-----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, Fbo/wVXQLe0uSl9Ze32raLpb9DPlzspF0ap3nUBaBJnZ5LQ+Gwq4SxhLjJREvOvC wb0fF8SCLDMorfUGgPHJ4A== 0000071304-99-000024.txt : 19990518 0000071304-99-000024.hdr.sgml : 19990518 ACCESSION NUMBER: 0000071304-99-000024 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: COMMONWEALTH ELECTRIC CO CENTRAL INDEX KEY: 0000071222 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041659070 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-07749 FILM NUMBER: 99626146 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 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEDFORD GAS & EDISON LIGHT CO DATE OF NAME CHANGE: 19810331 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEDFORD GAS LIGHT CO DATE OF NAME CHANGE: 19701106 10-Q 1 COMMONWEALTH ELECTRIC COMPANY 10-Q 3/31/1999 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 2-7749 COMMONWEALTH ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1659070 (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 2,043,972 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 COMMONWEALTH ELECTRIC 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 $569,996 $566,477 Less - Accumulated depreciation 186,395 182,345 383,601 384,132 Add - Construction work in progress 2,701 2,544 386,302 386,676 INVESTMENTS Equity in nuclear electric power company 508 485 Other 14 14 522 499 LONG-TERM RECEIVABLE - AFFILIATE 316,411 307,618 CURRENT ASSETS Cash 3,200 3,584 Accounts receivable - Affiliates 2,447 1,483 Customers 40,195 40,114 Unbilled revenues 4,367 6,096 Prepaid property taxes 1,576 3,153 Inventories and other 3,784 3,861 55,569 58,291 DEFERRED CHARGES Regulatory assets 113,837 101,895 Other 2,583 1,618 116,420 103,513 $875,224 $856,597 See accompanying notes. COMMONWEALTH ELECTRIC 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 - 2,043,972 shares wholly-owned by Commonwealth Energy System (Parent) $ 51,099 $ 51,099 Amounts paid in excess of par value 97,112 97,112 Retained earnings 39,892 36,984 188,103 185,195 Long-term debt, less current sinking fund requirements 142,601 143,651 330,704 328,846 CURRENT LIABILITIES Interim Financing - Advances from affiliates 53,045 40,350 Other Current Liabilities - Current sinking fund requirements 3,553 3,553 Accounts payable - Affiliates 4,861 14,159 Other 33,248 26,370 Accrued taxes - Income 35,139 35,945 Local property and other 2,267 3,343 Other 23,241 24,167 102,309 107,537 155,354 147,887 DEFERRED CREDITS Regulatory liabilities 306,424 297,693 Accumulated deferred income taxes 51,717 51,297 Unamortized investment tax credits 6,116 6,224 Other 24,909 24,650 389,166 379,864 COMMITMENTS AND CONTINGENCIES $875,224 $856,597 See accompanying notes. COMMONWEALTH ELECTRIC 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 $105,924 $106,101 OPERATING EXPENSES Electricity purchased for resale, transmission and fuel 64,114 65,673 Other operation and maintenance 22,692 18,823 Depreciation 4,742 4,519 Taxes - Income 3,113 4,212 Local property 1,576 1,530 Payroll and other 800 797 97,037 95,554 OPERATING INCOME 8,887 10,547 OTHER INCOME 464 20 INCOME BEFORE INTEREST CHARGES 9,351 10,567 INTEREST CHARGES Long-term debt 3,226 3,321 Other interest charges 1,173 419 4,399 3,740 NET INCOME 4,952 6,827 RETAINED EARNINGS - Beginning of period 36,984 31,993 Dividends on common stock 2,044 - End of period $ 39,892 $ 38,820 See accompanying notes. COMMONWEALTH ELECTRIC 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 $ 4,952 $ 6,827 Effects of noncash items - Depreciation and amortization 5,119 5,788 Deferred income taxes and investment tax credits, net 270 (179) Change in working capital, exclusive of cash and interim financing (2,890) (5,501) Transition costs deferral (10,634) (11,552) Power contract buy out (2,265) - Fuel charge stabilization deferral - 1,465 All other operating items (551) (33) Net cash used for operating activities (5,999) (3,185) INVESTING ACTIVITIES Additions to property, plant and equipment (inclusive of AFUDC) (3,986) (4,638) FINANCING ACTIVITIES Proceeds from short-term borrowings - 10,700 Proceeds from (payments to) affiliates 12,695 (820) Payment of dividends (2,044) - Sinking funds payments (1,050) (1,050) Net cash provided by financing activities 9,601 8,830 Net increase (decrease) in cash (384) 1,007 Cash at beginning of period 3,584 1,496 Cash at end of period $ 3,200 $ 2,503 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid (refunded) during the period for: Interest (net of capitalized amounts) $ 5,171 $ 5,020 Income taxes $ (3,515) $ 2,509 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (1) General Information Commonwealth Electric 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 693 regular employees including 485 (70%) represented by three collective bargaining units covered by separate contracts with expiration dates ranging from October 2001 through April 2003. Employee relations have generally been satisfactory. In response to the significant changes that have taken place in the utility industry, the Company sold all of its generating assets in 1998 to focus on the transmission and distribution of energy and related services. (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 poli- cies 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 presenta- tion 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 con- sumption of energy. COMMONWEALTH ELECTRIC 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 genera- tion, are probable of future recovery. As a result of electric industry restructuring, the Company discontin- ued 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 the 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) Transition costs $ 50,897 $ 38,622 Power contract buy-out 15,635 15,717 Fuel charge stabilization 26,537 26,682 Postretirement benefit costs 12,268 12,269 Pilgrim nuclear plant litigation costs 5,385 5,417 Yankee Atomic unrecovered plant and decommissioning costs 1,736 2,042 Other 1,379 1,146 $113,837 $101,895 COMMONWEALTH ELECTRIC 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 $300,737 $293,186 Demand-side management deferral 3,468 2,274 Excess Seabrook-related deferred income taxes 320 319 Other deferred income taxes 1,782 1,782 Excess replacement power refunds 117 132 $306,424 $297,693 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 its share of the net proceeds from affiliate Canal Electric Company's (Canal Electric) sale of generation 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. COM/Energy established Energy Investment Servic- es, Inc. as the vehicle to invest the Company's share of the net proceeds from the sale of Canal Electric's generating assets. 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 affiliate Cambridge Electric Light Company (Cambridge Electric). The Company's share of the net proceeds from the sale of Canal Electric's generating assets has been classified as a long-term receivable - affiliate in the accompanying Condensed Balance Sheets. The Company's regulatory assets, including the costs associated with an existing power contract with the Yankee Atomic nuclear power plant that was shut down permanently, and all of its regulatory liabilities are reflected in rates charged to customers. Regulatory assets are to be recovered over the next 11 years pursuant to the legislation discussed below. In November 1997, the Commonwealth of Massachusetts enacted a compre- hensive electric utility industry restructuring bill. On November 19, 1997, the Company, together with Cambridge 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 Cambridge 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 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 COMMONWEALTH ELECTRIC COMPANY at above market prices from independent power producers and regulatory assets and associated liabilities related to the generation portion of the electric business. (3) Commitments and Contingencies (a) Construction and Financing The Company is engaged in a continuous construction program presently estimated at $135.8 million for the five-year period 1999 through 2003. Of that amount, $30.5 million is estimated for 1999. As of March 31, 1999, the Company's construction expenditures amounted to approximately $4 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 that are ultimately expected to be repaid with the proceeds from the issuance of long-term debt and equity securities. The program is subject to periodic review and revision due to 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. (b) Pilgrim Power Contract The Company has an 11% (73.6 megawatts) contract entitlement in the output of the Pilgrim nuclear power plant, located in Plymouth, MA, which is expected to be sold by Boston Edison Company (Boston Edison) in 1999 to Entergy Nuclear Generating Company (Entergy). In conjunction with this sale, the Company has reached an agreement with Boston Edison to buy out of this life-of-the-unit contract, terminating the Company's rights and obligations under the contract regarding the power output of the plant. Pursuant to the buy out agreement, the Company will pay between $100 mill- ion and $115 million to terminate this contract with Boston Edison, sub- ject to adjustment at closing. On April 29, 1999, the Nuclear Regulatory Commission issued an order approving the transfer of the operating license for the plant from Boston Edison to Entergy. The buy out is expected to be completed in the second quarter of 1999. It is anticipated that the buy out will be paid for with funds currently held by affiliate Energy Investment Services, Inc. (see Note 2(b)). In a transaction related to the sale of the Pilgrim plant, the Company will buy power generated by the Pilgrim plant from Entergy on a declining basis through 2004. COMMONWEALTH ELECTRIC 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 $ (177) (0.2)% Operating Expenses - Electricity purchased for resale, transmission and fuel (1,559) (2.4) Other operation and maintenance 3,869 20.6 Depreciation 223 4.9 Taxes - Federal and state income (1,099) (26.1) Local property and other 49 2.1 1,483 1.6 Operating Income (1,660) (15.7) Other Income 444 2,220.0 Income Before Interest Charges (1,216) (11.5) Interest Charges 659 17.6 Net Income $ (1,875) (27.5) Unit Sales (Megawatthours or MWH) Retail 38,679 4.5 Wholesale (2,293) (0.6) Total unit sales 36,386 2.9 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 1,304,198 900,631 403,567 March 31, 1998 1,267,812 861,952 405,860 COMMONWEALTH ELECTRIC COMPANY Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel Despite a 2.9% increase in unit sales, operating revenues for the first quarter of 1999 were slightly lower than the corresponding period in 1998 primarily due to rate reductions resulting from electric industry restructur- ing legislation, and a net decrease in electricity purchased for resale, fuel and transmission charges of $1.6 million (2.4%). 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 subsequently increased to approximately 12% 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 cost 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). Elec- tricity supply services provided by the Company include optional standard offer service and default service. Standard offer service is the electricity that is supplied by the 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, 88.8% of retail customers receive standard offer service, 11.1% of retail customers receive default service and 0.1% of retail customers receive electricity supply services from competitive power suppli- ers. For further information on electric industry restructuring, refer to the Company's 1998 Annual Report on Form 10-K. Retail unit sales for the quarter increased primarily as a result of increases in the residential and commercial sectors of 7.1% and 5.6%, respec- tively. Other Operation and Maintenance The $3.9 million increase in other operation and maintenance in the first quarter of 1999 was primarily due to higher costs related to demand-side management and renewable energy programs ($1.2 million), the absence in the current period of an adjustment to year-end 1997 payroll (made in January 1998) related to the 1997 personnel reduction program ($1.5 million), and amortization related to the Company's share of personnel reduction costs associated with Canal Electric's sale of its generating assets ($742,000). COMMONWEALTH ELECTRIC COMPANY Depreciation and Taxes Depreciation expense increased due to a higher level of depreciable property, plant and equipment. Federal and state income taxes declined due mainly to the change in pretax income. Other Income Other income increased in the current quarter due to interest accrued on deferred transition costs associated with electric industry restructuring ($508,000). Interest Charges Total interest charges increased in the current quarter reflecting higher interest on amounts due customers related to industry restructuring ($579,000) and a greater level of short-term borrowings ($148,000), offset slightly by lower scheduled sinking fund payments on long-term debt. 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, COMMONWEALTH ELECTRIC COMPANY subject to an automatic extension of six months if the requisite regulatory 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, will become 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, COMMONWEALTH ELECTRIC COMPANY 1999. The testing phase for Year 2000 compliance is approximately 85% 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 COMMONWEALTH ELECTRIC COMPANY allow it to be successful in avoiding any material adverse effect on 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 Principle 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 derivative instrument (including certain derivative instruments embedded in other contracts possibly including fixed-price fuel supply and power con- tracts) 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. COMMONWEALTH ELECTRIC COMPANY PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any pending material legal 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 No reports on Form 8-K were filed during the three months ended March 31, 1999. COMMONWEALTH ELECTRIC COMPANY SIGNATURE 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. COMMONWEALTH ELECTRIC COMPANY (Registrant) Principal Financial and Accounting Officer: Date: May 17, 1999 JAMES D. RAPPOLI James D. Rappoli, Financial Vice President and Treasurer EX-27 2 FDS FOR COMMONWEALTH ELECTRIC CO. 3/31/1999
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 Commonwealth Electric Company for the three months ended March 31, 1999 and is qualified in its entirety by reference to such financial statements. 0000071222 COMMONWEALTH ELECTRIC COMPANY 1,000 DEC-31-1999 MAR-31-1999 3-MOS PER-BOOK 386,302 522 55,569 116,420 316,411 875,224 51,099 97,112 39,892 188,103 0 0 142,601 53,045 0 0 3,553 0 0 0 487,922 875,224 105,924 3,113 93,924 97,037 8,887 464 9,351 4,399 4,952 0 4,952 2,044 3,226 (5,999) 0 0
EX-27 3 RESTATED FDS FOR COMMONWEALTH ELECTRIC CO FOR 1998
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 Commonwealth Electric Company for the fiscal year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 0000071222 COMMONWEALTH ELECTRIC COMPANY 1,000 DEC-31-1998 DEC-31-1998 YEAR PER-BOOK 386,676 499 58,291 103,513 307,618 856,597 51,099 97,112 36,984 185,195 0 0 143,651 40,350 0 0 3,553 0 0 0 483,848 856,597 424,999 9,156 384,495 393,651 31,348 64 31,412 16,303 15,109 0 15,109 10,118 13,253 19,482 0 0
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