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, 2001
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 1-2301
BOSTON EDISON COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1278810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Boylston Street, Boston, 02199
Massachusetts
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 617-424-2000
Indicate by check mark whether the registrant (1) has filed all
reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the
registrant was required to file such reports), and (2) has been
subject to
such filing requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's
classes of
common stock, as of the latest practicable date.
Class Outstanding at November 1, 2001
Common Stock, $1 par value 100 shares
The Company meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q as a wholly-owned subsidiary and is
therefore filing this Form with the reduced disclosure format.
Part I - Financial Information
Item 1. Financial Statements
Boston Edison Company
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Operating revenues $622,439 $490,561 $1,565,356 $1,266,296
Operating expenses:
Purchased power 343,530 226,038 900,490 627,422
Operations and maintenance 50,426 47,403 143,870 157,570
Depreciation and 42,576 45,600 126,441 128,227
amortization
Demand side management and
renewable energy 13,707 13,620 40,764 41,017
programs
Taxes - property and other 16,428 13,888 51,257 44,510
Income taxes 53,042 45,318 92,937 74,999
Total operating expenses 519,709 391,867 1,355,759 1,073,745
Operating income 102,730 98,694 209,597 192,551
Other income, net 342 3,184 3,606 6,685
Operating and other income 103,072 101,878 213,203 199,236
Interest charges:
Long term debt 11,685 13,327 35,213 41,004
Transition property
securitization 10,337 11,223 31,566 34,625
certificates
Other (476) 9,531 5,382 10,450
Allowance for borrowed funds
used during construction (776) (557) (1,951) (2,005)
Total interest charges 20,770 33,524 70,210 84,074
Net income $ 82,302 $ 68,354 $ 142,993 $ 115,162
======== ======== ======== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Balance at the beginning of the
period $346,850 $254,371 $352,832 $ 1,462
Add:
Net income 82,302 68,354 142,993 115,162
Return of Shareholder Invested
Capital (Note B) - - - 224,201
Subtotal 429,152 322,725 495,825 340,825
Deduct:
Dividends declared:
Dividends to Parent 5,354 - 68,927 15,000
Preferred stock 1,490 1,490 4,470 4,470
Subtotal 6,844 1,490 73,397 19,470
Provision for preferred stock
redemption and issuance costs 60 60 180 180
Balance at the end of the period $422,248 $321,175 $422,248 $321,175
======== ======== ======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
September 30, December 31,
2001 2000
Assets
Utility plant in service, at original cost $2,572,786 $2,522,682
Less: accumulated depreciation 855,733 825,367
1,717,053 1,697,315
Construction work in progress 54,997 39,820
Net utility plant 1,772,050 1,737,135
Equity investments 14,525 15,512
Other investments 22 9,599
Current assets:
Cash and cash equivalents 14,821 12,125
Restricted cash 3,616 3,625
Accounts receivable:
Customers 390,824 200,479
Affiliates 121,351 54,392
Regulatory assets 45,604 193,641
Accrued unbilled revenues 45,878 66,879
Materials and supplies, at average cost 14,895 15,621
Other 391 5,919
Total current assets 637,380 552,681
Deferred debits:
Regulatory assets 788,054 780,974
Prepaid pension expense 179,757 149,889
Other 34,262 46,250
Total assets $3,426,050 $3,292,040
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
September 30, December 31,
2001 2000
Capitalization and Liabilities
Common equity:
Common stock, par value $1 per share
(100 shares issued and outstanding $ - $ -
Premium on common stock 548,350 482,004
Retained earnings 422,248 352,832
Total common equity 970,598 834,836
Accumulated other comprehensive loss, (117) (117)
net
Cumulative nonmandatory redeemable preferred
stock 43,000 43,000
Long-term debt 551,834 577,618
Transition property securitization
Certificates 513,904 584,130
Total long-term debt 1,065,738 1,161,748
Total capitalization 2,079,219 2,039,467
Current liabilities:
Transition property securitization
certificates due within one year 59,041 36,443
Redeemable preferred stock and long-term
debt due within one year 50,765 50,186
Notes payable 160,500 96,500
Accounts payable:
Affiliates 168,587 116,610
Other 86,141 115,783
Deferred taxes 36,245 99,542
Accrued interest 6,432 24,269
Other 190,017 113,409
Total current liabilities 757,728 652,742
Deferred credits:
Accumulated deferred income taxes 494,934 491,098
Accumulated deferred investment tax credits 19,603 20,346
Power contracts 22,083 25,868
Other 52,483 62,519
Total deferred credits 589,103 599,831
Commitments and contingencies
Total capitalization and liabilities $3,426,050 $3,292,040
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30,
2001 2000
Operating activities:
Net income $142,993 $ 115,162
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 126,441 128,227
Deferred income taxes and investment
tax credits (61,696) 34,945
Allowance for borrowed funds used during
construction (1,951) (2,005)
Net changes in working capital (64,646) (1,559)
Other, net (52,153) (165,678)
Net cash provided by operating activities 88,988 109,092
Investing activities:
Plant expenditures (excluding AFUDC) (92,178) (76,900)
Investments 10,585 465
Net cash used in investing activities (81,593) (76,435)
Financing activities:
Long-term debt redemptions (14,020) (200,733)
Capital Contribution - Parent 66,346 -
Transition property securitization
certificates redemptions (47,628) (82,149)
Net change in notes payable 64,000 167,500
Dividends paid (73,397) (25,000)
Net cash used in financing activities (4,699) (140,382)
Net increase (decrease) in cash and cash
equivalents 2,696 (107,725)
Cash and cash equivalents at beginning of year 12,125 117,537
Cash and cash equivalents at end of period $ 14,821 $ 9,812
======== =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 74,267 $ 87,917
========= =========
Income taxes $ 80,818 $ 5,177
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
The accompanying Notes should be read in conjunction with Notes
to the Consolidated Financial Statements incorporated in Boston
Edison's 2000 Annual Report on Form 10-K.
A) The Company
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under Massachusetts
law and is a wholly owned subsidiary of NSTAR. NSTAR is
Massachusetts' largest investor-owned combined electric and gas
utility and is an exempt public utility holding company. NSTAR
is an energy delivery company serving approximately 1.3 million
customers in Massachusetts, including more than one million
electric customers in 81 communities and 244,000 gas customers in
51 communities. Boston Edison serves approximately 681,000
electric customers in the city of Boston and 39 surrounding
communities. NSTAR's retail utility subsidiaries are Boston
Edison, Commonwealth Electric Company (ComElectric), Cambridge
Electric Light Company (Cambridge Electric) and NSTAR Gas Company
(NSTAR Gas). Its wholesale electric subsidiary is Canal Electric
Company (Canal Electric). NSTAR's three retail electric
companies operate under the brand name "NSTAR Electric."
Reference in this report to "NSTAR Electric" shall mean each of
Boston Edison, ComElectric and Cambridge Electric. NSTAR has a
service company that provides management and support services to
substantially all NSTAR subsidiaries - NSTAR Electric and Gas
Corporation (NSTAR Services).
B) Basis of Presentation
The financial information presented as of September 30, 2001 and
for the periods ended September 30, 2001 and 2000 have been
prepared from Boston Edison's books and records without audit by
independent accountants. Financial information as of
December 31, 2000 was derived from the audited consolidated
financial statements of Boston Edison, but does not include all
disclosures required by generally accepted accounting principles
(GAAP). In the opinion of 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 reclassifications have been made to the prior
year data to conform with the current presentation.
The preparation of financial statements in conformity with GAAP
requires management of the Company 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 periods ended September 30,
2001 and 2000 are not indicative of the results that may be
expected for an entire year. Kilowatt-hour sales and revenues
are typically higher in the winter and summer than in the spring
and fall, as sales tend to vary with weather conditions. Higher
usage levels during the summer period, combined with Boston
Edison's higher summer period seasonal rates, have had a
significant impact on the results of operations for this period.
In general, during periods of high demand, the impact on revenues
and expenses can be significant when combined with higher
seasonal demand rates.
Boston Edison experienced a new single hour peak load on August
9, 2001 of 3,311 megawatts (MW) that exceeded the prior peak load
of 3,070 MW by 7.9% experienced in 1999.
The Company's Board of Directors determined and voted that a
portion of the dividends declared on June 24, 1999 and July 22,
1999, which were paid out of retained earnings to its sole
shareholder, was a partial distribution of a return of capital.
As a result, the Company has appropriately transferred the
portion of its dividends deemed return of capital against Premium
on Common Stock.
C) Goodwill
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). This
statement, which is effective for fiscal years beginning after
December 15, 2001, establishes accounting and reporting standards
for acquired goodwill and other intangible assets. The Company
will adopt SFAS 142 in the first quarter of 2002. SFAS 142
states that goodwill shall not be amortized and shall be tested
for impairment on an annual basis. Management is currently
assessing the impact of SFAS 142 in light of its existing
regulatory rate plan requirements of SFAS 142. Therefore, NSTAR
is unable to reasonably estimate the impact of the adoption of
this statement.
D) Contingencies
1. Environmental Matters
Boston Edison is involved in approximately 15 state-regulated
properties where oil or other hazardous materials were previously
spilled or released. Boston Edison is required to clean up these
properties in accordance with specific state regulations. There
are uncertainties associated with these costs due to the
complexities of cleanup technology, regulatory requirements and
the particular characteristics of the different sites. Boston
Edison also continues to have potential liability as a
potentially responsible party in the cleanup of five multi-party
hazardous waste sites in Massachusetts and other states where it
is alleged to have generated, transported or disposed of
hazardous waste at the sites. Boston Edison generally expects to
have only a small percentage of the total potential liability for
these sites. Approximately $4.9 million and $5 million are
included as liabilities in the accompanying Condensed
Consolidated Balance Sheets at September 30, 2001 and December
31, 2000, respectively, related to the non-recoverable portion of
these cleanup liabilities. Management is unable to fully
determine a range of reasonably possible cleanup costs in excess
of the accrued amount. Based on its assessments of the specific
site circumstances, management does not believe that it is
probable that any such additional costs will have a material
impact on the Company's consolidated financial position. However,
it is reasonably possible that additional provisions for cleanup
costs that may result from a change in estimates could have a
material impact on the results of operations for a reporting
period in the near term.
Estimates related to environmental remediation costs are reviewed
and adjusted periodically as further investigation and assignment
of responsibility occurs. Boston Edison is unable to estimate its
ultimate liability for future environmental remediation costs.
However, in view of Boston Edison's current assessment of its
environmental responsibilities, existing legal requirements and
regulatory policies, management does not believe that these
matters will have a material adverse effect on Boston Edison's
financial position or results of operations for a reporting
period.
2. Industry and Corporate Restructuring Legal Proceedings
The MDTE order approving Boston Edison's electric restructuring
settlement agreement was appealed by certain parties to the
Massachusetts Supreme Judicial Court. One appeal remains pending.
However, there has to date been no briefing, hearing or other
action taken with respect to this proceeding. However, if an
unfavorable outcome were to occur, there could be a material
adverse impact on business operations, the consolidated financial
position, cash flows and the results of operations for a
reporting period.
The MDTE order approving the rate plan associated with the merger
of BEC and COM/Energy was appealed by certain parties to the
Massachusetts Supreme Judicial Court. The appeals of the
Massachusetts Attorney General and a separate group that consists
of The Energy Consortium, Harvard University and Associated
Industries of Massachusetts remain pending. In October 2001, the
MDTE certified the record of the case to the court; however,
there has to date been no briefing, hearing or other action taken
with respect to this proceeding. If an unfavorable outcome were
to occur, there could be a material adverse impact on business
operations, the consolidated financial position, cash flows and
the results of operations for a reporting period.
3. Regulatory Proceedings
In a Boston Edison 1999 reconciliation filing with the MDTE, the
Massachusetts Attorney General contested cost allocations related
to Boston Edison's wholesale customers since 1998. On June 1,
2001, the MDTE approved Boston Edison's revenue-credit approach
for wholesale sales to be consistent with Boston Edison's
restructuring settlement. The reconciliation of wholesale
revenues and costs, along with other reconciliation issues are
addressed in Boston Edison's outstanding filing covering the
reconciliation of costs through December 31, 2000. On October
19, 2001, Boston Edison and the Massachusetts Attorney General
filed a proposed Settlement Agreement with the MDTE resolving all
outstanding issues in this filing. This settlement agreement did
not have a material effect on NSTAR's consolidated financial
position or results of operations.
In October 1997, the MDTE opened a proceeding to investigate
Boston Edison's compliance with a 1993 order that permitted the
formation of Boston Energy Technology Group and authorized Boston
Edison to invest up to $45 million in non-utility activities.
Hearings were completed during 1999. Management is currently
unable to determine the timing and outcome of this proceeding.
However, if an unfavorable outcome were to occur, there could be
a material adverse impact on business operations, the
consolidated financial position, cash flows and results of
operations for a reporting period.
On October 29, 2001, NSTAR Electric and NSTAR Gas filed with the
MDTE a proposed service quality plan, which replaced the plan
that had previously been filed as a part of the NSTAR merger rate
plan and which implemented guidelines that had been established
by the MDTE as a result of its generic investigation of service
quality issues. The service quality plan would establish
performance benchmarks effective January 1, 2002 for certain
identified measures of service quality relating to customer
service and billing performance, customer satisfaction and
reliability and safety performance. The companies are required
to report annually concerning their performance as to each
measure and would be subject to penalties of up to two percent of
transmission and distribution revenues should performance fail to
meet the applicable benchmarks. On the same date, NSTAR Electric
and NSTAR Gas also filed with the MDTE a report concerning their
performance on the identified service quality measures for the
two twelve month periods ended August 31, 2000 and 2001. This
report included a calculation of penalties in accordance with
MDTE guidelines whereby penalties were calculated relating
primarily to Boston Edison electric system reliability
performance for the summer of 2001 totaling approximately $3.9
million. NSTAR disputes the legal applicability of penalties for
these performance periods; however proposed in settlement of this
matter to provide credits to Boston Edison customers totaling
$3.9 million, offset in part by other payments to Boston Edison
customers, which have totaled approximately $1.1 million to date,
relating to summer 2001 electric service outages.
Also, on October 29, 2001, NSTAR Electric filed with the MDTE a
comprehensive report regarding electric system performance issues
experienced during the summer of 2001. The filing included
detailed analyses of factors affecting performance, as well as,
the companies' plans to address issues identified. The MDTE has
also requested similar filings from other Massachusetts electric
distribution companies and has stated that they intend to hold
public hearings and adjudicatory hearings concerning each such
filing. NSTAR is unable to estimate its ultimate liability for
future costs as a result of such proceeding. However, in view of
NSTAR's current assessment of its electric distribution system
performance responsibilities, existing legal requirements and
regulatory policies, management does not believe that these
matters will have a material adverse effect on NSTAR's
consolidated financial position or results of operations for a
reporting period.
4. Other Litigation
In the normal course of its business Boston Edison is also
involved in certain other legal matters. Management is unable to
fully determine a range of reasonably possible legal costs in
excess of amounts accrued. Based on the information currently
available, it does not believe that it is probable that any such
additional costs will have a material impact on its consolidated
financial position
E) Income Taxes
The following table reconciles the statutory federal income tax
rate to the annual estimated effective income tax rate for 2001
and the actual effective income tax rate for the year ended
December 31, 2000:
2001 2000
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income tax 4.4 4.4
benefit
Investment tax credit amortization (0.4) (0.7)
Other 1.8 2.0
Effective tax rate 40.8% 40.7%
===== =====
Item 2. Management's Discussion and Analysis
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under
Massachusetts' law and is a wholly owned subsidiary of NSTAR.
NSTAR is Massachusetts' largest investor-owned combined electric
and gas utility. NSTAR is an energy delivery company serving
approximately 1.3 million customers in Massachusetts including
more than one million electric customers in 81 communities and
244,000 gas customers in 51 communities. Boston Edison serves
approximately 681,000 electric customers in the city of Boston
and 39 surrounding communities. NSTAR's retail utility
subsidiaries are Boston Edison, Commonwealth Electric Company
(ComElectric), Cambridge Electric Light Company (Cambridge
Electric) and NSTAR Gas Company (NSTAR Gas). Its wholesale
electric subsidiary is Canal Electric Company (Canal Electric).
NSTAR's three retail electric companies operate under the brand
name "NSTAR Electric." Reference in this report to "NSTAR
Electric" shall mean each of Boston Edison, ComElectric and
Cambridge Electric. NSTAR has a service company that provides
management and support services to substantially all NSTAR
subsidiaries - NSTAR Electric and Gas Corporation (NSTAR
Services).
The electric industry has continued to change in response to
legislative, regulatory and marketplace demands for improved
customer service at lower prices. These demands have resulted in
an increasing trend in the industry to seek competitive
advantages and other benefits through business combinations.
NSTAR was created to operate in this new marketplace by combining
the resources of its utility subsidiaries and concentrating its
activities in the transmission and distribution of energy.
The results of operations for the periods ended September 30,
2001 and 2000 are not indicative of the results that may be
expected for an entire year. Kilowatt-hour sales and revenues
are typically higher in the winter and summer than in the spring
and fall, as sales tend to vary with weather conditions. Higher
usage levels during the summer period, combined with Boston
Edison's higher summer period seasonal rates, have had a
significant impact on the results of operations for this period.
NSTAR Electric has seasonal rates for its large commercial and
industrial customers that are based on a demand charge determined
by the maximum fifteen-minute demand as determined by meter
during the monthly billing period, with reductions made in
billing for demand reached during off-peak hours. In general,
during periods of high demand, the impact on revenues and
expenses can be significant when combined with higher seasonal
demand rates.
Boston Edison established a new single hour peak load on August
9, 2001 of 3,311 megawatts (MW) that exceeded the prior peak load
of 3,070 MW by 7.9% experienced in 1999.
Retail Electric Rates
On October 29, 2001, NSTAR Electric and NSTAR Gas filed with the
MDTE a proposed service quality plan, which replaced the plan
that had previously been filed as a part of the NSTAR merger rate
plan and which implemented guidelines that had been established
by the MDTE as a result of its generic investigation of service
quality issues. The service quality plan would establish
performance benchmarks effective January 1, 2002 for certain
identified measures of service quality relating to customer
service and billing performance, customer satisfaction and
reliability and safety performance. The companies are required
to report annually concerning their performance as to each
measure and would be subject to penalties of up to two percent of
transmission and distribution revenues should performance fail to
meet the applicable benchmarks. On the same date, NSTAR Electric
and NSTAR Gas also filed with the MDTE a report concerning their
performance on the identified service quality measures for the
two twelve month periods ended August 31, 2000 and 2001. This
report included a calculation of penalties in accordance with
MDTE guidelines whereby penalties were calculated relating
primarily to Boston Edison electric system reliability
performance for the summer of 2001 totaling approximately $3.9
million. NSTAR disputes the legal applicability of penalties for
these performance periods; however proposed in settlement of this
matter to provide credits to Boston Edison customers totaling
$3.9 million, offset in part by other payments to Boston Edison
customers, which have totaled approximately $1.1 million to date,
relating to summer 2001 electric service outages.
Also, on October 29, 2001, NSTAR Electric filed with the MDTE a
comprehensive report regarding electric system performance issues
experienced during the summer of 2001. The filing included
detailed analyses of factors affecting performance, as well as,
the companies' plans to address issues identified. The MDTE has
also requested similar filings from other Massachusetts electric
distribution companies and has stated that they intend to hold
public hearings and adjudicatory hearings concerning each such
filing. NSTAR is unable to estimate its ultimate liability for
future costs as a result of such proceeding. However, in view of
NSTAR's current assessment of its electric distribution system
performance responsibilities, existing legal requirements and
regulatory policies, management does not believe that these
matters will have a material adverse effect on NSTAR's
consolidated financial position or results of operations for a
reporting period.
The 1997 Massachusetts Electric Restructuring Act (Restructuring
Act) requires electric distribution companies to obtain and
resell power to retail customers who choose not to buy energy
from a competitive energy supplier. This is through either
standard offer service or default service. As a result of the
Restructuring Act, standard offer customers of Boston Edison
currently pay rates that are 15% lower, on an inflation-adjusted
basis, than rates in effect prior to March 1, 1998, the retail
access date. All distribution customers must pay a transition
charge as a component of their rate.
From March 1, 1998, Boston Edison's accumulated cost to provide
default and standard offer service was in excess of the revenues
it was allowed to bill. As a result, Boston Edison recorded a
regulatory asset of approximately $193.6 million at December 31,
2000 that is reflected as a component of Current assets on the
accompanying Condensed Consolidated Balance Sheets. As a result
of new rates for standard offer and default service that became
effective January 1 and July 1, 2001, the regulatory asset has
declined to $45.6 million as of September 30, 2001.
Boston Edison must, on an annual basis, file a forecast
reconciliation of its rates for the upcoming year along with any
proposed adjustments of prior year revenues and costs for
standard offer, default service, transmission and transition
charges. The MDTE will, in the ordinary course, approve rates
for the coming year before the current year-end to allow the new
rates to become effective the first of January. Subsequently,
the estimates for the prior year are trued-up to the actual
amounts for that year. The MDTE reviews these costs and approves
the amounts subject to any required adjustments.
In November 2000, the retail electric subsidiaries of NSTAR made
filings containing proposed rate adjustments for 2001, including
a reconciliation of costs and revenues through 2000. The MDTE
subsequently approved Tariffs for each retail electric subsidiary
effective January 1, 2001. The filings were updated in April
2001 to include final costs for 2000, and were further updated in
July 2001 to reflect the results of MDTE orders regarding prior
year reconciliation proceedings for each company. The MDTE has
not yet ruled on the reconciliation component of each of these
filings; however on October 19, 2001, Boston Edison and the
Massachusetts Attorney General filed a proposed Settlement
Agreement with the MDTE resolving all outstanding issues in
Boston Edison's reconciliation filing. As a part of this
settlement, Boston Edison agreed to reduce the costs sought to be
collected through the transition charge by approximately $2.9
million as compared to the amounts that were originally sought.
A reserve was established in a prior period and this settlement
will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
Management is unable to determine the outcome of the remaining
MDTE proceedings. However, based upon past procedures and on
information currently available, management does not believe that
it is probable that the final MDTE approval will have a material
adverse impact on NSTAR's consolidated financial position,
results of operations and cash flows in the near term.
In addition to the annual rate filings referenced above, NSTAR
Electric also made interim filings with the MDTE concerning
charges for a standard offer fuel adjustment and for (market-
based) default service rates. In December 2000, the MDTE
approved an increase of 1.321 cents per kilowatt-hour (kWh) in
each company's standard offer service rates for the first-half of
2001, and in June 2001, the MDTE approved an additional increase
of 1.23 cents per kWh effective July 1, 2001 based on a fuel
adjustment formula contained in its standard offer tariffs that
reflects the prices of natural gas and oil. The MDTE has ruled
that these fuel adjustments are excluded from the 15% rate
reduction requirement under the Restructuring Act. The MDTE will
re-examine these rates before the end of the year for changes to
take effect in January 2002.
In October 2001, the MDTE approved market-based default service
rates for each company for 2002. Future prices for default
service are based upon market solicitations for power supply.
NSTAR has entered into power purchase agreements to meet its
entire default service supply obligations through December 31,
2002. NSTAR Electric will continue to make market solicitations
for default service power supply consistent with provisions of
the Restructuring Act and MDTE orders.
The cost of providing standard offer and default service, which
includes purchased power costs, is recovered from customers on a
fully reconciling basis.
Long-Term Power Purchase Contracts
NSTAR Electric, on behalf of Boston Edison and other affiliated
companies, has existing long-term power purchase agreements
(PPAs). These long-term contracts are expected to supply
approximately 90%-95% of its year 2001 standard offer service
obligations. NSTAR Electric has entered into shorter-term
agreements to meet the remaining standard offer service
obligation. Resulting from a July 2001 request for proposals for
standard offer and wholesale service requirements in excess of
that provided by its PPAs, NSTAR Electric entered into a letter
agreement in September 2001 for service commencing January 1,
2002 for a term of one year.
Results of Operations - Three Months Ended September 30, 2001 vs.
Three Months Ended September 30, 2000
Net income was $82.3 million for the three months ended
September 30, 2001 compared to $68.4 million for the same period
in 2000, a $13.9 million or 20.3% increase.
The results of operations for the quarter are not indicative of
the results that may be expected for the entire year due to the
seasonality of kilowatt-hour (kWh) sales and revenues. Refer to
Note B to the Condensed Consolidated Financial Statements.
Operating revenues
Operating revenues increased $131.9 million or 26.9% during the
third quarter of 2001 as follows:
(in thousands)
Retail electric revenues $ 123,464
Wholesale revenues 2,618
Other revenues 5,796
Increase in operating revenues $ 131,878
=========
Retail revenues were $579.5 million in 2001 compared to $456
million in 2000, an increase of $123.5 million, or 27.1%. The
change in retail revenues includes higher rates implemented in
January and July 2001 for standard offer and default service
($130.2 million), a net increase in distribution revenue ($20.8
million) and transmission revenues ($11.7 million), and a 4.1%
increase in retail kWh electric sales. Included in the net
change in distribution revenues are lower incentive revenue
entitlements of $20.6 million that the Company receives for
successfully lowering transition charges. Boston Edison
recognized revenues for earned mitigation incentives for the
years 1998 through September 2000 per the transition charge true-
up filed with the MDTE in November 2000. Boston Edison will
continue to earn mitigation incentive revenue as it lowers its
transition charge through 2009. The revenues related to standard
offer and default services are fully reconciled to the costs
incurred and have no impact on net income.
Wholesale electric revenues were $22.2 million in 2001 compared
to $19.6 million in 2000, an increase of $2.6 million, or 13.3%,
due primarily to settlement amounts received from Pilgrim
contract customers.
Other revenues were $20.7 million in 2001 compared to $14.9
million in 2000, an increase of $5.8 million, or 38.9%. This
change reflects higher Regional Network Services transmission
revenues.
Operating expenses
Purchased power costs were $343.5 million in 2001 compared to
$226 million in 2000, an increase of $117.5 million, or 52%. The
increase reflects higher purchased power requirements due to a
4.1% increase in retail sales, a 2.7% increase in wholesale sales
and the recognition of previously deferred purchased power costs
resulting from current year collections of these costs, partially
offset by lower wholesale electric costs. Boston Edison adjusts
its electric rates to collect the costs it actually incurs
related to energy supply. Differences between the level of
revenues collected and costs actually incurred are recorded as a
regulatory asset or liability. Due to the rate adjustment
mechanisms, changes in the amount of energy supply expense have
no impact on earnings.
Operations and maintenance expense was $50.4 million in 2001
compared to $47.4 million in 2000, an increase of $3 million, or
6.3%. This increase reflects higher electric distribution
weather-related maintenance costs during this past summer, higher
bad debt expense of $1.9 million and higher pension costs. These
factors were partially offset by merger related savings.
Depreciation and amortization expense was $42.6 million in 2001
compared to $45.6 million in 2000, a decrease of $3 million, or
6.6%. The decline in amortization expense is directly
attributable to the lower level of amortization expense
associated with a transition true-up filing in the third quarter
of 2000, partially offset by a higher level of depreciable plant
in service.
Demand side management (DSM) and renewable energy programs
expense was $13.7 million in 2001 compared to $13.6 million in
2000, an increase of $0.1 million, or 0.1%. This increase is
primarily due to timing in spending levels for these programs.
In accordance with legislative and regulatory directives, these
costs are collected from customers on a fully reconciling basis,
and therefore, fluctuations in program costs have no impact on
earnings. In addition, Boston Edison earns incentive amounts in
return for increased customer participation.
Property and other taxes were $16.4 million in 2001 compared to
$13.9 million in 2000, an increase of $2.5 million, or 18%. The
increase was primarily due fact that during 2000, Boston Edison
was reimbursed for the majority of to the payments in lieu of
property taxes to the Town of Plymouth by Entergy. Entergy
purchased the Pilgrim Station in 1999.
Income taxes from operations were $53 million in 2001 compared to
$45.3 million in 2000, an increase of $7.7 million, or 17%. This
increase reflects higher pretax operating income in 2001.
Other income
Other income was $0.3 million in the third quarter of 2001
compared to income of $3.2 million in the same period of 2000, a
net decrease in income of $2.9 million directly attributable to
the absence of Other income recognized in 2000 related to a $2
million billing settlement associated with the Company's
distribution electric energy customer.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $22 million in 2001 compared to $24.6 million in
2000, a decrease of $2.6 million, or 10.6%. The decrease
primarily reflects the retirement of several long term debt
issues during the second half of 2000 by Boston Edison. The
current period also reflects a reduction of securitization
certificates interest of $0.9 million due to the scheduled
partial paydown of this debt.
Other interest income were $0.5 million in 2001 compared to other
interest charges of $9.5 million in 2000, an increase of $10
million primarily due to a reconciliation of certain regulatory
deferrals that resulted in additional interest expense recorded
in 2000. Additionally, the benefit of lower interest rates is
almost entirely offset by higher average short-term borrowing
levels from banks. The increase in borrowing is primarily the
result of working capital requirements.
Results of Operations - Nine Months Ended September 30, 2001 vs.
Nine Months Ended September 30, 2000
Net income was $143 million for the nine months ended
September 30, 2001 compared to $115.2 million for the same period
in 2000, a 24.1% increase.
The results of operations for the nine month period are not
indicative of the results which may be expected for the entire
year due to the seasonality of kWh sales and revenues. Refer to
Note B to the Condensed Consolidated Financial Statements.
Operating revenues
Operating revenues increased $299.1 million or 23.6% during the
nine months ended September 30, 2001 as follows:
(in thousands)
Retail electric revenues $ 280,583
Wholesale revenues 9,252
Other revenues 9,225
Increase in operating revenues $ 299,060
==========
Retail revenues were $1,443.9 million in 2001 compared to
$1,163.4 million in 2000, an increase of $280.5 million, or
24.1%. The change in retail revenues includes higher rates
implemented in January and July 2001 for standard offer and
default service ($299.1 million), increase in transmission
revenues ($24.6 million), a 1.8% increase in retail kWh electric
sales and the absence in the current period of a $23.7 million
fuel charge refund to customers in the same period last year.
These increases in revenue were partially offset by a decrease in
distribution and transition revenues of $17.8 million. Included
in the change of net distribution and transition revenues is a
decrease in incentive revenue entitlements of $9.6 million that
the MDTE has allowed for successfully lowering certain transition
charges. Boston Edison recognized revenue for earned mitigation
incentives for the years 1998 through September 2000 per the
transition charge true-up filed with the MDTE in November 2000.
Boston Edison will continue to earn mitigation incentive revenue
as it lowers its transition charge through 2009. The revenues
related to standard offer and default services are fully
reconciled to the costs incurred and have no impact on net income
Wholesale electric revenues were $64.5 million in 2001 compared
to $55.2 million in 2000, an increase of $9.3 million, or 16.8%.
This increase in wholesale revenues reflects increased kWh sales
of 6.7%, primarily as the result of increased demand from a
public transit authority and municipalities.
Other revenues were $56.9 million in 2001 compared to $47.8
million in 2000, an increase of $9.1 million, or 19%. This
change reflects higher Regional Network Services transmission
revenues partially offset by the absence of a $1.6 million
transmission refund relating to Local Network Services
transmission revenues as recognized in the second quarter 2000
due to a FERC approved settlement.
Operating expenses
Purchased power costs were $900.5 million in 2001 compared to
$627.4 million in 2000, an increase of $273.1 million, or 43.5%.
The increase reflects higher purchased power requirements due to
a 1.8% increase in retail sales, a 6.7% increase in wholesale
sales and the recognition of previously deferred purchased power
costs resulting from current year collections of these costs,
partially offset by lower wholesale electric cost. Boston Edison
adjusts its electric rates to collect the costs it actually
incurs related to energy supply. Differences between the level
of revenues collected and costs actually incurred are recorded as
a regulatory asset or liability. Due to the rate adjustment
mechanisms, changes in the amount of energy supply expense have
no impact on earnings.
Operations and maintenance expense was $143.9 million in 2001
compared to $157.6 million in 2000, a decrease of $13.7 million,
or 8.7%. This decrease reflects lower employee benefit expenses
primarily resulting from lower permanent staffing levels and
other merger-related operating efficiencies. This decrease was
partially offset by higher electric distribution weather-related
maintenance costs, higher bad debt expense of $2.1 million and
higher pension costs.
Depreciation and amortization expense was $126.4 million in 2001
compared to $128.2 million in 2000, a decrease of $1.8 million,
or 1.4%. The decline in amortization expense is directly
attributable to the lower level of amortization expense
associated with a transition true-up filing in the third quarter
of 2000, partially offset by a higher level of depreciable plant
in service in the current period.
Demand side management (DSM) and renewable energy programs
expense was $40.8 million in 2001 compared to $41 million in
2000, a decrease of $0.2 million, or 0.5%. This decrease is
primarily due to timing in spending levels for programs. In
accordance with legislative and regulatory directives, these
costs are collected from customers on a fully reconciling basis,
and therefore, fluctuations in program costs have no impact on
earnings. In addition, Boston Edison earns incentive amounts in
return for increased customer participation.
Property and other taxes were $51.3 million in 2001 compared to
$44.5 million in 2000, an increase of $6.8 million, or 15.3%.
The increase was due to the fact that during 2000, Boston Edison
was reimbursed for the majority of its payments in lieu of
property taxes to the Town of Plymouth by Entergy. Entergy
purchased the Pilgrim Station in 1999.
Income taxes from operations were $92.9 million in 2001 compared
to $75 million in 2000, an increase of $17.9 million, or 23.9%.
This increase reflects higher pretax operating income in 2001.
Other income
Other income was $3.6 million in 2001 compared to income of $6.7
million in the same period of 2000, a net decrease in income of
$3.1 million directly attributable to the absence of interest
income recognized in the second quarter of 2000 of $4.5 million
from a former wholesale contract customer associated with the
Pilgrim contract buyout. In 2000, other income also included a
$2 million billing settlement associated with the Company's
distribution electric energy customer, offset by the allocation
from NSTAR Electric and Gas Corp. of $2.7 million as of September
30, 2001 of income associated with the receipt of equity
securities in connection with demutualization of two insurance
companies.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $66.8 million in 2001 compared to $75.6 million
in 2000, a decrease of $8.8 million, or 11.6%. Approximately
$3.1 million of the decrease is related to securitization
certificate interest reflecting the scheduled partial paydown of
this debt. The decrease in interest on long-term debt is
primarily the result of a reduction of approximately $5.5 million
due to the following retirements: $65 million of 6.8% debentures,
$34 million of 9.875% debentures and $100 million of 6.05%
debentures during the third quarter of 2000.
Other interest charges were $5.4 million in 2001 compared to
$10.5 million in 2000, a decrease of $5.1 million primarily due
to a reconciliation of certain regulatory deferrals that resulted
in additional interest expense recorded in 2000. Additionally,
the benefit of lower interest rates is almost entirely offset by
higher average short-term borrowing levels from banks. The
increase in borrowing is primarily the result of working capital
requirements.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). This
Statement, which is effective for fiscal years beginning after
December 15, 2001, establishes accounting and reporting standards
for acquired goodwill and other indefinite lived intangible
assets. It prohibits entities from continuing amortization of
these assets. Instead, goodwill and other intangible assets will
be subject to review for impairment. Management is currently
assessing the impact of SFAS 142 in light of its regulatory and
accounting requirements. Therefore, NSTAR is unable to
reasonably estimate the impact of the adoption of this statement.
On July 5, 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). This Statement, which
is effective for fiscal years beginning after June 15, 2002,
establishes accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and
(or) the normal operation of a long-lived asset, except for
certain obligations of lessees. This standard requires entities
to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful
life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Management is also
currently assessing the impact of SFAS 143 in light of its
regulatory and accounting requirements. Therefore, NSTAR is
unable to reasonably estimate the impact of the adoption of this
Statement.
As of January 1, 2001, Boston Edison adopted the FASB SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended by Statements of Financial
Accounting Standards No. 137 and 138, and collectively referred
to as SFAS 133. SFAS 133 established accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in contracts possibly
including fixed-price fuel supply and power contracts) be
recorded on the Consolidated Balance Sheets as either an asset or
liability measured at its fair value.
The management of the Company has assessed the impact of SFAS
133. As part of this assessment, the Company formed an
implementation team in 2000 consisting of key individuals from
various operational and financial areas of the organization. The
primary role of this team was to inventory and determine the
impact of potential contractual arrangements for SFAS 133
application. The implementation team has performed extensive
reviews of critical operating areas of the Company and has
documented its procedures in applying the requirements of SFAS
133 to Boston Edison's contractual arrangements in effect on
January 1, 2001. Based on Boston Edison's assessment to date,
the adoption of SFAS 133 has not had a material effect on its
results of operations, cash flows, or financial position.
Safe harbor cautionary statement
Management occasionally makes forward-looking statements such as
forecasts and projections of expected future performance or
statements of its plans and objectives. These forward-looking
statements may be contained in filings with the Securities and
Exchange Commission (SEC), press releases and oral statements.
Actual results could potentially differ materially from these
statements. Therefore, no assurances can be given that the
outcomes stated in such forward-looking statements and estimates
will be achieved.
The preceding sections include certain forward-looking statements
about operating results and environmental and legal issues.
The impact of continued cost control procedures on operating
results could differ from current expectations. The effects of
changes in economic conditions, tax rates, interest rates,
technology and the prices and availability of operating supplies
could materially affect the projected operating results.
The impacts of various environmental, legal issues, and
regulatory matters could differ from current expectations. New
regulations or changes to existing regulations could impose
additional operating requirements or liabilities other than
expected. The effects of changes in specific hazardous waste
site conditions and cleanup technology could affect estimated
cleanup liabilities. The impacts of changes in available
information and circumstances regarding legal issues could affect
estimated litigation costs.
Part II - Other Information
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
There have been no material changes since year-end.
Item 5. Other Information
The following additional information is furnished in connection
with the Registration Statements on Form S-3 of the Registrant
(File Nos. 33-57840 and 333-55890), filed with the Securities and
Exchange Commission on February 3, 1993 and February 20, 2001,
respectively.
Ratio of earnings to fixed charges and ratio of earnings to fixed
charges and preferred stock dividend requirements:
Twelve months ended September 30, 2001:
Ratio of earnings to fixed charges 3.51
Ratio of earnings to fixed charges and preferred
stock dividend requirements 3.24
1232:
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits filed herewith
Exhibit 4 - Instruments defining the rights of security
holders, including indentures
Management agrees to furnish to the
Securities and Exchange Commission, upon
request, a copy of any agreements or
instruments defining the rights of holders of
any long-term debt whose authorization does
not exceed 10% of total assets
Exhibit - Computation of ratio of earnings to fixed
12 charges
12.1 - Computation of ratio of earnings to fixed
charges for the twelve months ended September
30, 2001
12.2 - Computation of ratio of earnings to fixed
charges and preferred stock dividend
requirements for the twelve months ended
September 30, 2001
Exhibit - Letter re unaudited interim financial
15 information
15.1 - Report of Independent Accountants
Exhibit - Additional exhibits
99
99.1 - Letter of Independent Accountants
Form S-3 Registration Statements filed by
Boston Edison Company on February 3, 1993
(File No. 33-57840) and February 20, 2001
(File No. 333-55890).
b) No Form 8-K was filed during the third quarter of 2001.
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.
BOSTON EDISON COMPANY
(Registrant)
Date: November 14, 2001 /s/ ROBERT J. WEAFER,
JR.
Robert J. Weafer, Jr.
Vice President,
Controller and Chief
Accounting Officer
1308: