Conectiv's Recent SEC 10Q

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This should interest those of us in MD, Del, Va, NJ, and PA. As of the end of January they have only completed 30% of their power systems and 10% of the distribution systems. They have only spent 3 of 15 million and the budget is expected to rise. Ad infinitum ad nauseum. Can anyone on this forum say with any degree of confidence they will be producing power in 2000? BB

II-11 The following chart sets forth the current estimated completion percentage of the 140 different systems in the Year 2000 Project by major business group, and for the information technology systems used in managing Conectiv's busi- ness. Conectiv expects significant progress in remediation and testing over the next quarter based on work that is in process and material that is being ordered.
Inventory and Corrective Action/ System Testing/ Business Group Assessment Unit Testing Compliance -------------- ------------- ------------------ --------------- Business systems........ 95% 85% 65% Power production........ 95% 30% 30% Electricity distribution........... 95% 10% 5% Gas delivery............ 95% 60% 60% Competitive services.... 90% - 95% 30% - 80% 30% - 80%
Conectiv is also contacting vendors and service providers to review remediation of their Year 2000 issues. Many aspects of Conectiv's businesses are dependent on third parties. For example, fuel suppliers must be able to provide coal or gas to allow Conectiv's subsidiaries to generate electricity. Distribution of electricity is dependent on the overall reliability of the electric grid. ACE and DPL are cooperating with the North American Electric Reliability Council (NERC) and the PJM Interconnection in Year 2000 remediation and remediation planning efforts, and have accelerated their Year 2000 Project timeline to be generally in-line with the recommendations of those groups. At this time, a few generating units are scheduled for remediation and testing in September to coincide with previously scheduled outages. Recent reports issued by NERC indicate a diminished risk of disrup- tion to the electric grid caused by Year 2000 issues. Conectiv has incurred approximately $3 million in costs for the Year 2000 Project. Current estimates of the costs for the Year 2000 Project range from $10 million to $15 million. These estimates could change significantly as the Year 2000 Project progresses. The costs set forth above do not include several significant expenditures covering new systems, such as Conectiv's SAP busi- ness, financial and human resources management system and an Energy Control System. While the introduction of these new systems effectively remediated Year 2000 problems in the systems they replaced, Conectiv has not previously reported the expenditures on these systems in its costs for the Year 2000 Project. Since the project team is still in the process of assessing and correcting impacted systems, equipment and processes, Conectiv cannot with certainty de- termine whether the Year 2000 issue might cause disruptions to its operations and have impacts on related costs and revenues. Conectiv assesses the status of the Year 2000 Project on at least a monthly basis to determine the likeli- hood of business disruptions. Based on its own Year 2000 program, as well as reports from NERC and other utilities, Conectiv's management believes it is unlikely that significant Year 2000 related disruptions will occur. However, any substantial disruption to Conectiv's operations could negatively impact Conectiv's revenues, significantly impact its customers and could generate le- gal claims against Conectiv. Conectiv's results of operations and financial position would likely suffer an adverse impact if other entities, such as sup- pliers, customers and service providers do not effectively address their Year 2000 issues.

-- Anonymous, March 30, 1999

Answers

Bob, a comparison of Conectiv's third quarter 1998 SEC filing and this 10K filing for fiscal year end 1998 shows us what changes have been made in the three months difference the reports are addressing. (The 10K may have just recently been filed, but the data in it is for year end 1998.)

Much of this latest report's Year 2000 statement is a word for word duplicate of the earlier 10Q. The first change is an omission of part of the second paragraph of the earlier report which said:

"Those items rated as high or medium are believed to put the Company's business operations and customers at substantial risk and are then subject to the second phase of the project."

This was replaced by, "Those items rated as high or medium are then subject to the second phase of the project."

[Initially I just thought the legal team had decided it was better not to mention any "substantial risk", but an item later in the report might indicate another possible motivation for this change.]

Three sentences were added to the third paragraph of this report which were not in the first:

"Overall, Conectiv's Year 2000 Project covers approximately 140 different systems (some with numerous components) that had been originally identified as high or medium in criticality. However, only 21 of those 140 systems are essential for Conectiv to provide electric and gas service to its customers. The Year 2000 Project team will be focusing on these 21 systems, with additional work on the other systems continuing based on their relative importance to Conectiv's businesses."

[So, the 140 systems originally assessed as "believed to put the Company's business operations and customers at substantial risk" have now been re-assessed to 21 "essential" systems, which have project work priority. A reason for the omission of the earlier substantial risk definition now becomes more understandable in light of the change in work priorities to an essential 21 systems.]

The next change was an expected one, that of the chart indicating completion percentages. The Inventory and Assessment completions for Business Systems remained the same at 95%. The I&A completions for Power Production went from 90% to 95%. The I&A completion percentages for Electricity Distribution also went from 90% to 95%.

The Corrective Action (remediation) percentages for Business Systems went from 70% to 85%. Power Production went from 0% to 30% and Electricity Distribution went from 5% to 10%.

The Testing and Compliance category, indicating final completion and implementation of remediated systems, went from 60% to 65% for Business Systems. For Power Production, the change was from 0% to 30%. For Electricity Distribution there was no change -- it remained at 5%.

A summary of Conectiv's data shows that in three months 5% more business systems reached the final project stage. The first 30% of Power Production systems reached the final stage, and there was no change from the previous 5% of Distribution systems which were finalized.

In the paragraph about the overall reliability of the electric grid this was added: "At this time, a few generating units are scheduled for remediation and testing in September to coincide with previously scheduled outages. Recent reports issued by NERC indicate a diminished risk of disruption to the electric grid caused by Year 2000 issues."

Another slight change was that the previous statement, "Additionally, the project team will be updating existing outage contingency plans to address Year 2000 issues over the next 12 months," became just "Additionally, the project team will be updating existing outage contingency plans to address Year 2000 issues."

The $3 million of costs incurred to date remained exactly the same, as did the projected cost estimates of $10 to $15 million. It was added that the costs did not include expenditures for Conectiv's SAP business system nor a new Energy Control System.

Both reports contained the line, "Since the project team is still in the process of assessing and correcting impacted systems, equipment and processes, the Company cannot currently determine whether the Year 2000 issue might cause disruptions to its operations and have impacts on related costs and revenues."

Conectiv did add this line, "Based on its own Year 2000 program as well as reports from NERC and other utilities, Conectiv's management believes it is unlikely that significant Year 2000 related disruptions will occur." Then they ended the report with basically the same line as before:

"Conectiv's results of operations and financial position would likely suffer an adverse impact if other intities, such as suppliers, customers and service providers do not effectively address their Year 2000 issues."

My overall assessment of the changes? Conectiv has revised their priorities to a minimum of systems which they have now termed essential and they will be working on the other systems (formerly determined to put the business at substantial risk) as they can get to them. Assessment is not completed for the original 140 critical systems. Critical business software systems are 2/3s done, their power production systems are not quite 1/3 done, and their distribution system is still in remediation/testing infancy. Progress has obviously been slower than one would hope for, but Conectiv seems to be putting great stock in NERC's and other utilites' position of a diminished risk of disruption to the grid. I hope NERC and those other utilities which are farther along are right about a "diminished risk" because Conectiv may have problems getting their own final testing done in order to find out for themselves.

-- Anonymous, March 30, 1999


Thanks BC.

The only sensible thing to do is to be prepared. I am. But too many are following the piper and are in a 'wait and see' mode. I hope NERC is right. If they are not it looks like lights out here for quite a while.

BB

-- Anonymous, March 31, 1999


Bob, I agree that preparation is the wisest course of action. What I found most interesting is that this is the first utility example I've seen which has demonstrated the same kind of "downsizing" of critical systems which we have seen happening among government agencies. Over a year ago, full compliance was the watch word, then it became critical systems compliance, then critical systems "readiness" and now we have critical systems being re-defined. A few months ago, any system defined as putting a business at "substantial risk" was a critical system. Now we see Conectiv forming an "essential" subcategory of critical. To me this would be like saying, "keep the heart beating and worry about the arterial bleeding later." Practical, but definitely not reassuring. The whole process would be funny if the end result didn't have such severe possible consequences. 2000 is going to be an interesting year.

-- Anonymous, March 31, 1999

Bonnie,

You're good.

Didn't equate Conectiv's downsizing of mission-critical with the gov. I simply assumed (mistake) that they know this is a matter of life and death and have identified the 'life and death' systems. But upon further review, (Boy am I glad instant replay is back.), me thinks they have found themselves in a corner timewise. Power and distribution systems have to take laborious time and effort dealing with embedded chip systems. They must know there is no time to fix it all. This has to be the answer to the downsizing of mission-critical. To cover themselves they point to NERC as the guiding light. Bob

-- Anonymous, March 31, 1999


Bob - I think you may have hit the nail on the head with your comment "To cover themselves they point to NERC as the guiding light." I wrote to Northern States Power complaining when they told people here that there was no greater chance of power loss on 1/1/00 than any other winter day. They wrote back, and said in large part: That's what NERC says. I bet we see a claim of "that's the best information available, how were we to know anything more?" (Even after the utilities have been advised that there is a method of "exception reporting" that doesn't report some of the bad news to DOE or the public.

-- Anonymous, March 31, 1999


I sat and discussed these very issues with Conectiv in Jan.. at their Mays Landing offices. They are well aware of what's at stake if they try and finesse this issue. I don't believe they are doing this. Will that and a quarter mean we'll have electric in Jan 00? I think it's true that so many factors beyond their control could come into play that we have to realize they are caught in the same dilemna as the rest of us. To that end we should prepare for some problems. Do I buy the Gary North et. al. view of TOTAL Grid collapse followed by the collapse of our society. NOT!

-- Anonymous, April 02, 1999

If you are going to set North up as a straw man, first understand what he really believes. North DOES NOT say there WILL be a grid collapse. His position is that he sees no way the grid can stay up. His position is that IF the grid does go down for sixty days western civilization is in trouble. I don't see a problem with that position. See www.russkelly.com for the official statements of y2k experts.

-- Anonymous, April 02, 1999

Bonnie,

It occurs to me while reading your assessment of Connectiv's SEC 10Q that deep research such as yours is increasingly rare these days. Can you imagine what a different world we would live in if everyone had to do this kind of research before buying stocks on the internet?

Meanwhile, can someone please explain again what the difference is between "ready" and "compliant"? The distinction keeps slipping away from me...

-- Anonymous, April 09, 1999


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