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 March 31, 2002
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 May 14, 2002
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 March 31,
2002 2001
Operating revenues $ 421,765 $ 466,162
Operating expenses:
Purchased power 244,247 276,785
Operations and maintenance 53,730 51,549
Depreciation and amortization 42,779 42,264
Demand side management and renewable energy
programs 11,221 13,767
Taxes - property and other 18,168 18,126
Income taxes 11,861 16,388
Total operating expenses 382,006 418,879
Operating income 39,759 47,283
Other income, net 312 832
Operating and other income 40,071 48,115
Interest charges:
Long term debt 11,113 11,800
Transition property securitization certificates 9,805 10,798
Short-term debt and other 2,451 2,414
Allowance for borrowed funds used during
construction (171) (553)
Total interest charges 23,198 24,459
Net income $ 16,873 $ 23,656
========= =========
Per share data is not relevant because Boston Edison Company's common stock is
wholly-owned by NSTAR.
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 March 31,
2002 2001
Balance at the beginning of the period $428,150 $352,832
Add:
Net income 16,873 23,656
Subtotal 445,023 376,488
Deduct:
Dividends declared:
Dividends to Parent 28,100 32,323
Preferred stock 490 1,490
Subtotal 28,590 33,813
Provision for preferred stock redemption and
issuance costs - 60
Balance at the end of the period $416,433 $342,615
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
March 31, December 31,
2002 2001
Assets
Utility plant in service, at original cost $2,693,085 $2,641,759
Less: accumulated depreciation 891,111 875,158
1,801,974 1,766,601
Construction work in progress 39,264 38,818
Net utility plant 1,841,238 1,805,419
Equity investments 13,518 13,611
Current assets:
Cash and cash equivalents 6,270 13,549
Restricted cash 3,625 3,625
Accounts receivable customers, net 238,123 264,633
Accrued unbilled revenues 18,313 29,081
Materials and supplies, at average cost 14,106 15,461
Other 16,363 24,170
Total current assets 296,800 350,519
Deferred debits:
Regulatory assets 731,153 768,776
Prepaid pension expense 240,963 218,713
Other 26,635 27,763
Total assets $3,150,307 $3,184,801
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
March 31, December 31,
2002 2001
Capitalization and Liabilities
Common equity:
Common stock, par value $1 per share
(100 shares issued and outstanding) $ - $ -
Premium on common stock 528,795 528,795
Retained earnings 416,433 428,150
Total common equity 945,228 956,945
Cumulative non-mandatory redeemable preferred
stock 43,000 43,000
Long-term debt 401,850 551,803
Transition property securitization
certificates 479,500 513,904
Total long-term debt 881,350 1,065,707
Total capitalization 1,869,578 2,065,652
Current liabilities:
Transition property securitization
certificates 59,337 40,972
Long-term debt 150,267 667
Notes payable 202,000 191,500
Accounts payable -
Affiliates 35,932 73,243
Other 101,712 91,522
Accrued interest 6,076 10,738
Other 67,656 67,098
Total current liabilities 622,980 475,740
Deferred credits:
Accumulated deferred income taxes 576,428 559,516
Accumulated deferred investment tax credits 19,000 19,249
Power contracts 21,229 22,697
Other 41,092 41,947
Total deferred credits 657,749 643,409
Commitments and contingencies
Total capitalization and
liabilities $ 3,150,307 $ 3,184,801
=========== ===========
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)
Three Months Ended March 31,
2002 2001
Operating activities:
Net income $ 16,873 $ 23,656
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 42,779 40,269
Deferred income taxes and investment
tax credits 20,100 (14,806)
Allowance for borrowed funds used during
construction (171) (553)
Net changes in working capital (5,907) (42,394)
Other, net 7,183 (27,542)
Net cash provided by (used in) operating activities 80,857 (21,370)
Investing activities:
Plant expenditures (excluding AFUDC) (54,099) (25,372)
Other investments 93 (75)
Net cash used in investing activities (54,006) (25,447)
Financing activities:
Transition property securitization
certificates redemptions (16,040) (15,573)
Net change in notes payable 10,500 88,500
Dividends paid (28,590) (34,230)
Net cash (used in) provided by financing
activities (34,130) 38,697
Net decrease in cash and cash equivalents (7,279) (8,120)
Cash and cash equivalents at beginning of year 13,549 12,125
Cash and cash equivalents at end of period $ 6,270 $ 4,005
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 25,572 $ 28,264
========= =========
Income taxes $ 8,290 $ 708
========= =========
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 included in Boston
Edison's 2001 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 subsidiary of NSTAR. Boston Edison's
wholly owned subsidiaries are Harbor Electric Energy Company
(HEEC) and BEC Funding LLC. 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 approximately 1.1 million electric
customers in 81 communities and 246,000 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). 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 & Gas Corporation (NSTAR
Electric & Gas).
NSTAR Electric has committed resources to implement a System
Improvement Program to improve customer service and system
reliability. This comprehensive, non-recurring System
Improvement Program is being implemented to upgrade NSTAR
Electric's distribution system and is expected to be completed
during 2002. The cost of this program is expected to be $65
million and primarily is associated with improvements to Boston
Edison's electric system. Approximately $11 million will be
included in NSTAR Electric's operations and maintenance expense
in 2002 and $54 million will be invested in delivery assets
(Utility plant) during the year. Through March 31, 2002, NSTAR
Electric has expended approximately $3.7 million on this Program
of which the majority of these charges are related to Boston
Edison and are included as a component of Operations and
maintenance expense on the accompanying Condensed Consolidated
Statements of Income. In addition, NSTAR Electric has expended
approximately $9 million in capital improvements of which,
virtually all relate to Boston Edison's electric system and is
included as a component of Utility plant on the accompanying
Condensed Consolidated Balance Sheets. A combination of
unusually severe storms, record heat and extreme customer load in
the Boston area led to prolonged and wide-spread outages in the
summer of 2001 that underscored the need to address electric
system upgrades and improve maintenance.
B) Basis of Presentation
The financial information presented as of March 31, 2002 and for
the periods ended March 31, 2002 and 2001 have been prepared from
Boston Edison's books and records without audit by independent
accountants. Financial information as of December 31, 2001 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 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 months ended March 31,
2002 and 2001 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.
C) Amortization of Merger Related Costs
The merger creating NSTAR was accounted for under the purchase
method of accounting and resulted in the recognition of an
acquisition premium (goodwill). An integral part of the merger
is the rate plan of the combined retail utility subsidiaries that
was approved by the Massachusetts Department of
Telecommunications and Energy (MDTE) in July 1999. Significant
elements of the rate plan include a four-year distribution rate
freeze through 2004, recovery of the acquisition premium
(goodwill) of approximately $490 million over 40 years resulting
in annual amortization of approximately $12.2 million, and
recovery of filed transaction and integration costs (costs to
achieve) of $111 million over 10 years. NSTAR's retail utility
subsidiaries will reconcile the ultimate costs to achieve with
that estimate, and any difference is expected to be recovered
over the remainder of the amortization period. As a result of
the merger, cost savings have been realized due to reduced
staffing levels and operating efficiencies. Future cost savings
are expected to result from the avoidance of costs that would
have otherwise been incurred by the separate entities.
As disclosed in Boston Edison's Form 10-K for the year ended
December 31, 2001, NSTAR expected that it would transfer $319
million of goodwill to its reporting unit, as a component of
Boston Edison's common equity, effective January 1, 2002.
However, upon further review and consideration of all the
transition provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), NSTAR has
determined it will continue to account for goodwill by the
acquired entities as it has done since the date of the merger.
For regulatory purposes, Boston Edison has been allocated $319
million of goodwill and is expensing this amount over 40 years.
This amount is being recovered from Boston Edison's customers and
will continue to be treated as an intercompany charge among the
Company and its affiliated companies, ComElectric, Cambridge
Electric and NSTAR Gas. The annual allocation of goodwill
amortization expense to the Company is approximately $8 million.
D) Service Quality Index
On October 29, 2001, and as subsequently updated, NSTAR Electric
filed proposed service quality plans for each company with the
MDTE, which included guidelines that had been established by the
MDTE as a result of its generic investigation of service quality
issues. The service quality plans established 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 are
subject to maximum penalties of up to two percent of transmission
and distribution revenues should performance fail to meet the
applicable benchmarks. Concurrently, NSTAR Electric 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. On
March 22, 2002, following hearings on the matter, the MDTE issued
an order imposing a service quality penalty of approximately
$3.25 million on NSTAR Electric of which $3.2 million related
specifically to Boston Edison and is to be refunded to customers
as a credit to their bills during the month of May 2002. This
refund will not have a material effect on Boston Edison's
consolidated financial position or results of operations.
Through March 31, 2002, Boston Edison's performance has met or
exceeded the applicable established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year, including the peak-demand period
anticipated during the summer period.
Also on October 29, 2001, NSTAR Electric filed with the MDTE a
comprehensive report regarding electric system performance issues
encountered during the summer of 2001. The filing included
detailed analyses of factors affecting performance as well as the
companies' plans to address issues that were identified. On
March 22, 2002, following a number of public hearings throughout
the NSTAR Electric service area, the MDTE issued an order finding
that NSTAR Electric had made progress in addressing the issues
which initiated the investigation and requiring that NSTAR
Electric submit further updated reports on specific issues on a
quarterly and annual basis. Boston Edison is unable to estimate
its ultimate liability for future costs or penalties as a result
of any further filings relating to this investigation. However,
in view of Boston Edison's current assessment of its electric
distribution system performance responsibilities, existing legal
requirements and regulatory policies, management believes it
would not have a material effect on Boston Edison's consolidated
financial position, cash flows or results of operations for a
reporting period.
E) Contingencies
1. Environmental Matters
Boston Edison is involved in approximately 14 state-regulated
properties ("Massachusetts Contingency Plan, or "MCP sites")
where oil or other hazardous materials were previously spilled or
released. Boston Edison is required to clean up or otherwise
remedy these properties in accordance with specific state
regulations. There are uncertainties associated with the
remediation costs due to the final selection of the specific
cleanup technology and the particular characteristics of the
different sites. In addition to the MCP sites, Boston Edison also
faces possible liability as a potentially responsible party (PRP)
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 $4.7 million and $4.8 million are included as
liabilities in the accompanying Condensed Consolidated Balance
Sheets at March 31, 2002 and December 31, 2001, respectively,
related to the non-recoverable portion of these cleanup
liabilities. 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
Boston Edison's consolidated financial position. However, it is
possible that additional provisions for cleanup costs that may
result from a change in estimates could have an 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 and as either additional sites are
identified or Boston Edison's responsibilities for such sites are
resolved. 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. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are also involved in certain 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. However, it is
reasonably possible that additional legal costs that may result
from a change in estimates could have a material impact on the
results of a reporting period in the near term.
F) Income Taxes
The following table is a reconciliation of the statutory federal
income tax rate to the annual estimated effective income tax rate
for 2002 and the actual effective income tax rate for the year
ended December 31, 2001:
2002 2001
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income tax benefit 4.4 4.4
Investment tax credit amortization (0.4) (0.6)
Other 1.7 2.7
Effective tax rate 40.7% 41.5%
===== =====
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 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. In accordance with
SFAS 109, net regulatory assets include $61.8 million and $62.1
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of March
31, 2002 and December 31, 2001, respectively. The regulatory
assets represent the additional future revenues to be collected
from customers for deferred income taxes.
Item 2. Management's Discussion and Analysis
The accompanying Management's Discussion and Analysis (MD&A)
should be read in conjunction with the MD&A in Boston Edison's
2001 Annual Report on Form 10-K.
Overview
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under Massachusetts
law and is a subsidiary of NSTAR. Boston Edison's
wholly owned subsidiaries are Harbor Electric Energy Company
(HEEC) and BEC Funding LLC. 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 approximately 1.1 million electric
customers in 81 communities and 246,000 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). 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 & Gas Corporation (NSTAR
Electric & Gas).
NSTAR Electric has committed resources to implement a System
Improvement Program to improve customer service and system
reliability. This comprehensive, non-recurring System
Improvement Program is being implemented to upgrade NSTAR
Electric's distribution system and is expected to be completed
during 2002. The cost of this program is expected to be $65
million and primarily is associated with improvements to Boston
Edison's electric system. Approximately $11 million will be
included in NSTAR Electric's operations and maintenance expense
in 2002 and $54 million will be invested in delivery assets
(Utility plant) during the year. Through March 31, 2002, NSTAR
Electric has expended approximately $3.7 million on this Program
of which the majority of these charges are related to Boston
Edison and are included as a component of Operations and
maintenance expense on the accompanying Condensed Consolidated
Statements of Income. In addition, NSTAR Electric has expended
approximately $9 million in capital improvements of which
virtually all relate to Boston Edison's electric system and is
included as a component of Utility plant on the accompanying
Condensed Consolidated Balance Sheets. A combination of
unusually severe storms, record heat and extreme customer load in
the Boston area led to prolonged and wide-spread outages in the
summer of 2001 that underscored the need to address electric
system upgrades and improve maintenance.
Cautionary Statement
This Management's Discussion and Analysis contains certain
forward-looking statements such as forecasts and projections of
expected future performance or statements of management's plans
and objectives. These forward-looking statements may be
contained in filings with the Securities and Exchange Commission
(SEC) and 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 the Company
expected. Actual results could potentially 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.
The impact of continued cost control procedures on operating
results could differ from current expectations. Boston Edison's
revenues from its electric sales are weather-sensitive,
particularly sales to residential and commercial customers.
Accordingly, Boston Edison's sales in any given period reflect,
in addition to other factors, the impact of weather, with warmer
temperatures generally resulting in increased electric sales.
Boston Edison anticipates that these sensitivities to seasonal
and other weather conditions will continue to impact its sales
forecasts in future periods. The effects of changes in weather,
economic conditions, tax rates, interest rates, technology,
prices and availability of operating supplies could materially
affect the projected operating results.
Boston Edison 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 any further disclosures Boston Edison makes in its
filings to the SEC. Also note that Boston Edison provides in the
next paragraph a cautionary discussion of risks and other
uncertainties relative to its business. These are factors that
could cause its actual results to differ materially from expected
and historical performance. Other factors in addition to those
listed here could also adversely affect Boston Edison.
Boston Edison's forward-looking information depends in large
measure on prevailing governmental policies and regulatory
actions, including those of the Massachusetts Department of
Telecommunications and Energy (MDTE) and the Federal Energy
Regulatory Commission (FERC), with respect to allowed rates of
return, rate structure, financings, purchased power, 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.
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 the specific cleanup technology could affect
the estimated cleanup liabilities. The impacts of changes in
available information and circumstances regarding legal issues
could affect any estimated litigation costs.
Amortization of Merger Related Costs
The merger creating NSTAR was accounted for under the purchase
method of accounting and resulted in the recognition of an
acquisition premium (goodwill). An integral part of the merger
is the rate plan of the combined retail utility subsidiaries that
was approved by the Massachusetts Department of
Telecommunications and Energy (MDTE) in July 1999. Significant
elements of the rate plan include a four-year distribution rate
freeze through 2004, recovery of the acquisition premium
(goodwill) of approximately $490 million over 40 years resulting
in annual amortization of approximately $12.2 million, and
recovery of filed transaction and integration costs (costs to
achieve) of $111 million over 10 years. NSTAR's retail utility
subsidiaries will reconcile the ultimate costs to achieve with
that estimate, and any difference is expected to be recovered
over the remainder of the amortization period. As a result of
the merger, cost savings have been realized due to reduced
staffing levels and operating efficiencies. Future cost savings
are expected to result from the avoidance of costs that would
have otherwise been incurred by the separate entities.
As disclosed in Boston Edison's Form 10-K for the year ended
December 31, 2001, NSTAR expected that it would transfer $319
million of goodwill to its reporting unit, as a component of
Boston Edison's common equity, effective January 1, 2002.
However, upon further review and consideration of all the
transition provisions of the Financial Accounting Standards Board
Statement (FASB) of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" (SFAS 142), NSTAR has
determined it will continue to account for goodwill by the
acquired entities as it has done since the date of the merger.
For regulatory purposes, Boston Edison has been allocated $319
million of goodwill and is expensing this amount over 40 years.
This amount is being recovered from Boston Edison's customers and
will continue to be treated as an intercompany charge among the
Company and its affiliated companies, ComElectric, Cambridge
Electric and NSTAR Gas. The annual allocation of goodwill
amortization expense to the Company is approximately $8 million.
For regulatory accounting and ratemaking purposes, Boston Edison
reflects its allocated amount of goodwill on its balance sheet,
as ordered by the MDTE. The following schedule reflects the
impact on the Company's financial position of recording this
level of goodwill.
March 31, December 31,
(in thousands) 2002 2001
Total assets per the accompanying
Balance Sheets $ 3,150,307 $ 3,184,801
Goodwill, net 298,473 300,468
Total proforma assets $ 3,448,780 $ 3,485,269
============ ============
Total Common Equity $ 945,228 $ 956,945
Goodwill (original amount charged
to APIC) 319,048 319,048
Proforma common equity 1,264,276 1,275,993
Total current and long-term liabilities 2,184,504 2,209,276
Total proforma capitalization and
liabilities $ 3,448,780 $ 3,485,269
============ ============
Significant Accounting Policies
The accompanying consolidated financial statements for each
period presented include the activities of Boston Edison. All
significant intercompany transactions have been eliminated.
Certain reclassifications have been made to the prior year data
to conform to the current presentation.
a. Regulatory - Accounting
Boston Edison follows accounting policies prescribed by the FERC
and the MDTE. In addition, Boston Edison is subject to the
accounting and reporting requirements of the SEC. The
accompanying condensed consolidated financial statements conform
to generally accepted accounting principles (GAAP). As a rate-
regulated company, Boston Edison is subject to SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS
71). The application of SFAS 71 results in differences in the
timing of recognition of certain expenses from that of other
businesses and industries. The distribution business remains
subject to rate-regulation and continues to meet the criteria for
application of SFAS 71. This ratemaking process results in the
recording of regulatory assets based on current and future cash
inflows. As of March 31, 2002 and December 31, 2001, Boston
Edison has recorded regulatory assets of $731 million and $769
million, respectively. Boston Edison continuously reviews these
assets to assess their ultimate recoverability within the
approved regulatory guidelines. Impairment risk associated with
these assets relates to potentially adverse legislative, judicial
or regulatory actions in the future.
b. New Accounting Principles
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). This Statement, which is
effective for Boston Edison in the first quarter of 2002,
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. Boston Edison will continue amortizing
its allocated portion of goodwill over the regulatory recovery
period of 40 years. This amount is being recovered from Boston
Edison's customers and will continue to be treated as an
intercompany charge among the Company and its affiliated
companies, ComElectric, Cambridge Electric and NSTAR Gas. A
significant element of this rate plan includes recovery of the
acquisition premium over 40 years.
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 the 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 currently assessing the impact of SFAS 143 in light
of its regulatory and accounting requirements. However, based on
Boston Edison's assessment to date, the adoption of SFAS 143 is
not expected to have a material effect on its results of
operations, cash flows, or financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets," (SFAS 144) was effective January 1, 2002, and
addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and the Long-
Lived Assets to Be Disposed Of" (SFAS 121) and APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business." SFAS 144 retains the
fundamental provisions of SFAS 121 and expands the reporting of
discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. As of March 31, 2002, the
implementation of this Statement had no effect on Boston Edison's
results of operations and financial position.
As of January 1, 2001, Boston Edison adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), as amended by SFAS Nos. 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.
Boston Edison continues its assessment on any impact that
potentially may result from FASB revisions and clarifications,
including, but not limited to, FASB Derivative Implementation
Group Issue C15, to SFAS 133. Based on Boston Edison's
assessment, the adoption of SFAS 133 has not had a material
effect on its results of operations, cash flows, or financial
position.
c. Revenue Recognition
Boston Edison's revenues are based on authorized rates approved
by the FERC and the MDTE. Estimates of transmission,
distribution and transition revenues for electricity delivered to
customers but not yet billed are accrued at the end of each
accounting period. The determination of unbilled revenues
requires management to estimate the volume and pricing of
electricity delivered to customers prior to actual meter
readings.
d. Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
requires a consideration of all pertinent facts and circumstances
and the use of professional judgment. These factors affect the
carrying values 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.
Rate and Regulatory Proceedings
On October 29, 2001, and as subsequently updated, NSTAR Electric
filed proposed service quality plans for each company with the
MDTE, which included guidelines that had been established by the
MDTE as a result of its generic investigation of service quality
issues. The service quality plans established 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 are
subject to maximum penalties of up to two percent of transmission
and distribution revenues should performance fail to meet the
applicable benchmarks. Concurrently, NSTAR Electric 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. On
March 22, 2002, following hearings on the matter, the MDTE issued
an order imposing a service quality penalty of approximately
$3.25 million on NSTAR Electric of which $3.2 million related
specifically to Boston Edison and is to be refunded to customers
as a credit to their bills during the month of May 2002. This
refund will not have a material effect on Boston Edison's
consolidated financial position or results of operations.
Through March 31, 2002 Boston Edison's performance has met or
exceeded the applicable established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year, including the peak-demand period
anticipated during the summer period.
Also on October 29, 2001, NSTAR Electric filed with the MDTE a
comprehensive report regarding electric system performance issues
encountered during the summer of 2001. The filing included
detailed analyses of factors affecting performance as well as the
companies' plans to address issues that were identified. On
March 22, 2002, following a number of public hearings throughout
the NSTAR Electric service area, the MDTE issued an order finding
that NSTAR Electric had made progress in addressing the issues
which initiated the investigation and requiring that NSTAR
Electric submit further updated reports on specific issues on a
quarterly and annual basis. Boston Edison is unable to estimate
its ultimate liability for future costs or penalties as a result
of any further filings relating to this investigation. However,
in view of Boston Edison's current assessment of its electric
distribution system performance responsibilities, existing legal
requirements and regulatory policies, management believes it
would not have a material effect on Boston Edison's consolidated
financial position, cash flows or results of operations for a
reporting period.
Retail Electric Rates
The 1997 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
through either standard offer service or default service.
Standard offer service will be available to eligible customers
through 2004 at prices approved by the MDTE, set at levels so as
to guarantee mandatory overall rate reductions provided by the
Restructuring Act. New retail customers in the Boston Edison
service territory and other customers who are no longer eligible
for standard offer service and have not chosen to receive service
from a competitive supplier are provided default service. The
price of default service is intended to reflect the average
competitive market price for power. As of March 31, 2002 and
December 31, 2001, Boston Edison had approximately 23.4% and 19%,
respectively, of its load requirements provided by competitive
suppliers.
During 2000, Boston Edison's accumulated cost to provide default
and standard offer service was in excess of the revenues it was
allowed to bill by approximately $193.6 million. On January 1
and July 1, 2001, Boston Edison was permitted by the MDTE to
increase its rates to customers for standard offer and default
service to collect this shortfall. Furthermore, when combined
with the reduction in power supply costs experienced in 2001 and
into the first quarter of 2002, rates were reduced on January 1,
2002 in anticipation of further reduced costs and resulted in a
net over-collection of $31 million and $2.5 million as of March
31, 2002 and December 31, 2001.
In December 2000, the MDTE approved a standard offer fuel index
of 1.321 cents per kilowatt-hour (kWh) that was added to Boston
Edison's standard offer service rates for the first-half of 2001.
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 to reflect the
prices of natural gas and oil. In December 2001, the MDTE
approved a decrease in this fuel index of 1.125 cents to 1.426
cents per kWh for the first quarter of 2002 based on a decrease
in the cost of fuel. Effective April 1, 2002, Boston Edison's
fuel index was set to zero. The MDTE has ruled that these fuel
index adjustments are excluded from the 15% rate reduction
requirement under the Restructuring Act.
In December 2001, Boston Edison filed proposed rate adjustments
for 2002, including a preliminary reconciliation of costs and
revenues through 2001. The MDTE subsequently approved tariffs
effective January 1, 2002. The filings were updated in February
2002 to include final costs for 2001. The MDTE approved the
reconciliation of costs and revenues for Boston Edison through
2000 in its approval on November 16, 2001 of a Settlement
Agreement between Boston Edison and the Massachusetts Attorney
General (AG) resolving all outstanding issues in Boston Edison's
prior reconciliation filings. 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. This
settlement did not have a material adverse effect on Boston
Edison's consolidated financial position or results of
operations.
In addition to the annual rate filings referenced above, NSTAR
Electric has also made interim filings with the MDTE concerning
charges for a standard offer fuel adjustment and for (market-
based) default service rates, as discussed above.
Other Legal Matters
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. However, it is reasonably possible that
additional legal costs that may result from changes in estimates
could have a material impact on the results for a reporting
period.
Corporate Office Facility Transaction
In the first quarter of 2002, NSTAR closed on the transaction of
a new corporate office facility (the Summit) located in Westwood,
Massachusetts. This transaction represents a "like-kind
exchange" of cash and other properties held by the utility
companies of NSTAR, including the Company. In addition to the
transfer of property, Boston Edison expended approximately $10.5
million in capital costs that is included in investing activities
- - plant expenditures on the accompanying Condensed Consolidated
Statements of Cash Flows. Boston Edison holds a 64% ownership
interest in this facility.
Results of Operations - Three Months Ended March 31, 2002 vs.
Three Months Ended March 31, 2001
The following section of Management's Discussion and Analysis
compares the results of operations for each of the quarters ended
March 31, 2002 and 2001, respectively, and should be read in
conjunction with the condensed consolidated financial statements
and the accompanying notes included elsewhere in this report.
Net income was $16.9 million for the three months ended March 31,
2002 compared to $23.7 million for the same period in 2001, a
28.7% decrease.
The results of operations for the quarter are not indicative of
the results which 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 decreased 9.5% during the first quarter of
2002 as follows:
(in thousands)
Retail electric revenues $ (39,663)
Wholesale revenues (6,349)
Other revenues 1,615
Decrease in operating revenues $ (44,397)
=========
Retail revenues were $385 million in 2002 compared to $424.7
million in 2001, a decrease of $39.7 million, or 9%. The change
in retail revenues includes a 4.2% decline in retail kilowatt-
hour (kWh) electric sales. In addition, lower rates implemented
in January 2002 for standard offer and default services accounted
for a decrease in retail revenues by $8 million and $13.7
million, respectively. Transition revenues were $11.6 million
lower due to a decline in rates. The decline in transition
revenues includes a $2.1 million decline in earned mitigation
incentive revenues that were allowed for successfully lowering
transition charges. Transmission revenues increased by $3.2
million but were partially offset by lower distribution revenues
of $4.2 million. The change in retail revenues related to
standard offer and default services are fully reconciled to the
costs incurred and have no impact on net income.
Weather conditions greatly impact the change in electric revenues
in Boston Edison's service area. The first quarter period of
2002 was significantly warmer than the same period in 2001. In
fact, it was the warmest December through February period on
record, with March being warmer than last year and normal. Below
is comparative information on heating degree days for the three-
month periods ending March 31, 2002 and 2001 and the number of
degree days in a "normal" first quarter period as represented by
a 30-year average.
Normal
2002 2001 30-Year
Average
Heating degree days 3,362 4,009 3,967
Percentage change from prior year (16.1)% 7.7%
Percentage change from 30-year average (15.3)% 1.1%
Wholesale electric revenues were $17.2 million in 2002 compared
to $23.5 million in 2001, a decrease of $6.3 million, or 26.8%.
This decrease in wholesale revenues primarily reflects decreased
kWh sales of 9.1% and a decline in rates. Amounts collected from
wholesale customers have no impact on net income.
Other revenues were $19.5 million in the first quarter of 2002
compared to $17.9 million in the same period of 2001, an increase
of $1.6 million, or 9%. This increase primarily reflects higher
transmission revenues due to an increase in rates effective
January 2002.
Operating expenses
Purchased power costs were $244.2 million in the first quarter of
2002 compared to $276.8 million in the same period of 2001, a
decrease of $32.6 million, or 12%. The decrease in expense
reflects lower purchased power requirements due to a 4.2%
decrease in retail sales, a 9.1% decrease in wholesale sales and
lower costs that reflect the prices of natural gas and oil.
Included in the current and prior period was $28.4 million and
$41.7 million, respectively, that reflects the recognition of
previously deferred standard offer and default service supply
costs resulting from the current period collection of these
costs. Boston Edison adjusts its electric rates to collect the
costs related to energy supply from customers on a fully
reconciling basis. Due to the rate adjustment mechanisms,
changes in the amount of energy supply expense have no impact on
earnings.
Operations and maintenance expense was $53.7 million in 2002
compared to $51.5 million in 2001, an increase of $2.2 million,
or 4%. This increase reflects non-recurring corrective electric
systems maintenance costs of $3.7 million in connection with the
System Improvement Program, increased benefit costs of $2.8
million and a slight increase in bad debt expense. These
increases were partially offset by reduced expensed labor costs
and the absence of storm related costs during the first quarter
of 2002 resulting from milder weather conditions.
Depreciation and amortization expense was $42.8 million in 2002
compared to $42.3 million in 2001, an increase of $0.5 million,
or 1%. The increase reflects a slightly higher level of
depreciable plant in service.
Demand side management (DSM) and renewable energy programs
expense was $11.2 million in the first quarter of 2002 compared
to $13.8 million in the same period of 2001, a decrease of $2.6
million, or 19%, primarily due to the timing of DSM expense which
is consistent with the collection of conservation and renewable
energy revenues. These costs are collected from customers on a
fully reconciling basis and therefore, fluctuations in program
costs have no impact on earnings.
Property and other taxes were $18.2 million in 2002 compared to
$18.1 million in 2001, an increase of $0.1 million, or 1%. The
increase is due to higher overall municipal property taxes,
particularly for the City of Boston, offset by lower payroll
taxes.
Income taxes from operations were $11.9 million in 2002 compared
to $16.4 million in 2001, a decrease of $4.5 million, or 27%.
This decrease reflects lower pre-tax operating income in 2002.
Other income
Other Income was $0.3 million in the first quarter of 2002
compared to $0.8 million in the same period of 2001, a net
decrease in income of $0.5 million due to lower property rental
revenues and a decrease in equity interest income.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $20.9 million in 2002 compared to $22.6 million
in 2001, a decrease of $1.7 million, or 8%. Approximately $1
million of the decrease is related to securitization certificate
interest reflecting the scheduled retirement of this debt. The
remaining decrease relates to a decrease in interest on long-term
debt and is the result of a retirement of $24.3 million, 9.375%
debentures in August 2001.
Other interest charges were $2.5 million in 2002 compared to $2.4
million in 2001, an increase of $0.1 million. Despite a higher
level of debt outstanding, this increase was partially offset by
a significant reduction in short-term borrowing rates and a
reduction in regulatory interest due to reductions in the under-
collection of regulatory deferrals. The increase in borrowings
is primarily the result of increased working capital
requirements.
Performance Assurances and Financial Guarantees
NSTAR Electric has entered into a series of purchased power
agreements to meet its default service supply obligations and its
remaining unmet standard offer supply obligations through
December 31, 2002. NSTAR Electric is recovering all of the
payments it is making to suppliers and has financial and
performance assurances and financial guarantees in place with
those suppliers to protect NSTAR Electric from risk in the
unlikely event any of its suppliers encounter financial
difficulties or fail to maintain an investment grade credit
rating. In connection with certain of these agreements, should,
in the unlikely event, an individual NSTAR Electric distribution
company receive a credit rating below investment grade, that
company potentially could be required to obtain certain financial
commitments, including but not limited to, letters of credit.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
There have been no material changes since year-end.
Part II - Other Information
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 March 31, 2002:
Ratio of earnings to fixed charges 3.03
Ratio of earnings to fixed charges and preferred stock
dividend requirements 2.84
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
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
Exhibits filed herewith:
Exhibit 12 - Computation of ratio of earnings to fixed charges
12.1 - Computation of ratio of earnings to fixed charges for
the twelve months ended March 31, 2002
12.2 - Computation of ratio of earnings to fixed charges and
preferred stock dividend requirements for the twelve
months ended March 31, 2002
Exhibit 15 - Letter re unaudited interim financial information
15.1 - Report of Independent Accountants
Exhibit 99 - Additional exhibits
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 first quarter of 2002.
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: May 15, 2002 /s/ Robert J. Weafer, Jr.
Robert J. Weafer, Jr.
Vice President,
Controller and Chief
Accounting Officer