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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 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.
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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.
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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.
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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.
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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.
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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 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.
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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
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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
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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.
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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 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
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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).
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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,
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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,
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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
<PAGE 15>
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.
<PAGE 16>
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.
<PAGE 17>
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