UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Boylston Street, Boston, Massachusetts 02199
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-424-2000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 1999: None
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 26, 1999
-------------------------- -----------------------------
Common Stock, $1 par value 100 shares
1
Boston Edison Company
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Form 10-K Annual Report
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December 31, 1998
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Part I Page
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Item 1. Business 2
Item 2. Properties and Power Supply 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
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Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis 13
Item 8. Financial Statements and Supplementary Financial
Information 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 51
Part III
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Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management 63
Item 13. Certain Relationships and Related Transactions 63
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 64
2
Part I
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Item 1. Business
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(a) General Development of Business
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Boston Edison Company (Boston Edison), an investor-owned regulated public
utility incorporated in 1886 under Massachusetts law, received final approval
of its reorganization plan to form a holding company structure from the
Securities and Exchange Commission (SEC) in May 1998. Effective May 20, 1998
the holding company, BEC Energy (BEC), was formed with Boston Edison as a
wholly owned subsidiary of BEC. Effective June 25, 1998, Boston Energy
Technology Group (BETG) ceased being a subsidiary of Boston Edison and became
a wholly owned subsidiary of BEC.
Within its newly restructured industry, BEC has announced its intention to
focus its utility operations on the transmission and distribution of energy.
The sale of Boston Edison's fossil generating assets to Sithe Energies, Inc.
(Sithe) was completed in May 1998. In November 1998, Boston Edison signed an
agreement with Entergy Nuclear Generating Company (Entergy) to sell its wholly
owned nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim). BEC
signed a merger agreement with Commonwealth Energy System (CES) in December
1998 that will create an energy delivery company serving approximately 1.3
million customers located entirely within Massachusetts, including more than
one million electric customers in 81 communities and 240,000 gas customers in
51 communities.
(b) Financial Information about Industry Segments
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Boston Edison operates as a regulated electric public utility, therefore
industry segment information is not applicable.
(c) Narrative Description of Business
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Principal Products and Services
Boston Edison currently supplies electricity at retail to an area of 590
square miles, including the city of Boston and 39 surrounding cities and
towns. The population of the area served with electricity at retail is
approximately 1.5 million. In 1998 Boston Edison served an average of
approximately 660,000 customers. It also supplies electricity at wholesale
for resale to other utilities and municipalities. Electric operating revenues
by class for the last three years consisted of the following:
1998 1997 1996
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Retail electric revenues:
Commercial 51% 51% 50%
Residential 27% 27% 27%
Industrial 9% 9% 9%
Other 1% 1% 2%
Wholesale and contract revenues 12% 12% 12%
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3
Sources and Availability of Fuel
On May 15, 1998, Boston Edison completed the sale of its non-nuclear
generating assets to Sithe Energies. In April 1998, Boston Edison began
soliciting expressions of interest for the sale of its nuclear generating
unit, Pilgrim as part of the previously announced strategy to exit the
generation business. On November 19, 1998, Boston Edison announced that
Entergy, a subsidiary of New Orleans-based Entergy Corporation, had been
selected as the winning bidder for Pilgrim. A purchase and sale agreement has
been signed and all required approvals are anticipated in the second quarter
of 1999. Company generation by type of fuel for each of the last five years
were as follows:
Percentage of Company
Generation by Source (%)
--------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------
Oil 8.1 32.0 16.1 17.5 27.8
Gas 20.8 31.1 33.3 39.9 31.6
Nuclear 71.1 36.9 50.6 42.6 40.6
=========================================
The decrease in company oil and gas generation resulting from the fossil
divestiture was partially offset by higher purchased power in 1998 that
included a six-month transitional power purchase contract with Sithe that
began in May.
In order to obtain fuel for use at Pilgrim Station, Boston Edison must obtain
supplies of uranium concentrates and secure contracts for these concentrates
to go through the processes of conversion, enrichment and fabrication of
nuclear fuel assemblies. Boston Edison currently has contracts for supplies
of uranium concentrates and the processes of conversion, enrichment and
fabrication through 2002, 2000, 2004 and 2012, respectively. Following the
planned sale of Pilgrim, it is expected that each of these contracts will
either be terminated or permitted to expire in accordance with their terms.
Boston Edison may be subject to a penalty of approximately $10 million to
terminate one of these contracts. Management anticipates any payment will be
collected from customers under the terms of the Boston Edison settlement
agreement.
Franchises
Through its charter, which is unlimited in time, Boston Edison has the right
to engage in the business of producing and selling electricity, steam and
other forms of energy, has powers incidental thereto and is entitled to all
the rights and privileges of and subject to the duties imposed upon electric
companies under Massachusetts laws. The locations in public ways for electric
transmission and distribution lines are obtained from municipal and other
state authorities which, in granting these locations, act as agents for the
state. In some cases the action of these authorities is subject to appeal to
the Massachusetts Department of Telecommunications and Energy (DTE). The
rights to these locations are not limited in time, but are not vested and are
subject to the action of these authorities and the legislature. Pursuant to
the Massachusetts electric utility industry restructuring legislation enacted
in November 1997, the DTE has defined the service territory of Boston Edison
based on the territory actually served on July 1, 1997, and following, to the
extent possible, municipal boundaries. The legislation further provided that,
until terminated by effect of law or otherwise, Boston Edison shall have the
exclusive obligation to provide distribution service to all retail customers
within such service territory. No other entity shall provide distribution
4
service within this territory without the written consent of Boston Edison
which consent must be filed with the DTE and the municipality so affected.
Seasonal Nature of Business
Kilowatt-hour (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. Refer to the Selected Consolidated Quarterly Financial Data
(Unaudited) in Item 8 for specific financial information by quarter for 1998
and 1997.
Competitive Conditions
The utility industry has continued to change in response to the marketplace
demands for improved customer service and lower prices for energy. These
pressures have resulted in an increasing trend in the industry to seek
competitive advantages and other benefits through business combinations. On
December 5, 1998, BEC and CES, headquartered in Cambridge, Massachusetts,
entered into an Agreement and Plan of Merger (the Merger Agreement).
Management's Discussion and Analysis ("Merger with COM/Energy") in Item 7
provides further details regarding the Merger Agreement.
Boston Edison has been anticipating and responding to changes in the electric
energy business as a result of industry restructuring proceedings at both the
federal and state levels. Management's Discussion and Analysis ("Retail
Access") in Item 7 provides further details regarding Boston Edison's response
to the industry climate, including details of its industry restructuring
settlement agreement.
Environmental Matters
Boston Edison is subject to numerous federal, state and local standards with
respect to the management of wastes, air and water quality and other
environmental considerations. These standards could require modification of
existing facilities or curtailment or termination of operations at these
facilities. They could also potentially delay or discontinue construction of
new facilities and increase capital and operating costs by substantial
amounts. Noncompliance with certain standards can, in some cases, also result
in the imposition of monetary civil penalties.
Environmental-related capital expenditures for the years 1998 and 1997 were
$0.6 million and $1.4 million, respectively. Management believes that its
remaining operating facilities are in substantial compliance with currently
applicable statutory and regulatory environmental requirements. Additional
expenditures could be required as changes in environmental requirements occur.
Number of Employees
As of March 26, 1999, Boston Edison had 2,893 full-time and 48 part-time
employees including 1,966 represented by two locals of the Utility Workers
Union of America, AFL-CIO. The locals' labor contracts are effective through
May of the year 2000. Management believes it has satisfactory employee
relations.
Approximately 600 employees are expected to terminate employment as a result
of the divestiture of Pilgrim Station in 1999. Refer to the Generating Assets
Divestiture section of Item 7 for information regarding employees affected by
the nuclear divestiture.
5
(d) Financial Information about Foreign and Domestic Operations and Export
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Sales
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Boston Edison delivers electricity to retail and wholesale customers in the
Boston area. Boston Edison does not have any foreign operations or export
sales.
(e) Additional Information
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Regulation
Boston Edison and its wholly owned subsidiary, Harbor Electric Energy Company
(HEEC), operate primarily under the authority of the DTE, whose jurisdiction
includes supervision over retail rates for electricity and financing and
investing activities. In addition, the Federal Energy Regulatory Commission
(FERC) has jurisdiction over various phases of Boston Edison's business
including rates for power sold at wholesale for resale, facilities used for
the transmission or sale of that power, certain issuances of short-term debt
and regulation of the system of accounts.
The Nuclear Regulatory Commission (NRC) has broad jurisdiction over the
siting, construction and operation of nuclear reactors with respect to public
health and safety, environmental matters and antitrust considerations. A
license granted by the NRC may be revoked, suspended or modified for failure
to construct or operate a facility in accordance with its terms. Boston
Edison currently holds an operating license for Pilgrim Station which expires
in 2012. Continuing NRC review of existing regulations and certain operating
occurrences at other nuclear plants have periodically resulted in the
imposition of additional requirements for all nuclear plants in the United
States, including Pilgrim Station. NRC inspections and investigations can
result in the issuance of notices of violation. These notices can also be
accompanied by orders directing that certain actions be taken or by the
imposition of monetary civil penalties.
In addition, management could undertake certain actions regarding Pilgrim
Station at the request or suggestion of its insurers or the Institute of
Nuclear Power Operations, a voluntary association of nuclear utilities
dedicated to the promotion of safety and reliability in the operation of
nuclear power plants. Nuclear power continues to be a subject of political
controversy and public debate manifested from time to time in the form of
requests for various kinds of federal, state and local legislative or
regulatory action, direct voter initiatives or referenda or litigation.
Management cannot predict the extent, cost or timing of any modifications to
Pilgrim which could be necessary as a result of additional regulatory or other
requirements. As discussed in Sources and Availability of Fuel of this item,
Boston Edison entered into a purchase and sale agreement with Entergy for the
sale of Pilgrim Station. The DTE approved the sale of Pilgrim in March 1999.
Other required approvals are anticipated in the second quarter of 1999. Such
approvals are required for the completion of the Pilgrim sale. If the
required approvals are not received as anticipated, the agreement with Entergy
could be terminated. If Boston Edison is ultimately unable to sell Pilgrim,
management expects it would recover all stranded Pilgrim costs, including
decommissioning under the Boston Edison settlement agreement.
Plant Expenditures and Financings
The most recent estimates of plant expenditures (excluding nuclear fuel),
allowance for funds used during construction (AFUDC), long-term debt
6
maturities and preferred stock payment requirements for the years 1999 through
2003 are as follows:
(in thousands) 1999 2000 2001 2002 2003
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Plant
expenditures $127,000 $113,000 $ 96,000 $ 75,000 $ 78,000
AFUDC $ 1,200 $ 1,200 $ 1,200 $ 1,200 $ 1,200
Long-term debt $ 1,600 $166,600 $ 1,600 $ 1,600 $151,650
Preferred stock $ - $ - $ 50,000 $ - $ -
==============================================================================
Management continuously reviews its plant expenditure and financing programs.
These programs and, therefore, the estimates included in this Form 10-K are
subject to revision due to changes in regulatory requirements, environmental
standards, availability and cost of capital, interest rates and other
assumptions.
Plant expenditures in 1998 were $118 million and consisted primarily of
additions to Boston Edison's distribution and transmission systems. The
majority of these expenditures were for system reliability and control
improvements, customer service enhancements and capacity expansion to allow
for long range growth in the Boston Edison service territory.
Refer to the Liquidity section of Item 7 for more information regarding
capital resources to fund construction programs.
Item 2. Properties and Power Supply
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Total electric generation capacity from facilities owned by Boston Edison
consisted of the following:
Year
Unit (a) Location Capacity (b) Type Installed
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Pilgrim Nuclear Plymouth, Mass. 670 Nuclear 1972
Power Station
New Boston Station South Boston, Mass. 760 Fossil 1965-1967
Units 1 and 2
Mystic Station Everett, Mass.
Units 4-5-6 388 Fossil 1957-1961
Unit 7 592 Fossil 1975
Combustion turbine 14 Fossil 1969
generator
Combustion turbine Various 276 Fossil 1966-1971
generators (nine)
==============================================================================
<FN>
(a) As discussed in Sources and Availability of Fuel of this item, Boston
Edison completed the sale of its fossil generating assets to Sithe
Energies in May 1998. In addition, Pilgrim Station is expected to be
sold to Entergy in 1999.
(b) In megawatts (MW) based on winter capability audit results in 1997.
7
Boston Edison's high-tension transmission lines are generally located on land
either owned or subject to easements in its favor. Its low-tension
distribution lines are located principally on public property under permission
granted by municipal and other state authorities.
As of December 31, 1998, Boston Edison's transmission system consisted of 376
miles of overhead circuits operating at 115, 230 and 345 kilovolts (kV) and
171 miles of underground circuits operating at 115 and 345 kV. The
substations supported by these lines are 45 transmission or combined
transmission and distribution substations with transformer capacity of 11,053
megavolt amperes (MVA), 57 4 kV distribution substations with transformer
capacity of 932 MVA and 16 primary network units with 79 MVA capacity. In
addition, high tension service was delivered to 248 customers' substations.
The overhead and underground distribution systems cover approximately 3,700
and 3,200 circuit miles, respectively. HEEC, Boston Edison's regulated
subsidiary, has a distribution system that consists principally of a 4.1 mile
115 kV submarine distribution line and a substation which is located on Deer
Island in Boston, Massachusetts. HEEC provides the ongoing support required
to distribute electric energy to its one customer, the Massachusetts Water
Resources Authority, at this location.
Purchased Power Contracts
Boston Edison entered into a 13-month agreement effective December 1, 1998 to
transfer all of the unit output entitlements from its long-term power purchase
contracts to Select Energy (Select), a subsidiary of Northeast Utilities, Inc.
In return, Select will provide full energy service requirements to Boston
Edison, including New England Power Pool (NEPOOL) capability responsibilities,
at FERC approved tariff rates through December 31, 1999. For more information
regarding these long-term contracts refer to Note L to the Consolidated
Financial Statements in Item 8.
Sales Contracts
Boston Edison currently sells a percentage of Pilgrim Station's output to
Commonwealth Electric Company (Commonwealth), Montaup Electric Company
(Montaup) and various municipalities under long-term contracts. Under these
contracts, the utilities and municipalities pay their proportionate share of
the costs of operating the station and associated transmission facilities.
The long-term power sales contracts with Commonwealth and Montaup will be
terminated upon the closing of the sale of Pilgrim Station to Entergy. The
contracts with the municipalities remain in place whereby Boston Edison will
purchase power for resale to the municipalities under a purchase power
agreement entered into with Entergy. Refer to Notes K and L to the
Consolidated Financial Statements in Item 8 for more information regarding
these contracts.
New England Power Pool
Boston Edison is a member of NEPOOL, a voluntary association of electric
utilities and other electricity suppliers in New England responsible for the
coordination, monitoring and directing of the operations of the major
generating and transmission facilities in the region. To obtain maximum
benefits of power pooling, the electric facilities of all member companies are
directed by an Independent System Operator (ISO New England) as if they were a
single power system. This is accomplished through the use of a central
dispatching system that uses the lowest-priced generation and transmission
equipment available at any given time. NEPOOL's goal is to ensure a reliable
energy supply for the New England region at the lowest possible price.
8
During 1997, the power pool was restructured with changes taking effect to the
membership and governance provisions of the power pooling agreement along with
the transfer of operating responsibility of the integrated transmission and
generation system in New England to ISO New England. Previously, NEPOOL
dispatched generating units for operation based on the lowest operating costs
of available generation and transmission. Under the new structure, generators
will be required to provide ISO New England with market prices at which they
will sell short-term energy supply. These prices will form the basis for
dispatch anticipated to begin in the second quarter of 1999. As noted in the
Purchased Power Contracts section above, Boston Edison will receive all of its
power supply requirements from Select in 1999. Therefore, the change to
NEPOOL's operations and pricing structure is expected to have no material
impact on Boston Edison's costs for purchased electric energy.
Item 3. Legal Proceedings
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Industry and corporate restructuring legal proceedings
The DTE order approving the Boston Edison settlement agreement and the DTE
order approving the formation of BEC as a holding company were appealed by
certain parties to the Massachusetts Supreme Judicial Court (SJC). In
December 1998, the SJC dismissed the appeal of the order approving the holding
company formation. One settlement agreement appeal remains pending, however
there has to date been no briefing, hearing or other action taken with respect
to this proceeding.
In addition, along with other Massachusetts investor-owned utilities, Boston
Edison has been named as a defendant in a class action suit seeking to declare
certain provisions of the Massachusetts electric industry restructuring
legislation unconstitutional.
Management is currently unable to determine the outcome of these outstanding
proceedings or the impact the proceedings may have on its consolidated results
of operations.
A referendum seeking repeal of the Massachusetts electric industry
restructuring legislation that was enacted in November 1997 was overwhelmingly
defeated by a better than 70% to 30% margin in a state-wide general election
held on November 3, 1998. This outcome allows the comprehensive framework
established for the restructuring of the electric industry to continue as
intended under the enacted legislation.
Regulatory proceedings
In October 1997, the DTE opened a proceeding to investigate Boston Edison's
compliance with the 1993 order which permitted the formation of BETG and
authorized Boston Edison to invest up to $45 million in unregulated
activities. Hearings began in the fourth quarter of 1998 and are expected to
be completed in the first half of 1999.
Each of the Reading Municipal Light Department, the Littleton Electric Light
Department and the West Boylston Municipal Light Department have filed
separate claims for arbitration in Massachusetts alleging that the proposed
transfer of Pilgrim Station constitutes a breach of their respective power
sale agreements and seeking to terminate those agreements. The remaining
municipal light departments have also indicated that they plan to file similar
claims for arbitration. Boston Edison has requested the FERC to exercise its
pre-emptive authority to consider the claims of the municipal light
departments. In the event that either the FERC determines, or as a result of
9
the arbitrations, that the contracts should be terminated, Boston Edison would
continue to be obligated to purchase power from Entergy that it intended to
resell to the municipal light departments. Boston Edison may not be able to
resell such power in the short-term power exchange at a price equal to or
greater than the price it is required to pay to Entergy. However, Boston
Edison has filed at the DTE for recovery of any such shortfall as part of its
Pilgrim divestiture filing through the transition charge.
Management is currently unable to determine the outcome of these proceedings
or the impact these proceedings may have on its consolidated financial
position or results of operations.
Other litigation
In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim
Station, filed suit against Boston Edison. The town claimed that Boston
Edison wrongfully failed to execute an agreement with the town for payments in
addition to taxes due to the town under the Massachusetts electric industry
restructuring legislation. Boston Edison and the town agreed on a 15-year,
$141 million property tax package in March 1999. Payments in each of the
first four years are approximately $15 million after which payments gradually
decline. All payments under this agreement will be recovered from customers
through the transition charge.
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 a change in estimates could have a material impact
on the results of a reporting period in the near term.
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
10
Executive Officers of the Registrant
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The names, ages, positions and business experience during the past five years
of all the executive officers of Boston Edison as of March 1, 1999 are listed
below. There are no family relationships between any of the officers, nor any
arrangement or understanding between any officer and another person pursuant
to which the position as officer is held. Officers hold office until the
first meeting of the directors following the next annual meeting of the
stockholders and until their respective successors are chosen and qualified.
Business Experience
Name, Age and Position During Past Five Years
- ---------------------- ----------------------
Thomas J. May, 51 Chairman of the Board, President
Chairman of the Board, President and Chief Executive Officer (since
and Chief Executive Officer 1995), Chairman of the Board and
Chief Executive Officer (1994-
1995), President and Chief
Operating Officer (1993-1994);
Director (since 1991)
Ronald A. Ledgett, 60 Executive Vice President (since
Executive Vice President 1997), Senior Vice President -
Fossil, Field Service and Electric
Delivery (1996-1997), Senior Vice
President - Power Delivery (1991-
1995)
Alison Alden, 50 Senior Vice President - Sales,
Senior Vice President - Sales, Services and Human Resources
Services and Human Resources (since 1996), Vice President -
Sales & Service (1993-1996)
L. Carl Gustin, 55 Senior Vice President - Corporate
Senior Vice President - Corporate Relations (since 1995), Senior
Relations Vice President - Marketing &
Corporate Relations (1989-1995)
Douglas S. Horan, 49 Senior Vice President - Strategy
Senior Vice President - Strategy and Law and General Counsel
and Law and General Counsel (since 1995), Vice President and
General Counsel (1994-1995),
Deputy General Counsel (1991-1994)
11
Business Experience
Name, Age and Position During Past Five Years
- ---------------------- ----------------------
James J. Judge, 43 Senior Vice President - Corporate
Senior Vice President - Corporate Services and Treasurer (since
Services and Treasurer 1995), Assistant Treasurer (1989-
1995), Director - Corporate
Planning (1993-1995)
Robert J. Weafer, Jr., 52 Vice President - Finance,
Vice President - Finance, Controller and Chief Accounting
Controller and Chief Officer (since 1991)
Accounting Officer
Theodora S. Convisser, 51 Clerk of the Corporation (since
Clerk of the Corporation 1986) and Assistant General
Counsel (since 1984)
12
Part II
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Item 5. Market for the Registrant's Common Stock and Related Stockholder
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Matters
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Market information for Boston Edison's common stock prior to the formation of
the holding company structure is included in Item 5 of BEC Energy's report on
Form 10-K.
The following information is furnished in connection with the Registration
Statement on Form S-3 of the Registrant (File No. 33-57840), filed on
February 3, 1993.
Ratio of earnings to fixed charges and ratio of earnings to fixed charges and
preferred stock dividend requirements for the year ended December 31, 1998:
Ratio of earnings to fixed charges 3.38
Ratio of earnings to fixed charges and
preferred stock dividend requirements 2.98
Item 6. Selected Financial Data
- --------------------------------
The following table summarizes five years of selected consolidated financial
data (in thousands).
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------
Operating
revenues $1,622,972 $1,778,531 $1,668,856 $1,628,503 $1,544,735
Net income $ 157,337 $ 144,642 $ 141,546 $ 112,310 $ 125,022
Total
assets $3,104,478 $3,622,347 $3,729,291 $3,637,170 $3,608,699
Long-term
debt $ 955,563 $1,057,076 $1,058,644 $1,160,223 $1,136,617
Redeemable
preferred
stock $ 92,040 $ 163,093 $ 203,419 $ 206,514 $ 208,514
===========================================================================
13
Item 7. Management's Discussion and Analysis
- ---------------------------------------------
BEC Energy
Boston Edison Company (Boston Edison) received final approval of its
reorganization plan to form a holding company structure from the Securities
and Exchange Commission (SEC) in May 1998. Effective May 20, 1998, BEC Energy
(BEC) was formed with Boston Edison as a wholly owned subsidiary of BEC.
Effective June 25, 1998, Boston Energy Technology Group (BETG) ceased being a
subsidiary of Boston Edison and became a wholly owned subsidiary of BEC. The
holding company structure clearly separates the unregulated and regulated
operations of BEC and provides management with greater organizational
flexibility in order to take advantage of utility and nonutility business
opportunities in a more timely manner, including the merger with Commonwealth
Energy System (CES).
Merger with COM/Energy
The utility industry has continued to change in response to the marketplace
demands for improved customer service and lower prices for energy. These
pressures have resulted in an increasing trend in the industry to seek
competitive advantages and other benefits through business combinations. On
December 5, 1998, BEC and CES, headquartered in Cambridge, Massachusetts,
entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant
to the Merger Agreement, BEC and CES will be merged into a new holding company
which has not yet been named (Newco). Holders of BEC common shares will
receive one share of Newco common stock for each share held while CES common
shareholders will receive 1.05 shares of Newco common stock for each share
held. Alternatively, current BEC and CES common shareholders have the right
to receive $44.10 of cash for each share held, up to an aggregate maximum of
$300 million. At the close of the merger, BEC shareholders are expected to
own approximately 68% of Newco common stock and CES shareholders are expected
to own approximately 32%. The merger is expected to occur shortly after the
satisfaction of certain conditions, including the receipt of certain
regulatory approvals including that of the Massachusetts Department of
Telecommunications and Energy (DTE). The regulatory approval process is
expected to be completed during the second half of 1999.
The merger will create an energy delivery company serving approximately
1.3 million customers located entirely within Massachusetts, including more
than one million electric customers in 81 communities and 240,000 gas
customers in 51 communities.
The Merger Agreement may be terminated under certain circumstances, including
by any party if the merger is not consummated by December 5, 1999, subject to
an automatic extension of six months if the requisite regulatory approvals
have not yet been obtained by such date. The merger will be accounted for
using the purchase method of accounting.
Upon effectiveness of the merger, Thomas J. May, BEC's current Chairman,
President and Chief Executive Officer (CEO), will become the Chairman and CEO
of Newco. Russell D. Wright, CES' current President and CEO, will become the
President and Chief Operating Officer of Newco and will serve on Newco's board
of trustees. Also, upon the effective date of the merger, Newco's board of
trustees will consist of BEC's and CES' current trustees.
14
Retail Access
Boston Edison has been anticipating and responding to the changes in the
electric energy business as a result of industry restructuring proceedings at
both federal and state levels. In January 1998, the DTE approved Boston
Edison's restructuring settlement agreement. The DTE found that the
settlement agreement substantially complied or was consistent with key
provisions of a Massachusetts law enacted in November 1997 establishing a
comprehensive framework for the restructuring of the electric utility
industry. Prior to this settlement agreement, retail electric customers
within Boston Edison's service territory received all services related to the
provision of electricity from Boston Edison. This included the procurement of
the electricity supply (either through purchase contracts or generation) and
the transmission and distribution to customers' facilities. Major provisions
of the settlement agreement included the ability for retail electric customers
to choose their electricity supplier (referred to as retail access) effective
March 1, 1998 (the retail access date). Boston Edison will continue to
provide all transmission and distribution of electricity services to all of
its retail customers. Under its settlement agreement, Boston Edison provides
standard offer service to all customers of record as of the retail access
date. Customers continuing to buy electricity under the standard offer are
receiving service at rates designed to give 10% savings from the rates in
effect prior to the retail access date. These standard offer customers will
realize an additional 5% average savings, after an adjustment for inflation,
by September 1, 1999. Boston Edison expects to be able to meet this
additional rate reduction as a result of the divestiture of the fossil
generating assets which is discussed below. The proceeds from the divestiture
are being utilized to reduce customer rates. New retail customers in the
Boston Edison service territory and previously existing customers that are no
longer eligible for the standard offer due to choosing a competitive supplier
are on default service. Refer also to the Electric revenues section for more
information.
Generating Assets Divestiture
The Boston Edison restructuring settlement agreement included a provision for
the divestiture of its fossil generating assets no later than six months after
the retail access date. On May 15, 1998, Boston Edison completed the sale of
its non-nuclear generating assets to Sithe Energies, Inc. (Sithe). Boston
Edison received proceeds from the sale of $655 million, including $121 million
for a six-month transitional power purchase contract. The amount received
above net book value on the sale of these assets is being returned to Boston
Edison's customers over the settlement period. That amount is partially
offset by certain costs recoverable from customers due to the support of
standard offer service provided by Boston Edison's fossil generating assets
prior to the divestiture.
In April 1998, Boston Edison began soliciting expressions of interest for the
sale of its nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim)
as part of the previously announced strategy to exit the generation business.
On November 19, 1998, Boston Edison announced that Entergy Nuclear Generating
Company (Entergy), a subsidiary of New Orleans-based Entergy Corporation, had
been selected as the winning bidder for Pilgrim. In the nation's first
competitive bid process for a nuclear power plant, Entergy is expected to
purchase Pilgrim in a deal valued at an estimated $121 million. In addition,
under the agreement Boston Edison will fully fund and transfer its
decommissioning trust fund to Entergy and Entergy will then assume full
liability and responsibility for decommissioning the Pilgrim site. A purchase
and sale agreement has been signed and all required approvals are anticipated
15
in the second quarter of 1999. The purchase price includes reimbursement for
certain costs to be expended by Boston Edison in 1999. Therefore, the actual
proceeds could be impacted by the ultimate timing of the transaction.
As part of a benefits package offered to employees affected by the nuclear
divestiture, eligible non-represented nuclear and designated nuclear support
employees were offered unreduced retirement and transition benefits under a
voluntary early retirement program (VERP). Sixteen employees elected to
participate in the VERP. A retention benefit program was offered to all non-
represented nuclear and designated nuclear support employees that did not
elect or were ineligible to retire under the VERP who continue to work through
the sale closing date. It is anticipated that approximately 300 non-
represented nuclear and designated nuclear support employees will receive one-
time retention payments under this program. Costs associated with the VERP
and retention program are recoverable under Boston Edison's settlement
agreement.
For more information on the nuclear divestiture refer to the November 23, 1998
Boston Edison Report on Form 8-K announcing the purchase and sale agreement
with Entergy.
Results of Operations
1998 versus 1997
Net income was $157 million in 1998 compared to $145 million in 1997. This
increase of 8.8% is described below.
Operating revenues
Operating revenues decreased 8.7% from 1997 as follows:
(in thousands)
- ------------------------------------------------------
Retail revenues $(148,272)
Wholesale revenues (3,721)
Short-term sales and other revenues (3,566)
- ------------------------------------------------------
Decrease in operating revenues $(155,559)
======================================================
Retail revenues reflect the impact of the mandated 10% retail rate reduction.
A 2.0% increase in retail kilowatt-hour (kWh) sales in 1998 partially offset
the impact of the rate reduction. Retail revenues also reflect a decrease due
to the timing effect of fuel and purchased power cost recovery. Prior to its
cessation as of March 1, 1998, the fuel clause charge was lower than the prior
year as the 1997 charge reflected the recovery of substantial prior year
undercollections. Fuel clause revenues were offset by fuel and purchased
power expenses and, therefore, had no net effect on earnings.
The net decrease in short-term sales and other revenues reflects an 11%
decrease in short-term kWh sales. This decrease is due to the expiration of
certain short-term sales contracts. This decrease has no net impact on
earnings as it is offset by a corresponding decrease in fuel and purchased
power expenses. The decrease in short-term sales was partially offset by an
increase in other revenues which reflects the recovery of certain costs
through the transition charge due to the support of standard offer service
provided by Boston Edison's fossil generating assets prior to divestiture.
16
Operating expenses
Fuel and purchased power expense decreased $111.3 million. This decrease is
the result of significantly lower company fuel costs due to the fossil
divestiture in May 1998. These costs were partially offset by a net increase
in purchased power subsequent to the divestiture. Purchased power costs
include the six-month transitional power purchase contract with Sithe Energies
that began in May. The capacity portion of the Sithe purchased power costs is
offset by the recognition of the payment from Sithe, resulting in a
corresponding reduction to purchased power expense. The timing effect of the
fuel and purchased power and standard offer cost collection mechanisms also
contributed to the decrease in fuel and purchased power expense.
Operations and maintenance expense decreased approximately $46 million. The
decrease is due to the impact of the fossil divestiture, lower employee
benefit expenses and lower nuclear spending. The decrease in nuclear spending
reflects the impact of the refueling outage in 1997. The comparison of 1998
and 1997 is also positively impacted by the severe April 1997 Boston area
storm.
The increase in depreciation and amortization is due to an increase in the
composite distribution depreciation rate and the timing of recovery of
generation-related assets under the settlement agreement. These increases
were partially offset by an $8.7 million nonrecurring charge recorded in 1997
to reflect the removal of specific nuclear-related intangible assets from the
balance sheet. These intangible assets related to costs incurred for plant
design and safety studies. These studies were superceded by updated studies.
The increase in demand side management (DSM) and renewable energy programs
expense reflects an increase in the required spending for DSM programs in
1998. In addition, the renewable energy programs expense is the result of a
new state mandate for the funding of renewable energy that became effective
March 1, 1998. Renewable energy expenses are collected through a separate
rate mechanism and, therefore, have no net effect on earnings.
The decrease in property and other taxes is due to the decrease in municipal
property taxes resulting from the fossil divestiture.
The increase in operating income taxes is the result of a reduction in
investment tax credit amortization due to the divestiture of the fossil
generating assets. Refer to Note C to the Consolidated Financial Statements
for more information on income taxes.
Other income (expense), net
Other expense, net in 1998 includes certain costs related to the fossil
divestiture, net of the related tax benefits, offset by the recognition of
previously deferred investment tax credits associated with the fossil
generating stations. 1997 results reflect the charge of approximately $8
million, after tax, from the nuclear asset impairment which is further
discussed in Note B to the Consolidated Financial Statements.
Interest charges
Interest charges on long-term debt decreased due to the maturing of $100
million of 5.95% debentures in March 1998 and the cessation of amortization of
the associated redemption premiums and the redemption of a $100 million 6.662%
bank loan in June 1998.
17
The decrease in short-term interest charges is due to the redemption of Boston
Edison's outstanding short-term debt with proceeds from the fossil
divestiture.
Preferred stock dividends
Preferred stock dividends decreased as a result of Boston Edison's redemption
of 40,000 shares of 7.27% series cumulative preferred stock in May 1998 and
1997, the remaining 320,000 shares of the 7.27% series and 400,000 shares of
7.75% series cumulative preferred stock in July 1998 and 400,000 shares of
8.25% series in June 1997. Refer to Note G to the Consolidated Financial
Statements.
1997 versus 1996
Net income was $145 million in 1997 compared to $142 million in 1996. This
increase of 2.2% is described below.
Operating revenues
Operating revenues increased 6.6% over 1996 as follows:
(in thousands)
- ------------------------------------------------------
Retail revenues $ 88,484
Wholesale revenues (765)
Short-term sales and other revenues 21,956
- ------------------------------------------------------
Increase in operating revenues $109,675
======================================================
Retail base revenues, consistent with the 0.8% increase in kWh sales in 1997,
were relatively flat compared to 1996. Increases due to warmer than normal
temperatures in June and July, cooler temperatures in October and December and
the stronger local economy were offset by milder than normal winter conditions
during the first quarter of 1997 and lower industrial sales. Industrial sales
continued to be adversely affected by the decline in manufacturing activity in
the Boston Edison service territory. In addition, revenues in 1996 reflect
one more day of sales due to the leap year. Total retail electric revenues
increased $88.5 million primarily due to the timing effect of fuel and
purchased power cost recovery. The increase in fuel and purchased power
clause revenues reflect the recovery of substantial prior year
undercollections. These higher revenues are offset by higher fuel and
purchased power expenses and, therefore, have no net effect on earnings.
Pilgrim performance revenues, which varied annually based on the operating
performance of Pilgrim Station prior to the retail access date, decreased due
to a lower annual capacity factor effective November 1996 reflecting the
scheduled refueling and maintenance outage in the first quarter of 1997.
Short-term sales revenues increased approximately $16 million. This was due
to the continued reduction in available nuclear energy supply in New England
combined with a 42% increase in fossil generation allowing for increased sales
to the power exchange. Revenues from these short-term sales resulted in a
corresponding reduction to future fuel and purchased power billings to retail
customers and, therefore, had no net effect on earnings.
Operating expenses
Fuel and purchased power expenses increased $90.2 million. This increase
reflects $57 million related to the timing effect of fuel and purchased power
cost recovery. In addition, company fuel expense increased $50 million
primarily due to the 42% increase in fossil generation. These increases were
18
partially offset by a $22 million decrease in power exchange purchases. These
fuel and purchased power expenses are substantially recoverable through fuel
and purchased power revenues.
Operations and maintenance expense increased $0.4 million from 1996. The
incremental impact associated with service restoration efforts resulting from
the severe snow storm in April 1997 that struck the greater Boston area offset
the impact of lower spending from cost control efforts and significantly less
overhaul activity at the fossil generating units.
The increase in depreciation and amortization expense is due to the net impact
of two depreciation adjustments. An $8.7 million nonrecurring charge was
recorded to depreciation expense in the third quarter of 1997 to reflect the
removal of specific nuclear-related intangible assets from the balance sheet.
These intangible assets related to costs incurred for plant design and safety
studies. These studies were superceded by updated studies. In 1996 a $5.2
million adjustment was recorded to correct the accumulated depreciation
balance of certain large computer equipment.
Income taxes increased as a result of higher net income offset by the impact
of the favorable outcome of an Internal Revenue Service (IRS) appeal received
in the third quarter related to investment tax credits (ITC). This also
resulted in an increase in unamortized ITC which is being reflected as a
reduction to income tax expense over the life of the related assets. Refer to
Note C to the Consolidated Financial Statements for more information on income
taxes.
Other income (expense), net
Other expense, net in 1997 reflects the charge of approximately $8 million,
after tax, from the nuclear asset impairment which is further discussed in
Note B to the Consolidated Financial Statements in addition to BETG equity
losses. These decreases were partially offset by approximately $3 million,
after tax, in interest income from the IRS appeal.
Interest charges
Total interest charges on long-term debt decreased due to the maturing of $100
million of 5.70% debentures in March 1997 and the cessation of amortization of
the associated redemption premiums. This was partially offset by the March
1997 issuance of a $100 million 6.662% bank loan due in 1999. The decrease
also reflects the maturity of $100 million of 5 1/8% debentures in March 1996.
Allowance for borrowed funds used during construction (AFUDC), which
represents the financing costs of construction, decreased primarily due to a
lower average construction work in progress (CWIP) balance in 1997. The 1996
average CWIP balance included nuclear fuel purchased in anticipation of
Pilgrim Station's scheduled refueling outage in the first quarter of 1997.
Preferred stock dividends
The decrease in preferred stock dividends is the result of the redemption of
20,000 of mandatory and 20,000 of optional shares of 7.27% series cumulative
preferred stock in May 1997 and 400,000 shares of 8.25% series in June 1997.
Refer to Note G to the Consolidated Financial Statements.
19
Electric Sales and Revenues
Electric sales
Total kWh sales increased 2.3%. The 2.0% increase in 1998 retail kWh sales
was primarily due to the positive impact of a continued strong local economy
on commercial customers. The commercial sector represents approximately 50%
of electric operating revenues. The Boston area commercial office vacancy
rate is at a 17-year low. In addition, the Massachusetts employment rate
increased 2.8% over 1997. These positive impacts associated with the economic
conditions along with warmer than normal summer weather were partially offset
by the mild winter weather conditions in the first quarter of 1998. Wholesale
sales increased primarily due to a 32% increase in sales to Pilgrim contract
customers. That increase reflects a 97% capacity factor in 1998, the plant's
highest annual performance ever achieved. The lower level of sales in 1997
reflected that year's refueling outage. Short-term sales decreased due to
lower sales to other contract customers.
Retail kWh sales increased 0.8% in 1997. This was primarily attributable to
the commercial sector. The commercial increase reflects the impact of a
continued strong economy in the Boston area and very warm temperatures in June
and July and cooler than normal temperatures in the fourth quarter. Hotel
occupancy rates and non-manufacturing employment continued to increase in
1997. Residential revenues were also positively impacted by the weather.
These positive impacts were offset by milder winter weather in the first
quarter of 1997 and declines in manufacturing employment affecting the
industrial sector. In addition, revenues in 1996 reflect one more day of
sales due to the leap year. Total kWh sales increased 3.1% as a result of the
continued reduction in available nuclear energy supply in New England. This
reduction, combined with an increase in fossil generation allowed for
increased sales to the power exchange.
Electric revenues
Boston Edison's electric delivery business provides standard offer customers
service at rates designed to give 10% savings from the rates in effect prior
to the retail access date. As part of the Massachusetts restructuring
legislation enacted in November 1997, these customers will realize an
additional 5% average savings, after an adjustment for inflation, by
September 1, 1999. Boston Edison expects to meet this additional rate
reduction as a result of the proceeds received from the divestiture of the
fossil generating assets. All Boston Edison distribution customers must pay a
transition charge as a component of distribution electric rates. The purpose
of the transition charge is to allow Boston Edison to collect certain costs
from customers which would not be collected in the competitive energy supply
market. Such costs include the above market costs related to purchased power
contracts and its own generating stations, as well as the cost to decommission
Pilgrim Station. The plant and regulatory asset balances which will be
recovered through the transition charge until 2009 were approved by the DTE.
The other costs will be reviewed by the DTE on an annual basis. Under the
settlement agreement, the aggregate amount of the transition charge is reduced
by the net proceeds from fossil divestiture. The cost of providing standard
offer service, which includes fuel and purchased power costs, is recovered
from customers on a fully reconciling basis. The price of default service is
intended to reflect the average competitive market price for power.
As part of the settlement agreement, the annual performance adjustment charge
ceased and the cost recovery mechanism for Pilgrim Station changed effective
March 1, 1998. Approximately 25% of the operations and capital costs,
20
including a return on investment, continues to be collected under wholesale
contracts with other utilities and municipalities. Boston Edison's long-term
power sales contracts with the utilities, Commonwealth Electric Company and
Montaup Electric Company, will be terminated upon the closing of the sale of
Pilgrim Station to Entergy. Boston Edison's contracts with the various
municipalities remain in place. However, upon the Pilgrim sale closing date,
Boston Edison will purchase power for resale to the municipalities under a
purchase power agreement entered into with Entergy. Through the sale closing
date, Boston Edison will share 25% of any profit or loss from the sale of
Pilgrim's output with distribution customers through the transition charge.
In addition, Boston Edison will obtain transition payments up to a maximum of
$23 million per year depending on the level of costs incurred for such items
as property taxes, insurance, regulatory fees and security requirements.
Under its settlement agreement, Boston Edison's distribution rates will remain
unchanged through December 31, 2000, subject to a minimum and maximum return
on average common equity (ROE). The ROE is subject to a floor of 6% and a
ceiling of 11.75%. If the ROE is below 6%, Boston Edison is authorized to add
a surcharge to distribution rates in order to achieve the 6% floor. If the
ROE is above 11%, it is required to adjust distribution rates by an amount
necessary to reduce the calculated ROE between 11% and 12.5% by 50%, and a
return above 12.5% by 100%. No adjustment is made if the ROE is between 6%
and 11%. The cost of providing transmission service to distribution customers
is recovered on a fully reconciling basis.
Boston Edison filed proposed adjustments to its standard offer and transition
charges with the DTE in November 1998. The DTE approved these proposed
adjustments to be effective January 1, 1999. The DTE is continuing to examine
Boston Edison's cost recovery mechanisms. The rates provide an approximate
12% reduction from inflation-adjusted pre-retail access date rates.
Liquidity
Cash requirements for utility plant expenditures have been met in recent years
with internally generated funds. These funds are cash flows from operating
activities, adjusted to exclude changes in working capital and the payment of
dividends. During 1998, 1997 and 1996 internal generation of cash provided
111%, 211% and 177%, respectively of plant expenditures. Plant expenditures,
excluding nuclear fuel, forecasted for 1999 are $127 million. This spending
level includes the 1999 portion of business system replacements discussed
below. Plant expenditures over the next five years are forecasted to be
approximately $490 million. In addition to plant expenditures, debt and
preferred stock payment requirements are $1.6 million in 1999, $166.6 million
in 2000, $51.6 million in 2001, $1.6 million in 2002 and $151.65 million in
2003.
Boston Edison supplements internally generated funds as needed, primarily
through the issuance of short-term commercial paper and bank borrowings.
Boston Edison has authority from the Federal Energy Regulatory Commission
(FERC) to issue up to $350 million of short-term debt. Boston Edison has a
$200 million revolving credit agreement with a group of banks as well as other
arrangements with several banks to provide additional short-term credit on an
uncommitted and as available basis.
In December 1998, Boston Edison filed a securitization financing plan with the
DTE. Under the plan, a special purpose entity (SPE) will be formed as a
wholly owned subsidiary of Boston Edison. The SPE will pay Boston Edison an
amount equal to certain generation-related regulatory assets by issuing debt
securities. A portion of the net proceeds will be used to fund the nuclear
21
decommissioning trust. In addition, Boston Edison may also utilize a portion
of the proceeds to reduce capitalization and for general corporate purposes.
Boston Edison will remit amounts to the SPE as these amounts are collected
from customers through a separate component of the transition charge over the
settlement period. A DTE order regarding the securitization plan is expected
by the second quarter of 1999.
Year 2000 Computer Issue
The year 2000 issue is the result of computer programs that were written using
two digits rather than four to define an applicable year. If computer
programs with date-sensitive functions are not year 2000 compliant, they may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions and engage in other normal business activities. BEC has a year
2000 program in place to address the risk of non-compliant internal business
software, internal non-business software and embedded chip technology and
external noncompliance of third parties.
BEC is addressing the year 2000 issue on a coordinated basis. BEC has
inventoried and assessed all date-sensitive information and transaction
processing computer systems and has determined that approximately one-third of
business critical systems software need modification or replacement. BEC
defines its business critical systems as those which are necessary for the
delivery of and billing and accounting for electricity to its customers.
Plans have been developed and are being implemented to correct and test all
affected systems, with priorities assigned based on the importance of the
supported activity. As systems are being remediated or replaced, they are
tested for operational and year 2000 compliance in their own environment.
After completion of implementation, the systems are then tested for their
integration and compliance with other interactive systems. Management
estimates that approximately 70% of the efforts necessary to implement and
test its critical computer systems to alleviate the year 2000 issue are
complete and expects to complete all efforts by the end of the second quarter
of 1999. Management expects to complete the remediation, replacement and
testing of all other computer systems during the third quarter of 1999.
BEC has also inventoried its non-information technology systems that may be
date-sensitive and that use embedded technology such as micro-controllers or
micro-processors. The three categories of systems are (1) telecommunications,
(2) distribution system controls and (3) other distribution equipment. BEC is
55%, 100% and 80% complete, respectively, with its efforts to resolve and
remediate the systems that have been identified as year 2000 non-compliant
within each category. BEC expects completion of resolution and testing by the
end of the second quarter of 1999.
Costs incurred to remediate non-compliant systems are expensed as incurred.
In addition, a decision has been made to use this opportunity to upgrade some
of BEC's inefficient centralized business systems. Systems' replacement costs
will be capitalized and amortized over future periods. BEC expects the
modification and testing of its information and transaction processing systems
to cost $32 million. BEC has expended $19 million on this project through
December 31, 1998. BEC has funded and plans on continuing to fund all costs
related to year 2000 with internally generated cash flows.
In addition to its internal efforts, BEC has initiated formal communications
with its significant suppliers, service providers and other vendors to
determine the extent to which BEC may be vulnerable to their failure to
22
correct their own year 2000 issues. BEC has received responses from all
business critical vendors. All of these vendors have indicated that they will
be year 2000 compliant by the end of the fourth quarter of 1999. Many third
parties have indicated to BEC that they are already year 2000 compliant. In
addition, BEC has contacted all of its significant power suppliers. Each has
indicated that they either are or will be year 2000 compliant by the end of
the fourth quarter of 1999. In addition to the risk faced from its dependence
on third party suppliers for year 2000 compliance, BEC has a risk that power
will not be available from the New England Power Pool (NEPOOL) for the
purchase and distribution to Boston Edison's customers. Should NEPOOL fail to
resolve its year 2000 issues as planned, there would be an adverse impact on
Boston Edison and its customers. To mitigate this risk, efforts are being
coordinated with NEPOOL to establish inter-utility testing guidelines to
determine year 2000 readiness. Boston Edison is also a participant in the
NEPOOL/ISO New England Year 2000 Joint Oversight Committee which has
responsibility for the operational reliability of NEPOOL. Overall regional
activities, including those of NEPOOL/ISO New England, will be coordinated by
the Northeast Power Coordinating Council, whose activities will be
incorporated into the interregional coordinating effort by the North American
Electric Reliability Council. The target for the completion of this effort is
mid-1999.
In addition, parts of the global infrastructure, including national banking
systems, electrical power grids, gas pipelines, transportation facilities,
communications and government activities, may not be fully functional after
1999 due to the year 2000 issue. Infrastructure failures could significantly
reduce BEC's ability to acquire energy and its ability to serve its customers
as effectively as they are now being served.
BEC believes that its efforts to address the year 2000 issue will allow it to
successfully avoid any material adverse effect on its operations or financial
condition. However, it recognizes that failing to resolve year 2000 issues on
a timely basis would, in a most reasonable worst case scenario, significantly
limit its ability to acquire and distribute energy or process its daily
business transactions for a period of time, especially if such failure is
coupled with third party or infrastructure failures. Similarly, BEC could be
significantly affected by the failure of one or more significant suppliers,
customers or components of the infrastructure to conduct their respective
operations normally after 1999. Adverse effects on BEC could include, among
other things, business disruption, increased costs, loss of business and other
similar risks.
BEC's year 2000 program includes contingency plans. If required, these plans
are intended to address both internal risks as well as potential external
risks related to vendors, customers and energy suppliers. Plans have been
developed in conjunction with available national and regional guidance and are
based on system emergency plans that were developed and successfully tested
over the past several years. Included within its contingency plans are
procedures for the procurement of short-term power supplies and emergency
distribution system restoration procedures.
The foregoing discussion regarding year 2000 project timing, effectiveness,
implementation and costs includes forward-looking statements that are based on
management's current evaluation using available information. Factors that
might cause material changes include, but are not limited to, the availability
of key year 2000 personnel, the readiness of third parties and BEC's ability
to respond to unforeseen year 2000 complications.
23
Other Matters
Environmental
Boston Edison is an owner or operator of approximately 20 properties where oil
or hazardous materials were spilled or released. Boston Edison also continues
to face possible 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. Refer to Note K.4. to the Consolidated Financial
Statements for more information regarding hazardous waste issues.
Uncertainties continue to exist with respect to the disposal of both spent
nuclear fuel and low-level radioactive waste resulting from the operation of
nuclear generating facilities. The United States Department of Energy (DOE) is
responsible for the ultimate disposal of spent nuclear fuel. However,
uncertainties regarding the DOE's schedule of acceptance of spent fuel for
disposal continue to exist. Under the purchase and sale agreement with
Entergy, Entergy will assume full liability and responsibility for
decommissioning and waste disposal at Pilgrim Station. Refer to Note D to the
Consolidated Financial Statements for further discussion regarding nuclear
decommissioning and waste disposal.
Public concern continues regarding electromagnetic fields (EMF) associated
with electric transmission and distribution facilities and appliances and
wiring in buildings and homes. Such concerns have included the possibility of
adverse health effects caused by EMF as well as perceived effects on property
values. Some scientific reviews conducted to date have suggested associations
between EMF and potential health effects, while other studies have not
substantiated such associations. The National Research Council previously
reported that there is no conclusive evidence that exposure to EMF from power
lines and appliances presents a health hazard. The panel of scientists,
working with the National Academy of Sciences, report that more than 500
studies over the last several years have produced no proof that EMF causes
leukemia or other cancers or harms human health in other ways. Boston Edison
continues to support research into the subject and participates in the funding
of industry-sponsored studies. It is aware that public concern regarding EMF
in some cases has resulted in litigation, in opposition to existing or
proposed facilities in proceedings before regulators or in requests for
legislation or regulatory standards concerning EMF levels. It has addressed
issues relative to EMF in various legal and regulatory proceedings and in
discussions with customers and other concerned persons; however, to date it
has not been significantly affected by these developments. Boston Edison
continues to monitor all aspects of the EMF issue.
Industry and corporate restructuring legal proceedings
The DTE order approving the Boston Edison settlement agreement and the DTE
order approving the formation of BEC as a holding company were appealed by
certain parties to the Massachusetts Supreme Judicial Court (SJC). In
December 1998, the SJC dismissed the appeal of the order approving the holding
company formation. One settlement agreement appeal remains pending, however
there has to date been no briefing, hearing or other action taken with respect
to this proceeding.
In addition, along with other Massachusetts investor-owned utilities, Boston
Edison has been named as a defendant in a class action suit seeking to declare
certain provisions of the Massachusetts electric industry restructuring
legislation unconstitutional.
24
Management is currently unable to determine the outcome of these outstanding
proceedings or the impact the proceedings may have on its consolidated results
of operations.
Regulatory proceedings
In October 1997, the DTE opened a proceeding to investigate Boston Edison's
compliance with the 1993 order which permitted the formation of BETG and
authorized Boston Edison to invest up to $45 million in unregulated
activities. Hearings began in the fourth quarter of 1998 and are expected to
be completed in the first half of 1999.
Each of the Reading Municipal Light Department, the Littleton Electric Light
Department and the West Boylston Municipal Light Department have filed
separate claims for arbitration in Massachusetts alleging that the proposed
transfer of Pilgrim Station constitutes a breach of their respective power
sale agreements and seeking to terminate those agreements. The remaining
municipal light departments have also indicated that they plan to file similar
claims for arbitration. Boston Edison has requested the FERC to exercise its
pre-emptive authority to consider the claims of the municipal light
departments. In the event that either the FERC determines, or as a result of
the arbitrations, that the contracts should be terminated, Boston Edison would
continue to be obligated to purchase power from Entergy that it intended to
resell to the municipal light departments. Boston Edison may not be able to
resell such power in the short-term power exchange at a price equal to or
greater than the price it is required to pay to Entergy. However, Boston
Edison has filed at the DTE for recovery of any such shortfall as part of its
Pilgrim divestiture filing through the transition charge.
Management is currently unable to determine the outcome of these proceedings
or the impact these proceedings may have on its consolidated financial
position or results of operations.
Other litigation
In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim
Station, filed suit against Boston Edison. The town claims that Boston Edison
has wrongfully failed to execute an agreement with the town for payments in
addition to taxes due to the town under the Massachusetts electric industry
restructuring legislation. Boston Edison has disputed the town's claim and
will vigorously defend itself. In addition to this pending litigation, Boston
Edison and the town of Plymouth are also parties in proceedings before the
Appellate Tax Board and the DTE concerning substantially the same dispute.
Management is unable to determine the ultimate outcome of these proceedings or
the impact they may have on its consolidated financial position or results of
operations.
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 a change in estimates could have a material impact
on the results of a reporting period in the near term.
Refer to Note K.6. to the Consolidated Financial Statements for more
information on legal matters.
25
Interest rate risk
Boston Edison is exposed to changes in interest rates. Carrying amounts and
fair values of mandatory redeemable cumulative preferred stock, sewage
facility revenue bonds and unsecured debt as of December 31, 1998, are as
follows:
Carrying Fair Weighted average
(in thousands) amount value interest rate
- -----------------------------------------------------------------------------
Mandatory redeemable cumulative
preferred stock $49,040 $54,190 8.00%
Sewage facility revenue bonds $30,900 $33,914 7.32%
Unsecured debt $930,000 $994,294 7.79%
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 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 BEC's
merger with CES, the divestiture of nuclear generating assets, operating
results, year 2000 and environmental and legal issues.
The merger with CES could differ from current expectations. This could occur
if the requisite approvals are delayed or not obtained.
The nuclear divestiture plan could differ from current expectations. The
timing and a final closing of the sale may differ from management's
expectations if required approvals are delayed or not obtained.
The impacts 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 timing and total costs related to the year 2000 plan could differ from
current expectations. Factors that may cause such differences include the
ability to locate and correct all relevant computer codes and the availability
of personnel trained in this area. In addition, management cannot predict the
nature or impact on operations of third party noncompliance.
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 the estimated cleanup liabilities. The
impacts of changes in available information and circumstances regarding legal
issues could affect the estimated litigation costs.
26
Item 8. Financial Statements and Supplementary Financial Information
- ---------------------------------------------------------------------
Consolidated Statements of Income
years ended December 31,
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Operating revenues $1,622,972 $1,778,531 $1,668,856
- ---------------------------------------------------------------------------
Operating expenses:
Fuel and purchased power 567,806 679,131 588,893
Operations and maintenance 377,316 423,040 422,642
Depreciation and amortization 191,704 189,489 186,117
Demand side management and
renewable energy programs 51,839 29,790 30,825
Taxes-property and other 84,091 106,428 107,086
Income taxes 100,492 93,709 88,313
- ---------------------------------------------------------------------------
Total operating expenses 1,373,248 1,521,587 1,423,876
- ---------------------------------------------------------------------------
Operating income 249,724 256,944 244,980
Other income (expense), net (2,941) (6,392) 3,741
- ---------------------------------------------------------------------------
Operating and other income 246,783 250,552 248,721
- ---------------------------------------------------------------------------
Interest charges:
Long-term debt 82,951 92,489 94,823
Other 8,163 14,610 14,644
Allowance for borrowed funds used
during construction (1,668) (1,189) (2,292)
- --------------------------------------------------------------------------
Total interest charges 89,446 105,910 107,175
- ---------------------------------------------------------------------------
Net income $ 157,337 $ 144,642 $ 141,546
===========================================================================
Consolidated Statements of Retained Earnings
years ended December 31,
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Balance at the beginning of the year $ 328,802 $ 292,191 $ 257,749
Net income 157,337 144,642 141,546
- ---------------------------------------------------------------------------
Subtotal 486,139 436,833 399,295
- ---------------------------------------------------------------------------
Dividends declared:
Dividends to common shareholders 22,802 91,208 90,834
Dividends to BEC Energy 141,000 0 0
Preferred stock 8,765 13,149 15,365
Transfer of BETG to BEC Energy 8,392 0 0
- ---------------------------------------------------------------------------
Subtotal 180,959 104,357 106,199
- ---------------------------------------------------------------------------
Provision for preferred stock
redemption and issuance costs (a) 7,833 3,674 905
- ---------------------------------------------------------------------------
Balance at the end of the year $ 297,347 $ 328,802 $ 292,191
===========================================================================
<FN>
(a) Refer to Note A.7. to the Consolidated Financial Statements.
Per share data is not relevant because Boston Edison Company's common stock is
wholly owned by BEC Energy.
The accompanying notes are an integral part of the consolidated financial
statements.
27
Consolidated Balance Sheets
December 31,
(in thousands) 1998 1997
- ------------------------------------------------------------------------------
Assets
Utility plant in service, at
original cost $2,720,681 $4,457,831
Less: accumulated depreciation 926,020 $1,794,661 1,713,067 $2,744,764
- ------------------------------------------------------------------------------
Generation-related regulatory
asset, net 366,336 0
Nuclear fuel, net 68,706 67,935
Construction work in progress 40,965 33,291
- ------------------------------------------------------------------------------
Net utility plant 2,270,668 2,845,990
Nonutility property 0 8,137
Nuclear decommissioning trust 172,908 151,634
Equity investments 20,769 35,455
Other investments 10,029 7,107
Current assets:
Cash and cash equivalents 92,563 4,140
Accounts receivable 206,003 207,093
Accrued unbilled revenues 14,322 30,048
Fuel, materials and supplies,
at average cost 15,030 60,834
Prepaids and other 102,404 430,322 31,283 333,398
- ------------------------------------------------------------------------------
Deferred debits:
Regulatory assets 167,642 195,370
Other 32,140 45,256
- ------------------------------------------------------------------------------
Total assets $3,104,478 $3,622,347
==============================================================================
Capitalization and Liabilities
Common equity $1,039,891 $1,073,454
Cumulative preferred stock 92,040 161,093
Long-term debt 955,563 1,057,076
Current liabilities:
Long-term debt/preferred
stock due within one year $ 667 $ 102,667
Notes payable 0 137,013
Accounts payable 100,753 87,015
Accrued interest 19,991 24,289
Dividends payable 25,993 24,748
Other 176,823 324,227 128,061 503,793
- ------------------------------------------------------------------------------
Deferred credits:
Accumulated deferred income taxes 348,557 485,738
Accumulated deferred investment
tax credits 45,930 60,736
Nuclear decommissioning liability 176,578 155,182
Power contracts 58,415 71,445
Other 63,277 53,830
Commitments and contingencies
- ------------------------------------------------------------------------------
Total capitalization and liabilities $3,104,478 $3,622,347
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements
28
Consolidated Statements of Cash Flows
years ended December 31,
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Operating activities:
Net income $157,337 $144,642 $141,546
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 229,668 223,529 228,259
Deferred income taxes and investment tax
credits (152,798) (21,664) (4,057)
Allowance for borrowed funds used during
construction (1,668) (1,189) (2,292)
Net changes in:
Accounts receivable and accrued
unbilled revenues 29,666 45,678 (11,719)
Fuel, materials and supplies 29,834 (5,486) (2,171)
Accounts payable 19,697 (47,068) 609
Other current assets and liabilities (25,525) 25,428 (44,514)
Other, net (7,517) (4,640) 50,815
- -----------------------------------------------------------------------------
Net cash provided by operating activities 278,694 359,230 356,476
- -----------------------------------------------------------------------------
Investing activities:
Plant expenditures (excluding AFUDC) (117,803) (114,110) (145,347)
Proceeds from sale of fossil assets 533,633 0 0
Nuclear fuel expenditures (26,182) (4,089) (52,967)
Investments (33,600) (27,689) (34,314)
- -----------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 356,048 (145,888) (232,628)
- -----------------------------------------------------------------------------
Financing activities:
Issuances:
Common stock 0 144 12,559
Long-term debt 0 100,000 0
Redemptions:
Preferred stock (71,519) (44,000) (4,000)
Long-term debt (201,600) (101,600) (101,600)
Net change in notes payable (101,878) (64,441) 75,013
Dividends paid (171,322) (104,956) (106,010)
- -----------------------------------------------------------------------------
Net cash used in financing activities (546,319) (214,853) (124,038)
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 88,423 (1,511) (190)
Cash and cash equivalents at the
beginning of the year 4,140 5,651 5,841
- -----------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 92,563 $ 4,140 $ 5,651
=============================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 89,531 $100,795 $100,810
Income taxes $ 79,900 $ 99,326 $ 98,668
The accompanying notes are an integral part of the consolidated financial
statements.
29
Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
1. Nature of Operations
Boston Edison Company (Boston Edison) received final approval of its
reorganization plan to form a holding company structure from the Securities
and Exchange Commission (SEC) in May 1998. Effective May 20, 1998 the holding
company, BEC Energy (BEC), was formed with Boston Edison as a wholly owned
subsidiary of BEC.
Within its newly restructured industry, BEC has announced its intention to
focus its utility operations on the transmission and distribution of energy.
The sale of Boston Edison's fossil generating assets to Sithe Energies, Inc.
(Sithe) was completed in May 1998. In November 1998, Boston Edison signed an
agreement with Entergy Nuclear Generating Company (Entergy) to sell its wholly
owned nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim). BEC
signed a merger agreement with Commonwealth Energy System (CES) in December
1998 that will create an energy delivery company serving approximately 1.3
million customers located entirely within Massachusetts, including more than
one million electric customers in 81 communities and 240,000 gas customers in
51 communities.
Boston Edison currently 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 municipalities. Electric operating revenues are approximately
90% retail and 10% wholesale.
2. Basis of Consolidation and Accounting
Under the new holding company structure the owners of Boston Edison's common
stock became BEC common shareholders. Existing debt and preferred stock of
Boston Edison remained obligations of the regulated utility business.
Effective June 25, 1998, BETG ceased being a subsidiary of Boston Edison and
became a wholly owned subsidiary of BEC. The accompanying consolidated
financial statements include the results of operations and cash flows of BETG
prior to the reorganization. BETG is excluded from the consolidated results
of operations and cash flows beginning in the third quarter of 1998. The
consolidated balance sheet at December 31, 1997 reflects the financial
position of Boston Edison which also included BETG. BETG is excluded from the
consolidated balance sheet at December 31, 1998. The consolidated financial
statements for each period presented include the activities of Boston Edison's
wholly owned subsidiary, Harbor Electric Energy Company (HEEC). All
significant intercompany transactions have been eliminated. Certain
reclassifications have been made to the prior year data to conform with the
current presentation.
Boston Edison follows accounting policies prescribed by the Federal Energy
Regulatory Commission (FERC) and the Massachusetts Department of
Telecommunications and Energy (DTE). In addition, Boston Edison is subject to
the accounting and reporting requirements of the SEC. The consolidated
financial statements conform with generally accepted accounting principles
(GAAP). As a rate-regulated company Boston Edison has been subject to
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation (SFAS 71), under GAAP. The application of SFAS
71 results in differences in the timing of recognition of certain expenses
from that of other businesses and industries. As a result of the
30
Massachusetts electric industry restructuring legislation enacted in November
1997 and the DTE order regarding the related Boston Edison settlement
agreement, as of December 31, 1997, the provisions of SFAS 71 are no longer
being applied to the generation business. The distribution business remains
subject to rate-regulation and continues to meet the criteria for application
of SFAS 71. Refer to Note B to these Consolidated Financial Statements for
more information on the accounting implications of the electric utility
industry restructuring.
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.
3. Revenues
Estimates of retail base (transmission and distribution) revenues for
electricity used by customers but not yet billed are recorded at the end of
each accounting period.
4. Utility Plant
Utility plant is stated at original cost of construction. The costs of
replacements of property units are capitalized. Maintenance and repairs and
replacements of minor items are expensed as incurred. The original cost of
property retired, net of salvage value, and the related costs of removal are
charged to accumulated depreciation.
5. Depreciation and Nuclear Fuel Amortization
Depreciation of utility plant is computed on a straight-line basis using
composite rates based on the estimated useful lives of the various classes of
property. Excluding the effect of the adjustment discussed below, the overall
composite depreciation rates were 3.28%, 3.30% and 3.33% in 1998, 1997 and
1996, respectively.
Upon the completion of a review of Boston Edison's electric generating units,
management determined that the oldest and least efficient fossil units (Mystic
4, 5 and 6) were unlikely to provide competitively-priced power beyond the
year 2000. Therefore the estimated remaining economic lives of these units
was revised to five years in 1996. These units were sold in May 1998. Refer
to Note B to these Consolidated Financial Statements.
The cost of decommissioning Pilgrim Station is excluded from depreciation
rates. Refer to Note D to these Consolidated Financial Statements for a
discussion of nuclear decommissioning. The cost of nuclear fuel is amortized
based on the amount of energy Pilgrim Station generates. Nuclear fuel expense
also includes an amount for the estimated costs of ultimately disposing of
spent nuclear fuel and for assessments for the decontamination and
decommissioning of United States Department of Energy nuclear enrichment
facilities.
6. Deferred Nuclear Outage Costs
The incremental costs associated with nuclear refueling and maintenance
outages are deferred when incurred and amortized over Pilgrim Station's two-
year operating cycle.
31
7. Costs Associated with Issuance and Redemption of Debt and Preferred Stock
Consistent with the recovery in electric rates, discounts, redemption premiums
and related costs associated with the issuance and redemption of long-term
debt and preferred stock are deferred. The costs related to long-term debt
are recognized as an addition to interest expense over the life of the
original or replacement debt. Beginning in 1996, consistent with an
accounting order received from the FERC, costs related to preferred stock
issuances and redemptions are reflected as a direct reduction to retained
earnings upon redemption or over the average life of the replacement preferred
stock series as applicable.
8. Allowance for Borrowed Funds Used During Construction (AFUDC)
AFUDC represents the estimated costs to finance utility plant construction.
In accordance with regulatory accounting, AFUDC is included as a cost of
utility plant and a reduction of current interest charges. Although AFUDC is
not a current source of cash income, the costs are recovered from customers
over the service life of the related plant in the form of increased revenues
collected as a result of higher depreciation expense. AFUDC rates in 1998,
1997 and 1996 were 5.88%, 6.04% and 5.87%, respectively, and represented only
the cost of short-term debt.
9. Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid securities with
maturities of 90 days or less when purchased. Boston Edison's banking
arrangement does not require it to fund checks until they are presented for
payment. Therefore, outstanding checks are included in cash and accounts
payable until presented for payment.
10. Allowance for Doubtful Accounts
Accounts receivable are substantially recoverable. This recovery occurs both
from customer payments and from the portion of customer charges that provides
for the recovery of bad debt expense. Accordingly, a significant allowance
for doubtful accounts balance has not been maintained.
11. Regulatory Assets
Regulatory assets represent costs incurred which are expected to be collected
from customers through future charges in accordance with agreements with
regulators. These costs are expensed when the corresponding revenues are
received in order to appropriately match revenues and expenses. The majority
of these costs is currently being recovered from customers over varying time
periods. Refer to Note B to these Consolidated Financial Statements for
information regarding the recovery of regulatory assets related to the
generation business.
32
Regulatory assets consisted of the following:
December 31,
1998 1997
- --------------------------------------------------------------------
Power contracts $ 58,415 $ 71,445
Income taxes, net 52,168 51,096
Redemption premiums 23,419 27,019
Postretirement benefits costs 21,592 22,441
Decontamination and decommissioning 11,351 12,282
Other 697 11,087
- --------------------------------------------------------------------
$167,642 $195,370
====================================================================
12. Related Party Transactions
The December 31, 1998 consolidated balance sheet of Boston Edison includes a
$20 million receivable from BETG's wholly owned subsidiary, BECoCom. The
receivable is for construction and construction management services provided
by Boston Edison and its contractors.
Note B. Electric Utility Industry Restructuring
1. Accounting Implications
Under the traditional revenue requirements model, electric rates have been
based on the cost of providing electric service. Under this model, Boston
Edison has been subject to certain accounting standards that are not
applicable to other businesses and industries in general. The application of
SFAS 71 requires companies to defer the recognition of certain costs when
incurred if future rate recovery of these costs is expected. As a result of
the Massachusetts electric industry restructuring legislation enacted in
November 1997 and the DTE order regarding Boston Edison's related settlement
agreement, as of December 31, 1997, the provisions of SFAS 71 are no longer
being applied to the generation business. Under the settlement agreement,
approximately 75% of the net assets of Pilgrim Station are recoverable through
the non-bypassable transition charge of the utility's distribution business.
The distribution business continues to be subject to rate-regulation. The
remaining 25% is collected under Pilgrim's wholesale power contracts. The
1998 consolidated balance sheet reflects a reclassification of the Pilgrim net
assets recoverable through the transition charge from utility plant to
regulatory asset. This Pilgrim regulatory asset, included in the generation-
related regulatory asset on the consolidated balance sheet continues to be
grouped with utility plant for financial statement presentation.
Completion of the sale of Boston Edison's fossil generating assets took place
in May 1998. Boston Edison received proceeds from the sale of $655 million,
including $121 million for a six-month transitional power purchase contract.
The amount received above net book value on the sale of these assets is being
returned to Boston Edison's customers over the settlement period. That amount
is partially offset by certain costs recoverable through the transition charge
due to the support of standard offer service provided by Boston Edison's
fossil generating assets prior to the divestiture. The net deferred gain is
included as a reduction to the generation-related regulatory asset on the 1998
consolidated balance sheet. In addition, Boston Edison received $19 million
from Sithe for inventory and other closing adjustments.
The implementation of the Boston Edison settlement agreement had certain
accounting implications. The highlights of these include:
33
Generation-related plant and other regulatory assets
Plant and other regulatory assets related to the generation business, except
for those related to Pilgrim's wholesale contracts, are recovered through the
transition charge. This recovery, which includes a return, will occur over a
twelve-year period that began on March 1, 1998 (the retail access date).
Depreciation
The composite depreciation rate for distribution utility plant increased from
2.38% to 2.98% as of the retail access date.
Fuel and purchased power charge
The fuel and purchased power charge ceased as of the retail access date. The
net remaining overcollection of fuel and purchased power costs will be
reflected in future customer billings. These over recovered costs are
included as an offset to the settlement recovery mechanisms on the 1998
consolidated balance sheet.
Standard offer charge
Customers have the option of continuing to buy power from the electric
delivery business at standard offer prices as of the retail access date. The
standard offer charge began at 2.8 cents/kWh at the retail access date,
increased to 3.2 cents/kWh on June 1, 1998, to 3.69 cents/kWh on January 1,
1999 and is scheduled to increase to 5.1 cents/kWh by 2004. The cost of
providing standard offer service, which includes fuel and purchased power
costs, is recovered from standard offer customers on a fully reconciling
basis.
Distribution and transmission charges
Distribution rates are subject to a minimum and maximum return on average
common equity (ROE) through December 31, 2000. The ROE is subject to a floor
of 6% and a ceiling of 11.75%. If the ROE is below 6%, Boston Edison is
authorized to add a surcharge to distribution rates in order to achieve the 6%
floor. If the ROE is above 11%, it is required to adjust distribution rates
by an amount necessary to reduce the calculated ROE between 11% and 12.5% by
50%, and a return above 12.5% by 100%. No adjustment is made if the ROE is
between 6% and 11%. In addition, distribution rates will be adjusted for any
changes in tax laws or accounting principles that result in a change in costs
of more than $1 million. The cost of providing transmission service to
distribution customers is recovered on a fully reconciling basis.
Nuclear generation
Under the settlement agreement, the annual performance adjustment charge
ceased and the cost recovery mechanism for Pilgrim Station changed effective
March 1, 1998. Approximately 25% of the operations and capital costs,
including a return on investment, continues to be collected under Pilgrim's
wholesale contracts. Through Pilgrim's sale closing date, 25% of any profit
or loss from the sale of Pilgrim's output will be shared with distribution
customers through the transition charge. In addition, Boston Edison will
obtain transition payments up to a maximum of $23 million per year depending
on the level of costs incurred for such items as property taxes, insurance,
regulatory fees and security requirements.
34
2. Generating Assets Divestiture
The Boston Edison restructuring settlement agreement included a provision for
the divestiture of its fossil generating assets no later than six months after
the retail access date. In December 1997, Boston Edison entered into a
purchase and sale agreement with Sithe Energies, a privately-held company
headquartered in New York, to purchase these non-nuclear generating assets.
The sale of these assets was finalized on May 15, 1998.
In April 1998, Boston Edison began soliciting expressions of interest for the
sale of its nuclear generating unit, Pilgrim Station as part of the previously
announced strategy to exit the generation business. On November 19, 1998,
Boston Edison announced the selection of Entergy, a subsidiary of New Orleans-
based Entergy Corporation, as the winning bidder for the purchase of Pilgrim.
Entergy is expected to purchase Pilgrim in a deal valued at an estimated $121
million. In addition, under the agreement Boston Edison will fully fund and
transfer its decommissioning trust fund to Entergy and Entergy will then
assume full liability and responsibility for decommissioning the Pilgrim site.
A purchase and sale agreement has been signed and all required approvals are
anticipated in the second quarter of 1999. The purchase price includes
reimbursement for certain costs to be expended by Boston Edison in 1999.
Therefore, the actual proceeds could be impacted by the ultimate timing of the
transaction.
As part of a benefits package offered to employees affected by the nuclear
divestiture, eligible non-represented nuclear and designated nuclear support
employees were offered unreduced retirement and transition benefits under a
voluntary early retirement program (VERP). Sixteen employees elected to
participate in the VERP. A retention benefit program was offered to all non-
represented nuclear and designated nuclear support employees that did not
elect or were ineligible to retire under the VERP who continue to work through
the sale closing date. It is anticipated that approximately 300 non-
represented nuclear and designated nuclear employees will receive one-time
retention payments under this program. Costs associated with the VERP and
retention program are recoverable under Boston Edison's settlement agreement.
3. Nuclear Asset Impairment
As part of the settlement agreement, the net investment in Pilgrim Station as
of December 31, 1995 (adjusted for depreciation through 1997) is recovered
through the distribution transition charge. Due to the market pressures in
the industry, the ultimate recovery of investments made in Pilgrim since 1995
is not certain. Therefore, in 1997 the investment in Pilgrim was reduced by
the $13 million invested in the plant since January 1, 1996 as an impairment
loss under Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. An after tax charge of approximately $8 million due to this reduction was
recorded to non-operating expense on the consolidated statement of income in
the fourth quarter of 1997.
Note C. Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards 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 of $52.2 million and $51.1 million and corresponding net
increases in accumulated deferred income taxes were recorded as of
35
December 31, 1998 and 1997, respectively. The regulatory assets represent the
additional future revenues to be collected from customers for deferred income
taxes.
Accumulated deferred income taxes consisted of the following:
December 31,
(in thousands) 1998 1997
- ------------------------------------------------------------------------------
Deferred tax liabilities:
Plant-related $412,358 $535,460
Other 85,497 79,930
- ------------------------------------------------------------------------------
497,855 615,390
- ------------------------------------------------------------------------------
Deferred tax assets:
Plant-related 13,174 11,926
Investment tax credits 29,622 33,125
Other 106,502 84,601
- ------------------------------------------------------------------------------
149,298 129,652
- ------------------------------------------------------------------------------
Net accumulated deferred income taxes $348,557 $485,738
==============================================================================
No valuation allowances for deferred tax assets are deemed necessary.
Previously deferred investment tax credits are amortized over the estimated
remaining lives of the property giving rise to the credits.
Components of income tax expense were as follows:
years ended December 31,
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Current income tax expense $242,411 $115,373 $92,370
Deferred income tax expense (137,992) (14,104) 14
Investment tax credit amortization (3,927) (7,560) (4,071)
- -----------------------------------------------------------------------------
Income taxes charged to operations 100,492 93,709 88,313
- -----------------------------------------------------------------------------
Taxes on other income (17,853) (11,254) (331)
- -----------------------------------------------------------------------------
Total income tax expense $ 82,639 $ 82,455 $87,982
=============================================================================
The effective income tax rates reflected in the consolidated financial
statements and the reasons for their differences from the statutory federal
income tax rate were as follows:
1998 1997 1996
- -----------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit 4.6 4.5 4.3
Investment tax credit amortization (6.2) (3.3) (1.8)
Other 1.0 0.1 0.7
- -----------------------------------------------------------------------------
Effective tax rate 34.4% 36.3% 38.2%
=============================================================================
The 1998 effective tax rate declined by 4.5% as a result of the recognition in
net income of the remaining unamortized investment tax credits related to
Boston Edison's fossil generating assets at the time of their sale. This
shareholder benefit is included in other expense, net on the 1998 consolidated
statement of income.
The 1997 effective tax rate declined by 0.8% as a result of the favorable
outcome of an Internal Revenue Service appeal related to investment tax
credits.
36
Note D. Nuclear Decommissioning and Nuclear Waste Disposal
1. Nuclear Decommissioning
As a nuclear generating facility, Pilgrim Station will be required to be
decommissioned upon the expiration of its operating license. Decommissioning
means to remove nuclear facilities from service safely and reduce residual
radioactivity to a level that permits termination of the Nuclear Regulatory
Commission (NRC) license and release of the property for unrestricted use.
Estimated decommissioning costs are recorded to depreciation expense on the
consolidated statements of income over Pilgrim's expected service life. These
costs are recovered through charges to retail and wholesale contract
customers. In November 1998, Boston Edison filed an update of Pilgrim
Station's decommissioning cost study with the DTE. The updated study includes
an estimate of decommissioning and fuel storage costs of approximately $600
million in 1997 dollars.
2. Spent Nuclear Fuel
The spent fuel storage facility at Pilgrim Station is expected to provide
storage capacity through approximately 2003. Boston Edison has a license
amendment from the NRC to modify the facility to provide sufficient room for
spent nuclear fuel generated through the end of Pilgrim's operating license in
2012; however, any further modifications are subject to review by the DTE.
Delays in identifying a permanent storage site have continually postponed
plans for the United States Department of Energy's (DOE) long-term storage and
disposal for spent nuclear fuel. The DOE's current estimate for an available
site is no earlier than 2010. In November 1997, the U.S. Court of Appeals for
the District of Columbia Circuit ruled that the lack of an interim storage
facility does not excuse the DOE from meeting its contract obligation to begin
accepting spent nuclear fuel no later than January 31, 1998. This decision
was in response to petitions filed by Boston Edison and other interested
parties seeking declaratory rulings concerning enforcement and remedies for
the DOE's failure to accept spent fuel in a timely manner. The court directed
the plaintiffs to pursue relief under terms of their contracts with the DOE.
Based on this ruling, the DOE may have to pay contract damages for not taking
the spent nuclear fuel as scheduled. Under the Nuclear Waste Policy Act of
1982, it is the ultimate responsibility of the DOE to permanently dispose of
spent nuclear fuel. Boston Edison currently pays a fee of $1.00 per net
megawatthour sold from Pilgrim Station generation under a nuclear fuel
disposal contract with the DOE.
The DOE denied Boston Edison's petition to suspend payments to the Nuclear
Waste Fund based on its interpretation of the U.S. Court of Appeal's decision
made in November 1997. The DOE has, however, made an offer to consider
amendments to existing contracts to address the hardships the anticipated
delay in accepting spent fuel may cause individual contract holders.
3. Nuclear Divestiture
As discussed in Note B to these Consolidated Financial Statements, in November
1998 Boston Edison announced the selection of Entergy as the winning bidder
for the purchase of Pilgrim. A purchase and sale agreement has been signed
and all required approvals are anticipated in the second quarter of 1999.
Under the agreement Boston Edison will fully fund and transfer its
decommissioning trust fund to Entergy and Entergy will then assume full
liability and responsibility for decommissioning and waste disposal at Pilgrim
Station.
37
Note E. Pensions and Other Postretirement Benefits
The following information is presented in accordance with Statement of
Financial Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, effective for fiscal years beginning after
December 15, 1997.
1. Pensions
Boston Edison has a defined benefit funded retirement plan with certain
contributory features that covers substantially all employees and an unfunded
supplemental retirement plan for certain management employees.
The changes in the benefit obligation and plan assets were as follows:
December 31,
(in thousands) 1998 1997
- ----------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at the beginning of the year $ 457,436 $ 409,760
Service cost 13,645 12,625
Interest cost 31,981 31,537
Plan participants' contributions 214 248
Plan amendments - 1,081
Actuarial loss 67,564 32,762
Curtailment gain (15,644) (6,916)
Special termination benefits 665 3,530
Settlement payments (16,246) -
Benefits paid (41,627) (27,191)
- ----------------------------------------------------------------------------
Benefit obligation at the end of the year $ 497,988 $ 457,436
============================================================================
Change in plan assets:
Fair value of plan assets at the beginning of
the year $ 401,182 $ 331,299
Actual return on plan assets 44,589 60,602
Employer contribution 86,440 36,224
Plan participants' contributions 214 248
Settlement payments (16,246) -
Benefits paid (41,627) (27,191)
- ----------------------------------------------------------------------------
Fair value of plan assets at the end of the year $ 474,552 $ 401,182
============================================================================
The plans' funded status were as follows:
December 31,
(in thousands) 1998 1997
- ----------------------------------------------------------------------------
Funded status $ (23,436) $ (56,254)
Unrecognized actuarial net loss 96,310 50,646
Unrecognized transition obligation 3,856 5,704
Unrecognized prior service cost 15,557 19,121
- ----------------------------------------------------------------------------
Net amount recognized $ 92,287 $ 19,217
============================================================================
Amount recognized in the consolidated
balance sheets consist of:
Prepaid retirement cost $ 94,049 $ 20,584
Accrued supplemental retirement liability (9,856) (9,763)
Intangible asset 8,094 8,396
- ----------------------------------------------------------------------------
Net amount recognized $ 92,287 $ 19,217
============================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the supplemental retirement plan with accumulated
38
benefit obligations in excess of plan assets were $11,387,000, $9,856,000 and
$0, respectively, as of December 31, 1998, and $11,076,000, $9,763,000 and $0,
respectively, as of December 31, 1997.
Weighted average assumptions were as follows:
1998 1997 1996
- ----------------------------------------------------------------------------
Discount rate at the end of the year 6.50% 7.25% 7.75%
Expected return on plan assets for the year 10.00% 10.00% 10.00%
Rate of compensation increase at the end of
the year 4.00% 4.25% 3.90%
Components of net periodic benefit cost were as follows:
years ended December 31,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Service cost $ 13,645 $ 12,625 $ 13,452
Interest cost 31,981 31,537 32,325
Expected return on plan assets (39,140) (31,250) (29,826)
Amortization of prior service cost 1,847 1,827 1,831
Amortization of transition obligation 860 934 934
Recognized actuarial loss 808 1,799 3,790
- ----------------------------------------------------------------------------
Net periodic benefit cost $ 10,001 $ 17,472 $ 22,506
============================================================================
As a result of the fossil and nuclear divestitures discussed in Note B to
these Consolidated Financial Statements, amounts recognized for curtailment,
settlement and special termination benefit costs were $2,705,000, $0 and
$665,000, respectively for 1998 and $1,300,000, $3,162,000 and $3,530,000,
respectively for 1997. These amounts are recoverable under Boston Edison's
settlement agreement.
Boston Edison experienced a high number of employee retirements from 1994 to
1996. A large number of these retirements were as a direct result of the 1995
corporate restructuring. In 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, pension regulatory
asset was increased by $8.6 million in 1997 for the adjustment related to the
period covered by the 1992 Boston Edison settlement agreement. Through 1995,
in accordance with the 1992 settlement agreement, the difference between the
net pension cost of the retirement plan and its annual funding amount was
deferred. The remaining adjustment did not have a material impact on the
consolidated results of operations or financial position.
Boston Edison also provides defined contribution 401(k) plans for
substantially all employees. It matches a portion of employees' voluntary
contributions to the plans. Matching contributions of $8 million were made in
1998, 1997 and 1996, respectively.
2. Other Postretirement Benefits
In addition to pension benefits, Boston Edison also provides health care and
other benefits to retired employees who meet certain age and years of service
liability requirements. These benefits are not available to management
employees hired on or after January 1, 1995.
39
The changes in the benefit obligation and plan assets were as follows:
December 31,
(in thousands) 1998 1997
- ----------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at the beginning of the year $ 237,616 $ 230,905
Service cost 3,892 3,543
Interest cost 16,895 17,006
Plan participants' contributions 1,178 395
Actuarial loss 27,845 4,093
Curtailment gain (14,665) (5,531)
Special termination benefits 75 450
Benefits paid (14,080) (13,245)
- ----------------------------------------------------------------------------
Benefit obligation at the end of the year $ 258,756 $ 237,616
============================================================================
Change in plan assets:
Fair value of plan assets at the beginning of
the year $ 103,989 $ 72,702
Actual return on plan assets 14,344 18,852
Employer contribution 8,387 25,285
Plan participants' contributions 1,178 395
Benefits paid (14,080) (13,245)
- ----------------------------------------------------------------------------
Fair value of plan assets at the end of the year $ 113,818 $ 103,989
============================================================================
The plan's funded status and amount recognized in the consolidated balance
sheets were as follows:
December 31,
(in thousands) 1998 1997
- ----------------------------------------------------------------------------
Funded status $(144,938) $(133,627)
Unrecognized actuarial net loss 24,922 12,916
Unrecognized transition obligation 88,814 127,107
Unrecognized prior service cost (9,827) (14,128)
- ----------------------------------------------------------------------------
Net amount recognized $ (41,029) $ (7,732)
============================================================================
Weighted average assumptions were as follows:
1998 1997 1996
- ----------------------------------------------------------------------------
Discount rate at the end of the year 6.50% 7.25% 7.75%
Expected return on plan assets for the year 9.00% 9.00% 9.00%
For measurement purposes, a 5% annual rate of increase on the per capita cost
of covered health care benefits was assumed. A 13% annual rate of increase on
the per capita cost of covered prescription drug benefits was assumed,
decreasing gradually to 5% in the year 2012 and remaining level thereafter. A
4% annual rate of increase on the per capita cost of covered dental benefits
was assumed.
40
A 1% change in the assumed health care cost trend rate would have the
following effects:
One-Percentage-Point
Increase Decrease
-------- --------
Effect on total of service and interest cost
components for 1998 $ 3,319 $ (2,605)
Effect on December 31, 1998 postretirement benefit
obligation $ 34,088 $(27,270)
Components of net periodic benefit cost were as follows:
years ended December 31,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Service cost $ 3,892 $ 3,543 $ 4,616
Interest cost 16,895 17,006 16,815
Expected return on plan assets (8,563) (6,421) (4,738)
Amortization of prior service cost (942) (1,017) (1,614)
Amortization of transition obligation 8,474 9,151 9,151
Recognized actuarial loss 662 1,003 1,977
- ----------------------------------------------------------------------------
Net periodic benefit cost $ 20,418 $ 23,265 $ 26,207
============================================================================
As a result of the fossil and nuclear divestitures discussed in Note B to
these Consolidated Financial Statements, amounts recognized for curtailment
and special termination benefit costs were $21,187,000 and $79,000,
respectively for 1998 and $7,895,000 and $456,000, respectively for 1997.
These amounts are recoverable under Boston Edison's settlement agreement.
Note F. Stock-Based Compensation
In 1997, Boston Edison initiated a Stock Incentive Plan (the Plan) which was
adopted by the board of directors and approved by common stockholders. The
Plan permits a variety of stock and stock-based awards, including stock
options and deferred (nonvested) stock to be granted to certain key employees.
The Plan limits the terms of awards to ten years. Since the reorganization
into a holding company structure, all stock-based compensation involves BEC
Energy common shares. Subject to adjustment for stock-splits and similar
events, the aggregate number of shares of common stock that may be delivered
under the Plan is 2,000,000, including shares issued in lieu of or upon
reinvestment of dividends arising from awards. During 1998, 19,150 shares of
deferred stock and 419,200 ten-year non-qualified stock options were granted
under the plan. During 1997, 73,820 shares of deferred stock and 298,400 ten-
year non-qualified stock options were granted. The weighted average grant
date fair value of the deferred stock issued during 1998 and 1997 is $39.75
and $27.26, respectively. The options were granted at the full market price
of the stock on the date of the grant. Both awards vest ratably over a three-
year period.
41
Compensation cost for stock-based awards is recognized under the provisions of
Accounting Principals Board Opinion 25, which requires compensation cost to be
measured by the quoted stock market price at the measurement date less the
amount, if any, an employee is required to pay. The required fair value
method disclosures are as follows:
(in thousands, except per share amounts) 1998 1997
- ----------------------------------------------------------------------------
Net income
Actual $157,337 $144,642
Pro forma $156,952 $144,572
Stock option activity of the Plan was as follows:
1998 1997
- ----------------------------------------------------------------------------
Options outstanding at January 1 273,000 0
Options granted 419,200 298,400
Options exercised (3,800) 0
Options forfeited (21,800) (25,400)
- ----------------------------------------------------------------------------
Options outstanding at December 31 666,600 273,000
============================================================================
Summarized information regarding stock options outstanding at December 31,
1998:
Range of Weighted Average Remaining Weighted Average
Exercise Prices Contractual Life (Years) Exercise Price
- --------------- -------------------------- ----------------
$25.75-$26.00 8.44 $25.85
$39.75-$40.50 9.30 $39.75
There were 87,200 stock options exercisable at December 31, 1998 with a
weighted average exercise price of $25.85.
The stock options granted during 1998 have a weighted average grant date fair
value of $4.61. The fair value was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
Expected life (years) 4.0
Risk-free interest rate 5.66%
Volatility 16%
Dividends 4.88%
Compensation cost recognized in the consolidated statements of income for
stock-based compensation awards in 1998 and 1997 was $850,000 and $275,000,
respectively.
42
Note G. Capital Stock
December 31,
(dollars in thousands, except per share amounts) 1998 1997
- -----------------------------------------------------------------------------
Common equity:
Common stock, par value $1 per share,
100,000,000 shares authorized; 100
and 48,514,973 shares issued and
outstanding: $ - $ 48,515
Premium on common stock 742,544 696,137
Retained earnings 297,347 328,802
- -----------------------------------------------------------------------------
Total common equity $1,039,891 $1,073,454
=============================================================================
Upon the formation of the holding company in 1998, outstanding shares of
Boston Edison Company were converted into shares of BEC Energy. In addition,
100 shares of Boston Edison Company common stock were issued to BEC Energy as
part of this transaction.
Cumulative preferred stock:
Par value $100 per share, 2,890,000 shares
authorized; issued and outstanding:
Nonmandatory redeemable series:
Current Shares Redemption
Series Outstanding Price/Share
- -----------------------------------------------------------------------------
4.25% 180,000 $103.625 $ 18,000 $ 18,000
4.78% 250,000 $102.800 25,000 25,000
7.75% - - 0 40,000
- -----------------------------------------------------------------------------
Total nonmandatory redeemable series $ 43,000 $ 83,000
=============================================================================
Mandatory redeemable series:
Current Shares Redemption
Series Outstanding Price/Share
- -----------------------------------------------------------------------------
7.27% - - $ 0 $ 36,000
8.00% 500,000 - 50,000 50,000
- -----------------------------------------------------------------------------
50,000 86,000
Less: redemption and issuance costs (960) (5,907)
due within one year 0 (2,000)
- -----------------------------------------------------------------------------
Total mandatory redeemable series $ 49,040 $ 78,093
=============================================================================
Cumulative Mandatory Redeemable Preferred Stock
Boston Edison redeemed the remaining 360,000 shares of 7.27% sinking fund
series cumulative preferred stock during 1998. The stock was subject to a
mandatory sinking fund requirement of 20,000 shares each May at par plus
accrued dividends. Boston Edison also had the noncumulative option each May
to redeem additional shares, not to exceed 20,000, through the sinking fund at
$100 per share plus accrued dividends. It redeemed, at par value, 40,000
shares in 1998, 1997 and 1996. In addition, 320,000 shares were redeemed in
1998 at $101.94 per share.
Boston Edison is not able to redeem any part of the 500,000 shares of 8%
series cumulative preferred stock prior to December 2001. The entire series
is subject to mandatory redemption in December 2001 at $100 per share plus
accrued dividends.
43
Note H. Indebtedness
December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
Long-term debt:
Debentures:
5.950%, due March 1998 $ 0 $ 100,000
6.800%, due February 2000 65,000 65,000
6.050%, due August 2000 100,000 100,000
6.800%, due March 2003 150,000 150,000
7.800%, due May 2010 125,000 125,000
9.875%, due June 2020 100,000 100,000
9.375%, due August 2021 115,000 115,000
8.250%, due September 2022 60,000 60,000
7.800%, due March 2023 200,000 200,000
- -----------------------------------------------------------------------------
Total debentures 915,000 1,015,000
Less: due within one year 0 (100,000)
- -----------------------------------------------------------------------------
Net long-term debentures 915,000 915,000
- -----------------------------------------------------------------------------
Sewage facility revenue bonds 30,900 32,500
Less: due within one year (667) (667)
Less: funds held by trustee (4,670) (4,757)
- -----------------------------------------------------------------------------
Net long-term sewage facility revenue bonds 25,563 27,076
- -----------------------------------------------------------------------------
Massachusetts Industrial Finance Agency bonds:
5.750%, due February 2014 15,000 15,000
6.662% bank loan, due 1999 0 100,000
- -----------------------------------------------------------------------------
Total long-term debt $ 955,563 $1,057,076
=============================================================================
Short-term debt:
Notes payable:
Bank loans $ 0 $ 94,013
Commercial paper 0 43,000
- -----------------------------------------------------------------------------
Total notes payable $ 0 $ 137,013
=============================================================================
1. Long-term Debt
The 9 7/8% debentures due 2020 are first redeemable in June 2000 at a
redemption price of 104.483%, the 9 3/8% series due 2021 are first redeemable
in August 2001 at 104.612%, the 8.25% series due 2022 are first redeemable in
September 2002 at 103.780% and the 7.80% series due 2023 are first redeemable
in March 2003 at 103.730%. No other series are redeemable prior to maturity.
There is no sinking fund requirement for any series of debentures.
Sewage facility revenue bonds were issued by HEEC. The bonds are tax-exempt,
subject to annual mandatory sinking fund redemption requirements and mature
through 2015. Scheduled redemptions of $1.6 million were made in 1998, 1997
and 1996. The weighted average interest rate of the bonds is 7.3%. A portion
of the proceeds from the bonds is in reserve with the trustee. If HEEC should
have insufficient funds to pay for extraordinary expenses, Boston Edison would
be required to make additional capital contributions or loans to the
subsidiary up to a maximum of $1 million.
The 5.75% tax-exempt unsecured bonds due 2014 are redeemable beginning in
February 2004 at a redemption price of 102%. The redemption price decreases
to 101% in February 2005 and to par in February 2006.
44
The aggregate principal amounts of Boston Edison's long-term debt (including
HEEC sinking fund requirements) due through 2003 are $1.6 million in 1999,
$166.6 million in 2000, $1.6 million in 2001 and 2002 and $151.6 million in
2003.
2. Short-term Debt
Boston Edison currently has regulatory authority to issue up to $350 million
of short-term debt. Boston Edison has a $200 million revolving credit
agreement with a group of banks. This agreement is intended to provide a
standby source of short-term borrowings. Under the terms of this agreement
Boston Edison is required to maintain a common equity ratio of not less than
30% at all times. Commitment fees must be paid on the unused portion of the
total agreement amount. It also has arrangements with several banks to
provide additional short-term credit on an uncommitted and as available basis.
At December 31, 1998, Boston Edison did not have any short-term debt
outstanding.
Information regarding consolidated short-term borrowings is as follows:
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Maximum short-term borrowings $219,000 $316,100 $272,500
Weighted average amount outstanding $51,483 $212,663 $208,914
Weighted average interest rates excluding
commitment fees 5.81% 5.85% 5.65%
- -----------------------------------------------------------------------------
Note I. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of securities for which it is practicable to estimate the value:
Nuclear decommissioning trust:
The cost of $173 million approximates fair value based on quoted market prices
of securities held.
Cash and cash equivalents:
The carrying amount of $93 million approximates fair value due to the
short-term nature of these securities.
Mandatory redeemable cumulative preferred stock, sewage facility revenue bonds
and unsecured debt:
The fair values of these securities are based upon the quoted market prices of
similar issues. Carrying amounts and fair values as of December 31, 1998, are
as follows:
Carrying Fair
(in thousands) Amount Value
- ------------------------------------------------------------------------------
Mandatory redeemable cumulative preferred stock $ 49,040 $ 54,190
Sewage facility revenue bonds $ 30,900 $ 33,914
Unsecured debt $ 930,000 $ 994,294
- ------------------------------------------------------------------------------
Note J. Segment and Related Information
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, requires the disclosure of
certain financial and descriptive information by operating segments. Boston
45
Edison operates primarily as a regulated electric public utility for which
separate segment information is not applicable.
Note K. Commitments and Contingencies
1. Contractual Commitments
At December 31, 1998, Boston Edison had estimated contractual obligations for
plant and equipment of approximately $27 million. This includes $13.5 million
for nuclear fuel fabrication. Under the Pilgrim purchase and sale agreement,
Entergy will assume any unpaid portion of this obligation upon the sale
closing date.
Boston Edison also has leases for certain facilities and equipment. The
estimated minimum rental commitments under both transmission agreements and
noncancellable leases for the years after 1998 are as follows:
(in thousands)
- ------------------------------------------------------
1999 $ 18,464
2000 17,769
2001 14,771
2002 13,331
2003 11,272
Years thereafter 89,381
- ------------------------------------------------------
Total $164,988
======================================================
The total of future minimum rental income to be received under noncancellable
subleases related to the above leases is $146,125.
Boston Edison will capitalize a portion of lease rentals as part of plant
expenditures in the future. The total expense for both lease rentals and
transmission agreements was $29.4 million in 1998, $27.5 million in 1997 and
$26.3 million in 1996, net of capitalized expenses of $1.3 million in 1998,
$1.2 million in 1997 and $2.9 million in 1996.
Boston Edison had previously entered into various take or pay and throughput
agreements, primarily to supply the New Boston fossil generating station with
natural gas. As part of the fossil divestiture agreement, Sithe Energies
assumed these obligations. The total expense under these agreements was $47.1
million in 1997 and $49.5 million in 1996.
2. Electric Company Investments
Boston Edison has an approximately 11% equity investment in two companies
which own and operate transmission facilities to import electricity from the
Hydro-Quebec system in Canada. As an equity participant Boston Edison is
required to guarantee, in addition to its own share, the total obligations of
those participants who do not meet certain credit criteria. At December 31,
1998, Boston Edison's portion of these guarantees was $15.2 million.
Boston Edison has a 9.5% equity investment of approximately $2 million in
Yankee Atomic Electric Company (Yankee Atomic). In 1992 the board of
directors of Yankee Atomic decided to discontinue operations of the Yankee
Atomic nuclear generating station permanently and decommission the facility.
Yankee Atomic received approval from the FERC to continue to collect its
investment and decommissioning costs through 2000, the period of the plant's
operating license. The estimate of Boston Edison's share of Yankee Atomic's
investment and costs of decommissioning is approximately $8 million as of
46
December 31, 1998. This estimate is recorded on the consolidated balance
sheet as a power contract liability and an offsetting regulatory asset.
Boston Edison also has a 9.5% equity investment in Connecticut Yankee Atomic
Power Company (CYAPC) of approximately $10 million. In December 1996, the
board of directors of CYAPC, which owns and operates the Connecticut Yankee
nuclear electric generating unit (Connecticut Yankee), unanimously voted to
retire the unit. The decision was based on an economic analysis of the costs
of operating the unit through 2007, the period of its operating license,
compared to the costs of closing the unit and incurring replacement power
costs for the same period.
Boston Edison's share of Connecticut Yankee's remaining investment and
estimated costs of decommissioning is approximately $51 million as of
December 31, 1998. This estimate is recorded on the consolidated balance
sheet as a power contract liability and an offsetting regulatory asset similar
to Yankee Atomic.
In December 1996, CYAPC filed for rate relief at the FERC seeking to recover
certain post-operating costs, including decommissioning. In August 1998, the
FERC Administrative Law Judge (ALJ) released an initial decision regarding
CYAPC's filing. This decision called for the disallowance of the common
equity return on the CYAPC investment subsequent to the shutdown. The
decision also stated that decommissioning collections should continue to be
based on a previously approved estimate, with an adjustment for inflation,
until a more reliable estimate is developed. In October 1998, both CYAPC and
Northeast Utilities, a 49% equity investor in CYAPC, filed briefs on
exceptions to the ALJ decision. If the initial decision is upheld, CYAPC
could be required to write off a portion of its investment in the generating
unit and refund a portion of the previously collected return on investment.
Management is currently unable to determine the ultimate outcome of this
proceeding, however, the estimate of the effect of the ALJ's initial decision
does not have a material impact on its consolidated financial position or
results of operations.
3. Nuclear Insurance
The federal Price-Anderson Act currently provides $9.8 billion of financial
protection for public liability claims and legal costs arising from a single
nuclear-related accident. The first $200 million of nuclear liability is
covered by commercial insurance. Additional nuclear liability insurance up to
$9.6 billion is provided by a retrospective assessment of up to $88.1 million
per incident levied on each of the 109 nuclear generating units currently
licensed to operate in the United States, with a maximum assessment of $10
million per reactor per accident in any year.
Boston Edison has purchased insurance from Nuclear Electric Insurance Limited
(NEIL) to cover some of the costs to purchase replacement power during a
prolonged accidental outage and the cost of repair, replacement,
decontamination or decommissioning of utility property resulting from covered
incidents at Pilgrim Station. Boston Edison's maximum potential total
assessment for losses which occur during current policy years is $8.1 million
under both the replacement power and excess property damage, decontamination
and decommissioning policies.
47
4. Hazardous Waste
Boston Edison is an owner or operator of approximately 20 properties where oil
or hazardous materials were spilled or released. As such, Boston Edison is
required to clean up these remaining properties in accordance with a timetable
developed by the Massachusetts Department of Environmental Protection. 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 faces possible 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 is one of many potentially responsible parties and currently expects to
have only a small percentage of the total potential liability for these sites.
Through December 31, 1998, BEC had approximately $6 million accrued on its
consolidated balance sheet related to 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, 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 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.
5. Generating Unit Performance Program
Boston Edison's generating unit performance program ceased March 1, 1998.
Under this program the recovery of incremental purchased power costs resulting
from generating unit outages occurring through the retail access date is
subject to review by the DTE. Proceedings relative to generating unit
performance remain pending before the DTE. These proceedings will include the
review of replacement power costs associated with the shutdown of the
Connecticut Yankee nuclear electric generating unit which is discussed in
item 2. Management is unable to fully determine a range of reasonably
possible disallowance costs in excess of amounts accrued. Based on its
assessment of 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 disallowance 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.
6. Legal Proceedings
Industry and corporate restructuring legal proceedings
The DTE order approving the Boston Edison settlement agreement and the DTE
order approving the formation of BEC as a holding company were appealed by
certain parties to the Massachusetts Supreme Judicial Court (SJC). In
December 1998, the SJC dismissed the appeal of the order approving the holding
company formation. One settlement agreement appeal remains pending, however
there has to date been no briefing, hearing or other action taken with respect
to this proceeding.
In addition, along with other Massachusetts investor-owned utilities, Boston
Edison has been named as a defendant in a class action suit seeking to declare
certain provisions of the Massachusetts electric industry restructuring
legislation unconstitutional.
48
Management is currently unable to determine the outcome of these outstanding
proceedings or the impact the proceedings may have on its consolidated results
of operations.
A referendum seeking repeal of the Massachusetts electric industry
restructuring legislation that was enacted in November 1997 was overwhelmingly
defeated by a better than 70% to 30% margin in a state-wide general election
held on November 3, 1998. This outcome allows the comprehensive framework
established for the restructuring of the electric industry to continue as
intended under the enacted legislation.
Regulatory proceedings
In October 1997, the DTE opened a proceeding to investigate Boston Edison's
compliance with the 1993 order which permitted the formation of BETG and
authorized Boston Edison to invest up to $45 million in unregulated
activities. Hearings began in the fourth quarter of 1998 and are expected to
be completed in the first half of 1999.
Each of the Reading Municipal Light Department, the Littleton Electric Light
Department and the West Boylston Municipal Light Department have filed
separate claims for arbitration in Massachusetts alleging that the proposed
transfer of Pilgrim Station constitutes a breach of their respective power
sale agreements and seeking to terminate those agreements. The remaining
municipal light departments have also indicated that they plan to file similar
claims for arbitration. Boston Edison has requested the FERC to exercise its
pre-emptive authority to consider the claims of the municipal light
departments. In the event that either the FERC determines, or as a result of
the arbitrations, that the contracts should be terminated, Boston Edison would
continue to be obligated to purchase power from Entergy that it intended to
resell to the municipal light departments. Boston Edison may not be able to
resell such power in the short-term power exchange at a price equal to or
greater than the price it is required to pay to Entergy. However, Boston
Edison has filed at the DTE for recovery of any such shortfall as part of its
Pilgrim divestiture filing through the transition charge.
Management is currently unable to determine the outcome of these proceedings
or the impact these proceedings may have on its consolidated financial
position or results of operations.
Other litigation
In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim
Station, filed suit against Boston Edison. The town claims that Boston Edison
has wrongfully failed to execute an agreement with the town for payments in
addition to taxes due to the town under the Massachusetts electric industry
restructuring legislation. Boston Edison has disputed the town's claim and
will vigorously defend itself. In addition to this pending litigation, Boston
Edison and the town of Plymouth are also parties in proceedings before the
Appellate Tax Board and the DTE concerning substantially the same dispute.
Management is unable to determine the ultimate outcome of these proceedings or
the impact they may have on its consolidated financial position or results of
operations.
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
49
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.
Note L. Long-Term Power Contracts
1. Long-Term Contracts for the Purchase of Electricity
Boston Edison entered into a 13-month agreement effective December 1, 1998 to
transfer all of the unit output entitlements from its long-term power purchase
contracts to Select Energy (Select), a subsidiary of Northeast Utilities, Inc.
In return, Select will provide full energy service requirements to Boston
Edison, including NEPOOL capability responsibilities, at FERC approved tariff
rates through December 31, 1999.
Information relating to the contracts as of December 31, 1998 is as follows:
proportionate share (in thousands)
Units of ----------------------------------
Capacity Debt
Contract Purchased Minimum Outstanding
Expiration ----------- Debt Through Cont. Annual
Generating Unit Date % MW Service Exp. Date Cost
- ------------------------------------------------------------------------------
Canal Unit 1 2002 25.0 141 $ 1,433 $ 4,496 $ 22,936
Mass. Bay Trans-
portation
Authority - 1 2005 100.0 34 - - 1,089
Ocean State Power -
Unit 1 2010 23.5 72 3,996 15,970 22,120
Ocean State Power -
Unit 2 2011 23.5 72 3,420 14,370 23,111
Northeast Energy
Associates (a) (a) 219 - - 116,248
L'Energia (b) 2013 73.0 63 - - 28,220
MassPower 2013 44.3 117 10,727 65,127 53,143
Mass. Bay Trans-
portation
Authority - 2 2019 100.0 34 - - 450
- ------------------------------------------------------------------------------
Total $19,576 $99,963 $267,317
==============================================================================
<FN>
(a) Boston Edison purchases 75.5% of the energy output of this unit under
two contracts. One contract represents 135MW and expires in the year
2015. The other contract is for 84MW and expires in 2010. Energy is
paid for based on a price per kWh actually received. Boston Edison does
not pay a proportionate share of the unit's capital and fixed operating
costs.
(b) Boston Edison pays for this energy based on a price per kWh actually
received. An agreement has been made with L'Energia to terminate this
contract. FERC approval of this agreement is pending.
50
Boston Edison's total fixed and variable costs associated with these contracts
in 1998, 1997 and 1996 were approximately $267 million, $288 million and $281
million, respectively. Boston Edison's minimum fixed payments under these
contracts for the years after 1998 are as follows:
(in thousands)
- ------------------------------------------------------
1999 $ 86,072
2000 88,291
2001 88,662
2002 91,431
2003 81,927
Years thereafter 856,790
- ------------------------------------------------------
Total $1,293,173
======================================================
Total present value $ 743,716
======================================================
2. Long-Term Power Sales Contracts
In addition to other wholesale power sales, Boston Edison sells a percentage
of Pilgrim Station's output to other utilities and municipalities under long-
term contracts. Information relating to these contracts is as follows:
Contract Units of Capacity Sold
Expiration ----------------------
Contract Customer (a) Date % MW
- ------------------------------------------------------------------------------
Commonwealth Electric Company 2012 11.0 73.7
Montaup Electric Company 2012 11.0 73.7
Various municipalities 2000 (b) 3.7 25.0
- ------------------------------------------------------------------------------
Total 25.7 172.4
==============================================================================
<FN>
(a) Under these contracts, the utilities and municipalities pay their
proportionate share of the costs of operating Pilgrim Station and
associated transmission facilities. These costs include operation and
maintenance expense, insurance, local taxes, depreciation,
decommissioning and a return on investment. The long-term power sales
contracts with Commonwealth Electric Company and Montaup Electric Company
will be terminated upon the closing of the sale of Pilgrim Station to
Entergy. The contracts with the municipalities remain in place whereby
Boston Edison will purchase power for resale to the municipalities under
a purchase power agreement entered into with Entergy.
(b) Subject to certain adjustments.
51
Selected Consolidated Quarterly Financial Data (Unaudited)
(in thousands)
Operating Operating Net
Revenues Income Income
- ------------------------------------------------
1998
- ----
First quarter $394,117 $ 49,203 $22,859
Second quarter 385,708 65,300 35,340
Third quarter 479,304 100,806 82,492
Fourth quarter 363,843 34,415 16,646
1997
- ----
First quarter $422,856 $ 47,138 $20,935
Second quarter 426,835 59,633 33,978
Third quarter 520,414 106,673 81,418
Fourth quarter 408,426 43,500 8,311
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
52
Part III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
(a) Identification of Directors
- --------------------------------
Information about Nominees and Incumbent Directors
The Boston Edison board has fixed the number of directors at eleven as
permitted under its bylaws. Boston Edison's restated articles of organization
provides for the classification of the Boston Edison board into three classes
serving staggered three-year terms. The four persons named below have been
nominated by the Boston Edison board for election as Class II directors for a
term expiring at the year 2002 annual meeting and until their successors are
duly chosen and qualified. The remaining directors will continue to serve as
provided below, with the Class III directors having terms expiring in 2000 and
the Class I directors having terms expiring in 2001. If any of the nominees
shall be unavailable as a candidate at the Boston Edison annual meeting by
reason of death, disability or resignation, votes exercised through the
proxies will be cast for a substitute candidate as may be designated by the
Boston Edison board, or in the absence of a designation, in a manner the
directors may determine in their discretion. Alternatively, in this
situation, the Boston Edison board may take action to fix the number of
directors for the ensuing year at the number of nominees named herein who are
then able to serve.
The Boston Edison board has adopted the following director retirement policy.
Directors who are employees of BEC Energy or Boston Edison Company, with the
exception of the chief executive officer, retire from the Boston Edison board
when they retire from employment with BEC Energy or Boston Edison Company.
Under the Boston Edison board's current policy, directors who are not
employees of BEC Energy or Boston Edison Company or who have served as chief
executive officer retire from the board at the annual shareholder meeting
following their seventieth birthday.
The Boston Edison board, which held seven regular meetings and one special
meeting in 1998, has an Executive Committee, a Nuclear Oversight Committee,
and a Pricing Committee. During 1998, the Executive Committee, which is
authorized to exercise in the intervals between Boston Edison board meetings
those powers of the Boston Edison board which can be delegated, to act as a
nominating committee, and to review director compensation, met three times.
The Nuclear Oversight Committee, which is responsible for overseeing Boston
Edison's nuclear generation operations, met three times. Prior to the
establishment of BEC Energy in May 1998, the Boston Edison board also had an
Audit, Finance and Risk Management Committee, the responsibilities of which
included recommendations as to the selection of independent auditors, review
of the scope of the independent audit, annual financial statements, internal
audit reports, and financial and accounting controls and procedures, and
review of BEC Energy's financial requirements, insurance coverages, and legal
compliance programs, and an Executive Personnel Committee, the
responsibilities of which included reviewing executive officer compensation,
personnel planning and performance, some company benefit programs, and human
resources policies. Each of these committees met twice in 1998 before their
responsibilities were transferred to the corresponding committees of the BEC
Energy board. The Pricing Committee, which is authorized to approve the terms
of debt and equity offerings, did not meet in 1998. All directors attended at
least 75% of the aggregate of the total number of meetings of the Boston
Edison board and the total number of meetings held by all committees of the
53
Boston Edison board on which he or she served, with the exception of Mr. Egan,
who attended 65% of these meetings.
(b) Identification of Executive Officers
- -----------------------------------------
The information required by this item is included at the end of Part I of this
Form 10-K under the caption Executive Officers of the Registrant.
(c) Identification of Certain Significant Employees
- ----------------------------------------------------
Not applicable.
(d) Family Relationships
- -------------------------
Not applicable.
(e) Business Experience
- ------------------------
The names of the nominees as Class II directors and the incumbent Class I and
Class III directors and selected information concerning them are shown in the
table below. Unless a specific time period is indicated, each nominee and
director has held the position first listed across from his or her name for at
least five years.
Nominees as Class II Directors - Terms Expiring in 2002
-------------------------------------------------------
Nominees Principal Occupation and Directorships
- -------- -------------------------------------------------
Charles K. Gifford Chairman (since 1997 and from 1995-1996) and
Age: 56 Chief Executive Officer (since 1995), formerly
Boston Edison Company President (1989-1995), BankBoston Corporation
Director since: 1990 (Bank Holding Company), and Chairman and Chief
Member: Audit, Finance Executive Officer (since 1995), formerly
and Risk Management, President (1989-1996), BankBoston, N.A.;
Executive Personnel Director, Boston Edison Company, BankBoston
and Pricing Committees Corporation, BankBoston, N.A., Massachusetts
Mutual Life Insurance Company.
Paul A. LaCamera President and General Manager (since 1997),
Age: 55 WCVB-TV Channel 5, formerly Vice President and
Boston Edison Company General Manager (1994-1997); Director, Boston
Director since: 1998 Edison Company.
Member: Audit, Finance
and Risk Management
Committee
Thomas J. May Chairman, President and Chief Executive Officer
Age: 51 (since 1998), BEC Energy, and Chairman,
Boston Edison Company President (since 1995) and Chief Executive
Director since: 1991 Officer, Boston Edison Company; Director, Boston
Member: Executive Edison Company, BankBoston Corporation,
and Pricing Committees BankBoston, N.A., Liberty Mutual Insurance
Company, Liberty Mutual Fire Insurance Company,
Liberty Financial Companies, Inc., RCN
Corporation.
54
Nominees Principal Occupation and Directorships
- -------- -------------------------------------------------
Sherry H. Penney Chancellor (1988-1995 and 1996 to present),
Age: 61 University of Massachusetts at Boston, formerly
Boston Edison Company President (1995) (interim), University of
Director since: 1990 Massachusetts; Director, Boston Edison Company.
Member: Audit, Finance
and Risk Management and
Executive Personnel
Committees
Incumbent Class III Directors - Terms Expiring in 2000
------------------------------------------------------
Directors Principal Occupation and Directorships
- --------- -------------------------------------------------
Gary L. Countryman Chairman of the Board, Liberty Mutual Insurance
Age: 59 Company and Liberty Life Assurance Company of
Boston Edison Company Boston, formerly Chief Executive Officer (1985-
Director since: 1986 1998), Liberty Mutual Insurance Company and
Member: Executive Liberty Life Assurance Company of Boston;
and Executive Director, Boston Edison Company, Liberty Mutual
Personnel Committees Insurance Company, Liberty Life Assurance
Company of Boston, Liberty Mutual Fire Insurance
Company, Liberty Financial Companies, Inc.,
BankBoston Corporation, BankBoston, N.A., The
Neiman-Marcus Group, Inc., Alliance of American
Insurers.
Thomas G. Dignan, Jr. (1) Partner, Ropes & Gray (Law Firm); Director,
Age: 58 Boston Edison Company.
Boston Edison Company
Director since: 1983
Member: Executive
Committee
Herbert Roth, Jr. Former Chairman of the Board (1978-1985) and
Age: 70 Chief Executive Officer (1968-1985), LFE
Boston Edison Company Corporation (Traffic and Industrial Process
Director since: 1978 Control Systems); Director/Trustee, Boston
Member: Audit, Edison Company, Landauer, Inc., Tech/Ops Sevcon,
Finance and Risk Inc., Phoenix Home Life Mutual Insurance
Management Committee Company, Phoenix Series Fund, Phoenix Total
Return Fund, Inc., Phoenix Multi-Portfolio Fund,
The Bid Edge Series Fund, Mark IV Industries.
Stephen J. Sweeney Former Chairman of the Board (1986-1992) and
Age: 70 Chief Executive Officer (1984-1990), Boston
Boston Edison Company Edison Company; Director, Boston Edison Company,
Director since: 1983 Selecterm, Inc., Liberty Mutual Insurance
Member: Audit, Company, Liberty Mutual Fire Insurance Company,
Finance and Risk Liberty Life Assurance Company of Boston,
Management Committee Liberty Financial Companies, Inc., Uno
Restaurant Corporation.
55
Incumbent Class I Directors - Terms Expiring in 2001
----------------------------------------------------
Directors Principal Occupation and Directorships
- --------- -------------------------------------------------
Nelson S. Gifford Principal, Fleetwing Capital (Venture
Age: 68 Investments); formerly Chairman (1986-1990) and
Boston Edison Company Chief Executive Officer (1975-1990), Dennison
Director since: 1981 Manufacturing Company (Stationery Products,
Member: Executive Systems and Packaging); Director, Boston Edison
Committee Company, John Hancock Mutual Life Insurance
Company, Reed and Barton, J.M. Huber Corp.,
Nypro Inc, Partners Fund.
Richard J. Egan Chairman of the Board, EMC Corporation (Storage
Age: 63 Related Computer System Products); Director,
Boston Edison Company Boston Edison Company, Cognition Inc., Shiva
Director since: 1997 Corporation, New York Stock Exchange Listed
Member: Executive Company Advisory Committee.
Personnel Committee
Matina S. Horner Executive Vice President, Teachers Insurance and
Age: 59 Annuity Association/College Retirement Equities
Boston Edison Company Fund; formerly President (1972-1989), Radcliffe
Director since: 1988 College; Director, Boston Edison Company, The
Member: Executive, Neiman-Marcus Group, Inc.
Audit, Finance and
Risk Management and
Pricing Committees
<FN>
(1) During 1998, Boston Edison Company paid legal fees to the firm of Ropes
& Gray.
(f) Involvement in Certain Legal Proceedings
- ---------------------------------------------
Not applicable.
(g) Promoters and Control Persons
- ----------------------------------
Not applicable.
Item 11. Executive Compensation
- --------------------------------
Director Compensation
In 1998, the compensation programs for directors were reviewed and revised
with the assistance of an external compensation consultant. The review was
initiated to assure that the level of compensation be appropriate in reference
to comparable programs, the plan design supports BEC Energy's and Boston
Edison's strategic objectives, and the interests of the directors are aligned
with those of BEC Energy's shareholders.
When BEC Energy was established in May of 1998, the persons serving as
directors of Boston Edison were also named as trustees of BEC Energy. Members
of the Executive Committee of the BEC Energy board also serve on the Executive
Committee of the Boston Edison board. The compensation program for service on
the two boards was established to take into account the dual responsibilities.
Therefore, the payments described below represent the entire compensation
received by the trustees/directors serving on the boards of both entities.
56
Each director who is not an employee of Boston Edison receives an annual board
retainer of $20,000 in cash. Each director also receives an annual retainer
of $20,000 worth of BEC Energy common shares which is deferred until the
director retires from the board. Each non-employee director who is a member
of the Executive Committees of the two entities receives an additional
retainer of $3,000 and each director who chairs a BEC Energy or Boston Edison
board committee receives an additional retainer of $3,000. All other
retainers were discontinued as of October 1998. Each director who is not an
employee of Boston Edison receives $1,000 for attendance in person at each
meeting of the Boston Edison board or a committee and $500 for participating
in a meeting by telephone. When BEC Energy and Boston Edison board or
executive committee meetings are held consecutively, which is usually the
case, only one meeting fee is paid. Directors may elect to defer part or all
of their directors' fees under BEC Energy/Boston Edison deferred fee plan. In
1998, two director compensation programs were discontinued: the 1991 Director
Stock Plan and the 1993 Directors' Retirement Benefit. An amount equal to the
present value of the benefit each outside director accrued under the
Directors' Retirement Benefit was deposited in deferred accounts. Receipt is
deferred until the director's retirement from the BEC Energy/Boston Edison
boards.
Report of the Executive Personnel Committee
As noted above, when BEC Energy was established, the responsibilities of the
Boston Edison Executive Personnel Committee were transferred to the BEC Energy
Executive Personnel Committee. Below is the report of the BEC Energy
Executive Personnel Committee.
Under the rules established by the SEC, BEC Energy is required to provide
specified data and information with regard to the compensation and benefits
provided to its executive officers, including BEC Energy's chief executive
officer and the four other most highly compensated executive officers. The
disclosure requirements for these officers (the "Named Executive Officers")
include tables summarizing total compensation and a report explaining the
rationale and considerations that led to fundamental executive compensation
decisions affecting those individuals for the prior year.
The Executive Personnel Committee
BEC Energy's executive compensation program is administered by the Executive
Personnel Committee, a committee of the BEC Energy board composed of the four
non-employee trustees listed as signatories to this report. Except as
discussed below, none of these non-employee trustees has any interlocking or
other relationship with BEC Energy that would require disclosure to the SEC.
Generally, all decisions of the Executive Personnel Committee regarding the
compensation of the chief executive officer are subject to the approval of the
non-employee trustees of BEC Energy, none of whom is eligible to participate
in the incentive plans described below. The Executive Personnel Committee
administers the 1997 Stock Incentive Plan discussed below.
The Named Executive Officers
The officers identified as the five most highly compensated executive officers
of BEC Energy are all employees of Boston Edison Company, BEC Energy's
principal subsidiary. Three of the Named Executive Officers, Messrs. May,
Horan and Judge, also serve as officers of BEC Energy, in the following
capacities: Mr. May as Chairman, President and Chief Executive Officer;
Mr. Horan as Senior Vice President and General Counsel; and Mr. Judge as
57
Senior Vice President and Treasurer. BEC Energy does not have any employees
of its own.
Compensation Philosophy
The executive compensation philosophy of BEC Energy is to provide competitive
levels of compensation that advance BEC Energy's annual and long-term
performance objectives, reward corporate performance, and assist BEC Energy in
attracting, retaining and motivating highly qualified executives. The
framework for the compensation committee's executive compensation program is
to establish base salaries which are competitive with electric utilities in
general and to incentivize excellent performance by providing executives with
the opportunity to earn additional remuneration under the annual and long-term
incentive plans. The incentive plan goals are designed to improve the
effectiveness and enhance the efficiency of BEC Energy's operations and to
create value for shareholders. The committee also seeks to link executive and
shareholder interests through equity-based incentive plans. Accordingly, in
1997, upon the committee's recommendation, the Boston Edison board approved
stock ownership guidelines of three times base salary for the chief executive
officer and one to one-and one-half times base salary for the other executive
officers of BEC Energy and Boston Edison Company. These guidelines allow the
executives five years to acquire this amount of stock.
Components of Compensation
Compensation paid to the Named Executive Officers, as reflected in the
following tables, consists of three primary elements: base salary, annual
incentive awards, and long-term incentive awards. BEC Energy compares its
compensation levels against those of other growth-oriented investor-owned
electric utility companies. BEC Energy's strategy is to establish total
compensation, i.e., base salary and annual incentives, at the 60th percentile
of the utility industry, and to compare its long-term incentive plan to those
of more aggressive utilities and general industry companies that focus on
value creation.
During 1998, the committee thoroughly reviewed data collected by nationally
recognized compensation experts as well as by Boston Edison's human resources
group to determine whether BEC Energy's compensation strategy was being met.
The review evaluated base salary and annual incentives of nearly all electric
utility companies, and long-term incentives of a blend of utilities and
general industry. The data demonstrated that BEC Energy was in conformity
with its compensation strategy to the satisfaction of the committee.
The income tax deductions of publicly traded companies may be limited to the
extent total compensation for particular executive officers exceeds one
million dollars during any year. This deduction limit, however, does not
apply to payments which qualify as "performance based". The committee has
reviewed the regulations issued by the Internal Revenue Service and will
continue to review the application of these rules to future compensation.
However, the committee intends to continue basing its executive compensation
decisions primarily upon performance achieved, both corporate and individual,
while retaining the right to make subjective decisions and to award
compensation that may or may not meet all of the Internal Revenue requirements
for deductibility.
Annual Incentive Plan
Annual incentive payments to the Named Executive Officers, reported in the
fourth column of the Summary Compensation Table below, are based on both
58
corporate and business unit performance objectives which are derived from the
corporate operating plan and approved by the committee. Corporate performance
objectives include a comparison of target to actual earnings per share from
operations. Business unit performance objectives include predetermined levels
for operating and capital budgets, as well as key operating goals. The annual
incentive plan award for Mr. May is based solely on BEC Energy's achieving the
earnings per share objective. In 1998, BEC Energy's basic earnings per share
were $2.76, which exceeded the plan target. The annual incentive plan awards
for Messrs. Gustin, Horan, Judge and Ledgett were based 50% on earnings per
share and 50% on specific business unit performance objectives to achieve
various budget and operating plan targets. All four officers exceeded the
specified business unit performance levels.
Long-Term Compensation
Under the 1997 Stock Incentive Plan, executive officers and other key
employees are eligible to receive grants from time to time of stock-related
awards of seven general types: (i) stock options, (ii) stock appreciation
rights, (iii) restricted stock awards, (iv) deferred stock awards, (v)
performance unit awards, (vi) dividend equivalent awards, and (vii) other
stock-based awards. The long-term grant in May of 1998 consisted of non-
qualified stock options, deferred shares and dividend equivalents on the
deferred shares, and was based upon the committee's evaluation of performance
towards key strategic objectives, and competitive award data provided by an
external consultant. The committee did not weight any of these factors. The
options and the deferred shares vest at the rate of 33% per year over a three-
year period from the date of grant, and the options may be exercised over a
ten-year period.
Other Plans
At various times in the past, BEC Energy and Boston Edison Company have
adopted various broad-based employee benefit plans in which officers are
permitted to participate on the same terms as non-executive employees who meet
applicable eligibility criteria. These plans include pension, life, and
health insurance plans, as well as a section 401(k) savings plan which
includes a company matching contribution equal to the first six percent of pay
contributed by the employee up to a maximum excludable 401(k) contribution
allowed by the Internal Revenue Code. In addition, Boston Edison Company has
a deferred compensation plan in which officers and senior managers may elect
to participate.
In 1996, the committee implemented a supplemental executive retirement plan
which provides eligible participates with supplementary retirement income of
up to 60% of final average cash compensation, depending upon each
participant's years of service, reduced by 50% of the participant's social
security benefit and further reduced by benefits the participant receives
under Boston Edison's pension plan.
Mr. May's 1998 Compensation
The Executive Personnel Committee makes decisions regarding the compensation
of the chief executive officer using the same philosophy and criteria
described above. As with the compensation of all officers, BEC Energy
compares compensation levels for the chief executive officer to those of all
other investor-owned electric utility companies.
Each year BEC Energy approves the adjustment of salary ranges for the chief
executive officer and other corporate officers based on studies conducted by
59
external executive compensation consultants and Boston Edison Company's human
resources group. The 1998 studies found BEC Energy's executive compensation
levels to be within the approved 60th percentile position to market. Mr. May
received a 5% increase to his base salary in 1998.
Mr. May's annual incentive award, shown in the fourth column of the Summary
Compensation Table below, was in conformity with the provisions of the annual
incentive plan described above, and was based on BEC Energy surpassing its
operating plan targets. The committee's policy is to base individual long-
term incentive awards on an annual study by the compensation consultant
comparing the value of long-term incentive grants to salary levels for a blend
of electric utility and general industry companies. The 6,000 deferred shares
and 60,000 options granted Mr. May in 1998 reflect this policy.
Compensation Committee Interlocks and Insider Participation
Charles K. Gifford, who is a member of BEC Energy's Executive Personnel
Committee, is Chairman and Chief Executive Officer of BankBoston Corporation
and BankBoston, N.A. Thomas J. May, BEC Energy's Chairman, President and
Chief Executive Officer, serves on the boards of directors of BankBoston
Corporation and BankBoston, N.A.
Gary L. Countryman, who is the Chairman of BEC Energy's Executive Personnel
Committee, is Chairman of the Board and Chief Executive Officer of Liberty
Mutual Insurance Company and Liberty Mutual Fire Insurance Company and
Chairman of the Board of Liberty Financial Companies, Inc. Mr. May serves on
the boards of directors of Liberty Mutual Insurance Company, Liberty Mutual
Fire Insurance Company, and Liberty Financial Companies, Inc.
By the Executive Personnel Committee,
Gary L. Countryman (Chairman)
Richard J. Egan
Charles K. Gifford
Sherry H. Penney
Executive Compensation Tables
The following information is given regarding annual and long-term compensation
earned by the chief executive officer and the four other most highly
compensated executive officers of BEC Energy and Boston Edison Company with
respect to the years 1996, 1997 and 1998.
60
Summary Compensation Table
--------------------------
Annual Long-Term
Compensation Compensation Awards Payouts
------------------ ---------------------- -------
Securities
Other Deferred Underlying
Name and Annual Share Options/ LTIP All Other
Principal Position Year Salary Bonus Compensation(1) Awards(2) SARs(#) Payouts Compensation(3)
- ------------------ ---- -------- -------- --------------- --------- ----------- ------- ---------------
Thomas J. May..... 1998 $519,583 $600,000 - 238,500 60,000 - $ 9,600
Chairman, 1997 496,875 498,750 - 426,400 100,000 - 9,600
President and 1996 463,625 324,750 - - - - 9,000
Chief Executive
Officer
BEC Energy and
Boston Edison
Company
Ronald A. Ledgett. 1998 277,875 248,850 - 99,375 27,000 - 84,600
Executive Vice 1997 232,500 216,750 - 118,450 28,600 - 9,600
President, 1996 193,667 119,300 - - - - 9,000
Boston Edison
Company
Douglas S. Horan.. 1998 208,750 196,750 - 59,625 14,000 - 59,600
Senior Vice 1997 195,417 140,000 - 103,000 25,000 - 9,600
President, 1996 175,833 83,750 - - - - 9,000
BEC Energy and
Boston Edison
Company
James J. Judge.... 1998 205,417 196,750 - 59,625 14,000 - 59,600
Senior Vice 1997 183,667 136,400 - 97,850 23,400 - 9,600
President, 1996 167,000 80,000 - - - - 9,000
BEC Energy and
Boston Edison
Company
L. Carl Gustin.... 1998 194,375 163,875 - 51,675 12,000 - 9,600
Senior Vice 1997 187,813 121,250 - 97,850 23,800 - 9,600
President, 1996 182,507 67,262 - - - - 9,000
Boston Edison
Company
<FN>
(1) None of the Named Executive Officers received amounts of other annual
compensation in 1996, 1997, or 1998 which would require disclosure
under SEC rules.
(2) Deferred common share awards are valued at the closing market price as
of the date of the grant. The awards vest one-third on each of the
first, second and third anniversaries of the date of the grant.
Dividends will accrue on the awards from the date of grant and will be
be payable in the form of additional shares which will vest at the same
time the awards vest. Aggregate deferred common share holdings and
values based on the closing price of the common shares on December 31,
1998 are as follows: Mr. May, 16,933 shares ($697,428); Mr. Ledgett,
5,567 shares ($229,291); Mr. Gustin, 3,833 shares ($157,872); Mr. Horan,
4,167 shares ($171,628) and Mr. Judge, 4,033 shares ($166,109).
(3) Messrs. Ledgett, Horan and Judge received payments in the amounts of
$75,000, $50,000 and $50,000 respectively, under retention agreements
entered into in 1996. All other amounts in this column represent Boston
Edison's matching contribution under its 401(k) plan.
61
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
------------------------------------------------
% of
Total
Options Grant
Number of Granted Exercise Date
Securities to or Present
Underlying Employees Base Expiration Value
Name Options Granted(1) in 1998 Price Date (2)
- ---- ------------------ --------- -------- ---------- -------
Thomas J. May..... 60,000 14.3% $39.75 4/22/08 $276,600
Ronald A. Ledgett. 27,000 6.4% $39.75 4/22/08 $124,470
L. Carl Gustin.... 12,000 2.9% $39.75 4/22/08 $ 55,320
Douglas S. Horan.. 14,000 3.3% $39.75 4/22/08 $ 64,540
James J. Judge.... 14,000 3.3% $39.75 4/22/08 $ 64,540
<FN>
(1) Options vest one-third annually beginning April 22, 1999.
(2) The grant date present values were determined using the Black-Scholes
option pricing model. There is no assurance that the value realized
would be at or near the value estimated by the Black-Scholes model.
Assumptions used for the model are as follows: stock volatility, 16%;
risk-free interest rate, 5.66%; dividend yield, 4.88%; and time
to exercise, four years.
Aggregated Option/SAR Exercises and Fiscal Year-End
---------------------------------------------------
Option Value Table
------------------
Number of Securities Value of Securities
Underlying Underlying Unexercised
Unexercised Options In-the-Money Options
Shares/SARs At Fiscal Year-End At Fiscal Year-End (1)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
Thomas J. May..... 0 $0 33,333 / 126,667 $506,245 / $1,098,755
Ronald A. Ledgett. 0 $0 9,533 / 46,067 $147,166 / $333,159
L. Carl Gustin.... 0 $0 7,933 / 27,867 $122,466 / $262,197
Douglas S. Horan.. 0 $0 8,333 / 30,667 $128,641 / $277,422
James J. Judge.... 0 $0 7,800 / 29,600 $120,413 / $260,950
<FN>
(1) Based on the closing price of BEC Energy common shares on December 31,
1998 of $41.1875.
62
Pension Plan Table
The following table shows the estimated annual retirement benefits payable to
executive officers under the qualified pension plan and the supplemental
executive retirement plan, assuming retirement at age 65. The Supplemental
executive retirement plan is a non-qualified pension plan providing a maximum
benefit of 60% of compensation after the executive has accumulated 20 years of
credited service and has reached age 60. The supplemental executive
retirement plan provides the incremental benefits in excess of the benefits
paid under the qualified plan necessary to reach the benefit shown in the
table. Each of the officers named in the Summary Compensation Table
participates in the supplemental executive retirement plan. The benefits
presented are based on a straight life annuity and do not take into account a
reduction in benefits of up to 50% of the participant's primary social
security benefit.
Years of Credited Service
Average Annual ----------------------------
Compensation 10 15 20
- -------------- -------- -------- --------
$200,000....................................... $ 60,000 $ 90,000 $120,000
$300,000....................................... 90,000 135,000 180,000
$400,000....................................... 120,000 180,000 240,000
$500,000....................................... 150,000 225,000 300,000
$600,000....................................... 180,000 270,000 360,000
$700,000....................................... 210,000 315,000 420,000
$800,000....................................... 240,000 360,000 480,000
$900,000....................................... 270,000 405,000 540,000
For purposes of the retirement plans, Messrs. May, Ledgett, Gustin, Horan and
Judge currently have 23, 18, 18, 21 and 21 years of credited service,
respectively.
Final average compensation for purposes of calculating the benefits under the
supplemental executive retirement plan is the highest average annual
compensation of the participant during any consecutive 36-month period.
Compensation taken into account in calculating the benefits described above
includes salary and annual bonus, including any amounts deferred under the
terms of the deferred compensation plan.
Mr. May can elect, and Mr. Ledgett receives, an alternative supplemental
retirement benefit equal to 33% of final base salary annually for 15 years,
which at the current level would provide Mr. Ledgett with approximately $7,000
in excess of the amounts shown in the table above.
Change of Control Agreements
Boston Edison Company has change of control agreements with various key
employees, including those named in the Summary Compensation Table, which
provide severance benefits in the event of specified terminations of
employment following a change in control of Boston Edison. Events which
constitute a change of control under these agreements are described below.
If, following a change in control, the employee's employment is terminated
without cause or the employee terminates employment for good reason, the
employee receives severance pay in an amount equal to two times, three times
in the case of Mr. May, the sum of annual base salary (at the rate in effect
immediately prior to the date of termination or immediately before the change
of control, whichever is higher) plus actual bonus paid in respect of the most
recently completed fiscal year or target bonus for the fiscal year in which
the termination occurs, whichever is higher. In addition, the change of
63
agreements provide for a pro rated bonus payment for the year in which the
termination occurs, the immediate vesting of bonus awards, immediate payment
of deferred compensation amounts upon the termination and payments equal to
the benefit the employee would have received under Boston Edison Company's
retirement plan assuming the executive was vested and remained employed for an
additional two years, three years in the case of Mr. May. For two years,
three years in the case of Mr. May, following termination of employment, the
employee would be entitled to continue to participate in all welfare plans
provided by Boston Edison Company. The change of control agreements further
provide for a "gross-up" payment under which, if amounts paid under these
agreements would be effectively reduced a federal excise tax on "excess
parachute payments," Boston Edison Company will pay the employee an additional
amount of cash, so that, after payment of all parachute taxes by the employee,
the employee will have received the amount the employee would have received in
the absence of any such tax. A change of control under these agreements
generally includes the following events: (i) a person or group becomes the
beneficial owner of more than 30% of the voting power of Boston Edison
Company's securities; (ii) continuing directors cease to be a majority
of the Boston Edison Company board; (iii) a consolidation, merger or other
reorganization or sale or other disposition of all or substantially all of the
assets of Boston Edison Company, other than certain defined transactions; or
(iv) approval by the stockholders of a complete liquidation or dissolution of
Boston Edison Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
- ----------------------------------------------------
Boston Edison's common stock is wholly owned by BEC Energy.
(b) Security Ownership of Management
- -------------------------------------
No director or executive officer is the beneficial owner of Boston Edison's
cumulative preferred stock.
(c) Changes in Control
- -----------------------
Not applicable.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Not applicable.
64
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements:
Page
----
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 26
Consolidated Statements of Retained Earnings for the
years ended December 31, 1998, 1997 and 1996 26
Consolidated Balance Sheets as of December 31, 1998 and 1997 27
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 28
Notes to Consolidated Financial Statements 29
Selected Consolidated Quarterly Financial Data (Unaudited) 51
Report of Independent Accountants 73
2. Financial Statement Schedules:
No financial statement schedules are included as they are either not required
or not applicable.
3. Exhibits:
Refer to the exhibits listing beginning on the following page.
(b) Reports on Form 8-K:
A Form 8-K dated November 23, 1998, was filed during the fourth quarter of
1998 disclosing that Entergy Nuclear Generating Company was selected as the
winning bidder for the purchase of Pilgrim Station.
65
Exhibit SEC Docket
------- ----------
Exhibit 3 Articles of Incorporation and By-Laws
- --------- -------------------------------------
Incorporated herein by reference:
3.1 Restated Articles of Organization 3.1 1-2301
Form 10-Q
for the
quarter ended
June 30, 1994
3.2 Boston Edison Company Bylaws 3.1 1-2301
April 19, 1977, as amended Form 10-Q
January 22, 1987, January 28, 1988, for the
May 24, 1988 and November 22, 1989 quarter ended
June 30, 1990
Exhibit 4 Instruments Defining the Rights of
- --------- ----------------------------------
Security Holders, Including Indentures
--------------------------------------
Incorporated herein by reference:
4.1 Medium-Term Notes Series A - Indenture 4.1 1-2301
dated September 1, 1988, between Form 10-Q
Boston Edison Company and Bank of for the
Montreal Trust Company quarter ended
September 30,
1988
4.1.1 First Supplemental Indenture 4.1 1-2301
dated June 1, 1990 to Form 8-K
Indenture dated September 1, 1988 dated
with Bank of Montreal Trust Company - June 28, 1990
9 7/8% debentures due June 1, 2020
4.1.2 Indenture of Trust and Agreement among 4.1.26 1-2301
the City of Boston, Massachusetts Form 10-K
(acting by and through its Industrial for the
Development Financing Authority) and year ended
Harbor Electric Energy Company and December 31,
Shawmut Bank, N.A., as Trustee, dated 1991
November 1, 1991
4.1.3 Votes of the Pricing Committee of the 4.1.27 1-2301
Board of Directors of Boston Edison Form 10-K
Company taken August 5, 1991 re for the
9 3/8% debentures due August 15, 2021 year ended
December 31,
1991
66
Exhibit SEC Docket
------- ----------
4.1.4 Revolving Credit Agreement dated 4.1.24 1-2301
February 12, 1993 Form 10-K
for the
year ended
December 31,
1992
4.1.4.1 First Amendment to Revolving Credit 4.1.10 1-2301
Agreement dated May 19, 1995 Form 10-K
for the
year ended
December 31,
1995
4.1.4.2 Second Amendment to Revolving Credit 4.1.4.2 1-2301
Agreement dated July 1, 1997 Form 10-K
for the
year ended
December 31,
1997
4.1.5 Votes of the Pricing Committee of the 4.1.25 1-2301
Board of Directors of Boston Edison Form 10-K
Company taken September 10, 1992 re for the
8 1/4% debentures due September 15, 2022 year ended
December 31,
1992
4.1.6 Votes of the Pricing Committee of the 4.1.26 1-2301
Board of Directors of Boston Edison Form 10-K
Company taken January 27, 1993 re for the
6.80% debentures due February 1, 2000 year ended
December 31,
1992
4.1.7 Votes of the Pricing Committee of the 4.1.27 1-2301
Board of Directors of Boston Edison Form 10-K
Company taken March 5,1993 re for the
6.80% debentures due March 15, 2003, year ended
7.80% debentures due March 15, 2023 December 31,
1992
4.1.8 Votes of the Pricing Committee of the 4.1.28 1-2301
Board of Directors of Boston Edison Form 10-K
Company taken August 18, 1993 re for the
6.05% debentures due August 15, 2000 year ended
December 31,
1993
67
Exhibit SEC Docket
------- ----------
4.1.9 Votes of the Pricing Committee of the 4.1.9 1-2301
Board of Directors of Boston Edison Form 10-K
Company taken May 10, 1995 re for the
7.80% debentures due May 15, 2010 year ended
December 31,
1995
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 SEC Docket
------- ----------
Exhibit 10 Material Contracts
- ---------- ------------------
Incorporated herein by reference:
10.1 Key Executive Benefit Plan 10.3.1 1-2301
Standard Form of Agreement, May Form 10-K
1986, with modifications for the
year ended
December 31,
1991
10.2 Executive Annual Incentive 10.5 1-2301
Compensation Plan Form 10-K
for the
year ended
December 31,
1988
10.2.1 Supplemental Executive Retirement 10.1 1-2301
Plan Form 10-Q
for the
quarter ended
June 30, 1997
10.2.2 1997 Stock Incentive Plan 10.2 1-2301
Form 10-Q
for the
quarter ended
June 30, 1997
68
Exhibit SEC Docket
------- ----------
10.3 Boston Edison Company Deferred 10.11 1-2301
Fee Plan dated January 14, 1993 Form 10-K
for the
year ended
December 31,
1992
10.4 Deferred Compensation Trust 10.10 1-2301
between Boston Edison Company Form 10-K
and State Street Bank and for the
Trust Company dated year ended
February 2, 1993 December 31,
1992
10.4.1 Amendment No. 1 to Deferred 10.5.1 1-2301
Compensation Trust dated Form 10-K
March 31, 1994 for the
year ended
December 31,
1994
10.5 Boston Edison Company Deferred 10.9 1-2301
Compensation Plan, Amendment and Form 10-K
Restatement dated January 31, 1995 for the
year ended
December 31,
1994
10.6 Employment Agreement applicable to 10.10 1-2301
Ronald A. Ledgett dated April 30, 1987 Form 10-K
for the
year ended
December 31,
1994
10.7 Change in Control Agreement applicable 10.2 1-2301
to Thomas J. May dated July 8, 1996 Form 10-Q
for the
quarter ended
June 30, 1996
10.8 Form of Change in Control Agreement 10.3 1-2301
applicable to Ronald A. Ledgett, Form 10-Q
L. Carl Gustin, Douglas S. Horan, for the
James J. Judge and certain other quarter ended
officers dated July 8, 1996 June 30, 1996
69
Exhibit SEC Docket
------- ----------
10.9 Boston Edison Company Restructuring 10.12 1-2301
Settlement Agreement dated July 1997 Form 10-K
for the
year ended
December 31,
1997
10.10 Boston Edison Company and Sithe 10.1 1-2301
Energies, Inc. Purchase and Sale Form 10-Q
and Transition Agreements dated for the
December 10, 1997 quarter ended
March 31, 1998
Filed herewith:
10.11 Boston Edison Company Directors'
Deferred Fee Plan Restatement
effective October 1, 1998
10.12 Boston Edison Company and Entergy
Nuclear Generation Company Purchase
and Sale Agreement dated November 18,
1998
Exhibit 12 Statement re Computation of Ratios
- ---------- ----------------------------------
Filed herewith:
12.1 Computation of Ratio of Earnings
to Fixed Charges for the Year
Ended December 31, 1998
12.2 Computation of Ratio of Earnings
to Fixed Charges and Preferred Stock
Dividend Requirements for the Year
Ended December 31, 1998
Exhibit 21 Subsidiaries of the Registrant
- ---------- ------------------------------
21.1 Harbor Electric Energy Company
(incorporated in Massachusetts),
a wholly owned subsidiary of Boston
Edison Company
70
Exhibit SEC Docket
------- ----------
Exhibit 23 Consent of Independent Accountants
- ---------- ----------------------------------
Filed herewith:
23.1 Consent of Independent Accountants
to incorporate by reference their
opinion included with this Form
10-K in the Form S-3 Registration
Statement filed by Boston Edison
Company on February 3, 1993 (File
No. 33-57840)
Exhibit 27 Financial Data Schedule
Filed herewith:
27.1 Schedule UT
Exhibit 99 Additional Exhibits
Incorporated herein by reference:
99.1 Settlement Agreement between Boston 28.1 1-2301
Edison Company and Commonwealth Form 8-K
Electric Company, Montaup Electric dated
Company and the Municipal December 21,
Light Department of the Town of 1989
Reading, Massachusetts, dated
January 5, 1990
99.2 Settlement Agreement Between Boston 28.2 1-2301
Edison Company and City of Holyoke Form 10-Q
Gas and Electric Department et. al., for the
dated April 26, 1990 quarter ended
March 31, 1990
99.3 Information required by SEC Form 1-2301
11-K for certain employee benefit Form 10-K/A
plans for the years ended Amendments to
December 31, 1997, 1996 and 1995 Form 10-K for
the years ended
December 31,
1997, 1996 and
1995 dated
June 25,1998,
June 26, 1997
and June 27,
1996,
respectively
71
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ James J. Judge
---------------------------------------
James J. Judge
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 25th day of March 1999.
/s/ Thomas J. May Chairman of the Board, President
- ------------------------------------ and Chief Executive Officer
Thomas J. May
/s/ Robert J. Weafer, Jr. Vice President - Finance,
- ------------------------------------ Controller and Chief Accounting
Robert J. Weafer, Jr. Officer
/s/ Gary L. Countryman Director
- ------------------------------------
Gary L. Countryman
/s/ Thomas G. Dignan, Jr. Director
- ------------------------------------
Thomas G. Dignan, Jr.
- ------------------------------------ Director
Richard J. Egan
- ------------------------------------ Director
Charles K. Gifford
/s/ Nelson S. Gifford Director
- ------------------------------------
Nelson S. Gifford
/s/ Matina S. Horner Director
- ------------------------------------
Matina S. Horner
72
/s/ Paul A. LaCamera Director
- ------------------------------------
Paul A. LaCamera
/s/ Sherry H. Penney Director
- ------------------------------------
Sherry H. Penney
/s/ Herbert Roth, Jr. Director
- ------------------------------------
Herbert Roth, Jr.
- ------------------------------------ Director
Stephen J. Sweeney
73
Report of Independent Accountants
To the Stockholders and Directors of Boston Edison Company:
In our opinion, the accompanying consolidated financial statements listed in
Item 14(a) of this Form 10-K present fairly, in all material respects, the
consolidated financial position of Boston Edison Company and its subsidiary at
December 31, 1998 and 1997 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 28, 1999