UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] |
| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended September 30, 2009 | |
| 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: | 001-02301 |
NSTAR Electric Company |
(Exact name of registrant as specified in its charter) |
Massachusetts |
| 04-1278810 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification Number) |
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800 Boylston Street, Boston, Massachusetts |
| 02199 |
(Address of principal executive offices) |
| (Zip code) |
(617) 424-2000 |
(Registrant's telephone number, including area code) |
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.
| [X] | Yes |
| [ ] | No |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| [ ] | Yes |
| [ ] | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | [ ] |
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Non-accelerated filer | [ X ] |
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| Smaller reporting company | [ ] |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| [ ] | Yes |
| [ X ] | No |
The number of shares outstanding of the registrant's class of common stock was 100 Common Stock shares, par value $1 per share, as of October 29, 2009.
The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. |
NSTAR Electric Company
Form 10-Q
Quarterly Period Ended September 30, 2009
Table of Contents
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Glossary of Terms |
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Cautionary Statement Regarding Forward-Looking Information |
| 3 | ||||||||
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Part I. Financial Information: |
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| Item 1. | Financial Statements (unaudited) |
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| 9 -16 | ||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| 16 - 27 | ||||||
| Item 4. |
| 27 | |||||||
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Part II. Other Information: |
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| Item 1. |
| 28 | |||||||
| Item 1A. |
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| Item 5. |
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| Item 6. |
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| Exhibit 31.1 | Section 302 CEO Certification |
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| Exhibit 31.2 | Section 302 CFO Certification |
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| Exhibit 32.1 | Section 906 CEO Certification |
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| Exhibit 32.2 | Section 906 CFO Certification |
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Important Information | ||||||||||
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NSTAR Electric files its Forms 10-K, 10-Q, 8-K reports, and other information with the Securities and Exchange Commission (SEC). You may access materials free of charge NSTAR Electric has filed with the SEC on NSTAR’s website atwww.nstar.com: Select “Investor Relations” and “Financial Information” or on the SEC’s website atwww.sec.gov. Copies of NSTAR Electric’s SEC filings may also be obtained free of charge by writing to NSTAR’s Investor Relations Department at the address on the cover of this Form 10-Q or by calling 781-441-8338. As a wholly-owned subsidiary of NSTAR, NSTAR Electric is subject to the NSTAR Board of Trustees Guidelines on Significant Corporate Governance Issues, a Code of Ethics for the Principal Executive Officer, General Counsel, and Senior Financial Officers pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, and a Code of Ethics and Business Conduct for Trustees (Directors), Officers and Employees (“Code of Conduct”). NSTAR Electric intends to disclose any amendment to, and any waiver from, a provision of the Code of Ethics that applies to the Chief Executive Office or Chief Financial Officer or any other executive officer and that relates to any element of the Code of Ethics definition enumerated in Item 406(b) of Regulation S-K, on Form 8-K, within four business days following the date of such amendment or waiver. NSTAR Electric’s Corporate Governance documents, including charters, guidelines and codes, an d any amendments to such charters, guidelines and codes that are applicable to NSTAR Electric’s executive officers, senior financial officers or directors can be accessed free of charge on NSTAR’s website at:www.nstar.com Select “Investor Relations” and “Company Information.” The certifications of NSTAR Electric's Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are attached to this Quarterly Report on Form 10-Q as Exhibits 31.1, 31.2, 32.1 and 32.2. | ||||||||||
1
Glossary of Terms
The following is a glossary of abbreviated names or acronyms frequently used throughout this report.
NSTAR Companies |
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| |
NSTAR |
| NSTAR (Parent company) or NSTAR and its subsidiaries (as the context requires) | |
NSTAR Electric |
| NSTAR Electric Company | |
NSTAR Gas |
| NSTAR Gas Company | |
NSTAR Electric & Gas |
| NSTAR Electric & Gas Corporation | |
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| |
Regulatory and Other Authorities |
| ||
DOE |
| U.S. Department of Energy | |
DPU |
| Massachusetts Department of Public Utilities | |
FERC |
| Federal Energy Regulatory Commission | |
IRS |
| U.S. Internal Revenue Service | |
ISO-NE |
| ISO (Independent System Operator) - New England, Inc | |
PCAOB |
| Public Company Accounting Oversight Board (United States) | |
SEC |
| U.S. Securities and Exchange Commission | |
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Other |
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AFUDC |
| Allowance for Funds Used During Construction | |
ARRA |
| American Recovery and Reinvestment Act of 2009 | |
CPSL |
| Capital Projects Scheduling List | |
CY |
| Connecticut Yankee Atomic Power Company | |
DSM |
| Demand-Side Management | |
GAAP |
| Generally Accepted Accounting Principles in the United States of America | |
GCA |
| Massachusetts Green Communities Act | |
MD&A |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
MWh |
| Megawatthour (equal to one million watthours) | |
MY |
| Maine Yankee Atomic Power Company | |
PAM |
| Pension and PBOP Rate Adjustment Mechanism | |
PBOP |
| Postretirement Benefits Other than Pensions | |
RMR |
| Reliability Must Run | |
ROE |
| Return on Equity | |
SIP |
| Simplified Incentive Plan | |
SSCM |
| Simplified Service Cost Method | |
YA |
| Yankee Atomic Electric Company | |
2
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains statements that are considered forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements may also be contained in other filings with the SEC, in press releases and oral statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are based on the current expectations, estimates or projections of management and are not guarantees of future performance. Some or all of these forward-looking statements may not turn out to be what NSTAR El ectric expected. Actual results could differ materially from these statements. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved.
Examples of some important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to, the following:
· | adverse financial market conditions including changes in interest rates and the availability and cost of capital |
· | adverse economic conditions |
· | changes to prevailing local, state, and federal governmental policies and regulatory actions (including those of the DPU and the FERC) with respect to allowed rates of return, rate structure, continued recovery of regulatory assets and energy costs, financings, municipalization, acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies, and changes in and compliance with environmental and safety laws and policies |
· | new governmental regulations or changes to existing regulations that impose additional operating requirements or liabilities |
· | changes in available information and circumstances regarding legal issues and the resulting impact on our estimated litigation costs |
· | weather conditions that directly influence the demand for electricity |
· | impact of continued cost control processes on operating results |
· | ability to maintain current credit ratings |
· | impact of uninsured losses |
· | impact of adverse union contract negotiations |
· | damage from major storms |
· | impact of conservation measures and self-generation by our customers |
· | changes in financial accounting and reporting standards |
· | changes in hazardous waste site conditions and the cleanup technology |
· | prices and availability of operating supplies |
· | impact of terrorist acts and cyber-attacks, and |
· | impact of service quality performance measures |
Any forward-looking statement speaks only as of the date of this filing and NSTAR Electric undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult all further disclosures NSTAR Electric makes in its filings to the SEC. Other factors in addition to those listed here could also adversely affect NSTAR Electric. This Quarterly Report also describes material contingencies and critical accounting policies and estimates in the accompanyingNotes to Condensed Consolidated Financial Statements and in the accompanying Part I, Item 2,“Management’s Discussion and Analysis of Financial Condition and Results of Operations”(MD&A) and NSTAR Electric encourages a review of these items.
3
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands)
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| 2009 |
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| 2008 |
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| 2009 |
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| 2008 |
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Operating revenues |
| $ | 702,409 |
| $ | 796,701 |
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| $ | 1,983,589 |
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| $ | 2,025,796 |
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Operating expenses: |
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Purchased power and transmission |
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| 319,125 |
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| 417,188 |
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| 995,298 |
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| 1,033,871 |
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Operations and maintenance |
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| 77,749 |
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| 81,030 |
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| 229,484 |
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| 250,007 |
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Depreciation and amortization |
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| 84,591 |
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| 84,812 |
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| 256,511 |
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| 254,538 |
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DSM and renewable energy programs |
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| 24,603 |
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| 18,680 |
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| 59,337 |
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| 51,065 |
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Property and other taxes |
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| 23,130 |
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| 20,664 |
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| 68,556 |
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| 61,721 |
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Income taxes |
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| 59,883 |
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| 59,245 |
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| 123,804 |
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| 118,226 |
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Total operating expenses |
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| 589,081 |
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| 681,619 |
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| 1,732,990 |
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| 1,769,428 |
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Operating income |
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| 113,328 |
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| 115,082 |
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| 250,599 |
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| 256,368 |
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Other income (deductions): |
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Other income, net |
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| 1,560 |
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| 1,745 |
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| 4,344 |
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| 4,100 |
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Other deductions, net |
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| (159 | ) |
| (1,391 | ) |
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| (771 | ) |
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| (1,925 | ) |
Total other income, net |
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| 1,401 |
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| 354 |
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| 3,573 |
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| 2,175 |
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Interest charges (income): |
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Long-term debt |
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| 20,937 |
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| 19,667 |
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| 62,247 |
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| 59,052 |
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Transition property securitization |
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| 4,792 |
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| 6,982 |
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| 15,595 |
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| 22,090 |
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Short-term debt and other, net |
|
| (5,388 | ) |
| (3,855 | ) |
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| (20,921 | ) |
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| (9,350 | ) |
AFUDC |
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| (101 | ) |
| (297 | ) |
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| (341 | ) |
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| (1,284 | ) |
Total interest charges |
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| 20,240 |
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| 22,497 |
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| 56,580 |
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| 70,508 |
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Net income |
| $ | 94,489 |
| $ | 92,939 |
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| $ | 197,592 |
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| $ | 188,035 |
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Per share data is not relevant because NSTAR Electric Company's common stock is wholly-owned by NSTAR.
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| 2009 |
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| 2008 |
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| 2009 |
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| 2008 |
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Balance at the beginning of the period |
| $ | 1,032,078 |
| $ | 874,434 |
| $ | 1,002,255 |
| $ | 836,918 |
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Add: |
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Net income |
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| 94,489 |
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| 92,939 |
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| 197,592 |
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| 188,035 |
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Subtotal |
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| 1,126,567 |
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| 967,373 |
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| 1,199,847 |
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| 1,024,953 |
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Deduct: |
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Common stock dividends declared to Parent |
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| 40,300 |
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| - |
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| 112,600 |
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| 56,600 |
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Preferred stock dividends declared |
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| 490 |
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| 490 |
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| 1,470 |
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| 1,470 |
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Subtotal |
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| 40,790 |
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| 490 |
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| 114,070 |
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| 58,070 |
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Balance at the end of the period |
| $ | 1,085,777 |
| $ | 966,883 |
| $ | 1,085,777 |
| $ | 966,883 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
NSTAR Electric Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
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| September 30, |
| December 31, | |
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| 2009 |
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| 2008 |
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Assets |
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Utility plant: |
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Electric plant in service, at original cost |
| $ | 5,183,954 |
| $ | 4,970,766 |
Less: accumulated depreciation |
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| 1,241,899 |
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| 1,178,315 |
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| 3,942,055 |
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| 3,792,451 |
Construction work in progress |
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| 56,481 |
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| 111,300 |
Net utility plant |
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| 3,998,536 |
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| 3,903,751 |
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Other property and investments: |
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Equity and other investments |
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| 5,638 |
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| 6,782 |
Restricted cash |
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| 6,988 |
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| 6,988 |
Nonutility property, net |
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| 516 |
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| 518 |
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| 13,142 |
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| 14,288 |
Current assets: |
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Cash and cash equivalents |
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| 9,741 |
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| 8,556 |
Accounts receivable, net of allowance of $23,846 and $25,431 in 2009 and 2008, respectively |
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| 248,885 |
|
| 258,381 |
Accrued unbilled revenues |
|
| 50,287 |
|
| 47,340 |
Regulatory assets |
|
| 311,316 |
|
| 390,551 |
Inventory, at average cost |
|
| 23,135 |
|
| 23,805 |
Refundable income taxes |
|
| 128,340 |
|
| 128,340 |
Other |
|
| 29,429 |
|
| 20,558 |
Total current assets |
|
| 801,133 |
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| 877,531 |
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Deferred debits: |
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Regulatory assets |
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| 1,922,996 |
|
| 2,055,410 |
Other |
|
| 39,891 |
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| 38,822 |
Total deferred debits |
|
| 1,962,887 |
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| 2,094,232 |
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Total assets |
| $ | 6,775,698 |
| $ | 6,889,802 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
NSTAR Electric Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
|
| September 30, |
| December 31, | |||||||
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| 2009 |
| 2008 | |||||||
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Capitalization and Liabilities |
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Common equity: |
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| Common stock, par value $1 per share |
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| (100 shares issued and outstanding) |
| $ | - |
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| $ | - |
| ||
| Premium on common stock |
|
| 992,613 |
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| 992,613 |
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| Retained earnings |
|
| 1,085,777 |
|
|
| 1,002,255 |
| ||
| Total common equity |
|
| 2,078,390 |
|
|
| 1,994,868 |
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Cumulative non-mandatory redeemable preferred stock |
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| 43,000 |
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| 43,000 |
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Long-term debt: |
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Long-term debt |
|
| 1,322,091 |
|
|
| 1,343,954 |
| |||
Transition property securitization |
|
| 212,202 |
|
|
| 331,209 |
| |||
| Total long-term debt |
|
| 1,534,293 |
|
|
| 1,675,163 |
| ||
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|
|
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Current liabilities: |
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|
| |||
| Transition property securitization |
|
| 98,600 |
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|
| 92,580 |
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| Long-term debt |
|
| 126,100 |
|
|
| 688 |
| ||
| Notes payable |
|
| 235,500 |
|
|
| 354,583 |
| ||
| Power contract obligations |
|
| 131,368 |
|
|
| 123,540 |
| ||
| Accounts payable |
|
| 156,512 |
|
|
| 203,337 |
| ||
| Payable to affiliates, net |
|
| 105,007 |
|
|
| 84,244 |
| ||
| Income taxes |
|
| 98,277 |
|
|
| 101,692 |
| ||
| Accrued interest |
|
| 28,391 |
|
|
| 14,490 |
| ||
| Other |
|
| 61,624 |
|
|
| 65,075 |
| ||
| Total current liabilities |
|
| 1,041,379 |
|
|
| 1,040,229 |
| ||
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Deferred credits: |
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| |||
| Accumulated deferred income taxes |
|
| 1,116,426 |
|
|
| 1,091,459 |
| ||
| Power contract obligations |
|
| 245,843 |
|
|
| 345,393 |
| ||
| Pension liability |
|
| 324,338 |
|
|
| 305,668 |
| ||
| Regulatory liability - cost of removal |
|
| 223,676 |
|
|
| 217,266 |
| ||
| Payable to affiliates |
|
| 60,210 |
|
|
| 60,210 |
| ||
| Other |
|
| 108,143 |
|
|
| 116,546 |
| ||
Total deferred credits |
|
| 2,078,636 |
|
|
| 2,136,542 |
| |||
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Commitments and contingencies |
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| |||
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| |||
| Total capitalization and liabilities |
| $ | 6,775,698 |
|
| $ | 6,889,802 |
| ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
| Nine Months Ended September 30, | |||||
|
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| 2009 |
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| 2008 |
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Operating activities: |
|
|
|
|
|
|
|
Net income |
| $ | 197,592 |
| $ | 188,035 |
|
Adjustments to reconcile net income to net |
|
|
|
|
|
|
|
cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 260,130 |
|
| 258,760 |
|
Deferred income taxes |
|
| (698 | ) |
| (14,721 | ) |
Net changes in: |
|
|
|
|
|
|
|
Current assets and liabilities |
|
| 11,644 |
|
| 19,096 |
|
Regulatory assets |
|
| 88,516 |
|
| 57,767 |
|
Long-term power contract obligations |
|
| (91,722 | ) |
| (102,178 | ) |
Deferred debits and credits, net |
|
| 12,324 |
|
| (12,610 | ) |
Net cash provided by operating activities |
|
| 477,786 |
|
| 394,149 |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
Plant expenditures (including AFUDC) |
|
| (235,129 | ) |
| (272,985 | ) |
Proceeds from sale of utility property |
|
| 1,795 |
|
| - |
|
Net change in other investment activities |
|
| 414 |
|
| 746 |
|
Net cash used in investing activities |
|
| (232,920 | ) |
| (272,239 | ) |
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Transition property securitization redemptions |
|
| (112,987 | ) |
| (115,886 | ) |
Issuance of long-term debt |
|
| 100,000 |
|
| - |
|
Premium on issuance of long-term debt |
|
| 4,553 |
|
| - |
|
Long-term debt redemption |
|
| (1,219 | ) |
| (1,167 | ) |
Net change in notes payable |
|
| (119,083 | ) |
| 50,887 |
|
Debt issuance costs |
|
| (875 | ) |
| - |
|
Dividends paid |
|
| (114,070 | ) |
| (58,070 | ) |
Net cash used in financing activities |
|
| (243,681 | ) |
| (124,236 | ) |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 1,185 |
|
| (2,326 | ) |
Cash and cash equivalents at the beginning of the year |
|
| 8,556 |
|
| 16,815 |
|
Cash and cash equivalents at the end of the period |
| $ | 9,741 |
| $ | 14,489 |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest, net of amounts capitalized |
| $ | 62,561 |
| $ | 70,392 |
|
Income taxes |
| $ | 103,944 |
| $ | 106,300 |
|
Non-cash investing activity: |
|
|
|
|
|
|
|
Plant expenditures included in accounts payable |
| $ | 9,701 |
| $ | 19,466 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in NSTAR Electric's 2008 Annual Report on Form 10-K.
Note A. Business Organization and Summary of Significant Accounting Policies
1. About NSTAR Electric
NSTAR Electric Company (“NSTAR Electric” or “the Company”) is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly-owned subsidiary of NSTAR. NSTAR Electric serves approximately 1.1 million electric distribution customers in the City of Boston and 80 surrounding communities. NSTAR is a holding company engaged through its subsidiaries in the retail electric distribution and transmission and retail natural gas distribution businesses and serves approximately 1.4 million customers in Massachusetts, including NSTAR Electric’s distribution customers and approximately 300,000 natural gas distribution customers in 51 communities served by NSTAR's other retail utility subsidiary NSTAR Gas. NSTAR has a services company, NSTAR Electric & Gas, that provides management and support services to substantially all NSTAR subsidiaries.
Harbor Electric Energy Company, a wholly-owned subsidiary of NSTAR Electric, provides distribution service and ongoing support to its only customer, the Massachusetts Water Resources Authority's wastewater treatment facility located on Deer Island in Boston, Massachusetts. In addition, NSTAR Electric consolidates its three wholly-owned special-purpose subsidiaries, BEC Funding LLC, BEC Funding II LLC, and CEC Funding LLC, which were established to facilitate the sale of electric rate reduction certificates at public offerings. The certificates of these special-purpose subsidiaries are secured by a portion of the transition charge assessed on NSTAR Electric's retail customers as permitted by the 1997 Massachusetts Electric Restructuring Act and authorized by the DPU. These certificates are non-recourse to NSTAR Electric. These entities are included in the accompanying condensed consolidated financial statements of NSTAR Electric.
2. Basis of Consolidation and Accounting
The accompanying condensed consolidated financial information presented as of September 30, 2009 and for the three and nine-month periods ended September 30, 2009 and 2008 has been prepared from NSTAR Electric's books and records without audit by an independent registered public accounting firm. However, NSTAR Electric's independent registered public accounting firm has performed a review of these interim financial statements in accordance with standards established by the PCAOB. The review report is filed as Exhibit 99.1 to this Form 10-Q. Financial information as of December 31, 2008 was derived from the audited consolidated financial statements of NSTAR Electric, but does not include all disclosures required by GAAP. In the opinion of NSTAR Electric's management, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial information for the periods indicated, have been included. Certain immaterial reclassifications have been made to the accompanying prior period Condensed Consolidated Statement of Cash Flow amounts to conform to the current period’s presentation.
NSTAR Electric follows accounting policies prescribed by the FERC and the DPU. In addition, NSTAR Electric is subject to the accounting and reporting requirements of the SEC. NSTAR Electric is subject to the application of an accounting standard that considers the effects of regulation resulting from differences in the timing of their recognition of certain revenues and expenses from those of other businesses and industries. The distribution and transmission businesses are subject to rate-regulation that is based on cost recovery and meets the criteria for application of this accounting standard.
9
The preparation of financial statements in conformity with GAAP requires management of NSTAR Electric to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The results of operations for the three and nine-month periods ended September 30, 2009 and 2008 are not indicative of the results that may be expected for an entire year. The demand for electricity is affected by weather conditions, economic conditions, and consumer conservation behavior. Electric energy sales and revenues are typically higher in the winter and summer months than in the spring and fall months.
3. Pension and Postretirement Benefits Other than Pensions (PBOP) Plans
NSTAR Electric’s allocated net periodic Pension Plan and PBOP Plan benefit costs for the third quarter are based on the latest annual actuarial valuation.
NSTAR Electric’s Pension Plan and NSTAR’s PBOP Plan assets are affected by fluctuations in the financial markets. Net periodic pension and postretirement benefit costs for 2009 have increased over 2008 primarily due to the decline in the Plans’ asset values during 2008. Fluctuations in the fair value of the Pension Plan and PBOP Plan assets impact the funded status, accounting costs, and cash funding requirements of these Plans. The earnings impact of increased Pension and PBOP costs is mitigated by NSTAR’s DPU-approved Pension and PBOP rate adjustment mechanism (PAM).
Pension
NSTAR Electric is the sponsor of the NSTAR Pension Plan (the Plan), which is a defined benefit retirement plan that covers substantially all employees. As its sponsor, NSTAR Electric allocates the costs of the Plan to NSTAR Electric & Gas. NSTAR Electric & Gas charges all of its benefit costs to the NSTAR operating companies, including NSTAR Electric, based on the proportion of total direct labor charged to the Company. During the nine months ended September 30, 2009, NSTAR contributed approximately $30 million to the Plan. NSTAR currently anticipates contributing approximately $70 million of additional funds to the Plan during the remainder of 2009. The actual level of funding may be different from this estimate.
Components of net periodic pension benefit cost were as follows:
|
|
| Three Months Ended |
| Nine Months Ended | |||||||||
|
|
| September 30, |
| September 30, | |||||||||
(in millions) |
|
| 2009 |
|
| 2008 |
|
|
| 2009 |
|
| 2008 |
|
Service cost |
| $ | 5.3 |
| $ | 5.2 |
|
| $ | 16.0 |
| $ | 15.4 |
|
Interest cost |
|
| 15.4 |
|
| 15.2 |
|
|
| 46.3 |
|
| 45.7 |
|
Expected return on Plan assets |
|
| (14.5 | ) |
| (21.6 | ) |
|
| (43.6 | ) |
| (64.7 | ) |
Amortization of prior service cost |
|
| (0.2 | ) |
| (0.2 | ) |
|
| (0.6 | ) |
| (0.6 | ) |
Recognized actuarial loss |
|
| 13.4 |
|
| 3.8 |
|
|
| 40.0 |
|
| 11.4 |
|
Net periodic pension benefit cost |
| $ | 19.4 |
| $ | 2.4 |
|
| $ | 58.1 |
| $ | 7.2 |
|
Postretirement Benefits Other than Pensions
NSTAR also provides health care and other benefits to retired employees who meet certain age and years of service eligibility requirements. Under certain circumstances, eligible retirees are required to contribute to the costs of postretirement benefits.
To fund these postretirement benefits, NSTAR, on behalf of NSTAR Electric and other NSTAR subsidiaries, makes contributions to various VEBA trusts that were established pursuant to section 501(c)(9) of the Internal Revenue Code.
10
NSTAR Electric participates in the Plan trusts with other NSTAR subsidiaries. Plan assets are available to provide benefits for all Plan participants who are former employees of NSTAR Electric and other subsidiaries of NSTAR. During the nine months ended September 30, 2009, NSTAR contributed approximately $22 million to this plan and anticipates contributing approximately $8 million for the remainder of 2009 toward these benefits. NSTAR Electric will fund approximately $18 million and $6 million of these amounts, respectively.
The net periodic postretirement benefit cost allocated to NSTAR Electric for the nine-month period ended September 30, 2009 was $27 million, as compared to $13 million in the nine-month period ended September 30, 2008.
4. Short-Term Debt and Other Interest Charges (Income), net
Major components of interest charges (income) related to short-term debt and other, net were as follows:
|
|
| Three Months Ended |
| Nine Months Ended |
| |||||||
|
|
| September 30, |
| September 30, |
| |||||||
(in thousands) |
|
| 2009 |
|
| 2008 |
|
| 2009 |
|
| 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
| $ | 147 |
| $ | 1,733 |
| $ | 607 |
| $ | 5,715 |
|
Regulatory assets |
|
| (5,779 | ) |
| (5,053 | ) |
| (17,176 | ) |
| (12,724 | ) |
Interest on income tax items |
|
| (459 | ) |
| (873 | ) |
| (6,656 | ) |
| (3,609 | ) |
Other |
|
| 703 |
|
| 338 |
|
| 2,304 |
|
| 1,268 |
|
Total short-term debt and other, net |
| $ | (5,388 | ) | $ | (3,855 | ) | $ | (20,921 | ) | $ | (9,350 | ) |
5. New Accounting Standards Updates
Disclosures about Pension and Other Postretirement Plan Assets
Effective December 31, 2009, the Company will implement additional disclosure requirements for pension and other postretirement plan assets. These additional disclosures include: how management makes investment allocation decisions, the major categories of plan assets, the valuation methodologies used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs, changes in plan assets for the period, and significant concentrations of risk within plan assets. Since this requirement relates only to disclosures about the Company’s pension and other postretirement plan assets, the additional disclosure requirements will not affect the Company’s financial position, results of operations, or cash flows.
Variable Interest Entities
Amended consolidation guidance applicable to variable interest entities will be effective for NSTAR Electric beginning in fiscal year 2010. The Company continues to assess the potential impact of adoption.
6. Subsequent Events
Management has reviewed subsequent events through October 29, 2009 and concluded that no material subsequent events have occurred that are not accounted for in the accompanying financial statements or disclosed in the accompanying notes.
Note B. Cost of Removal
For NSTAR Electric, the ultimate cost to remove utility plant from service (cost of removal) is recognized as a component of depreciation expense in accordance with approved regulatory treatment. As of September 30, 2009 and December 31, 2008, the estimated amount of the cost of removal included in regulatory liabilities was $223.7 million and $217.3 million, respectively, and are reflected as “Deferred
11
credits: Regulatory liability – cost of removal” on the accompanying Condensed Consolidated Balance Sheets. These estimates are based on the cost of removal component in current depreciation rates.
Note C. Derivative Instruments
Energy Contracts
NSTAR Electric accounts for its energy contracts in accordance with applicable accounting standards and guidance. NSTAR Electric has determined that its electricity supply contracts qualify for, and NSTAR Electric has elected, the normal purchases and sales exception. As a result, these agreements are not reflected on the accompanying Condensed Consolidated Balance Sheets.
Note D. Income Taxes
Income taxes are accounted for in accordance with the application of an accounting standard that requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Pursuant to the application of certain accounting standards related to regulated companies and income taxes, net regulatory assets of $29 million and $30.4 million and corresponding net increases in accumulated deferred income taxes were recorded as of September 30, 2009 and December 31, 2008, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes.
NSTAR Electric is part of a consolidated tax group. As such, income tax payments are either due to or from NSTAR (Parent).
The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 2009 and the actual effective income tax rate for the year ended December 31, 2008:
|
| 2009 |
|
| 2008 |
|
Statutory tax rate |
| 35 | % |
| 35 | % |
State income tax, net of federal income tax benefit |
| 4 |
|
| 4 |
|
Effective tax rate |
| 39 | % |
| 39 | % |
Uncertain Tax Positions
There were no changes to estimates of unrecognized tax benefits during the three and nine-month periods ended September 30, 2009.
Interest on tax positions
Unrecognized benefits associated with interest on construction-related uncertain tax positions from the use of SSCM were $4.4 million and $9 million as of September 30, 2009 and December 31, 2008, respectively. During the second quarter of 2009, NSTAR Electric recognized $4.6 million of these previously unrecognized benefits. The likelihood that the amount of the remaining unrecognized benefits relating to the deduction for these construction-related costs will be recognized in the form of interest income is remote.
Note E. Fair Value Measurement
NSTAR Electric is obligated to disclose fair value measurement pursuant to the application of an amended accounting standard that defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. While the standard does not expand the use of fair value, it has applicability to several current accounting standards that require or permit measurement of assets and liabilities at fair value. The Company prospectively adopted
12
this new accounting guidance on January 1, 2008, with no impact to its results of operations, financial position, or cash flows.
Financial Instruments
The carrying amounts for cash and cash equivalents, net accounts receivable, other current assets, certain current liabilities, and notes payable as of September 30, 2009 and December 31, 2008, respectively, approximate fair value due to the short-term nature of these securities.
The fair values of long-term indebtedness (excluding notes payable) are based on the quoted market prices of similar issues. Carrying amounts and fair values as of September 30, 2009 and December 31, 2008 were as follows:
|
| September 30, 2009 |
|
| December 31, 2008 | ||||
(in thousands) |
| Carrying Amount |
| Fair Value |
|
| Carrying Amount |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
Long-term indebtedness (including current maturities) | $ | 1,758,993 | $ | 1,837,500 |
| $ | 1,768,431 | $ | 1,779,620 |
Note F. Long-Term Debt Issuance
On February 13, 2009, NSTAR Electric sold, at a premium, $100 million of fixed rate (5.625%) Debentures due November 15, 2017 (effective rate of 4.976%). The Debentures form a single series and are fungible with NSTAR Electric’s 5.625% $300 million Debentures due November 15, 2017 issued on November 19, 2007.
Note G. Commitments and Contingencies
1. Environmental Matters
NSTAR Electric faces possible liabilities as a result of involvement in several multi-party disposal sites, state-regulated sites or third party claims associated with contamination remediation. NSTAR Electric generally expects to have only a small percentage of the total potential liability for the majority of these sites. As of September 30, 2009 and December 31, 2008, NSTAR Electric had a liability of approximately $0.7 million and $0.8 million, respectively, for these environmental sites. This estimated liability recorded is based on an evaluation of all currently available facts with respect to these sites.
Estimates related to environmental remediation costs are reviewed and adjusted as further investigation and assignment of responsibility occurs and as additional sites are identified or NSTAR Electric's responsibilities for such sites evolve or are resolved. NSTAR Electric's ultimate liability for future environmental remediation costs may vary from these estimates. Based on NSTAR Electric's current assessment of its environmental responsibilities, existing legal requirements and regulatory policies, NSTAR Electric does not believe that these environmental remediation costs will have a material adverse effect on NSTAR Electric's consolidated results of operations, financial position, or cash flows.
2. Regulatory Matters
Wholesale Power Cost Savings Initiatives
The Rate Settlement Agreement includes incentives to encourage NSTAR Electric to continue its efforts to advocate on behalf of customers at the FERC to mitigate wholesale electricity cost inefficiencies that would be borne by regional customers. If NSTAR Electric's efforts to reduce customers’ costs are successful, it is allowed to retain a portion of those savings as an incentive, as well as recover related litigation costs. Under the terms of the Rate Settlement Agreement, NSTAR Electric was to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electric's share of benefits is to be
13
collected over three years. As a result of its role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and began collecting some of these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Through September 30, 2009, approximately $17.3 million has been collected from customers for the Wholesale Power Cost Savings Initiatives. NSTAR Electric is unable to predict the timing or ultimate outcome of this DPU proceeding. In the event an adverse decision is issued, it would not have a material impact on the Company's results of operations.
DPU Safety and Reliability Programs (CPSL)
As part of the Rate Settlement Agreement, NSTAR Electric is allowed to recover incremental spending for the double pole inspection, replacement/restoration and transfer program and the underground electric safety program, which includes stray-voltage remediation and manhole inspections, repairs, and upgrades. Recovery of these Capital Program Scheduling List (CPSL) costs is subject to DPU review and approval. NSTAR Electric incurred incremental costs of $11.1 million and $13.1 million in 2006 and 2007, respectively. This includes incremental operations and maintenance and revenue requirements on capital investments. The final reconciliation of 2006 and 2007 CPSL costs recovery is currently under review by the DPU. The incremental costs for the year 2008 are currently under review by the Company and are estimated to be approximately $15 million. NSTAR Electric anticipates filing its final 2008 CPSL cost recovery reconciliation with t he DPU in the fourth quarter of 2009. NSTAR Electric cannot predict the timing of a DPU order related to these pending filings. Should an adverse decision be issued which disallows a significant portion of CPSL cost recovery, it could have a material adverse impact to NSTAR Electric’s results of operations, financial position, and cash flows.
Basic Service Bad Debt Adder
On July 1, 2005, in response to a generic DPU order that required electric utilities in Massachusetts to reflect the cost of the energy-related portion of bad debt costs in their Basic Service rates, NSTAR Electric increased its Basic Service rates and reduced its distribution rates for those bad debt costs. In furtherance of this generic DPU order, NSTAR Electric included a bad debt cost recovery mechanism as a component of the Rate Settlement Agreement. This recovery mechanism (bad debt adder) allows NSTAR Electric to recover its Basic Service bad debt costs on a fully reconciling basis. These rates were implemented, effective January 1, 2006, as part of NSTAR Electric’s Rate Settlement Agreement.
On February 7, 2007, NSTAR Electric filed its 2006 Basic Service reconciliation with the DPU proposing an adjustment related to the increase of its Basic Service bad debt charge-offs. This proposed rate adjustment was anticipated to be implemented effective July 1, 2007. On June 28, 2007, the DPU issued an order approving the implementation of a revised Basic Service rate. However, the DPU instructed NSTAR Electric to reduce distribution rates by the increase in its Basic Service bad debt charge-offs. Such action would result in a further reduction to distribution rates from the adjustment NSTAR Electric made when it implemented the Settlement Agreement and effectively eliminates the fully reconciling nature of the Basic Service bad debt adder.
NSTAR Electric has not implemented the components of the June 28, 2007 DPU order. Implementation of this order would require NSTAR Electric to write-off a previously recorded regulatory asset related to its Basic Service bad debt costs. NSTAR Electric believes its position is appropriate and that it is probable that it will ultimately prevail. However, in the event the DPU does not rule in its favor, NSTAR Electric intends to pursue all legal options. As of September 30, 2009, the potential impact to earnings of a disallowance of the bad debt adder would be approximately $18.9 million, pre-tax. NSTAR Electric cannot predict the timing of this proceeding.
14
Service Quality Indicators
NSTAR Electric filed its 2007 and 2008 Service Quality Reports with the DPU that demonstrated the Company achieved sufficient levels of service performance. The reports indicate that no penalty was assessable for 2007 or 2008.
Other
In the fourth quarter of each year, NSTAR Electric files proposed distribution rate adjustments for effect on the following January 1. These rate adjustments include a SIP rate factor and several other fully reconciling cost recovery items. Consistent with previous filings, the 2009 filings include a combination of actual and forecasted data for 2009 that NSTAR Electric will update during 2010 with year-end data to allow a final investigation and reconciliation. There are several case years that remain outstanding at the DPU. These cases are pending decisions at the DPU and NSTAR Electric cannot predict the timing or the ultimate outcome of these filings.
3. Yankee Companies Spent Fuel Litigation
In October 2006, the U.S. Court of Federal Claims issued a judgment in a spent nuclear fuel litigation, in the amounts of $34.2 million, $32.9 million, and $75.8 million for Connecticut Yankee Atomic Power Company (CY), Yankee Atomic Electric Company (YA), and Maine Yankee Atomic Power Company (MY), respectively. This judgment in favor of these Yankee Companies relates to the alleged failure of the Department of Energy (DOE) to provide for a permanent facility to store spent nuclear fuel for years prior to 2001 for CY and YA, and prior to 2002 for MY (DOE Phase I Damages). NSTAR Electric’s portion of the Phase I judgments amounts to $4.8 million, $4.6 million, and $3 million, respectively. On July 1, 2009, the Yankee Companies filed for additional damages related to the alleged failure of the DOE to provide for a permanent facility to store spent nuclear fuel for the years from January 2002 through December 2008 for CY and YA, and from January 2 003 through December 2008 for MY (DOE Phase II Damages). This phase of the spent nuclear fuel litigation specifies damages in the amounts of $135.4 million, $86.1 million, and $43 million for CY, YA, and MY, respectively. Claim amounts applicable to NSTAR Electric are $19 million, $12 million, and $1.7 million, respectively.
NSTAR Electric cannot predict the ultimate outcome of these pending decisions for trial, appeal or the potential subsequent complaints. However, should the Yankee Companies ultimately prevail, NSTAR Electric’s share of the proceeds received would be refunded to its customers.
4. Legal Matters
In the normal course of its business, NSTAR Electric is involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued and amounts covered by insurance. Based on the information currently available, NSTAR Electric does not believe that it is probable that any such legal liabilities will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities that may result from changes in circumstances could have a material impact on its results of operations, financial condition, and cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
The accompanying MD&A focuses on factors that had a material effect on the financial condition, results of operations and cash flows of NSTAR Electric during the periods presented and should be read in conjunction with the accompanying condensed consolidated financial statements and related notes and with the MD&A in NSTAR Electric's 2008 Annual Report on Form 10-K.
15
Business Overview
NSTAR Electric Company ("NSTAR Electric" or "the Company") is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly-owned subsidiary of NSTAR. NSTAR Electric's wholly-owned subsidiaries are Harbor Electric Energy Company, BEC Funding LLC, BEC Funding II LLC, and CEC Funding LLC. NSTAR Electric serves approximately 1.1 million electric distribution customers in the City of Boston and 80 surrounding communities. Harbor Electric Energy Company provides electric distribution service and ongoing support to its only customer, the Massachusetts Water Resources Authority's Wastewater treatment facility located on Deer Island in Boston, Massachusetts. BEC Funding LLC, BEC Funding II LLC, and CEC Funding LLC are special purpose entities created to facilitate the sale of electric rate reduction certificates to the public. NSTAR Electric's core business is its electric transmission and distribution operations with a continued commitment for safe and reliable energy delivery to its customers. NSTAR Electric's strategy is to invest in transmission and distribution assets that will align with its core competencies.
Earnings
NSTAR Electric's earnings are impacted by its customers’ requirements for energy in the form of unit sales of electric kWh, which directly determine the levels of retail distribution and transmission revenues recognized. In accordance with the regulatory rate structures in which NSTAR Electric operates, its recovery of energy and energy-related costs are fully reconciled with the level of energy revenues currently recorded and, therefore, do not have an impact on earnings.
Net income for the three and nine-month periods ended September 30, 2009 amounted to $94.5 million and $197.6 million, respectively, as compared to $92.9 million and $188 million, respectively, for the same periods in 2008, as further explained in this discussion.
Critical Accounting Policies and Estimates
For a complete discussion of critical accounting policies, refer to "Critical Accounting Policies and Estimates" in Item 7 of NSTAR Electric's 2008 Form 10-K. There have been no substantive changes to those policies and estimates.
Rate Structure
a. Rate Settlement Agreement
NSTAR Electric is currently operating under a DPU-approved seven-year Rate Settlement Agreement (“Rate Settlement Agreement”) that expires December 31, 2012. From 2007 through 2012, the Rate Settlement Agreement establishes for NSTAR Electric, among other things, annual inflation-adjusted distribution rate adjustments that are generally offset by an equal and corresponding reduction in transition rates. The increase adjustment will be 1.32% effective January 1, 2010; and corresponding adjustments were 1.74%, 2.68%, and 2.64% effective January 1, 2009, 2008, and 2007, respectively. Uncollected transition charges as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge.
16
b. Electric Rates
Retail electric delivery rates are established by the DPU and are comprised of:
· | a distribution charge, which includes a fixed customer charge and a demand and/or energy charge (to collect the costs of building and expanding the infrastructure to deliver power to its destination, as well as ongoing operating costs and certain DPU-approved safety and reliability program costs), a Pension and PBOP Rate Adjustment Mechanism (PAM) to recover related costs and a reconciling rate adjustment mechanism to recover costs associated with the residential assistance adjustment clause, |
· | a basic service chargerepresents the collection of energy costs, including costs related to charge-offs of uncollected energy costs, through DPU-approved rate mechanisms. Electric distribution companies in Massachusetts are required to obtain and resell power to retail customers through Basic Service for those who choose not to buy energy from a competitive energy supplier. Basic Service rates are reset every six months (every three months for large commercial and industrial customers). The price of Basic Service is intended to reflect the average competitive market price for electric power, |
· | a transition charge represents the collection of costs primarily from previously held investments in generating plants and costs related to existing above-market power contracts, and contract costs related to long-term power contracts buy-outs, |
· | a transmission charge represents the collection of costs of moving the electricity over high voltage lines from generating plants to substations located within NSTAR’s service area including costs allocated to NSTAR Electric by ISO-NE to maintain the wholesale electric market, |
· | an energy conservation chargerepresents a legislatively-mandated charge to collect costs for demand-side management programs and energy efficiency programs, and |
· | a renewable energy charge represents a legislatively-mandated charge to collect the costs to support the development and promotion of renewable energy projects. |
c. Regulatory Matters
Wholesale Power Cost Savings Initiatives
The Rate Settlement Agreement includes incentives to encourage NSTAR Electric to continue its efforts to advocate on behalf of customers at the FERC to mitigate wholesale electricity cost inefficiencies that would be borne by regional customers. If NSTAR Electric's efforts to reduce customers’ costs are successful, it is allowed to retain a portion of those savings as an incentive, as well as recover related litigation costs. Under the terms of the Rate Settlement Agreement, NSTAR Electric was to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electric's share of benefits is to be collected over three years. As a result of its role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and began collecting some of these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Through September 30, 2009, approximately $17.3 million ha s been collected from customers for the Wholesale Power Cost Saving Initiatives. NSTAR Electric is unable to predict the timing or ultimate outcome of this DPU proceeding. In the event an adverse decision is issued, it would not have a material impact on the Company’s results of operations.
DPU Safety and Reliability Programs (CPSL)
As part of the Rate Settlement Agreement, NSTAR Electric is allowed to recover incremental spending for the double pole inspection, replacement/restoration and transfer program and the underground electric safety program, which includes stray-voltage remediation and manhole inspections, repairs, and
17
upgrades. Recovery of these Capital Program Scheduling List (CPSL) costs is subject to DPU review and approval. NSTAR Electric incurred incremental costs of $11.1 million and $13.1 million in 2006 and 2007, respectively. This includes incremental operations and maintenance and revenue requirements on capital investments. The final reconciliation of 2006 and 2007 CPSL costs recovery is currently under review by the DPU. The incremental costs for the year 2008 are currently under review by the Company and are estimated to be approximately $15 million. NSTAR Electric anticipates filing its final 2008 CPSL cost recovery reconciliation with the DPU in the fourth quarter of 2009. NSTAR Electric cannot predict the timing of a DPU order related to these pending filings. Should an adverse decision be issued which disallows a significant portion of CPSL cost recovery, it could have a material adverse impact to NSTAR Electric’ s results of operations, financial position, and cash flows.
Basic Service Bad Debt Adder
On July 1, 2005, in response to a generic DPU order that required electric utilities in Massachusetts to reflect the cost of the energy-related portion of bad debt costs in their Basic Service rates, NSTAR Electric increased its Basic Service rates and reduced its distribution rates for those bad debt costs. In furtherance of this generic DPU order, NSTAR Electric included a bad debt cost recovery mechanism as a component of its Rate Settlement Agreement. This recovery mechanism (bad debt adder) allows NSTAR Electric to recover its Basic Service bad debt costs on a fully reconciling basis. These rates were implemented, effective January 1, 2006, as part of NSTAR Electric’s Rate Settlement Agreement.
On February 7, 2007, NSTAR Electric filed its 2006 Basic Service reconciliation with the DPU proposing an adjustment related to the increase of its Basic Service bad debt charge-offs. This proposed rate adjustment was anticipated to be implemented effective July 1, 2007. On June 28, 2007, the DPU issued an order approving the implementation of a revised Basic Service rate. However, the DPU instructed NSTAR Electric to reduce distribution rates by the increase in its Basic Service bad debt charge-offs. Such action would result in a further reduction to distribution rates from the adjustment NSTAR Electric made when it implemented the Settlement Agreement and effectively eliminates the fully reconciling nature of the Basic Service bad debt adder.
NSTAR Electric has not implemented the components of the June 28, 2007 DPU order. Implementation of this order would require NSTAR Electric to write-off a previously recorded regulatory asset related to its Basic Service bad debt costs. NSTAR Electric believes its position is appropriate and that it is probable that it will ultimately prevail. However, in the event the DPU does not rule in its favor, NSTAR Electric intends to pursue all legal options. As of September 30, 2009, the potential impact to earnings of a disallowance of the bad debt adder would be approximately $18.9 million, pre-tax. NSTAR Electric cannot predict the timing of this proceeding.
FERC Transmission ROE
NSTAR Electric earns an 11.14% ROE on local transmission facility investments. The ROE on NSTAR Electric’s regional transmission facilities is 11.64%. Additional incentive adders are decided on a case-by-case basis according to FERC’s national transmission incentive rules. The FERC may grant a variety of financial incentives, including ROE basis point incentive adders for qualified investments made in new regional transmission facilities that can bring the ROE for NSTAR Electric up to 12.64% for certain qualified regional investments. In addition, NSTAR Electric may qualify for other incentives on future transmission projects based upon certain conditions that could bring the ROE to 13.1%.
Other
a. Energy Efficiency Plans
NSTAR Electric administers an energy efficiency program. The GCA directs electric and gas distribution companies to develop three-year energy efficiency plans. The first three-year plan is to be effective January 1, 2010, and is expected to lead to a significant expansion of energy efficiency activity in
18
Massachusetts. Like the historical programs, the new three-year plans may include financial incentives based on energy efficiency program performance. In addition, the DPU has stated that it will permit distribution companies that do not as yet have rate decoupling mechanisms in place to implement lost base revenue rate adjustment mechanisms that will offset reduced distribution rate revenues as a result of successful energy efficiency programs.
During 2009, NSTAR Electric anticipates spending approximately $74.2 million. For 2010, NSTAR Electric anticipates that the program will constitute $130 million in spending, subject to DPU approval.
b. American Recovery and Reinvestment Act of 2009 (ARRA)
The American Recovery and Reinvestment Act of 2009 (ARRA) provides resources for significant increases in spending in several energy-related areas that have relevance to NSTAR Electric, including energy efficiency, smart grid funding, renewable energy financing and transmission projects. These initiatives are largely directed through federal and state governmental agencies and not-for-profit public agencies. NSTAR Electric continues to evaluate the impact of this legislation on its business initiatives in these areas. Any action will require regulatory approval.
NSTAR Electric is in the process of pursuing U.S. Department of Energy (DOE) Funding Opportunities made available under the ARRA. In August 2009, NSTAR Electric applied for Federal grants for its Smart Grid Programs. The requested funding represents 50% of the estimated total project costs. On October 27, 2009, NSTAR Electric received notice from the DOE that it had been awarded a $10 million grant related to a distribution automation proposal. NSTAR Electric anticipates that most of the remaining costs not recovered through the grant process will be recovered from customers. These projects are anticipated to enhance information technology, communications and monitoring functions, and improve reliability and efficiency on NSTAR Electric’s distribution network.
c. Proposed Transmission Investment
On May 21, 2009, NSTAR and Northeast Utilities announced that the FERC issued a declaratory judgment that ruled favorably on the proposed structure of a transmission arrangement for a new participant-funded transmission line between New England and Quebec. Under this arrangement, firm transmission rights would be assigned to Hydro-Quebec, and the proposed line would transmit at least 1,200 megawatts of power. NSTAR, Northeast Utilities, and Hydro-Quebec have agreed to develop this project, and are currently negotiating long-term transmission service and purchase power agreements.
Results of Operations
The following section of MD&A compares the results of operations for each of the three and nine-month periods ended September 30, 2009 and 2008 and should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report.
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Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008
Executive Summary of Quarterly Results
Net income was $94.5 million for the quarter ended September 30, 2009 compared to $92.9 million for the same period in 2008. Major factors (after-tax) that contributed to the $1.6 million, or 1.7%, increase in the three months ended September 30, 2009 earnings include:
· | Lower operations and maintenance expense primarily due to milder weather in 2009 that led to fewer emergent restoration events, lower storm-related costs due to the absence of severe storms. Also contributing were control of outside services and lower administrative and other operating costs ($1.9 million) |
· | Higher transmission margin primarily due to higher current earnings resulting from higher investment base ($1.3 million) |
· | Higher other income due to changes in cash surrender value of executive life insurance policies ($1.2 million) |
These increases in earnings factors were partially offset by:
· | Higher depreciation and amortization and property tax expenses in 2009 related to higher electric plant investments and higher municipal tax rates ($2.7 million) |
Significant cash flow events during the quarter include the following:
· | Cash flows from operating activities provided approximately $230.6 million, an increase of $13 million as compared to the same period in 2008. The increase primarily reflects the timing of the collection of energy supply costs from customers. |
· | NSTAR Electric invested approximately $54 million in capital projects to improve system reliability and capacity |
· | NSTAR Electric paid approximately $40.8 million in common share dividends to NSTAR and retired approximately $40.8 million in long-term and securitized debt |
Energy sales
The following is a summary of retail electric energy sales for the periods indicated:
Retail Electric Sales - MWh | Three Months Ended September 30, | ||||||
|
| 2009 |
| 2008 |
| % Change |
|
|
|
|
|
|
|
|
|
Residential |
| 1,760,094 |
| 1,795,946 |
| (2.0) |
|
Commercial, Industrial, and other |
| 3,978,336 |
| 4,148,861 |
| (4.1) |
|
Total retail sales |
| 5,738,430 |
| 5,944,807 |
| (3.5) |
|
NSTAR Electric’s energy sales in the three months ended September 30, 2009 declined 3.5% compared to 2008 primarily due to unfavorable weather conditions resulting from a cooler summer during 2009 as compared to 2008. Cooling degree-days in the Boston area for the three months ended September 30, 2009 were down 11.4% from the same period in 2008. Electric sales were also impacted by economic conditions and customer conservation behavior.
Weather, fluctuations in fuel costs, conservation measures, and economic conditions affect sales to NSTAR Electric’s residential and small commercial customers. Economic conditions, fluctuations in fuel costs, and conservation measures affect NSTAR Electric’s large commercial and industrial customers. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature variations. Refer to the“Operating Revenues” section below for a more detailed discussion.
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Weather conditions
NSTAR Electric forecasts its electric sales based on normal weather conditions. Actual results may vary from those projected due to actual weather conditions, economic conditions, energy conservation, and other factors. Refer to the“Cautionary Statement Regarding Forward-Looking Information” section preceding Part 1“Financial Information” of this Form 10-Q.
NSTAR Electric customers’ demand for electricity is affected by weather conditions. Weather conditions impact electric sales primarily during the summer. Customer heating or cooling usage may not directly correlate with historical levels or with the level of degree-days that occur (as further discussed below), particularly when weather patterns experienced are consistently colder or warmer. Also, NSTAR Electric’s business is sensitive to variations in daily weather, is highly influenced by New England’s seasonal weather variations, and is susceptible to severe storm-related incidents that could adversely affect the Company’s ability to provide energy.
Degree-days measure changes in daily mean temperature levels. A degree-day is a unit measuring how much the outdoor daily mean temperature falls below (in the case of heating) or rises above (in the case of cooling) a base of 65 degrees. The comparative information below relates to heating degree-days for the three months ended September 30, 2009 and 2008 and the number of heating degree-days in a “normal” year using a 30-year average. NSTAR Electric uses the “normal 30-year average” degree-days data to compare current temperature readings to a baseline or “normal” period, that is recalculated every ten years for the preceding 30 years, as collected at Boston’s Logan Airport for heating and cooling degree-day data. Weather conditions during the three months ended September 30, 2009 measured by heating and cooling degree-days, respectively, were 34.6% higher/colder related to heating degree-days and 11.4% lower /cooler related to cooling degree-days for 2009 as compared to 2008. Refer to the“Operating Revenues” section below for a more detailed discussion.
Heating Degree-Days |
|
|
Three months ended September 30, 2009 |
| 105 |
Three months ended September 30, 2008 |
| 78 |
Normal 30-Year Average |
| 96 |
|
|
|
Percentage that 2009 was colder than 2008 |
| 34.6% |
Percentage that 2009 was colder than 30-year average |
| 9.4% |
Cooling Degree-Days |
|
|
Three months ended September 30, 2009 |
| 512 |
Three months ended September 30, 2008 |
| 578 |
Normal 30-Year Average |
| 593 |
|
|
|
Percentage that 2009 was cooler than 2008 |
| 11.4% |
Percentage that 2009 was cooler than 30-year average |
| 13.7% |
Operating revenues
Operating revenues for the third quarter of 2009 decreased $94.3 million, or 11.8%, from the same period in 2008 as follows:
(in millions) |
| Three Months Ended September 30, |
|
| Increase (Decrease) | |||||||
Operating revenues |
|
| 2009 |
|
| 2008 |
|
| Amount |
| Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail distribution and transmission |
| $ | 331.7 |
| $ | 304.1 |
| $ | 27.6 |
| 9.1 | % |
Energy, transition, and other |
|
| 370.7 |
|
| 492.6 |
|
| (121.9 | ) | (24.7 | )% |
Total operating revenues |
| $ | 702.4 |
| $ | 796.7 |
| $ | (94.3 | ) | (11.8 | )% |
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NSTAR Electric's largest earnings sources are the revenues derived from distribution and transmission rates approved by the DPU and the FERC. Electric retail distribution revenues primarily represent charges to customers for recovery of the Company's capital investment, including a return component, and operation and maintenance costs related to its electric distribution infrastructure. The transmission revenue component represents charges to customers for the recovery of similar costs to move the electricity over high voltage lines from the generator to the Company's distribution substations.
The increase of $27.6 million, or 9.1%, in retail distribution and transmission revenues primarily reflects:
· | Increase in transmission revenues is primarily due to the recovery of a higher transmission investment base and recovery of higher regional network service costs ($28 million) |
· | Increased electric revenues resulting from the annual inflation rate adjustment ($3.7 million) |
These increases were partially offset by:
· | Decreased energy sales of 3.5% due to the impact of weather conditions, economic conditions and customer conservation measures ($3.7 million) |
Energy, transition, and other revenues primarily represent charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for recovery of the Company's prior investments in generating plants and the costs related to long-term power contracts. The energy revenues relate to customers being provided energy supply under Basic Service. These revenues are fully reconciled to the costs incurred and have no impact on NSTAR Electric's consolidated net income. Energy, transition, and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs (incentive entitlements), rental revenue from electric property, and annual cost reconciliation true-up adjustments. The $121.9 million decrease in energy, transition, and other revenues is primarily attributable to lower demand and lower energy costs. Uncollected transition costs as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge.
Operating expenses
Purchased power and transmission expense was $319.1 million in the third quarter of 2009 compared to $417.2 million in the same period of 2008, a decrease of $98.1 million, or 23.5%. The decrease in expense reflects lower energy sales of 3.5% and lower energy supply costs. These decreases are partially offset by higher transmission costs of $33.3 million due to an increase in regional network support costs. NSTAR Electric adjusts its rates to collect the costs related to energy supply from customers on a fully reconciling basis. Due to this rate adjustment mechanism, changes in the amount of energy supply expense have no impact on consolidated net income.
Operations and maintenance expense was $77.7 million in the third quarter of 2009 compared to $81 million in the same period of 2008, a decrease of $3.3 million, or 4.1%. Milder weather in 2009 led to lower storm-related costs ($0.7 million). Another factor was control of outside services and lower administrative and other operating costs ($2.7 million).
Depreciation and amortization expense was $84.6 million in the third quarter of 2009 compared to $84.8 million in the same period of 2008, a decrease of $0.2 million, or 0.2%. The decrease primarily reflects lower amortization of costs to achieve, partially offset by higher depreciation.
DSM and renewable energy programs expense was $24.6 million in the third quarter of 2009 compared to $18.7 million in the same period of 2008, an increase of $5.9 million, or 31.6%. The increase reflects higher spending levels during 2009 and is consistent with the collection of conservation and renewable energy revenues. These costs are in accordance with program guidelines established by
22
the DPU and are collected from customers on a fully reconciling basis plus an incentive return. NSTAR Electric anticipates a further increase in DSM spending during 2009 and in future years driven by requirements of the Massachusetts Green Communities Act (GCA). Those spending increases are expected to be funded partially through proceeds from the Regional Greenhouse Gas Initiative and through NSTAR Electric’s participation in the Forward Capacity Market.
Property and other taxes expense was $23.1 million in the third quarter of 2009 compared to $20.7 million in the same period of 2008, an increase of $2.4 million, or 11.6%, reflecting higher overall property investments and higher tax rates.
Income tax expense attributable to operations was $59.9 million in the third quarter of 2009 compared to $59.2 million in the same period of 2008, an increase of $0.7 million, or 1.2%.
Other income, net
Total other income, net was approximately $1.4 million in the third quarter of 2009 compared to $0.4 million in the same period of 2008, an increase of $1.0 million. The increase relates primarily to an increase to the cash surrender value of executive life insurance policies in 2009 compared to a decrease of $1.4 million in 2008, reported as an other deduction.
Interest charges (income)
Interest on long-term debt and transition property securitization certificates was $25.7 million in the third quarter of 2009 compared to $26.6 million in the same period of 2008, a decrease of $0.9 million, or 3.4%. This decrease in interest expense reflects:
· | Lower interest costs of $2.2 million on transition property securitization debt attributable to scheduled principal pay downs |
This decrease was partially offset by:
· | Higher interest costs of $1.3 million associated with NSTAR Electric’s February 2009 $100 million issuance of 5.625% debentures |
Short-term debt and other interest changes (income), net were $5.4 million of net interest income in the third quarter of 2009 compared to $3.9 million of net interest income in the same period of 2008, a change of $1.5 million. The change in short-term and other net interest charges (income) reflects:
· | Lower short-term borrowing costs of $1.6 million resulting from a 202 basis point decrease in the weighted average short-term borrowing rates for the third quarter 2009 (0.28%) to the comparable period of 2008 (2.30%). Partially offsetting the lower rates was an increase in the average level of borrowed funds as compared to the same period in 2008. |
· | Increased interest income of $0.3 million related to the timing of collections from customers of certain regulatory assets |
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Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008
Executive Summary of Year to Date Results
Net income was $197.6 million for the nine-month period ended September 30, 2009 compared to $188 million for the same period in 2008. Major factors (after-tax) that contributed to the $9.6 million, or 5.1%, increase in 2009 earnings include:
· | Lower operations and maintenance expense primarily due to milder weather in 2009 that led to fewer emergent restoration events, lower storm-related costs, and lower labor costs. Also contributing were lower liability claims, control of outside services, and lower administrative and other operating costs ($11.2 million) |
· | Lower net interest charges primarily due to decreases in short-term interest rates, increased interest income on income tax items and increased interest income on regulatory deferrals ($4.4 million) |
· | Higher transmission revenues as a result of increased transmission investment base ($4.1 million) |
These increases in earnings factors were partially offset by:
· | Lower electric distribution revenues due to a 3.7% decrease in sales offset by the annual inflation rate adjustment ($4.1 million) |
· | Higher depreciation and amortization and property tax expenses in 2009 related to higher plant investment and higher municipal tax rates ($7.3 million) |
· | The absence of a cumulative impact in 2008 of implementing the March 29, 2008 FERC ROE order ($2.4 million) |
Significant cash flow events during the nine months ended September 30, 2009 include the following:
· | Cash flows from operating activities provided approximately $477.8 million, an increase of $83.7 million, as compared to the same period in 2008. The increase primarily reflects a change in the timing of income tax payments and the timing of the recovery of energy supply costs when compared to the same period in 2008. These positive sources of cash were partially offset by the timing of payables and energy supply payments |
· | NSTAR Electric invested approximately $235 million in capital projects to improve system reliability and capacity |
· | NSTAR Electric paid approximately $114.1 million in common share dividends to NSTAR and retired approximately $114.2 million in long-term and securitized debt |
Energy sales
The following is a summary of retail electric energy sales for the periods indicated:
Retail Electric Sales - MWh | Nine Months Ended September 30, | |||||
|
| 2009 |
| 2008 |
| % Change |
|
|
|
|
|
|
|
Residential |
| 4,876,682 |
| 4,969,744 |
| (1.9) |
Commercial, Industrial, and other |
| 11,001,807 |
| 11,516,459 |
| (4.5) |
Total retail sales |
| 15,878,489 |
| 16,486,203 |
| (3.7) |
NSTAR Electric’s energy sales in the nine months ended September 30, 2009 declined 3.7% compared to 2008. Electric sales were impacted by cooler weather in the third quarter of 2009 and by economic conditions.
Weather, fluctuations in fuel costs, conservation measures, and economic conditions affect sales to NSTAR Electric’s residential and small commercial customers. Economic conditions, fluctuations in fuel
24
costs, and conservation measures affect NSTAR Electric’s large commercial and industrial customers. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature variations. Refer to the“Operating Revenues” section below for a more detailed discussion.
Weather Conditions
Refer to and consider for this nine-month period ended September 30, 2009 discussion, NSTAR Electric’s disclosure on factors that affect its energy sales, including the effect of variable weather conditions, and a description and use of energy degree-days, as found in the“Three Months Ended September 30, 2009 compared to the Three Months Ended September 30, 2008 – Weather Conditions” section of this MD&A.
The following comparative information relates to heating and cooling degree-days for the nine months ended September 30, 2009 and 2008 and the number of heating and cooling degree-days in a “normal” year using a 30-year average. Weather conditions during the nine months ended September 30, 2009 measured by heating and cooling degree-days, respectively, were 7.7% higher/colder related to heating degree-days and 25% lower/cooler related to cooling degree-days for 2009 as compared to 2008. Refer to the“Operating Revenues” section below for a more detailed discussion.
Heating Degree-Days |
|
|
Nine months ended September 30, 2009 |
| 3,798 |
Nine months ended September 30, 2008 |
| 3,527 |
Normal 30-Year Average |
| 3,750 |
|
|
|
Percentage that 2009 was colder than 2008 |
| 7.7% |
Percentage that 2009 was colder than 30-year average |
| 1.3% |
Cooling Degree-Days |
|
|
Nine months ended September 30, 2009 |
| 591 |
Nine months ended September 30, 2008 |
| 788 |
Normal 30-Year Average |
| 769 |
|
|
|
Percentage that 2009 was cooler than 2008 |
| 25% |
Percentage that 2009 was cooler than 30-year average |
| 23.1% |
Operating revenues
Operating revenues for the nine months ended September 30, 2009 decreased $42.2 million, or 2.1%, from the same period in 2008 as follows:
(in millions) | Nine Months Ended September 30, |
| Increase/(Decrease) |
| |||||||||
Operating revenues |
|
| 2009 |
|
| 2008 |
| Amount |
| Percent |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail distribution and transmission |
| $ | 814.0 |
| $ | 750.8 |
| $ | 63.2 |
|
| 8.4 | % |
Energy, transition, and other |
|
| 1,169.6 |
|
| 1,275.0 |
|
| (105.4 | ) |
| (8.3 | )% |
Total operating revenues |
| $ | 1,983.6 |
| $ | 2,025.8 |
| $ | (42.2 | ) |
| (2.1 | )% |
NSTAR Electric's largest earnings sources are the revenues derived from distribution and transmission rates approved by the DPU and the FERC. Electric retail distribution revenues primarily represent charges to customers for recovery of the Company's capital investment, including a return component, and operation and maintenance costs related to its electric distribution infrastructure. The transmission revenue component represents charges to customers for the recovery of costs to move the electricity over high voltage lines from the generator to the Company's distribution substations.
25
The increase of $63.2 million, or 8.4%, in retail distribution and transmission revenues primarily reflects:
· | Increased transmission revenues primarily due to the recovery of a higher transmission investment base and recovery of higher regional network service costs ($71 million) |
This increase was partially offset by:
· | Decreased energy sales of 3.7% due to the impact of weather conditions, economic conditions, and customer conservation measures offset by increased electric revenues resulting from the annual inflation rate adjustment ($6.7 million) |
Energy, transition, and other revenues primarily represent charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for recovery of the Company's prior investments in generating plants and the costs related to long-term power contracts. The energy revenues relate to customers being provided energy supply under Basic Service. These revenues are fully reconciled to the costs incurred and have no impact on NSTAR's consolidated net income. Energy, transition, and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs (incentive entitlements), rental revenue from electric property, and annual cost reconciliation true-up adjustments. The $105.4 million decrease in energy, transition, and other revenues is primarily attributable to lower demand and lower energy costs. Uncollected transition co sts as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge.
Operating expenses
Purchased power and transmission expense was $995.3 million in the nine months ended September 30, 2009 compared to $1,033.9 million in the same period of 2008, a decrease of $38.6 million, or 3.7%. The decrease in expense reflects lower energy sales of 3.7%, as well as lower basic service and other energy costs ($144.2 million). These decreases are partially offset by higher transmission costs of $88.3 million primarily due to an increase in regional network support costs. NSTAR Electric adjusts its rates to collect the costs related to energy supply from customers on a fully reconciling basis. Due to this rate adjustment mechanism, changes in the amount of energy supply expense have no impact on consolidated net income.
Operations and maintenance expense was $229.5 million in the nine months ended September 30, 2009 compared to $250 million in the same period of 2008, a decrease of $20.5 million, or 8.2%. Milder weather in 2009 led to fewer emergent restoration events and lower storm-related costs ($3.1 million). Other factors were lower liability claims ($2 million), lower labor and labor-related costs ($6.7 million), and control of outside services and lower administrative and other operating costs ($8.5 million).
Depreciation and amortization expense was $256.5 million in the nine months ended September 30, 2009 compared to $254.5 million in the same period of 2008, an increase of $2.0 million, or 0.8%. The increase primarily reflects higher depreciable distribution and transmission plant in service.
DSM and renewable energy programs expense was $59.3 million in the nine months ended September 30, 2009 compared to $51.1 million in the same period of 2008, an increase of $8.2 million, or 16.0%. The increase reflects higher spending levels during 2009 and is consistent with the collection of conservation and renewable energy revenues. These costs are in accordance with program guidelines established by the DPU and are collected from customers on a fully reconciling basis plus an incentive return. NSTAR Electric anticipates a further increase in DSM spending during 2009 driven by requirements of the GCA. These spending increases are expected to be funded partially through proceeds from the Regional Greenhouse Gas Initiative and through NSTAR Electric’s participation in the Forward Capacity Market.
26
Property and other tax expense was $68.6 million in the nine months ended September 30, 2009 compared to $61.7 million in the same period of 2008, an increase of $6.9 million, or 11.2%, reflecting higher overall property investments and higher tax rates.
Income tax expense attributable to operations was $123.8 million in the nine months ended September 30, 2009 compared to $118.2 million in the same period of 2008, an increase of $5.6 million, or 4.7%, reflecting higher pre-tax operating income in 2009.
Other income, net
Total other income, net was approximately $3.6 million in the nine months ended September 30, 2009 compared to $2.2 million in the same period of 2008, an increase of $1.4 million, or 63.6%. The increase relates to increases to the cash surrender value of executive life insurance policies in 2009.
Interest charges (income)
Long-term debt and transition property securitization certificates interest charges were $77.8 million in the nine months ended September 30, 2009 compared to $81.1 million in the same period of 2008, a decrease of $3.3 million, or 4.2%. This decrease in interest expense reflects:
· | Lower interest costs of $6.5 million on transition property securitization debt attributable to scheduled principal pay downs |
This decrease was partially offset by:
· | Higher interest costs of $3.3 million associated with NSTAR Electric’s February 2009 $100 million issuance of 5.625% debentures |
Short-term debt and other interest charges (income), netwere $20.9 million of net interest income in the nine months ended September 30, 2009 compared to $9.4 million of net interest income in the same period of 2008, a change of $11.5 million. The change in the short-term and other net interest charges (income) reflects:
· | Lower borrowing costs of $5.1 million resulting from a 224 basis point decrease in the weighted average short-term borrowing rates from the nine months ended September 30, 2008 (2.60%) to the comparable period in 2009 (0.36%) Partially offsetting the lower rates was an increase in the average level of borrowed as compared to the same period in 2008 |
· | Increased interest income of $7.5 million related to the timing of collections from customers of certain regulatory assets and interest income on federal income tax-related items |
AFUDC decreased $0.9 million in the nine months ended September 30, 2009 due to lower short-term borrowing rates.
Item 4. Controls and Procedures
NSTAR Electric's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
As of the end of the period covered by this Quarterly Report on Form 10-Q, NSTAR Electric carried out an evaluation, under the supervision and with the participation of NSTAR Electric's management, including NSTAR Electric's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
27
and operation of NSTAR Electric's disclosure controls and procedures pursuant to Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NSTAR Electric's disclosure controls and procedures were effective (1) to timely alert them to material information relating to NSTAR Electric's information required to be disclosed by NSTAR Electric in the reports that it files or submits under the Securities Exchange Act of 1934 and (2) to ensure that appropriate information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There have been no changes in NSTAR Electric’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934) during NSTAR Electric's most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, NSTAR Electric's internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
In the normal course of its business, NSTAR Electric and its subsidiaries are involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued and amounts covered by insurance. Based on the information currently available, NSTAR Electric does not believe that it is probable that any such legal liability will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities that may result from changes in estimates could have a material impact on its results of operations, financial condition, or cash flows.
Investors or prospective investors should carefully consider the risk factors that were previously disclosed in NSTAR Electric's Annual Report on Form 10-K for the year ended December 31, 2008.
The following is furnished for informational purposes.
Ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred stock dividend requirements:
Twelve months ended September 30, 2009: |
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Ratio of earnings to fixed charges |
| 5.37 |
Ratio of earnings to fixed charges and preferred stock dividend requirements |
| 5.18 |
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a) | Exhibits: |
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| Exhibit | 4 | - |
| Instruments Defining the Rights of Security Holders, Including Indentures | |
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| Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any agreement or instrument of NSTAR Electric defining the rights of holders of any non-registered debt whose authorization does not exceed 10% of total assets. | |
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| Exhibits filed herewith: | |||||
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| Exhibit | 12 | - |
| Statement re Computation of Ratios | |
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| Computation of Ratio of Earnings to Fixed Charges for the Twelve Months Ended September 30, 2009 | |
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| 12.2 | - |
| Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements for the Twelve Months Ended September 30, 2009 | |
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| Letter Re Unaudited Interim Financial Information | |
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| PricewaterhouseCoopers LLP Awareness Letter | |
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| Rule 13a – 14(a)/15d – 14(a) Certifications | |
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| Certification Statement of Chief Executive Officer of NSTAR Electric pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
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| 31.2 | - |
| Certification Statement of Chief Financial Officer of NSTAR Electric pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
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| Exhibit | 32 | - |
| Section 1350 Certifications | |
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| 32.1 | - |
| Certification Statement of Chief Executive Officer of NSTAR Electric pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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| 32.2 | - |
| Certification Statement of Chief Financial Officer of NSTAR Electric pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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| Exhibit | 99 | - |
| Additional Exhibits | |
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| Report of Independent Registered Public Accounting Firm * | |
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| Rule 436(c) of the 1933 Act provides that a report on unaudited interim financial information shall not be considered part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Section 7 or 11 of the 1933 Act. Therefore, the accountant is not subject to the liability provisions of Section 11 of the 1933 Act. | |
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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.
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| NSTAR Electric Company |
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| (Registrant) |
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Date: October 29, 2009 |
| By: /s/ R. J. WEAFER, JR. |
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| Robert J. Weafer, Jr. |
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| Vice President, Controller and |
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| Chief Accounting Officer |
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