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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 June 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 2-7909
CAMBRIDGE ELECTRIC LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1144610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street, Cambridge, Massachusetts 02142-9150
(Address of principal executive offices) (Zip Code)
(617) 225-4000
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock August 1, 1999
Common Stock, $25 par value 346,600 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
ASSETS
(Dollars in thousands)
June 30, December 31,
1999 1998
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $142,455 $140,642
Less - Accumulated depreciation 48,874 47,179
93,581 93,463
Add - Construction work in progress 1,056 937
94,637 94,400
INVESTMENTS
Equity in nuclear electric power companies 10,074 9,906
Other 5 5
10,079 9,911
LONG-TERM RECEIVABLE - AFFILIATE 36,077 35,441
CURRENT ASSETS
Cash 1,466 778
Advances to affiliates - 27,450
Accounts receivable
Affiliates 303 1,729
Customers 11,515 10,774
Unbilled revenues 71 1,577
Prepaid taxes 1,674 1,410
Inventories and other 1,479 1,076
16,508 44,794
DEFERRED CHARGES
Regulatory assets 61,960 70,372
Other 144 2,012
62,104 72,384
$219,405 $256,930
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
June 30, December 31,
1999 1998
(Unaudited)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized and outstanding -
346,600 shares, wholly-owned by
Commonwealth Energy System (Parent) $ 8,665 $ 8,665
Amounts paid in excess of par value 27,953 27,953
Retained earnings 12,246 16,182
48,864 52,800
Long-term debt, including premiums, less
maturing debt and current sinking fund
requirements 7,201 7,301
56,065 60,101
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 1,600 -
Advances from affiliates 2,400 -
Maturing long-term debt - 10,000
4,000 10,000
Other Current Liabilities -
Current sinking fund requirements 100 100
Accounts payable
Affiliates 4,309 23,257
Other 6,700 8,328
Other 7,208 9,406
18,317 41,091
22,317 51,091
DEFERRED CREDITS
Accumulated deferred income taxes 15,210 15,328
Regulatory liabilities 63,754 65,124
Purchased power contracts 53,993 57,465
Unamortized investment tax credits and other 8,066 7,821
141,023 145,738
COMMITMENTS AND CONTINGENCIES
$219,405 $256,930
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
1999 1998 1999 1998
ELECTRIC OPERATING REVENUES $26,977 $27,155 $54,349 $54,726
OPERATING EXPENSES
Electricity purchased for resale,
transmission and fuel 20,984 15,755 40,121 30,781
Other operation and maintenance 3,004 6,272 9,187 11,400
Depreciation 990 2,129 1,822 3,630
Taxes -
Income 179 940 30 2,781
Local property 633 760 1,266 1,525
Payroll and other 143 181 303 384
25,933 26,037 52,729 50,501
OPERATING INCOME 1,044 1,118 1,620 4,225
OTHER INCOME 377 344 772 749
INCOME BEFORE INTEREST CHARGES 1,421 1,462 2,392 4,974
INTEREST CHARGES
Long-term debt 155 361 447 722
Other interest charges 884 446 1,635 888
1,039 807 2,082 1,610
NET INCOME 382 655 310 3,364
RETAINED EARNINGS -
Beginning of period 11,864 14,316 16,182 11,607
Dividends on common stock - (2,599) (4,246) (2,599)
RETAINED EARNINGS -
End of period $12,246 $12,372 $12,246 $12,372
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
(Unaudited)
1999 1998
OPERATING ACTIVITIES
Net income $ 310 $ 3,364
Effects of noncash items -
Depreciation and amortization 1,911 3,882
Deferred income taxes and investment tax
credits, net 799 392
Earnings from corporate joint ventures (348) (564)
Dividends from corporate joint ventures 180 38
Change in working capital, exclusive of cash,
advances to affiliates and interim financing (21,250) 4,473
Transition costs deferral 5,988 (6,322)
All other operating items (1,628) 161
Net cash provided by (used for) operating activities (14,038) 5,424
INVESTING ACTIVITIES
Payments from affiliates 27,450 -
Additions to property, plant and equipment
(inclusive of AFUDC) (2,378) (3,773)
Net cash provided by (used for) investing activities 25,072 (3,773)
FINANCING ACTIVITIES
Payment of dividends (4,246) (2,599)
Retirement of long-term debt (10,000) -
Proceeds from short-term borrowings 1,600 10,750
Proceeds from (payments to) affiliates 2,400 (9,755)
Sinking funds payments (100) (100)
Net cash used for financing activities (10,346) (1,704)
Net increase (decrease) in cash 688 (53)
Cash at beginning of period 778 521
Cash at end of period $ 1,466 $ 468
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 729 $ 1,552
Income taxes $ 981 $ 1,277
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
Cambridge Electric Light Company (the Company) is a wholly-owned subsid-
iary of Commonwealth Energy System (the Parent). The Parent, together with
its subsidiaries, is collectively referred to as "COM/Energy." The Parent
is an exempt public utility holding company under the provisions of the
Public Utility Holding Company Act of 1935 and, in addition to its
investment in the Company, has interests in other utility and several
nonregulated companies. In December 1998, the Parent signed an Agreement
and Plan of Merger with BEC Energy, the parent company of Boston Edison
Company, that will create an energy delivery company, that includes the
Company, serving approximately 1.3 million customers located entirely within
Massachusetts including more than one million electric customers in 81
communities and 240,000 gas customers in 51 communities.
The Company has 101 regular employees including 76 (75%) represented by
a collective bargaining unit with a contract that expires on March 1, 2001.
Employee relations have generally been satisfactory.
In response to the significant changes that have taken place in the
utility industry, the Company sold substantially all of its generating
assets in 1998 to focus on the transmission and distribution of energy and
related services (see Note 2(c)).
(2) Significant Accounting Policies
(a) Principles of Accounting
The Company's significant accounting policies are described in Note 2 of
Notes to Financial Statements included in its 1998 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting policies
but considers each interim period as an integral part of an annual period
and makes allocations of certain expenses to interim periods based upon
estimates of such expenses for the year.
The unaudited financial statements for the periods ended June 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 presentation used in the
current period's financial statements.
Income tax expense is recorded using the statutory rates in effect
applied to book income subject to tax recorded in the interim period.
The results for interim periods are not necessarily indicative of
results for the entire year because of seasonal variations in the consump-
tion of energy.
(b) Regulatory Assets and Liabilities
The Company is regulated as to rates, accounting and other matters by
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CAMBRIDGE ELECTRIC LIGHT COMPANY
various authorities including the Federal Energy Regulatory Commission
(FERC) and the Massachusetts Department of Telecommunications and Energy
(DTE).
Based on the current regulatory framework, the Company accounts for the
economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The Company has established
various regulatory assets in cases where the DTE and/or the FERC have
permitted or are expected to permit recovery of specific costs over time.
Similarly, the regulatory liabilities established by the Company are
required to be refunded to customers over time. In the event the criteria
for applying SFAS No. 71 are no longer met, the accounting impact would be
an extraordinary, noncash charge to operations of an amount that could be
material. Criteria that give rise to the discontinuance of SFAS No. 71
include: 1) increasing competition that restricts the Company's ability to
establish prices to recover specific costs, and 2) a significant change in
the current manner in which rates are set by regulators from cost-based
regulation to another form of regulation. These criteria are reviewed on a
regular basis to ensure the continuing application of SFAS No. 71 is
appropriate. Based on the current evaluation of the various factors and
conditions that are expected to impact future cost recovery, the Company
believes that its regulatory assets including those related to generation,
are probable of future recovery.
As a result of electric industry restructuring, the Company discontinued
application of accounting principles applied to its investment in electric
generation facilities effective March 1, 1998. The Company will not be
required to write-off any of its generation-related assets including
regulatory assets. These assets will be retained on the Company's Balance
Sheets because the legislation and DTE's plan for a restructured electric
industry specifically provide for their recovery through a non-bypassable
transition charge.
The principal regulatory assets included in deferred charges were as
follows:
June 30, December 31,
1999 1998
(Dollars in thousands)
Maine Yankee unrecovered plant
and decommissioning costs $29,382 $30,646
Connecticut Yankee unrecovered plant
and decommissioning costs 23,496 25,185
Yankee Atomic unrecovered plant
and decommissioning costs 1,115 1,634
Transition costs 3,893 9,149
Postretirement benefits costs 3,204 3,120
Other 870 638
$61,960 $70,372
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CAMBRIDGE ELECTRIC LIGHT COMPANY
The regulatory liabilities, reflected in the accompanying Condensed
Balance Sheets, were as follows:
June 30, December 31,
1999 1998
(Dollars in thousands)
Regulatory liability related to
sale of generating assets $59,000 $61,040
Deferred income taxes 2,345 2,402
Demand-side management deferral 2,409 1,682
$63,754 $65,124
The regulatory liability related to the sale of generating assets was
established pursuant to the Company's divestiture filing that was approved
by the DTE in which the Company agreed to use the net proceeds from the sale
of its generating assets and its share of the net proceeds from affiliate
Canal Electric Company's (Canal Electric) sale of generating assets to
reduce transition costs that are billed to its retail electric customers
over the next several years as a result of electric industry restructuring.
COM/Energy established Energy Investment Services, 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 proceeds have been 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 Commonwealth Electric Company
(Commonwealth 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 on the accompanying Condensed Balance Sheets.
The Company's regulatory assets, including the costs associated with
existing power contracts with three Yankee nuclear power plants that have
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 eleven years pursuant to the legislation discussed below. However,
the Company received approximately $6.3 million from EIS in July 1999 which
will reduce the amount of regulatory assets to be recovered in the future.
In November 1997, the Commonwealth of Massachusetts enacted a comprehen-
sive electric utility industry restructuring bill. On November 19, 1997,
the Company, together with affiliates Commonwealth Electric and Canal
Electric, filed a restructuring plan with the DTE. The plan, approved by
the DTE on February 27, 1998, provides that the Company and Commonwealth
Electric, beginning March 1, 1998, initiate a ten percent rate reduction for
all customer classes and allow customers to choose their energy supplier.
As part of the plan, the DTE authorized the recovery of certain strandable
costs and provides that certain future costs may be deferred to achieve or
maintain the rate reduction that the restructuring bill mandates. The
legislation gives the DTE the authority to determine the amount of
strandable costs that is eligible for recovery. Costs that qualify as
strandable costs and are eligible for recovery include, but are not limited
to, certain above market costs associated with generating facilities, costs
associated with long-term commitments to purchase power at above market
prices from independent power producers and regulatory assets and associated
liabilities related to the generation portion of the electric business.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
(c) Divestiture of Generation Assets
The cost of transitioning to competition will be mitigated, in part, by
the sale of COM/Energy's non-nuclear generating assets. On May 27, 1998,
COM/Energy agreed to sell substantially all of its non-nuclear generating
assets (984 MW) to affiliates of The Southern Company of Atlanta, Georgia.
The sale was conducted through an auction process that was outlined in a
restructuring plan filed with the DTE in November 1997 in conjunction with
the state's industry restructuring legislation enacted in 1997. The sale
was approved by the DTE on October 30, 1998 and by the FERC on November 12,
1998. Proceeds from the sale of the Company's Kendall Station generating
assets, after construction-related adjustments at the closing that occurred
on December 30, 1998, amounted to approximately $58.2 million or 8.2 times
their book value of approximately $7.1 million. The proceeds from the sale,
net of book value and transaction costs amounted to $49.3 million and will
be used to reduce transition costs related to electric industry
restructuring that otherwise would have been collected through a non-
bypassable transition charge. No gain was recorded on the sale of these
generating assets because the Company is obligated to reduce its transition
costs by the net proceeds of the sale. The Company has determined that this
transaction was not a taxable event because it provided no economic benefit
to the Company.
(3) Commitments and Contingencies
(a) Construction Program
The Company is engaged in a continuous construction program presently
estimated at $59.2 million for the five-year period 1999 through 2003. Of
that amount, $7.8 million is estimated for 1999. As of June 30, 1999, the
Company's actual construction expenditures amounted to approximately $2.4
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 which are ultimately
expected to be repaid with the proceeds from the issuance of long-term debt
securities.
The program is subject to periodic review and revision because of
factors such as changes in business conditions, rates of customer growth,
effects of inflation, maintenance of reliable and safe service, equipment
delivery schedules, availability and cost of capital and environmental
factors.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
The following is a discussion of certain significant factors which have
affected operating revenues, expenses and net income during the periods
included in the accompanying Condensed Statements of Income. This discussion
should be read in conjunction with the Notes to Condensed Financial Statements
appearing elsewhere in this report.
A summary of the period to period changes in the principal items included
in the Condensed Statements of Income for the three and six months ended June
30, 1999 and 1998 and unit sales for these periods is shown below:
Three Months Six Months
Ended June 30, Ended June 30,
1999 and 1998 1999 and 1998
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $ (178) (0.7)% $ (377) (0.7)%
Operating Expenses -
Electricity purchased for
resale, transmission and fuel 5,229 33.2 9,340 30.3
Other operation and maintenance (3,268) (52.1) (2,213) (19.4)
Depreciation (1,139) (53.5) (1,808) (49.8)
Taxes -
Federal and state income (761) (81.0) (2,751) (98.9)
Local property and other (165) (17.5) (340) (17.8)
(104) (0.4) 2,228 4.4
Operating Income (74) (6.6) (2,605) (61.7)
Other Income 33 9.6 23 3.1
Income Before Interest Charges (41) (2.8) (2,582) (51.9)
Interest Charges 232 28.7 472 29.3
Net Income $ (273) (41.7) $(3,054) (90.8)
Unit Sales (MWH)
Retail (15,545) (4.8) (7,997) (1.2)
Wholesale (15,352) (45.2) (21,360) (23.1)
Total unit sales (30,897) (8.7) (29,357) (4.0)
The following is a summary of unit sales for the periods indicated:
Unit Sales (MWH)
Three Months Six Months
Period Ended Total Retail Wholesale Total Retail Wholesale
June 30, 1999 326,262 307,664 18,598 706,699 635,516 71,183
June 30, 1998 357,159 323,209 33,950 736,056 643,513 92,543
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CAMBRIDGE ELECTRIC LIGHT COMPANY
Operating Revenues, Electricity Purchased For Resale, Transmission and Fuel
Operating revenues for the first six months of 1999 decreased $377,000
(0.7%) due to a decrease in fuel costs ($1.4 million) as well as rate
reductions resulting from electric industry restructuring legislation. Also
contributing to this decrease was a 1.2% decrease in retail unit sales.
Somewhat offsetting the impact of these items were increases in electricity
purchased for resale ($9.5 million) and transmission charges ($1.4 million).
During the second quarter, operating revenues decreased $178,000 (0.7%) due to
lower fuel costs ($1.1 million) and the aforementioned rate reductions,
offset, somewhat by increases in electricity purchased for resale ($4.1
million) and transmission charges ($2.1 million). The significant increase in
electricity purchased for resale during both current periods reflects the
absence of power previously available from the Company's Kendall Station
facility which was sold on December 30, 1998 (see Note 2(c)). As a result of
industry restructuring, the Company has unbundled its rates and provided
customers with a ten percent rate reduction as of March 1, 1998 that was
increased to 16% effective January 1, 1999 in conjunction with the Company's
restructuring plan as approved by the DTE.
This legislation also provides customers with the opportunity to purchase
generation supply in the competitive market. Unbundled delivery rates are
composed of a customer charge (to collect metering and billing costs), a
distribution charge (to collect the costs of delivering electricity), a
transition charge (to collect past costs for investments in generating plants
and costs related to power contracts), a transmission charge (to collect the
costs of moving the electricity over high voltage lines from a generating
plant), an energy conservation charge (to collect costs for demand-side
management programs) and a renewable energy charge (to collect the cost to
support the development and promotion of renewable energy projects).
Electricity supply services provided by the Company include optional standard
offer service and default service. Standard offer service is the electricity
that is supplied by a local distribution company (such as the Company) until a
competitive supplier is chosen by the customer. It is designed as a seven-
year transitional service to give the customer time to learn about competitive
power suppliers. The price of standard offer service will increase over time.
Default service is the electricity that is supplied by the local distribution
company when a customer is not receiving power from either standard offer
service or a competitive power supplier. The market price for default service
will fluctuate based on the average market price for power. Amounts collected
through these various charges will be reconciled to actual expenditures on an
on-going basis. Currently, 74.9% of retail electric customers receive
standard offer service and 25.1% of retail customers receive default service.
For further information on electric industry restructuring, refer to the
Company's 1998 Annual Report on Form 10-K.
The decrease in total unit sales for both current periods reflects
decreases in retail sales as sales to commercial and industrial customers
declined, and also includes for both periods a decrease in wholesale sales due
primarily to a lower level of sales to ISO - New England.
Operating Expenses
For the current quarter and first half of 1999, operation and maintenance
decreased $3.3 million (52.1%) and $2.2 million (19.4%), respectively, due
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CAMBRIDGE ELECTRIC LIGHT COMPANY
primarily to lower operating costs as a result of the sale of the Kendall
Station facility on December 30, 1998 and lower maintenance costs ($234,000
and $391,000, respectively) also related to the sale of Kendall Station. Also
contributing to the decrease in both the current quarter and first half of
1999 were lower insurance and benefits costs ($144,000 and $132,000,
respectively). Depreciation expense decreased in both current periods
reflecting the sale of the Kendall Station facility and the absence of
adjustments to depreciation recorded in 1998 pursuant to the electric industry
restructuring legislation. The decreases in federal and state income taxes
was due to a lower level of pre-tax income. During both current periods the
decrease in local property and other taxes reflects lower property tax expense
($126,000 and $259,000, respectively), and lower payroll and other taxes due
to a decrease in the number of employees, both of which reflect the impact of
the asset sale.
Interest Charges
Interest charges for the current three and six-month periods increased
$232,000 (28.7%) and $472,000 (29.3%), respectively due to increases in other
interest ($438,000 and $747,000, respectively) that include interest on
amounts deferred in conjunction with the Company's restructuring plan as
approved by the DTE. This increase was offset in part by lower long-term
interest costs ($206,000 and $275,000) due to the repayment of a $10 million
(8.04%) debt issue during the first quarter of 1999 and by the significantly
lower interest on short-term borrowings due to a lower average level of short-
term borrowings during the current periods.
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, COM/Energy 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 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 customers in 51 communities. The merger is
expected to occur shortly after the satisfaction of certain conditions,
including the receipt of the required approvals. On June 24, 1999, common
shareholders of COM/Energy and BEC approved the merger. On June 30, 1999, the
FERC approved the merger. On July 27, 1999, the DTE approved the rate plan
filed by the utility subsidiaries of the two companies that is an integral
part of the merger. On August 16, 1999, the Massachusetts Attorney General's
Office and a group of four intervenors filed appeals of the DTE's rate plan
order with the Massachusetts Supreme Judicial Court. The significant elements
of the rate plan include a four-year distribution rate freeze for each of the
NSTAR retail utility subsidiaries and the recovery of all merger-related costs
including an acquisition premium of approximately $516 million. On August 11,
1999, the Nuclear Regulatory Commission approved the transfer of control of
Canal Electric's interest in the Seabrook nuclear generating plant from
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CAMBRIDGE ELECTRIC LIGHT COMPANY
COM/Energy to NSTAR. The remaining merger approval from the Securities and
Exchange Commission is expected to be issued in August.
The Merger Agreement may be terminated under certain circumstances,
including by any party if the merger is not consummated by December 5, 1999,
subject to an automatic extension of six months if the requisite regulatory
approvals have not yet been obtained by such date. The merger will be
accounted for as an acquisition of COM/Energy by BEC 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 the Parent'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, implemented, and all of these systems have
been modified, upgraded or replaced. COM/Energy is currently at a 98%
completion level in its five-phase process for all systems, with completion of
the last stages of its extensive testing process for the final six systems
expected by September 30, 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 has reported to
the North American Electric Reliability Council (NERC) that it met the NERC
target date of June 30, 1999 for 100% readiness of all its mission critical
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CAMBRIDGE ELECTRIC LIGHT COMPANY
components required for the continued safe and reliable delivery of electrici-
ty into the Year 2000. COM/Energy's gas and other operations are also at a
100% completion level for all mission critical issues regarding Year 2000
readiness. Overall, the non-information technology systems are at a 99%
completion level, with the final items scheduled for completion by August 31,
1999.
Modifying and testing COM/Energy's information and transaction processing
systems from 1996 through 2000 is currently expected to cost approximately
$10.2 million, including approximately $900,000, $3.1 million and $3.2 million
incurred through 1997, 1998 and the first half of 1999, respectively.
Approximately $3 million is expected to be spent during 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. COM/Energy has ranked its vendors in terms of importance,
and as of June 30, 1999 has received adequate responses from 100% of its
"critical" and "high" rated vendors. 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 all other vendors is continuing and inadequate
responses are being pursued by COM/Energy. COM/Energy is prepared to replace
certain suppliers or to initiate other contingency plans for any vendor not
responding to COM/Energy's satisfaction.
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 has identified the
elements of the infrastructure that are critical to its operations and has
requested and obtained information as to the expected Year 2000 readiness of
these elements.
COM/Energy has completed the development of its Year 2000 contingency
plans for all operational areas that may be effected by Year 2000 issues.
COM/Energy's 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 COM/Energy. The implementation of
the contingency plans will continue throughout the remainder of 1999.
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.
<PAGE>
<PAGE 15>
CAMBRIDGE ELECTRIC LIGHT COMPANY
While COM/Energy believes its efforts to address the Year 2000 issue will
allow it to be successful in avoiding any material adverse effect on
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 avail-
ability of key Year 2000 personnel, the readiness of third parties, and
COM/Energy's ability to respond to unforeseen Year 2000 complications.
New Accounting Principles
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every deri-
vative instrument (including certain derivative instruments embedded in other
contracts possibly including fixed-price fuel supply and power contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000
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.
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.
<PAGE>
<PAGE 16>
CAMBRIDGE ELECTRIC LIGHT COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was an intervenor in an appeal at the Massachusetts
Supreme Judicial Court (SJC) filed by the Massachusetts Institute of
Technology (MIT) involving a DTE decision approving a customer
transition charge (CTC) for the recovery of stranded investment
costs. By its terms, the CTC was terminated on March 1, 1998,
coincident with the retail access date established by the
Massachusetts Legislature in the Electric Industry Restructuring
Act. On September 18, 1997, the SJC remanded the CTC matter to the
DTE for further consideration. The SJC stated that, although
recovery of prudent and verifiable stranded costs by utility
companies is in the public interest and consistent with the Public
Utility Regulatory Policies Act, the insufficiencies of the DTE's
subsidiary findings precluded the SJC from undertaking a meaningful
review of the DTE's calculations that formed the basis of the CTC.
The DTE is in the process of determining whether to hear additional
evidence in the remand or to rely on the record and pleadings
already filed. At this time, management is unable to predict the
ultimate outcome of this proceeding.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
six months ended June 30, 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
None
<PAGE>
<PAGE 17>
CAMBRIDGE ELECTRIC LIGHT COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBRIDGE ELECTRIC LIGHT COMPANY
(Registrant)
Principal Financial and
Accounting Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: August 16, 1999
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<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet, statement of income and statement of cash flows contained in
Form 10-Q of Cambridge Electric Light Company for the six months ended June
30, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
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<LEGEND>
This schedule contains restated summary financial information extracted from
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statement of cash flows contained in Form 10-K of Cambridge Electric Light
Company for the fiscal year ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000016573
<NAME> CAMBRIDGE ELECTRIC LIGHT COMPANY
<MULTIPLIER> 1,000
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<PERIOD-END> DEC-31-1998
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<CAPITAL-LEASE-OBLIGATIONS> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 186,729
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<GROSS-OPERATING-REVENUE> 118,707
<INCOME-TAX-EXPENSE> 3,423
<OTHER-OPERATING-EXPENSES> 105,316
<TOTAL-OPERATING-EXPENSES> 108,739
<OPERATING-INCOME-LOSS> 9,968
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