1
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, 1997
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, Massachusetts 02199
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
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 12, 1997
- ----- ---------------------------
Common Stock, $1 par value 48,514,973 share
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Part I - Financial Information
Item 1. Financial Statements
- -----------------------------
Boston Edison Company
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended March 31,
1997 1996
-------- --------
Operating revenues $422,725 $387,849
-------- --------
Operating expenses:
Fuel and purchased power 181,168 142,918
Operations and maintenance 99,795 102,847
Depreciation and amortization 45,523 39,657
Demand side management programs 6,990 6,470
Taxes - property and other 29,171 28,789
Income taxes 12,489 14,895
-------- --------
Total operating expenses 375,136 335,576
-------- --------
Operating income 47,589 52,273
Other income (expense), net (140) 460
-------- --------
Operating and other income 47,449 52,733
-------- --------
Interest charges:
Long-term and medium-term debt 23,399 24,990
Other 3,404 2,868
Allowance for borrowed funds
used during construction (289) (328)
-------- --------
Total interest charges 26,514 27,530
-------- --------
Net income 20,935 25,203
Preferred stock dividends 3,817 3,890
-------- --------
Earnings available for common
shareholders $ 17,118 $ 21,313
======== ========
Weighted average common shares
outstanding 48,515 48,071
====== ======
Earnings per share of common stock $0.35 $0.44
===== =====
Dividends declared per share of
common stock $0.47 $0.47
===== =====
Common shares outstanding at end
of period 48,515 48,106
====== ======
The accompanying notes are an integral part of the consolidated financial
statements
3
Boston Edison Company
Consolidated Balance Sheets
(Unaudited)
(in thousands)
March 31, December 31,
1997 1996
---------- ----------
Assets
- ------
Utility plant in service, at original cost $4,404,687 $4,393,585
Less: accumulated depreciation 1,592,821 1,550,317
---------- ----------
2,811,866 2,843,268
Nuclear fuel, net 82,249 82,944
Construction work in progress 49,722 30,376
---------- ----------
Net utility plant 2,943,837 2,956,588
Investments in electric companies, at equity 23,525 23,054
Nuclear decommissioning trust 137,480 132,076
Current assets:
Cash and cash equivalents 4,201 5,651
Accounts receivable 232,569 233,024
Accrued unbilled revenues 32,665 34,922
Fuel, materials and supplies,
at average cost 46,833 57,075
Prepaid expenses and other 28,690 45,146
---------- ----------
Total current assets 344,958 375,818
---------- ----------
Regulatory assets:
Power contracts 84,122 88,963
Redemption premiums 29,719 31,052
Income taxes, net 47,823 47,483
Postretirement benefits costs 22,441 15,009
Nuclear outage costs 15,622 3,432
Other 15,822 16,087
---------- ----------
Total regulatory assets 215,549 202,026
Other deferred debits 37,109 39,729
---------- ----------
Total assets $3,702,458 $3,729,291
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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Boston Edison Company
Consolidated Balance Sheets
(Unaudited)
(in thousands)
March 31, December 31,
1997 1996
---------- ----------
Capitalization and Liabilities
- ------------------------------
Common stock equity:
Common stock $ 744,377 $ 744,233
Retained earnings 286,281 292,191
---------- ----------
Total common stock equity 1,030,658 1,036,424
---------- ----------
Cumulative preferred stock:
Nonmandatory redeemable series 120,023 119,954
Mandatory redeemable series 81,622 81,465
---------- ----------
Total preferred stock 201,645 201,419
---------- ----------
Long-term and medium-term debt 1,058,553 1,058,644
---------- ----------
Total capitalization 2,290,856 2,296,487
---------- ----------
Current liabilities:
Long-term debt/preferred stock
due within one year 102,267 102,667
Notes payable 220,790 201,454
Accounts payable 101,777 134,083
Accrued interest 13,313 24,378
Dividends payable 25,343 25,343
Other 122,150 115,812
---------- ----------
Total current liabilities 585,640 603,737
---------- ----------
Deferred credits:
Power contracts 84,122 88,963
Accumulated deferred income taxes 496,712 498,718
Accumulated deferred investment tax credits 57,881 58,899
Nuclear decommissioning liability 138,790 133,388
Other 48,457 49,099
---------- ----------
Total deferred credits 825,962 829,067
Commitments and contingencies __________ __________
Total capitalization and liabilities $3,702,458 $3,729,291
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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Boston Edison Company
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended March 31,
1997 1996
--------- ---------
Operating activities:
Net income $ 20,935 $ 25,203
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 53,067 50,622
Deferred income taxes and investment
tax credits (3,650) (3,270)
Allowance for borrowed funds used during
construction (289) (328)
Net changes in:
Accounts receivable and accrued
unbilled revenues 2,712 (6,519)
Fuel, materials and supplies 9,560 2,464
Accounts payable (32,306) (39,201)
Other current assets and liabilities 1,576 33,319
Other, net (8,645) 9,749
--------- ---------
Net cash provided by operating activities 42,960 72,039
--------- ---------
Investing activities:
Plant expenditures (excluding AFUDC) (31,485) (21,013)
Nuclear fuel expenditures 23 (1,346)
Investments (5,810) (4,303)
--------- ---------
Net cash used in investing activities (37,272) (26,662)
--------- ---------
Financing activities:
Issuances:
Common stock 145 3,029
Medium-term debt 100,000 0
Redemptions:
Long-term debt (100,000) (100,000)
Net change in notes payable 19,336 75,619
Dividends paid (26,619) (26,454)
--------- ---------
Net cash used in financing activities (7,138) (47,806)
--------- ---------
Net decrease in cash and cash equivalents (1,450) (2,429)
Cash and cash equivalents at beginning of year 5,651 5,841
--------- ---------
Cash and cash equivalents at end of period $ 4,201 $ 3,412
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 35,888 $ 38,088
========= =========
Income taxes $ 6,700 $ 6,054
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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Notes to Consolidated Financial Statements
- ------------------------------------------
A) Basis of Presentation
---------------------
The accompanying consolidated financial statements should be read in
conjunction with the Boston Edison Company (the Company) 1996 Form 10-K Annual
Report. The financial information presented as of March 31 has been prepared
from the Company's books and records without audit. Financial information as
of December 31 has been derived from the audited financial statements of the
Company, but does not include all disclosures required by generally accepted
accounting principles. In the opinion of the Company's management, all
adjustments necessary for a fair presentation of the financial information for
the periods indicated have been included. All adjustments are of a normal
recurring nature, except for the pension accounting adjustment described in
Note C. Certain reclassifications have been made to the prior year data to
conform with the current presentation.
The consolidated financial statements conform with generally accepted
accounting principles (GAAP). The preparation of financial statements in
conformity with GAAP requires 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 three-month period ended March 31, 1997 are
not indicative of the results which may be expected for the entire year. The
Company's kWh 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. In
addition, the Company currently bills higher base rates to commercial and
industrial customers during the billing months of June through September as
mandated by the Massachusetts Department of Public Utilities (MDPU).
Accordingly, greater than half of the Company's annual earnings typically
occurs in the third quarter.
B) Nature of Operations
--------------------
The Company is an investor-owned regulated public utility operating in the
energy and energy services business. This includes the generation, purchase,
transmission, distribution and sale of electric energy and the development and
implementation of electric demand side management programs. A portion of the
generation is produced by the Company's wholly owned nuclear generating unit,
Pilgrim Nuclear Power Station. The Company supplies electricity at retail to
an area of 590 square miles, including the city of Boston and 39 surrounding
cities and towns. It also supplies electricity at wholesale for resale to
other utilities and municipal electric departments. Electric operating
revenues were 88% retail and 12% wholesale in 1996. In addition, the Company
conducts unregulated activities through its wholly owned subsidiary, Boston
Energy Technology Group (BETG).
In January 1997, BETG, through one of its wholly owned subsidiaries, entered
into a joint venture (EnergyVision, LLC) with Williams Energy Services
Company, a subsidiary of The Williams Companies, Inc. EnergyVision, LLC,
which markets electricity, natural gas and energy-related services to retail
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customers in the six New England states, began operations in February 1997.
EnergyVision had no material effect on the Company's consolidated results of
operations in the first quarter.
C) Pension Accounting Adjustment
-----------------------------
The Company experienced a high number of employee retirements from 1994 to
1996. A large number of these retirements were as a direct result of the
Company's 1995 corporate restructuring. In the first quarter of 1997, a
review of the accounting for the pension expense related to the retirements
revealed that an adjustment to the pension costs related to these employees
was necessary. Therefore, the Company increased its pension regulatory asset
by $8.6 million in the first quarter of 1997 for the adjustment related to the
period of the Company's 1992 retail rate settlement. The remaining adjustment
did not have a material impact on the Company's consolidated results of
operations or financial position.
D) Depreciation Expense
--------------------
Upon the completion of a review of its electric generating units, the Company
determined that its oldest and least efficient fossil units (Mystic 4, 5 and
6) were unlikely to provide competitively priced power beyond the year 2000.
Therefore, during the second quarter of 1996, the Company revised the
estimated remaining economic lives of these units to five years retroactive to
the beginning of the year. Depreciation expense in the first quarter of 1997
includes $5.6 million, or $0.07 per share after tax, of additional
depreciation relating to this adjustment. On a comparative basis, the first
quarter of 1996 did not include any additional depreciation.
E) Commitments and Contingencies
-----------------------------
The Company owns or operates approximately 40 properties where oil or
hazardous materials were previously spilled or released. The Company is
required to clean up these properties in accordance with a timetable developed
by the Massachusetts Department of Environmental Protection and is continuing
to evaluate the costs associated with their cleanup. There are uncertainties
associated with these costs due to the complexities of cleanup technology,
regulatory requirements and the particular characteristics of the different
sites. The Company also continues to face possible liability as a potentially
responsible party in the cleanup of approximately ten 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. At the
majority of these sites the Company is one of many potentially responsible
parties and currently expects to have only a small percentage of the potential
liability. Through March 31, 1997, the Company has $7 million accrued related
to its cleanup liabilities. The Company is unable to fully determine a range
of reasonably possible cleanup costs in excess of the accrued amount, however
based on its assessments of the specific site circumstances, it does not
believe that it is probable that any such additional costs will have a
material impact on its financial condition. 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 a reporting
period in the near term.
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Statement of Position 96-1, Environmental Remediation Liabilities (SOP 96-1),
became effective in 1997. SOP 96-1 contains authoritative guidance on
specific accounting issues related to the recognition, measurement, display
and disclosure of environmental remediation liabilities. It requires that an
accrual for environmental liabilities include estimates of the costs to
perform all elements of the remediation effort including the costs of
compensation and benefits for those employees expected to devote a significant
amount of time directly to that effort. SOP 96-1 had no material effect on
the Company's consolidated results of operations or financial position.
The Company was named as a party in lawsuits by Subaru of New England, Inc.
and Subaru Distributors Corporation. The plaintiffs claimed certain
automobiles stored on lots in South Boston suffered pitting damage caused by
emissions from New Boston Station. In February 1997, the Company settled the
lawsuit brought by Subaru Distributors Corporation. The settlement did not
have a material impact on the Company's consolidated results of operations or
financial position. The Subaru of New England, Inc. lawsuit is still pending.
In the normal course of its business the Company is also involved in certain
other legal matters. The Company is unable to fully determine a range of
reasonably possible litigation costs in excess of amounts accrued, although,
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
financial condition. However, it is reasonably possible that additional
litigation 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 reconciles the federal statutory income tax rate to the
annual estimated effective income tax rate for 1997 and the actual effective
income tax rate for 1996.
1997 1996
---- ----
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income
tax benefit 4.2 4.3
Investment tax credits (1.7) (1.8)
Other (0.6) 0.7
---- ----
Effective tax rate 36.9% 38.2%
==== ====
G) Long-term and Medium-term Debt
------------------------------
In March 1997, $100 million of 5.70% debentures matured. These debentures
were replaced with $100 million of 6.662% bank debt due in 1999.
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
Results of Operations - Three Months Ended March 31, 1997 vs. Three Months
- --------------------------------------------------------------------------
Ended March 31, 1996
- --------------------
Earnings per share of common stock for the three months ended March 31, 1997
were $0.35 as compared to $0.44 for the three months ended March 31, 1996.
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Earnings in 1997 reflect an increase in depreciation expense related to the
change in estimated economic lives of the Company's oldest and least efficient
fossil generating units. This adjustment reduced first quarter earnings by
$0.07 per share compared to the same period in 1996. The adjustment was made
in the second quarter of 1996 retroactive to the beginning of 1996 and,
therefore, will have no impact on the comparative annual earnings of 1996 and
1997.
In addition, earnings in 1997 were negatively impacted by significantly milder
than normal winter weather and the effect of the 1996 leap year which caused
an overall decline of 1.9% in retail kWh sales. This was partially offset by
lower operating costs associated with the Company's 1995 restructuring.
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 the
Company's kWh sales and revenues. Refer to Note A to the Consolidated
Financial Statements.
Operating revenues
Operating revenues increased 9.0% in the first quarter of 1997 as follows:
(in thousands)
- ------------------------------------------------------
Retail electric revenues $31,232
Demand side management revenues (336)
Wholesale revenues (2,594)
Short-term sales and other revenues 6,574
- ------------------------------------------------------
Increase in operating revenues $34,876
======================================================
Despite the decrease in retail kWh sales noted above, retail electric revenues
increased $31 million due to the timing effect of fuel and purchased power
cost recovery. These higher revenues are offset by higher fuel and purchased
power expenses and, therefore, have no net effect on earnings. That increase
was partially offset by decreases in retail base and performance revenues.
Retail base revenues decreased due to significantly milder than normal weather
in 1997 and the impact of the 1996 leap year. Performance revenues, which
vary annually based on the operating performance of Pilgrim Station, decreased
due to a lower forecasted annual capacity factor reflecting the scheduled
refueling outage in the first quarter of 1997. Refer to the Electric Revenues
section for more information regarding Pilgrim Station.
The decrease in wholesale revenues reflects lower sales to the Company's
Pilgrim contract customers as a result of the outage at Pilgrim Station.
Short-term sales revenues increased $4.7 million primarily due to an increase
in short-term power purchase requirements resulting from a reduction in the
available nuclear energy supply in New England. Net revenues from short-term
sales result in a corresponding reduction to future fuel and purchased power
billings to retail customers and, therefore, have no net effect on earnings.
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Operating expenses
Fuel and purchased power expenses increased $38 million. The increase was
primarily due to the timing effect of fuel and purchased power cost recovery
and a significant increase in fossil generation due to the Pilgrim refueling
and maintenance outage. Fuel and purchased power expenses are substantially
recoverable through fuel and purchased power revenues.
Operations and maintenance expense decreased $3 million. The 1997 expense
reflects lower labor costs resulting from the Company's 1995 corporate
restructuring as the related reductions in employee staffing levels were not
complete until mid-1996.
The increase in depreciation and amortization expense is primarily due to the
change in estimated remaining economic lives of Mystic 4, 5 and 6 which is
discussed in Note C to the Consolidated Financial Statements.
Interest charges
Interest charges on long-term debt decreased due to the maturity of $100
million 5 1/8% debentures in March 1996.
Interest on short-term debt increased due to a higher average short-term debt
level in 1997 primarily resulting from the maturity of the $100 million 5 1/8%
debentures and the overall decrease in operating cash flow.
Electric Revenues
- -----------------
The annual Pilgrim performance adjustment charge provides the Company with
opportunities to improve its financial results. The most significant
potential impact of this performance incentive is based on Pilgrim Station's
annual capacity factor. Refer to the Electric revenues section of the
Company's 1996 Form 10-K Annual Report for detail regarding the annual
performance adjustment charge.
The Company is currently billing customers based on a capacity factor of 78%
for the performance year ended October 1997. This is a decrease from the
capacity factor of 91% achieved in the performance year ended October 1996 in
which there was no refueling and maintenance outage. The current performance
year's outage, originally scheduled to be completed in March 1997, was
extended through April 1997 due to the replacement of Pilgrim's main
transformer. The power needs usually met by Pilgrim Station were met by other
generating plants or purchased from other suppliers during this period.
Liquidity
- ---------
The Company continues to supplement internally generated funds with external
financings, primarily through the issuance of short-term commercial paper and
bank borrowings. The Company has authority from the Federal Energy Regulatory
Commission (FERC) to issue up to $350 million of short-term debt. The Company
also has a $200 million revolving credit agreement and arrangements with
several banks to provide additional short-term credit on a committed as well
as on an uncommitted and as available basis. At March 31, 1997 the Company
had $221 million of short-term debt outstanding, none of which was incurred
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under the revolving credit agreement. In 1994 the MDPU approved the Company's
financing plan to issue up to $500 million of equity and long-term securities
through 1996. In 1996 the MDPU approved the Company's request to extend this
financing plan through 1998. Proceeds from issuances under this plan are to
be used to refinance short and long-term securities and to fund capital
expenditures. As discussed in Note G to the Consolidated Financial
Statements, $100 million of 5.70% debentures matured in March 1997 and were
replaced with $100 million of 6.662% bank debt due in 1999. There is
approximately $220 million remaining under the plan.
Connecticut Yankee
- ------------------
In December 1996, the board of directors of Connecticut Yankee Atomic Power
Company (CYAPC), which owns and operates the Connecticut Yankee nuclear
electric generating unit, unanimously voted to permanently shut down the unit.
This decision was based on an economic analysis of the costs of operating the
unit compared to the costs of closing the unit and incurring replacement power
costs through the period of its operating license.
The Connecticut Department of Public Utility Control (DPUC) has raised
concerns to the FERC regarding CYAPC's estimate of the post-operation costs
and the plant operator's prudency prior to the shut down decision. The DPUC
has requested that CYAPC be prohibited by the FERC from passing through
certain post-operation costs to the power purchasers. The Company, a 9.5%
equity investor in CYAPC and power purchaser, is currently unable to determine
the ultimate outcome of this dispute or its impact on the Company.
Safe Harbor Cautionary Statement
- --------------------------------
The Company 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, 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. Refer also to the
safe harbor cautionary statements included in the Company's 1996 Form 10-K
Annual Report.
The preceding sections include certain forward-looking statements about
environmental and legal issues and Pilgrim Station's performance.
The impacts of various environmental and legal issues 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 the estimated litigation costs.
Pilgrim Station's performance could differ from current expectations. The
capacity factor could be impacted by changes in regulations or by unplanned
outages resulting from certain operating conditions.
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Part II - Other Information
Item 5. Other Information
- --------------------------
The following additional information is furnished in connection with the
Registration Statement on Form S-3 of the Registrant (File No. 33-57840),
filed with the Securities and Exchange Commission on February 3, 1993.
Price and dividend information per share of common stock:
Price
------------------------ Dividend
High Low Paid
------- ------- --------
First quarter 1997 $27 3/8 $26 $0.470
The market value per share of the Company's common stock as of the close of
business on May 12, 1997 was $26 per share as reported in the Wall Street
Journal.
Ratio of earnings to fixed charges and ratio of earnings to fixed charges and
preferred stock dividend requirements:
Twelve months ended March 31, 1997:
----------------------------------
Ratio of earnings to fixed charges 2.89
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.39
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) 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, 1997
12.2 - Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements for the
twelve months ended March 31, 1997
Exhibit 15 - Letter re unaudited interim financial information
15.1 - Report of Independent Accountants
Exhibit 27 - Financial Data Schedule
27.1 - Schedule UT
Exhibit 99 - Additional Exhibits
99.1 - Letter of Independent Accountants
Re Form S-3 Registration Statements filed by the
Company on February 3, 1993 (File No. 33-57840)
and May 31, 1995 (File No. 33-59693); Form S-8
Registration Statements filed by the Company on
October 10, 1985 (File No. 33-00810), July 28, 1986
(File No. 33-7558), December 31, 1990 (File No.
33-38434), June 5, 1992 (File Nos. 33-48424 and
33-48425), March 17, 1993 (File Nos. 33-59662 and
33-59682) and April 6, 1995 (File No. 33-58457) and
in the Form S-4 Registration Statement filed by
Boston Edison Holdings, currently known as BEC
Energy, on March 17, 1997 (File No. 333-23439)
b) No Form 8-K was filed during the first quarter of 1997.
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Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTON EDISON COMPANY
---------------------
(Registrant)
Date: May 15, 1997 /s/ Robert J. Weafer, Jr.
------------------------------
Robert J. Weafer, Jr.
Vice President-Finance,
Controller and Chief
Accounting Officer