIGHT COMPANY Operating Revenues, Electricity Purchased For Resale, Transmission and Fuel Operating revenues for the first quarter of 1999 decreased $199,000 (0.7%) due to decreases in fuel costs ($311,000), transmission charges and wholesale sales ($967,000) as well as rate reductions resulting from electric industry restructuring legislation. These factors were offset by an increase in purchased power costs ($5.4 million) and a 2.4% increase in retail unit sales. During the quarter, the increase in purchased power reflects the absence of power previously available from the Company's Kendall Station facility which was sold on December 30, 1998 (see Note 2(c)). As a result of industry restructuring, the Company has unbundled its rates and provided customers with a ten percent rate reduction as of March 1, 1998 that was increased to approximately 16% effective January 1, 1999 in conjunction with the Company's restructuring plan as approved by the DTE. This legislation also provides customers with the opportunity to purchase generation supply in the competitive market. Unbundled delivery rates are composed of a customer charge (to collect metering and billing costs), a distribution charge (to collect the costs of delivering electricity), a transition charge (to collect past costs for investments in generating plants and costs related to power contracts), a transmission charge (to collect the costs of moving the electricity over high voltage lines from a generating plant), an energy conservation charge (to collect costs for demand-side management programs) and a renewable energy charge (to collect the cost to support the development and promotion of renewable energy projects). Electricity supply services provided by the Company include optional standard offer service and default service. Standard offer service is the electricity that is supplied by a local distribution company (such as the Company) until a competitive supplier is chosen by the customer. It is designed as a seven- year transitional service to give the customer time to learn about competitive power suppliers. The price of standard offer service will increase over time. Default service is the electricity that is supplied by the local distribution company when a customer is not receiving power from either standard offer service or a competitive power supplier. The market price for default service will fluctuate based on the average market price for power. Amounts collected through these various charges will be reconciled to actual expenditures on an on-going basis. Currently, 77.3% of retail electric customers receive standard offer service and 22.7% of retail customers receive default service. For further information on electric industry restructuring, refer to the Company's 1998 Annual Report on Form 10-K. Total unit sales increased 0.4% during the quarter, reflecting a 2.4% increase in retail unit sales that includes increases in sales to residential, commercial and industrial customer segments, offset in part by a 10.3% decline in wholesale sales due to a decrease in sales to ISO - New England. Operating Expenses For the first quarter of 1999, operation and maintenance increased $1.1 million, or 20.6%, primarily due to an increase in conservation and load management costs ($646,000) and an increase in maintenance expense ($103,000), primarily reflecting maintenance at Blackstone Station. Depreciation expense decreased $669,000 or 44.6% due to a lower level of depreciable plant reflecting the sale of the Kendall Station facility in December 1998 and the CAMBRIDGE ELECTRIC LIGHT COMPANY absence of adjustments to depreciation recorded in 1998 pursuant to the electric industry restructuring legislation. The decrease in federal and state income taxes was due to a lower level of pre-tax income. The decrease in local property and other taxes reflects lower property tax expense ($133,000), and lower payroll and other taxes ($42,000) due to a decrease in the number of employees, both of which reflect the impact of the asset sale (see Note 2(c)). Interest Charges Interest charges for the current three-month period increased $240,000 or 29.9% due to an increase in other interest ($310,000) that includes interest on amounts deferred in conjunction with the Company's restructuring plan as approved by the DTE, offset in part by lower long-term interest costs ($70,000) due to the repayment of a $10 million (8.04%) debt issue during the current quarter and by the absence of interest on short-term borrowings during the period. 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 stated in the forward-looking state- ments. Those factors include developments in the legislative, regulatory and competitive environment, certain environmental matters, demands for capital expenditures and the availability of cash from various sources. Merger with BEC Energy The electric utility industry has continued to change in response to legislative and regulatory mandates that are aimed at lowering prices for energy by creating a more competitive marketplace. These pressures have resulted in an increasing trend in the electric industry to seek competitive advantages and other benefits through business combinations. On December 5, 1998, the Parent and BEC Energy (BEC), headquartered in Boston, Massachusetts, entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement, COM/Energy and BEC will be merged into a new holding company to be known as NSTAR. The merger is expected to occur shortly after the satisfaction of certain conditions, including the receipt of certain regulatory approvals including that of the DTE. The regulatory approval process is expected to be completed during the second half of 1999. The merger will create an energy delivery company serving approximately 1.3 million customers located entirely within Massachusetts, including more than one million electric customers in 81 communities and 240,000 gas custom- ers in 51 communities. Shareholder votes on the merger will be held as part of each of COM/Energy's and BEC's annual shareholder meetings scheduled for June 24, 1999. The Merger Agreement may be terminated under certain circumstances, including by any party if the merger is not consummated by December 5, 1999, subject to an automatic extension of six months if the requisite regulatory CAMBRIDGE ELECTRIC LIGHT COMPANY approvals have not yet been obtained by such date. The merger will be accounted for using the purchase method of accounting. Upon effectiveness of the merger, Thomas J. May, BEC's current Chairman, President and Chief Executive Officer (CEO), will become the Chairman and CEO of NSTAR. Russell D. Wright, COM/Energy's current President and CEO, willbecome the President and Chief Operating Officer of NSTAR and will serve on NSTAR's board of trustees. Also, upon effectiveness of the merger, NSTAR's board of trustees will consist of COM/Energy's and BEC's current trustees. Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer program that has date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a temporary inability to process transactions or engage in normal business activities. COM/Energy has been involved in Year 2000 compliancy since 1996. COM/Energy, on a coordinated basis and with the assistance of RCG Informa- tion Technologies and other consultants, is addressing the Year 2000 issue. COM/Energy has followed a five-phase process in its Year 2000 compliance efforts, as follows: Awareness (through a series of internal announcements to employees and through contacts with vendors); Inventory (all computers, applications and embedded systems that could potentially be affected by the Year 2000 problem); Assessment (all applications or components and the impact on overall business operations and a plan to correct deficiencies and the cost to do so); Remediation (the modification, upgrade or replacement of deficient hardware and software applications and infrastructure modifications); and Testing (a detailed, comprehensive testing program for the modified critical component, system or software that involves the planning, execution and analysis of results). COM/Energy's inventory phase required an assessment of all date sensitive information and transaction processing computer systems and determined that approximately 90% of its software systems needed some modifications or replacement. Plans were developed and are being implemented to correct and test all affected systems, with priorities assigned based on the importance of the activity. COM/Energy has identified the software and hardware installa- tions that are necessary. All installations are expected to be completed and tested by mid-1999. COM/Energy has also inventoried its non-information technology systems that may be date sensitive (facilities, electric and gas operations, energy supply/production and distribution) that use embedded technology such as micro-controllers and micro-processors. COM/Energy has completed its assess- ment of these non-information technology systems and determined that 20% of these systems required remediation or replacement. COM/Energy is approximate- ly 94% complete in its efforts to resolve non-compliance with Year 2000 requirements related to these systems and anticipates that these systems will be updated or replaced and tested by mid-1999. At present, the remediation phase for information technology as it applies to hardware and non-technology issues is scheduled for completion by June 1, 1999. The testing phase for Year 2000 compliance is approximately 85% CAMBRIDGE ELECTRIC LIGHT COMPANY complete and is scheduled to be concluded by June 30, 1999. All other phases are complete. Modifying and testing COM/Energy's information and transaction processing systems from 1996 through 2000 is currently expected to cost approximately $9.85 million, including approximately $900,000, $3.1 million and $1.9 million incurred through 1997, 1998 and the first quarter of 1999, respectively. Approximately $3.95 million is expected to be spent in the remainder of 1999 and in 2000. Year 2000 costs have been expensed as incurred and will continue to be funded from operations. In addition to its internal efforts, COM/Energy has initiated formal communications with its significant suppliers to determine the extent to which COM/Energy may be vulnerable to its suppliers' failure to correct their own Year 2000 issues. As of April 1, 1999, COM/Energy has received responses from approximately 82% of those entities contacted, and nearly all have indicated that they are or will be Year 2000 compliant. Failure of COM/Energy's significant suppliers to address Year 2000 issues could have a material adverse effect on COM/Energy's operations, although it is not possible at this time to quantify the amount of business that might be lost or the costs that could be incurred by COM/Energy. Contact with significant vendors is continu- ing and inadequate or marginal responses are being pursued by COM/Energy. COM/Energy is prepared to replace certain suppliers or to initiate other contingency plans should these vendors not respond to COM/Energy's satisfac- tion by July 1, 1999. In addition, parts of the global infrastructure, including national banking systems, electrical power grids, gas pipelines, transportation facilities, communications and governmental activities, may not be fully functional after 1999. Infrastructure failures could significantly reduce COM/Energy's ability to acquire energy and its ability to serve its customers as effectively as they are now being served. COM/Energy is identifying elements of the infrastructure that are critical to its operations and is obtaining information as to the expected Year 2000 readiness of these ele- ments. COM/Energy has started its contingency planning for critical operational areas that might be effected by the Year 2000 issue if compliance by COM/Energy is delayed. COM/Energy's gas and electric operations currently have emergency operating plans as well as information technology disaster recovery plans as components of its standard operating procedures. These plans will be enhanced to identify potential Year 2000 risks to normal operations and the appropriate reaction to these potential failures including contingency plans that may be required for any third parties that fail to achieve Year 2000 compliance. All necessary contingency plans are expected to be completed by June 30, 1999, although in certain cases, especially infra- structure failures, there may be no practical alternative course of action available to COM/Energy. COM/Energy is working with other energy industry entities, both regionally and nationally with respect to Year 2000 readiness and is cooperating in the development of local and wide-scale contingency planning. While COM/Energy believes its efforts to address the Year 2000 issue will allow it to be successful in avoiding any material adverse effect on CAMBRIDGE ELECTRIC LIGHT COMPANY COM/Energy's operations or financial condition, it recognizes that failing to resolve Year 2000 issues on a timely basis would, in a "most reasonably likely worst case scenario," significantly limit its ability to acquire and distrib- ute energy and process its daily business transactions for a period of time, especially if such failure is coupled with third party or infrastructure failures. Similarly, COM/Energy could be significantly effected by the failure of one or more significant suppliers, customers or components of the infrastructure to conduct their respective operations after 1999. Adverse affects on COM/Energy could include, among other things, business disruption, increased costs, loss of business and other similar risks. The foregoing discussion regarding Year 2000 project timing, effective- ness, implementation and costs includes forward-looking statements that are based on management's current evaluation using available information. Factors that might cause material changes include, but are not limited to, the availability of key Year 2000 personnel, the readiness of third parties, and COM/Energy's ability to respond to unforeseen Year 2000 complications. New Accounting Principles In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every deri- vative instrument (including certain derivative instruments embedded in other contracts possibly including fixed-price fuel supply and 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 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 adoption of SFAS No. 133 is not expected to have a material impact on the Company's results of operations or financial condition. 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. 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 March 31, 1999. Filed herewith as Exhibit 2 is the restated Financial Data Schedule for the year ended December 31, 1998. (b) Reports on Form 8-K One report on Form 8-K was filed during the three months ended March 31, 1999. The report dated January 14, 1999 relates to an event that occurred on December 30, 1998 regarding the sale of substantially all 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: May 17, 1999 EX-27 2 FDS FOR CEL 3/31/99
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 three months ended March 31, 1999 and is qualified in its entirety by reference to such financial statements. 0000016573 CAMBRIDGE ELECTRIC LIGHT COMPANY 1,000 DEC-31-1999 MAR-31-1999 3-MOS PER-BOOK 94,175 9,854 34,943 71,317 29,837 240,126 8,665 27,953 11,864 48,482 0 0 7,301 0 0 0 100 0 0 0 184,243 240,126 27,372 (149) 26,945 26,796 576 395 971 1,043 (72) 0 0 4,246 292 5,869 0 0
EX-27 3 FDS FOR CEL RESTATED FOR 12/31/98
UT This schedule contains restated summary financial information extracted from the balance sheet, statement of income, statement of retained earnings and statement of cash flows contained in Form 10-K of Cambridge Electric Light Company for the fiscal year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 0000016573 CAMBRIDGE ELECTRIC LIGHT COMPANY 1,000 DEC-31-1998 DEC-31-1998 YEAR PER-BOOK 94,400 9,911 46,706 76,484 29,429 256,930 8,665 27,953 16,182 52,800 0 0 7,301 0 0 0 10,100 0 0 0 186,729 256,930 118,707 3,423 105,316 108,739 9,968 2,236 12,204 3,383 8,821 0 8,821 4,246 1,442 11,207 0 0
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