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News Analysis

Fortnightly Magazine - January 1 1999

Rising projections, with few expenditures to date, paint an uncertain picture.

"In almost all cases, companies will have material events and changes requiring updated year 2000 disclosure in each quarterly and annual report filed with us."

That was the general mandate suggested by the Securities and Exchange Commission last summer in its interpretive release on the disclosure requirements for the Y2K issue. In other words, the "Management Discussion and Analysis" section of Forms 10-K and 10-Q (annual and quarterly reports filed with the SEC by all publicly held companies) should include detailed and specific information. But have utilities responded as requested? And more importantly, what are they reporting?

The SEC release calls for the companies to address four categories of information in their MD&A: (1) their state of readiness, including information on both information technology as well as embedded systems issues; (2) the costs of addressing the Y2K issue; (3) risks involved, including a description of possible worst-case scenarios; and (4) their contingency plans to be implemented in the event of worst-case scenarios coming to fruition.

A survey of Forms 10-Q filed by electric utilities show different degrees of readiness and cost projections.

Spending Lags

In spite of the hefty price tags, many of the companies state that their Y2K projects should have no material impact on operating results or cash flows. In fact, while many companies began their the Y2K projects a few years ago, they still have spent a relatively small proportion of their total estimated expenditures. Of the large public utilities surveyed, only one gave an explanation for this. PECO Energy Co., which estimates a $75.4 million Y2K price tag but had spent only $7.4 million, stated in its third-quarter 10-Q that the majority of the cost would be spent in the testing phase.

Detroit Edison estimates that addressing the Y2K problem will cost between $50 million and $75 million, $13 million of which was spent between Jan. 1 and Sept. 30. Many of the larger utilities studied, in fact, give estimates somewhere in that range, although Carolina Power & Light Co. expects to spend only $18 million. FPL Group and Florida Power & Light, which gave Y2K barely a mention in their June 30 10-Q, responded to the SEC release in their third-quarter report. They expect Y2K costs to total about $50 million, 20 percent of which had been spent as of Sept. 30.

There also remains the possibility that estimates may balloon as 2000 draws nearer. In its second-quarter 10-Q, Southern California Edison Co. estimated a Y2K price tag of anywhere between $55 million and $80 million. Its third-quarter report, however, gets more specific, simply putting the cost estimate at the ceiling of the previous range, $80 million.

Pacific Gas & Electric Co., already one of the top spenders for Y2K adjustments, is raising its projected costs. In its second-quarter 10-Q, the company stated that it expected to spend $100 million during the remainder of 1998 and 1999 on the matter. However, in its third-quarter report, future cost estimates jumped to $180 million, not including the $80

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