The following is a post from the Yourdon forum:

Dan, there is a post in this forum on March 31 about CP&L spending $4 million on y2k from 1994 to now, while planning to spend $13 million between now and August when it will be "ready." Can you shed some light on what that's all about? Are they going to be doing three times as much work in the next 6 months as they've done in the past 6 years?

Can someone respond to this? The factual information is from the latest SEC filing.

-- Anonymous, April 01, 1999

Answers

I cannot speak for CP&L, but in my experience it is quite possible for an Information Technology project to have such a cash flow. First it is a good idea to pay out larger percentages of a projects total contract dollars at the end rather than equally over the course of the work. The idea is that the vendor is paid larger amounts as a more complete product is delivered. This is not the case where you are paying out only on a time and materials (pay as you go) basis. Large software or systems projects often have a mix of both types of contracts.

Another element is related to the number of people using the software or systems being developed. While you are developing software you may have a relatively small number of users and when it is being used for the purpose it is intended the number of users does jump up dramatically. An example might be a dozen people using it during development and thousands using it after its in productive use. This is significant because many software systems are priced based upon the number of users licensed for use or using the system at the same time. These fees can easily amount into a differential of millions of dollars (tens of millions for large enterprise wide systems). Since such a large amount of money is involved, the prudent thing to do, because of the cost of capital (interest paid on borrowed money and/or interest lost on money not invested), is to pay for the increase in use as late as possible in the project. Assuming the companys cash flow can support that pay out at that later date. In a large utility, cash flow is usually not a problem and deferral to as late a date as possible is not unusual. An exception to that general case occurs when one budget cycle ends and another begins - some payments may be made sooner rather that later to keep the accountants and the IRS happy.

Another factor is always at work in Information Technology projects  fear of the unknown and unexpected. Any project manager who has graciously returned funds to the general budget just prior to the unknown and unexpected happening is unlikely to do it twice. Besides it is better to be under budget that over budget - unless of course you were tired of working for them anyway.

Of course they could be in a heap-o-trouble. In which case the money might have been budgeted for the level of desired testing that will now not be possible in the time remaining. In my experience, however, such a large bump in the bucks was always of interest to CFOs, internal auditors and the like. Consequently, they had to be explained and the heap-o-trouble explanation never went over well.

-- Anonymous, April 01, 1999

Charles, I appreciate that response. That does make some sense. Thanks again.

-- Anonymous, April 01, 1999

Puddintame, I can't explain what CP&L might have planned budget wise and Charles did a great job of explaining the various fiscal planning concerns. (Thanks, Charles!) I can add some information, though. That data for Carolina Power & Light is from their SEC 10Q for the third quarter of 1998. They just filed their 10K for the end of 1998 and the cost information has changed substantially. This is the "Costs" paragraph in the 10K:

"As of January 31, 1999, the total remaining cost of the Year 2000 Project is estimated at $12 million. This estimate excludes Year 2000 Project costs attributable to recent subsidiary acquisitions, which the Company does not expect to be material to its financial position and results of operations. Approximately $4 million is for new software and hardware purchases and will be capitalized. The remaining $8 million will be expensed as incurred. Through December 1998, the Company had incurred and expensed approximately $8 million related to the inventory, assessment and remediation of non-compliant systems, equipment and applications. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived using assumptions of future events including the continued availability of certain resources, third parties' Year 2000 readiness and other factors."

In both the earlier 10Q and the 10K the estimated project completion date is the same --August, 1999. This is what has changed, cost-wise, in the three months time difference addressed in these reports:

As of Sept. 30, 1998, CP&L had spent $4 million and the "total remaining" cost was estimated to be $13 million. This makes an overall project cost of $17 million.

As of Dec. 31, 1998, CP&L had spent $8 million and as of Jan. 31, 1999 the "total remaining" cost is estimated to be $12 million. This comes to an overall project cost of $20 million. CP&L has *raised* their estimated cost projections by 3 million dollars.

-- Anonymous, April 01, 1999

Bonnie and Charles, thank you for those wonderful answers. If you feel like it elaborating, I am now wondering whether the $3 million increase in estimated total cost has any clear implications about the status of the project? My main questions have been answered above. Thanks again.

-- Anonymous, April 01, 1999

Puddintame, there are only two implications I can think of which might pertain to the $3 million increase in projected expense. The first is the obvious one -- like other reports (Gartner, for instance) indicate, the cost of Y2K projects has been underestimated.

The second thought which comes to mind is that the most recent projected total expenditure was as of Jan. 31 of this year, after the NERC report to the DOE was released and at a time when it was known that the industry was saying fewer problems had been found than was initially expected. That being the case, you would expect to see the earlier projected expenses declining somewhat as less items needing remediation or replacement were encountered. Either that or the initial projections were even farther under actual costs than we see now.

This is just surmisal, however, and certainly no conclusions are possible about an industry pattern based on just one utility report. CP&L could be an anomaly and we may yet see other utlities' projected costs go down. We'll have to wait for more cost information from all the rest of the SEC filers. The 10K's are being posted now, but I prefer to wait until the middle of April when the 10Q's for the first quarter of 1999 are due. Those Year 2000 statements will be more up to date (only six weeks old versus 12 weeks for the 10Ks) and any changes should be more apparent. (Plus we're traveling on vacation between now and then and I don't think we're going to take the laptop with us. I may go through information withdrawal but seeing and playing with the grandkids will more than make up for it!)

-- Anonymous, April 01, 1999

So sorry, I meant to say May 15 for the first quarter 10Q's, not April 15. Six weeks to go for those reports.

-- Anonymous, April 01, 1999