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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 September 30, 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.)
800 Boylston Street, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
(617) 424-2000
(Registrant's telephone number, including area code)
One Main Street, Cambridge, Massachusetts 02142
(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 November 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.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
ASSETS
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1999 1998
PROPERTY, PLANT AND EQUIPMENT, at original cost $578,665 $566,477
Less - Accumulated depreciation 192,044 182,345
386,621 384,132
Add - Construction work in progress 2,856 2,544
389,477 386,676
INVESTMENTS
Equity in nuclear electric power company 455 485
Other 14 14
469 499
LONG-TERM RECEIVABLE - AFFILIATE 139,810 307,618
GOODWILL 234,946 -
CURRENT ASSETS
Cash 4,012 3,584
Advances to affiliates 13,950 -
Accounts receivable -
Affiliates 2,606 1,483
Customers 45,755 40,114
Unbilled revenues 2,026 4,646
Prepaid property taxes 4,849 3,153
Inventories and other 3,726 3,861
76,924 56,841
DEFERRED CHARGES
Regulatory assets 106,231 101,895
Other 6,201 3,068
112,432 104,963
$954,058 $856,597
The accompanying notes are an integral part of these financial statements.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1999 1998
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized and outstanding -
2,043,972 shares $ 51,099 $ 51,099
Amounts paid in excess of par value 332,273 97,112
Retained earnings 34,714 36,984
418,086 185,195
Long-term debt, less current sinking
fund requirements 142,606 143,651
560,692 328,846
CURRENT LIABILITIES
Interim Financing -
Advances from affiliates - 40,350
Other Current Liabilities -
Current sinking fund requirements 3,197 3,553
Accounts payable -
Affiliates 9,275 14,159
Other 43,255 26,370
Accrued taxes -
Income 43,628 35,945
Local property and other 5,520 3,343
Other 24,680 24,167
129,555 107,537
129,555 147,887
DEFERRED CREDITS
Regulatory liabilities 138,089 297,693
Accumulated deferred income taxes 52,476 51,297
Unamortized investment tax credits 5,900 6,224
Postretirement benefits costs 32,909 -
Other 34,437 24,650
263,811 379,864
COMMITMENTS AND CONTINGENCIES
$954,058 $856,597
The accompanying notes are an integral part of these financial statements.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands - unaudited)
Three Months Ended Nine Months Ended
1999 1998 1999 1998
ELECTRIC OPERATING REVENUES $112,872 $120,671 $332,336 $343,640
OPERATING EXPENSES
Electricity purchased for
resale, transmission and fuel 64,180 78,126 203,768 230,321
Other operation and maintenance 37,046 21,047 81,877 59,789
Depreciation 4,545 4,506 13,932 13,530
Taxes -
Income (381) 4,069 4,683 8,120
Local property 1,589 1,702 4,966 4,765
Payroll and other 628 558 2,061 1,948
107,607 110,008 311,287 318,473
OPERATING INCOME 5,265 10,663 21,049 25,167
OTHER INCOME 844 131 1,955 296
INCOME BEFORE INTEREST CHARGES 6,109 10,794 23,004 25,463
INTEREST CHARGES
Long-term debt 3,225 3,321 9,677 9,963
Other interest charges 3,203 831 5,684 2,008
6,428 4,152 15,361 11,971
NET (LOSS) INCOME (319) 6,642 7,643 13,492
RETAINED EARNINGS -
Beginning of period 38,814 31,893 36,984 31,993
Dividends paid to Parent (3,781) - (9,913) (6,950)
End of period $ 34,714 $ 38,535 $ 34,714 $ 38,535
The accompanying notes are an integral part of these financial statements.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands - unaudited)
1999 1998
OPERATING ACTIVITIES
Net income $ 7,643 $13,492
Effects of noncash items -
Depreciation and amortization 17,247 17,866
Deferred income taxes and investment
tax credits, net 2,238 101
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 16,313 (93)
Transition costs deferral (10,445) (25,952)
EIS proceeds (Note 2) 167,808 -
Power contract buyouts (107,227) -
All other operating items (12,522) (3,132)
Net cash provided by operating activities 81,055 2,282
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (15,369) (14,424)
Advances to affiliates (13,950) -
Net cash used for investing activities (29,319) (14,424)
FINANCING ACTIVITIES
Proceeds from short-term borrowings - 15,625
(Payments to) advances from affiliates (40,350) 4,750
Payment of dividends (9,913) (6,950)
Sinking funds payments (1,045) (1,044)
Net cash (used for) provided by financing activities (51,308) 12,381
Net increase in cash 428 239
Cash at beginning of period 3,584 1,496
Cash at end of period $ 4,012 $ 1,735
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refunded) during the period for:
Interest (net of capitalized amounts) $ 12,300 $12,721
Income taxes $ (3,877) $ 8,120
The accompanying notes are an integral part of these financial statements.
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COMMONWEALTH ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
Commonwealth Electric Company (the Company) is a wholly-owned subsid-
iary of NSTAR. NSTAR is the new holding company that was formed, effec-
tive August 25, 1999 after receipt of all necessary approvals and upon
completion of a merger transaction between Commonwealth Energy System
(COM/Energy, formerly the parent of the Company) and BEC Energy (formerly
the parent company of Boston Edison Company). The merger creates an
energy delivery company, that includes the Company, serving approximately
1.3 million customers located in Massachusetts including more than one
million electric customers in 81 communities and 240,000 gas customers in
51 communities. NSTAR 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's operations are involved in the distribution and sale of
electricity to 327,000 customers (including 45,500 seasonal) in 40
communities located in southeastern Massachusetts, including Cape Cod and
the island of Martha's Vineyard, having an approximate year-round popula-
tion of 549,000 and a large influx of summer residents.
The Company has 676 employees including 480 (71%) represented by three
collective bargaining units covered by separate contracts with expiration
dates ranging from October 2001 through April 2003.
(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 September 30,
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.
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.
(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).
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COMMONWEALTH ELECTRIC COMPANY
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.
The principal regulatory assets included in deferred charges were as
follows:
September 30, December 31,
1999 1998
(Dollars in thousands)
Transition costs $ 53,967 $ 38,622
Power contract buy-out - 15,717
Fuel charge stabilization 17 26,682
Postretirement benefit costs 35,813 12,269
Yankee Atomic unrecovered plant
and decommissioning costs 1,124 2,042
Merger costs 17,330 -
Other (2,020) 6,563
$106,231 $101,895
The increase in the regulatory asset related to postretirement
benefits reflects the impact of immediate recognition of the Company's
previously unrecognized postretirement benefit obligation ($32.9 million)
pursuant to the requirements of purchase accounting. The merger costs
include severance costs ($8.3 million) associated with a voluntary
separation program (VSP) offered to employees as a result of the merger,
pension curtailment costs ($4.9 million) resulting from the VSP and other
costs to achieve the merger ($4.1 million).
The regulatory liabilities, reflected in the accompanying Condensed
Balance Sheets, were as follows:
September 30, December 31,
1999 1998
(Dollars in thousands)
Regulatory liability related to
sale of generating assets $125,029 $293,186
Pension costs 5,815 -
Demand-side management deferral 5,463 2,274
Deferred income taxes 1,782 2,101
Other - 132
$138,089 $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
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. COM/Energy established Energy Investment Servic-
es, Inc. (EIS) as the vehicle to invest the Company's share of the net
proceeds from the sale of Canal Electric's generating assets. These
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COMMONWEALTH ELECTRIC COMPANY
proceeds have been invested in a 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. 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 a comprehensive electric
utility industry restructuring law enacted by the Commonwealth of Massa-
chusetts in November 1997.
(3) Commitments and Contingencies
(a) Pilgrim Power Contract
The Company had an 11% (73.6 megawatts) contract entitlement in the
output of the Pilgrim nuclear power plant, located in Plymouth, MA, which
was sold by Boston Edison Company (Boston Edison) on July 13, 1999 to
Entergy Nuclear Generating Company (Entergy). 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. In
conjunction with this sale, the Company 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 paid
approximately $105 million in July 1999 to terminate this contract with
Boston Edison. The buy-out was paid with funds held by affiliate EIS (see
Note 2(b)) that were provided from the Company's share of the net proceeds
from Canal Electric's sale of its generating assets. The DTE approved the
buy-out transaction as a mitigation measure and approved inclusion of the
buy-out payment as a transition cost for purposes of cost recovery by the
Company. 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.
(b) Lowell Cogeneration Company Power Contract
On October 27, 1999, the DTE approved an Amended and Restated Power
Sale Agreement between the Company and Lowell Cogeneration Company Limited
Partnership (Lowell) that will terminate the Company's obligation to
purchase the output (28 megawatts) from the combined-cycle cogeneration
facility located in Lowell, MA.
In September 1986, the Company had agreed to purchase all of the
electric capacity and energy produced by Lowell through the year 2008. A
1994 restructured agreement eliminated the Company's purchase obligations
through the year 2000 while extending the agreement with Lowell through
2010 as a dispatchable unit.
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COMMONWEALTH ELECTRIC COMPANY
Pursuant to the restructured agreement, the Company will retain the
right, at its sole option, to purchase the output of the unit under call-
back rights to ensure ongoing supply for default and standard offer
service. The Company's buy-out payments to be paid to Lowell ($1.1
million per month during the 4.5 year term of the restructured agreement),
are to be included in the Company's transition charge to be collected from
the Company's retail customers. The variable costs will be paid with
funds held by affiliate EIS provided from the Company's share of the net
proceeds from Canal Electric's sale of its generating assets. As ap-
proved, there will be a reduction in the overall level of transition costs
to be recovered from customers.
(c) Litigation
In the normal course of business, the Company is involved in various
legal matters. Management is unable to fully determine the range of
reasonably possible legal costs in excess of amounts accrued. Based on
the information currently available, it does not believe that it is
probable that any such additional costs will have a material impact on its
financial position. However, it is reasonably possible that additional
legal costs that may result from a change in estimates could have a
material impact on the results of a reporting period in the near term.
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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 and nine months ended
September 30, 1999 and 1998 and unit sales for these periods is shown below:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 and 1998 1999 and 1998
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $ (7,799) (6.5)% $(11,304) (3.3)%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel (13,946) (17.9) (26,553) (11.5)
Other operation and maintenance 15,999 76.0 22,088 36.9
Depreciation 39 0.9 402 3.0
Taxes -
Federal and state income (4,450) (109.4) (3,437) (42.3)
Local property and other (43) (1.9) 314 4.7
(2,401) (2.2) (7,186) (2.3)
Operating Income (5,398) (50.6) (4,118) (16.4)
Other Income 713 544.3 1,659 560.5
Income Before Interest Charges (4,685) (43.4) (2,459) (9.7)
Interest Charges 2,276 54.8 3,390 28.3
Net Income $ (6,961) (104.8) $ (5,849) (43.4)
Unit Sales (Megawatthours or MWH)
Retail 63,211 6.3 138,585 5.2
Wholesale (113,212) (37.6) (152,788) (14.9)
Total (50,001) (3.8) (14,203) (0.4)
The following is a summary of unit sales (in MWH) for the periods
indicated:
Three Months Nine Months
Period Ended Total Retail Wholesale Total Retail Wholesale
September 30,
1999 1,255,578 1,068,080 187,498 3,660,904 2,786,483 874,421
September 30,
1998 1,305,579 1,004,869 300,710 3,675,107 2,647,898 1,027,209
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel
Operating revenues declined in the current quarter and nine-month period
ended September 30, 1999 despite higher unit sales, due to rate reductions
provided to customers as a result of industry restructuring. The Company
unbundled its rates and provided customers with a 10% rate reduction as of
March 1, 1998 that was subsequently increased to approximately 12% effective
January 1, 1999 and to 15% effective September 1, 1999.
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, 85.3% of retail customers receive standard offer
service, 14.6% 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 and nine-month periods ended September
30, 1999 increased primarily as a result of increases in the residential and
commercial sectors of 6.3% and 6.1%, respectively.
Other Operation and Maintenance
Other operation and maintenance increased in the current quarter and nine-
month period due to the recognition of costs allocated to the Company that
relate to various compensation plans whose benefits have vested as a result of
a change in control at the parent company level and legal costs related to the
merger ($1.1 million) and amortization of goodwill and merger costs ($690,000)
(see merger discussion below). In addition, $7.6 million in pension costs
that were previously deferred, have been expensed in the current period
because recovery is no longer certain. Other factors that impacted other
operation and maintenance in the first nine months of 1999 were costs associ-
ated with transmission and distribution to repair overhead conductors
($700,000), amortization related to the Company's share of personnel reduction
costs associated with Canal Electric's sale of its generating assets ($2.2
million), costs related to Hurricane Floyd ($2 million), increased employee
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COMMONWEALTH ELECTRIC COMPANY
medical costs ($1 million), an increase in the provision for bad debts
($982,000), and higher costs related to demand-side management and renewable
energy programs ($1.1 million). The increase in expense for the current
quarter was primarily attributable to the aforementioned merger-related and
pension costs, costs for Hurricane Floyd damages ($2 million), the amortiza-
tion referred to above associated with the sale of Canal Electric's generating
assets ($742,000), and increased employee medical costs ($921,000).
Depreciation and Taxes
Depreciation expense in the current quarter and nine-month period ended
September 30, 1999 increased due to a higher level of depreciable property,
plant and equipment. Federal and state income taxes declined in both current
periods due mainly to the change in pretax income. The increase in local
property and other taxes for the current nine-month period is primarily the
result of higher property tax rates and assessments.
Other Income
Other income increased in the current quarter and nine-month period due to
interest accrued on deferred transition costs associated with electric
industry restructuring of $726,000 and $1.9 million, respectively.
Interest Charges
Total interest charges increased in the current quarter and nine-month
periods due to interest on customer refunds ($2.3 million and $3.4 million)
and interest on potential income tax deficiencies ($813,000 and $938,000),
respectively.
Merger with BEC Energy
NSTAR, an exempt public utility holding company, was created after
completion of a merger transaction between BEC Energy (BEC) and Commonwealth
Energy System (COM/Energy) on August 25, 1999. The 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 market-
place. These pressures have resulted in an increasing trend in the utility
industry to seek competitive advantages and other benefits through business
combinations. NSTAR is focusing its utility operations on the transmission
and distribution of energy following the sale of BEC's fossil generating
facilities to Sithe Energies in May 1998, BEC's nuclear generation facility to
Entergy Nuclear Generating Company in July 1999 and substantially all of
COM/Energy's generating facilities to Southern Company in December 1998.
The utility companies of NSTAR form an energy delivery company serving
approximately 1.3 million customers located in Massachusetts, including more
than one million electric customers in 81 communities and 240,000 gas custom-
ers in 51 communities.
The merger became effective after receipt of various regulatory approvals.
The Federal Energy Regulatory Commission approved the merger on June 24, 1999.
The Nuclear Regulatory Commission approved the transfer of control of subsid-
iary Canal Electric Company's interest in the Seabrook nuclear plant from
COM/Energy to NSTAR on August 11, 1999. The Securities and Exchange
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COMMONWEALTH ELECTRIC COMPANY
Commission issued its approval on August 24, 1999.
An integral part of the merger is the rate plan that was filed by the
retail utility subsidiaries of BEC and COM/Energy in February 1999 and
approved by the DTE on July 27, 1999. Significant elements of the rate plan
include a four-year distribution rate freeze (after an adjustment to the
distribution rates of affiliate Cambridge Electric Light Company and the
Company to collect the appropriate level of distribution costs that is offset
by a reduction in the transition charge that was previously approved by the
DTE), recovery of the acquisition premium (goodwill) over 40 years and
recovery of transaction and integration costs (costs to achieve) over 10
years.
The merger was accounted for by BEC as an acquisition of COM/Energy under
the purchase method of accounting. The goodwill amounted to approximately
$478 million while the original estimate of costs to achieve the merger was
$111 million to be amortized over 10 years. This estimate, which has been
allocated among the retail utility subsidiaries of NSTAR, will be reconciled
to actual costs and any difference is expected to be recovered over the
remainder of the amortization period. The amount of goodwill attributed to
the Company was approximately $235 million to be amortized over 40 years.
A group of four intervenors and the Massachusetts Attorney General filed
two separate appeals of the DTE's rate plan order with the Massachusetts
Supreme Judicial Court (SJC) in August 1999. While management anticipates
that the DTE's decision to approve the rate plan will be upheld by the SJC, it
is unable to determine the ultimate outcome of these appeals or their impact
on the rate plan.
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.
The Company and its affiliates (the companies) have been involved in Year 2000
compliancy since 1996. While the recent merger with BEC Energy has led to
some integrated planning efforts, the companies have essentially continued to
resolve Year 2000 issues independently of BEC Energy.
The companies have followed a five-phase process in its Year 2000 compli-
ance efforts, as follows: Awareness (through a series of internal announce-
ments to employees and through contacts with vendors); Inventory (all comput-
ers, 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 modifica-
tions); and Testing (a detailed, comprehensive testing program for the
modified critical component, system or software that involves the planning,
execution and analysis of results).
The companies' inventory phase required an assessment of all date sensi-
tive information and transaction processing computer systems and determined
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COMMONWEALTH ELECTRIC COMPANY
that approximately 90% of their software systems needed some modifications or
replacement. Plans were developed, implemented, and all of these systems have
been modified, upgraded or replaced.
The companies have also inventoried their 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. The companies have completed their
assessment of these non-information technology systems and determined that 20%
of these systems required remediation or replacement. The companies have
reported to the North American Electric Reliability Council (NERC) that they
met the NERC target date of June 30, 1999 for 100% readiness of all their
mission critical components required for the continued safe and reliable
delivery of electricity into the Year 2000. The companies' gas and other
operations are also at a 100% completion level for all mission critical issues
regarding Year 2000 readiness.
Modifying and testing the companies' information and transaction process-
ing systems from 1996 through 2000 is currently expected to cost approximately
$10.3 million, including approximately $8.3 million incurred through September
30, 1999. Year 2000 costs have been expensed as incurred and will continue to
be funded from operations.
In addition to their internal efforts, the companies have initiated formal
communications with their significant suppliers to determine the extent to
which the companies may be vulnerable to their suppliers' failure to correct
their own Year 2000 issues. The companies have ranked their vendors in terms
of importance and have received adequate responses from all of their "criti-
cal" and "high" rated vendors. Failure of the companies' significant suppli-
ers to address Year 2000 issues could have a material adverse effect on the
companies' 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 the companies. Contact with all other vendors is continuing and inadequate
responses are being pursued by the companies.
In addition, parts of the global infrastructure, including national
banking systems, electrical power grids, gas pipelines, transportation facili-
ties, communications and governmental activities, may not be fully functional
after 1999. Infrastructure failures could significantly reduce the companies'
ability to acquire energy and their ability to serve their customers as ef-
fectively as they are now being served. The companies have identified the
elements of the infrastructure that are critical to their operations and have
requested and obtained information as to the expected Year 2000 readiness of
these elements.
The companies have completed the development of their Year 2000 contingen-
cy plans for all operational areas that may be effected by Year 2000 issues.
The companies' gas and electric operations currently have emergency operating
plans, as well as information technology disaster recovery plans, as compo-
nents of their standard operating procedures. These plans have been enhanced,
identifying potential Year 2000 risks to normal operations and the appropriate
response to these potential failures. These plans also include actions to be
taken in the event of third party and infrastructure failures with regard to
the Year 2000 event, although in certain cases, there may be no practical
alternative course of action available to the companies. The implementation
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COMMONWEALTH ELECTRIC COMPANY
of the contingency plans will continue throughout the remainder of 1999.
The companies are working with other energy industry entities, both
regionally and nationally, with respect to Year 2000 readiness and is cooper-
ating in the development of local and wide-scale contingency planning.
While the companies believe their efforts to address the Year 2000 issue
will allow them to be successful in avoiding any material adverse effect on
the companies' operations or financial condition, they recognize that failing
to resolve Year 2000 issues on a timely basis would, in a "most reasonably
likely worst case scenario," significantly limit their ability to acquire and
distribute energy and process their daily business transactions for a period
of time, especially if such failure is coupled with third party or infra-
structure failures. Similarly, the companies 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 the companies 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 avail-
ability of key Year 2000 personnel, the readiness of third parties, and the
companies' ability to respond to unforeseen Year 2000 complications.
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 the ultimate impact of the merger, developments
in the legislative, regulatory and competitive environment, certain environ-
mental matters, demands for capital expenditures and the availability of cash
from various sources.
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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
Filed herewith:
Exhibit 27 - Financial Data Schedule
27.1 - Schedule UT
Exhibit 99 - Additional Exhibits
99.1 - Report of Independent Accountants
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1999.
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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)
Date: November 15, 1999 R. J. WEAFER, JR.
Robert J. Weafer, Jr.
Vice President, Controller
and Chief Accounting Officer