UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
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 1-14768
NSTAR
(Exact name of registrant as specified in its charter)
Massachusetts 04-3466300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Boylston Street, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)424-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 8, 2003
Common Shares, $1 par value 53,032,546 shares
NSTAR
Form 10-Q - Quarterly Period Ended March 31, 2003
Index
Part I. Financial Information Page(s) No.
Item 1. Financial Statements -
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of
Comprehensive Income 4
Condensed Consolidated Statements of
Retained Earnings 4
Condensed Consolidated Balance Sheets 5 - 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated
Financial Statements 8 - 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17 - 28
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 28
Item 4. Controls and Procedures 28 - 29
Part II. Other Information
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of
Security Holders 29 - 30
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
Sarbanes-Oxley Act Section 302(a) Certification Statements 32 - 33
___________________________________
Important Shareholder Information
NSTAR files its Forms 10-K, 10-Q and 8-K reports, proxy statements
and other information with the Securities and Exchange Commission
(SEC). You may access materials NSTAR has filed with the SEC on
the SEC's website at www.sec.gov. In addition, certain of NSTAR's
SEC filings can be accessed free of charge on NSTAR's website
at www.nstaronline.com. Copies of NSTAR's filings may also be
obtained by writing or calling NSTAR's Investor Relations
Department at the address or phone number on the cover of this
Form 10-Q.
Part I - Financial Information
Item 1. Financial Statements
NSTAR
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
Three Months Ended March 31,
2003 2002
Operating revenues $ 763,555 $ 705,228
Operating expenses:
Purchased power and cost of gas sold 434,239 395,694
Operations and maintenance 109,924 106,253
Depreciation and amortization 62,144 60,625
Demand side management and renewable energy
programs 16,870 16,425
Property and other taxes 26,379 27,049
Income taxes 28,522 22,467
Total operating expenses 678,078 628,513
Operating income 85,477 76,715
Other income (deductions):
Other income, net 1,056 1,533
Other deductions, net (617) (9)
Total other income, net 439 1,524
Interest charges:
Long-term debt 31,779 28,022
Transition property securitization 8,684 9,805
Short-term debt and other interest 3,913 5,897
Allowance for borrowed funds used during
construction (AFUDC) (1,288) (279)
Total interest charges 43,088 43,445
Net income 42,828 34,794
Preferred stock dividends of subsidiary 490 490
Earnings available for common shareholders $ 42,338 $ 34,304
========= =========
Weighted average common shares outstanding:
Basic 53,033 53,033
====== ======
Diluted 53,312 53,256
====== ======
Earnings per common share:
Basic $ 0.80 $ 0.65
========= =========
Diluted $ 0.79 $ 0.64
========= =========
Dividends declared per common share $ 0.54 $ 0.53
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
NSTAR
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
Three Months Ended March 31,
2003 2002
Net income $ 42,828 $ 34,794
Other comprehensive income (loss), net:
Unrealized gain (loss) on investments 2,203 (6,715)
Reclassification adjustment for gain included
in net income - (1,823)
Deferred income taxes - 3,139
Comprehensive income $ 45,031 $ 29,395
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
NSTAR
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)
Three Months Ended March 31,
2003 2002
Balance at the beginning of the period $ 382,886 $ 334,138
Add:
Net income 42,828 34,794
Subtotal 425,714 368,932
Deduct:
Dividends declared:
Common shares 28,638 28,107
Preferred stock 490 490
Subtotal 29,128 28,597
Balance at the end of the period $ 396,586 $ 340,335
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
NSTAR
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
March 31, December 31,
2003 2002
Assets
Utility plant in service, at original cost $ 4,105,652 $ 4,090,843
Less: accumulated depreciation 1,334,488 1,309,270
2,771,164 2,781,573
Construction work in progress 87,573 66,047
Net utility plant 2,858,737 2,847,620
Non-utility property, net 137,982 129,918
Goodwill 448,311 451,374
Equity and other investments 74,752 52,236
Current assets:
Cash and cash equivalents 27,105 53,438
Restricted cash 35,052 33,899
Accounts receivable, net and accrued
unbilled revenues 389,810 345,848
Inventory, at average cost 37,544 58,555
Other 11,652 14,886
Total current assets 501,163 506,626
Deferred debits:
Regulatory assets - other 901,303 875,038
Regulatory asset - power contracts 582,935 701,084
Regulatory asset - pension costs 431,379 425,755
Other 93,785 133,624
2,009,402 2,135,501
Total assets $ 6,030,347 $ 6,123,275
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
NSTAR
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
March 31, December 31,
2003 2002
Capitalization and Liabilities
Common equity:
Common shares, par value $1 per share
(100,000,000 shares authorized;
53,032,546 shares issued and outstanding) $ 53,033 $ 53,033
Premium on common shares 871,382 870,877
Retained earnings 396,586 382,886
Accumulated other comprehensive loss (5,287) (7,491)
Total common equity 1,315,714 1,299,305
Cumulative non-mandatory redeemable
preferred stock of subsidiary 43,000 43,000
Long-term debt 1,793,792 1,645,465
Transition property securitization 411,081 445,890
Total long-term debt 2,204,873 2,091,355
Total capitalization 3,563,587 3,433,660
Current liabilities:
Long-term debt 7,596 172,191
Transition property securitization 58,405 40,555
Notes payable 217,400 198,600
Accounts payable 256,443 230,939
Accrued expenses 228,604 239,160
Deferred income taxes 23,047 4,692
Total current liabilities 791,495 886,137
Deferred credits:
Accumulated deferred income taxes and
unamortized investment tax credits 678,827 675,881
Power contracts 679,408 773,922
Pension liability 159,225 177,675
Other 157,805 176,000
1,675,265 1,803,478
Commitments and contingencies
Total capitalization and liabilities $ 6,030,347 $ 6,123,275
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
NSTAR
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended March 31,
2003 2002
Operating activities:
Net income $ 42,828 $ 34,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 62,349 60,496
Deferred income taxes and investment tax
credits 24,101 17,885
Allowance for borrowed funds used during
construction (1,288) (279)
Net changes in:
Current assets (20,870) 106,318
Current liabilities 33,303 (36,682)
Net change from other operating activities (68,260) 3,978
Net cash provided by operating activities 72,163 186,510
Investing activities:
Plant expenditures (excluding AFUDC) (55,031) (85,490)
Other investments 294 2,936
Net cash used in investing activities (54,737) (82,554)
Financing activities:
Long-term debt redemptions (166,472) (31,239)
Transition property securitization (16,959) (16,040)
Net change in notes payable 168,800 (33,547)
Dividends paid (29,128) (28,597)
Net cash used in financing activities (43,759) (109,423)
Net decrease in cash and cash equivalents (26,333) (5,467)
Cash and cash equivalents at beginning of year 53,438 11,655
Cash and cash equivalents at end of period $ 27,105 $ 6,188
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 49,882 $ 55,446
========= =========
Income taxes $ 6,519 $ 21,719
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The accompanying Notes should be read in conjunction with Notes
to the Consolidated Financial Statements included in NSTAR's 2002
Annual Report on Form 10-K.
Note A. Business Organization and Summary of Significant
Accounting Policies
1. About NSTAR
NSTAR is an energy delivery company serving approximately 1.4
million customers in Massachusetts, including approximately 1.1
million electric customers in 81 communities and 300,000 gas
customers in 51 communities. NSTAR's retail utility subsidiaries
are Boston Edison Company (Boston Edison), Commonwealth Electric
Company (ComElectric), Cambridge Electric Light Company
(Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). NSTAR's
three retail electric companies operate under the brand name
"NSTAR Electric." Reference in this report to "NSTAR" shall mean
the registrant NSTAR or one or more of its subsidiaries as the
context requires. Reference in this report to "NSTAR Electric"
shall mean each of Boston Edison, ComElectric and Cambridge
Electric. NSTAR also conducts non-utility, unregulated
operations.
2. Basis of Consolidation and Accounting
The financial information presented as of March 31, 2003 and for
the periods ended March 31, 2003 and 2002 have been prepared from
NSTAR's books and records without audit by independent
accountants. Financial information as of December 31, 2002 was
derived from the audited consolidated financial statements of
NSTAR, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America (GAAP). In the opinion of NSTAR's management, all
adjustments (which are of a normal recurring nature) necessary
for a fair presentation of the financial information for the
periods indicated have been included. Certain immaterial
reclassifications have been made to the prior year data to
conform with the current presentation.
The utility subsidiaries are subject to the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). The application of SFAS 71
results in differences in the timing of recognition of certain
expenses from that of other businesses and industries. The
distribution business remains subject to rate-regulation and
continues to meet the criteria for application of SFAS 71.
The preparation of financial statements in conformity with GAAP
requires management of NSTAR and its subsidiaries to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
The results of operations for the three months ended March 31,
2003 and 2002 are not indicative of the results that may be
expected for an entire year. Kilowatt-hour sales and revenues
are typically higher in the winter and summer than in the spring
and fall, as sales tend to vary with weather conditions. Gas
sales and revenues are typically higher in the winter months than
during other periods of the year.
3. Stock Option Plan
NSTAR applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its stock option plan.
No stock-based employee compensation expense for option grants is
reflected in net income as all options granted under those plans
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if
NSTAR had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" to stock-based
employee compensation.
Three-Months Ended March 31,
(in thousands, except per share amounts) 2003 2002
Net income, as reported $42,828 $ 34,794
Add: Share grant incentive compensation expense
included in reported net income, net of related
tax effects 455 302
Deduct: Total share grant and stock option
compensation expense determined under fair value
method for all awards, net of related tax effects (598) (457)
Pro forma net income $ 42,685 $ 34,639
======== ========
Earnings per share:
Basic - as reported $0.80 $0.65
Basic - pro forma $0.80 $0.64
Diluted - as reported $0.79 $0.64
Diluted - pro forma $0.79 $0.64
Note B. Asset Retirement Obligations
On January 1, 2003, NSTAR adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). This Statement
establishes accounting and reporting standards for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS 143 requires entities to
record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes the cost
by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement.
NSTAR has identified certain insignificant long-lived assets,
including obligations under lease and easement arrangements, and
has determined that it is legally responsible to remove such
property.
For its regulated utility businesses, NSTAR has identified legal
retirement obligations that are currently not material to its
financial statements. The recognition of a potential asset
retirement obligation will have no impact on its earnings. For
NSTAR's regulated utilities, which follow SFAS 71, NSTAR would
establish regulatory assets or liabilities to defer any
differences between the liabilities established for ratemaking
purposes and those recorded as required under SFAS 143.
For NSTAR's regulated utility businesses, cost of removal
(negative net salvage) is recognized as a component of
depreciation expense in accordance with approved regulatory
treatment. Since NSTAR applies SFAS 71 to its regulated utility
businesses, it will continue to include removal costs in
depreciation expense and will quantify the removal costs included
in accumulated depreciation as regulatory liabilities in footnote
disclosure. NSTAR estimates that as of March 31, 2003, there is
approximately $234 million of removal costs, not yet incurred,
included in accumulated depreciation.
NSTAR has identified several long-lived assets, in which it has
legal obligations to remove such property, for its non-regulated
businesses. Based on current information and assumptions, NSTAR
recorded an increase in non-utility plant of approximately $0.6
million, an asset retirement liability of approximately $1
million and a cumulative effect of adoption after tax, reducing
net income by $0.4 million in 2003. The cumulative effect
adjustment is recorded as part of Depreciation and amortization
expense on the accompanying Condensed Consolidated Statements of
Income.
Note C. Investments - Available for Sale Securities
NSTAR classifies its investment in marketable securities as
available for sale. These investments include 11.6 million
common shares of RCN Corporation (RCN). The total carrying value
of the 11.6 million RCN common shares is included in Equity and
other investments on the accompanying Condensed Consolidated
Balance Sheets at its estimated fair value of approximately $8.3
million at March 31, 2003. The fair value of the 11.6 million
shares held may increase or decrease as a result of changes in
the market value of RCN common shares. As of March 31, 2003,
December 31, 2002 and March 31, 2002, the market value per share
of RCN was $0.72, $0.53 and $1.41, respectively. The unrealized
gain or loss associated with these shares will fluctuate due to
the changes in fair value of these securities during each period
and is reflected, net of associated income taxes, as a component
of Other comprehensive income (loss), net on the accompanying
Condensed Consolidated Statements of Comprehensive Income. The
cumulative increase or decrease in fair value of these shares
including the impact of the write-down adjustments of these
shares are included in Accumulated other comprehensive loss on
the accompanying Condensed Consolidated Balance Sheets.
Note D. Derivative Instruments - Power Contracts
NSTAR accounts for its power contracts in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The accounting for derivative financial
instruments is subject to change based on the guidance received
from the Derivative Implementation Group (DIG) of FASB. The DIG
issued No. C15, "Scope Exceptions: Normal Purchases and Normal
Sales Exception for Option-Type Contracts and Forward Contracts
in Electricity," which specifically addressed the interpretation
of clearly and closely related contracts that qualify for the
normal purchases and sales exception under SFAS 133. The
conclusion reached by the DIG was that contracts with a pricing
mechanism that is subject to future adjustment based on a generic
index that is not specifically related to the contracted service
commodity generally would not qualify for the normal purchases
and sales exception.
NSTAR has six purchased power contracts that contain components
with pricing mechanisms that are based on a pricing index, such
as the GNP or CPI. Although these factors are only applied to
certain ancillary pricing components of these agreements, as
required by the interpretation of DIG Issue C15, NSTAR began
recording these contracts at fair value on its Consolidated
Balance Sheets during 2002. This action resulted in the
recognition of a liability for the fair value of the above-market
portion of these contracts at March 31, 2003 and December 31,
2002 of approximately $583 million and $701 million,
respectively, and is a component of Deferred credits - Power
contracts on the accompanying Condensed Consolidated Balance
Sheets. This decline in above-market costs during the current
period was primarily due to an increase in wholesale energy
prices during the first quarter. NSTAR has recorded a
corresponding regulatory asset to reflect the future recovery of
the above-market component of these contracts through its
transition charge. Therefore, as a result of this regulatory
treatment, recording of the fair value of these contracts on
NSTAR's accompanying Condensed Consolidated Balance Sheets does
not result in an earnings impact.
Note E. Other Utility Matters
1. Blackstone Station
Subsequent to the end of the current quarter, on April 8, 2003,
Cambridge Electric completed the sale of the land and buildings
constituting Blackstone Station to Harvard University (Harvard)
for $14.6 million; the net proceeds from the sale were used to
reduce Cambridge Electric's transition charge. The sale by
Cambridge Electric was approved by the Massachusetts Department
of Telecommunications and Energy (MDTE) during the first quarter.
At the same time, NSTAR Steam completed the sale of its
Blackstone steam assets and contracts to Harvard for $3 million
and will recognize a gain of $2.7 million in the second quarter
of 2003. Under the terms of this agreement, NSTAR Steam will
continue to manage the day-to-day operations of the steam plant
on this site for one year after the sale. Cambridge Electric
divested its electric generating assets consistent with the
provisions of the Massachusetts Electric Restructuring Act of
1997 (Restructuring Act). Cambridge Electric divested the
majority of its non-nuclear generating facilities in 1998.
2. Service Quality Index
On February 28, 2003, NSTAR Electric and NSTAR Gas filed their
2002 Service Quality Reports with the MDTE that reflected
significant improvements in reliability and performance and
indicate that no penalty will be assessed for that period. These
penalties are monitored on a monthly basis to determine NSTAR's
contingent liability, and if NSTAR determines it is probable that
a liability has been incurred and is estimable, NSTAR would then
accrue an appropriate liability. Any MDTE settlement or rate
order that would result in a different liability (or credit)
level from what has been accrued would be adjusted in the period
when such settlement or rate order is issued.
Through March 31, 2003, NSTAR Electric's performance has met or
exceeded the applicable established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year, including the peak-demand period
anticipated during the summer period.
3. Regulatory Proceedings
In December 2002, NSTAR Electric filed proposed transition rate
adjustments for 2003, including a preliminary reconciliation of
transition, transmission, standard offer and default service
costs and revenues through 2002. The MDTE approved tariffs for
each retail electric subsidiary effective January 1, 2003. The
filings were updated in February 2003 to include final costs and
revenues for 2002.
On April 24, 2003, NSTAR Electric received approval from the MDTE
for a Standard Offer Service Fuel Adjustment of $0.902 per
kilowatt-hour to be effective May 1, 2003. The increase in rates
is in response to continuing high wholesale costs. In the past,
the MDTE has allowed companies to adjust to rapidly changing
market costs of oil and natural gas used to generate electricity.
In accordance with that order, NSTAR implemented the adjustment
in January 2001 as energy prices soared on world markets and
reduced the charge back to zero in April 2002 when market energy
costs dropped. The NSTAR Standard Offer Service Fuel Adjustment
remained at zero for the past year. The MDTE has ruled that
these fuel index adjustments are excluded from the 15% rate
reduction requirement under the Restructuring Act.
Note F. Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the future
tax effects of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. In accordance with
SFAS 109, net regulatory assets include $50.6 million and $50.7
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of March
31, 2003 and December 31, 2002, respectively. The regulatory
assets represent the additional future revenues to be collected
from customers for deferred income taxes.
The following table reconciles the statutory federal income tax
rate to the annual estimated effective income tax rate for 2003
and the actual effective income tax rate for the year ended
December 31, 2002:
2003 2002
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income tax benefit 4.9 4.8
Investment tax credit amortization (0.6) (3.2)
Other 1.0 0.7
Effective tax rate before write-down and tax
valuation allowance adjustment 40.3 37.3
Adjustment to tax valuation allowance and write-
down of RCN investment (federal and state) - (4.0)
Effective tax rate 40.3% 33.3%
==== ====
Tax Gain on Generating Assets
The IRS is in the process of completing its audit of COM/Energy's
income tax returns for 1997, 1998 and 1999. Before completion of
these audits, and before the end of the third quarter of 2003, it
is expected that the IRS National Office will provide a response
to a Request for Technical Advice to be filed by the IRS
examining agents. Should NSTAR's position be challenged as a
result of the IRS Request for Technical Advice, it is probable
that NSTAR will make a payment to the IRS of approximately $60
million in order to stop the accrual of interest on the potential
tax deficiency. NSTAR intends to vigorously defend its position,
which is supported by an opinion from an independent tax advisor,
relative to this transaction and anticipates pursuing a refund of
the amount paid plus interest. In addition, NSTAR would pursue
regulatory rate recovery for the interest on tax deficiencies
should any amounts ultimately be incurred as a result of this
transaction. It is probable that any amounts incurred as a
result of this transaction will be fully recovered from NSTAR's
customers.
Note G. Earnings Per Common Share
Basic earnings per common share (EPS) is calculated by dividing
net income, after deductions for preferred dividends, by the
weighted average common shares outstanding during the year. SFAS
No. 128, "Earnings per Share," requires the disclosure of diluted
EPS. Diluted EPS is similar to the computation of basic EPS
except that the weighted average common shares is increased to
include the number of dilutive potential common shares. Diluted
EPS reflects the impact on shares outstanding of the deferred
(nonvested) shares and stock options granted under the NSTAR 1997
Share Incentive Plan.
The following table summarizes the reconciling amounts between
basic and diluted EPS:
Three Months Ended March 31,
(in thousands, except per share amounts) 2003 2002
Earnings available for common shareholders $ 42,338 $ 34,304
Basic EPS $ 0.80 $ 0.65
Diluted EPS $ 0.79 $ 0.64
Weighted average common shares outstanding for
basic EPS 53,033 53,033
Effect of dilutive shares:
Weighted average dilutive potential common shares 279 223
Weighted average common shares outstanding for
diluted EPS 53,312 53,256
====== ======
Note H. Segment and Related Information
For the purpose of providing segment information, NSTAR's
principal operating segments, or its traditional core businesses,
are the electric and natural gas utilities that provide energy
delivery services in 107 cities and towns in Massachusetts.
NSTAR subsidiaries also supply electricity at wholesale to
municipalities. The unregulated operating segment engages in
business activities that include district energy operations,
telecommunications and a liquefied natural gas service. Amounts
shown on the following table include the allocation of NSTAR's
(parent company) results of operations and assets, net of inter-
company transactions, and primarily consist of interest charges
and investment assets, respectively, to these business segments.
The allocation of parent company charges is based on an indirect
allocation of the parent company's investment relating to these
various business segments.
Financial data for the operating segments were as follows:
Utility Operations Unregulated Consolidated
(in thousands) Electric Gas Operations Total
Three months ended March 31,
2003
Operating revenues $ 524,492 $ 200,865 $ 38,198 $ 763,555
Segment net income $ 23,151 $ 19,118 $ 559 $ 42,828
2002
Operating revenues $ 555,994 $ 113,806 $ 35,428 $ 705,228
Segment net income $ 18,958 $ 12,657 $ 3,179 $ 34,794
Total assets
March 31, 2003 $5,172,295 $ 633,692 $ 224,360 $6,030,347
December 31, 2002 $5,285,143 $ 620,956 $ 217,176 $6,123,275
Note I. Commitments and Contingencies
1. Environmental Matters
As of March 31, 2003, NSTAR's subsidiaries are involved in 12
state-regulated properties ("Massachusetts Contingency Plan, or
"MCP" sites") where oil or other hazardous materials were
previously spilled or released. The NSTAR subsidiaries are
required to clean up or otherwise remediate these properties in
accordance with specific state regulations. There are
uncertainties associated with the remediation costs due to the
final selection of the specific cleanup technology and the
particular characteristics of the different sites. Estimates of
approximately $0.8 million are included as liabilities in the
accompanying Condensed Consolidated Balance Sheets at March 31,
2003 and December 31, 2002.
In addition to the MCP sites, NSTAR subsidiaries also face
possible liability as a result of involvement in 13 multi-party
disposal sites or third party claims associated with
contamination remediation. NSTAR generally expects to have only
a small percentage of the total potential liability for these
sites. Estimates of approximately $3.4 million are included as
liabilities in the accompanying Condensed Consolidated Balance
Sheets at March 31, 2003 and December 31, 2002.
Accordingly, the MCP and multi-party disposal site amounts have
not been reduced by any potential rate recovery treatment of
these costs or any potential recovery from NSTAR's insurance
carriers. Prospectively, should NSTAR be allowed to collect
these specific costs from customers, it would record an
offsetting regulatory asset and record a credit to operating
expenses equal to previously expensed costs. Based on its
assessments of the specific site circumstances, management does
not believe that it is probable that any such additional costs
will have a material impact on NSTAR's consolidated financial
position.
NSTAR Gas is participating in the assessment of four former
manufactured gas plant (MGP) sites and alleged MGP waste disposal
locations to determine if and to what extent such sites have been
contaminated and whether NSTAR Gas may be responsible for
remedial action. The MDTE has approved recovery of costs
associated with MGP sites over a 7-year period, without carrying
costs. As of March 31, 2003 and December 31, 2002, NSTAR has
recorded a liability of approximately $4.8 million as an estimate
for site cleanup costs for several MGP sites for which NSTAR Gas
was previously cited as a potentially responsible party. A
corresponding regulatory asset has been recorded that reflects
the future rate recovery for these costs.
Estimates related to environmental remediation costs are reviewed
and adjusted periodically as further investigation and assignment
of responsibility occurs and as either additional sites are
identified or NSTAR's responsibilities for such sites evolve or
are resolved. NSTAR's ultimate liability for future
environmental remediation costs may vary from these estimates.
NSTAR's management does not believe that its current assessment
of its environmental responsibilities, existing legal
requirements and regulatory policies, will have a material
adverse effect on NSTAR's consolidated financial position or
results of operations for a reporting period.
2. Legal Proceedings
In the normal course of its business, NSTAR and its subsidiaries
are involved in certain legal matters, including civil
litigation. Management is unable to fully determine a range of
reasonably possible court-ordered damages, settlement amounts,
and related litigation costs ("legal liabilities") that would be
in excess of amounts accrued. Based on the information currently
available, NSTAR does not believe that it is probable that any
such additional legal liability will have a material impact on
its consolidated financial position. However, it is reasonably
possible that additional legal liabilities that may result from
changes in estimates could have a material impact on its results
of operations for a reporting period.
Note J. Subsequent Events
1. Long-Term Debt Issuance
In the second quarter of 2003, it is anticipated that ComElectric
will enter into a $150 million, three-year variable rate
unsecured Term Loan with a group of banks. The net proceeds will
be used to repay outstanding short-term debt balances. For
financial reporting purposes, $150 million of Notes payable has
been reclassified on the accompanying Condensed Consolidated
Balance Sheets as Long-term debt to reflect this transaction.
2. Pension and Postretirement Benefit Obligations Other Than
Pensions (PBOP) Adjustment Mechanism Tariff Filing
On April 16, 2003, Boston Edison, Cambridge Electric, ComElectric
and NSTAR Gas (together, "the Company") submitted a request to
the MDTE for approval to establish a reconciliation adjustment
mechanism to provide for the recovery of costs associated with
the Company's obligations to provide its employees pension
benefits and PBOP.
The Company's proposal is intended to give effect to the
accounting treatment previously approved by the MDTE, through a
reconciling ratemaking mechanism that will provide rate stability
and ensure that customers pay no more or no less than the amounts
needed to extend pension and PBOP benefits to the Company's
employees. In addition, this mechanism will ensure that the
financial integrity of the Company is not impaired by financial
reporting requirements and cash flow issues that arise from the
extreme volatility of pension and PBOP funding obligations.
The Company's proposed reconciliation adjustment mechanism does
not result in any immediate change (increase or decrease) in
prices paid by customers and allows the Company to recover the
same types of pension and PBOP costs that have always been
recovered in rates. In addition, the proposed reconciliation
adjustment mechanism removes the extreme volatility in rates that
may be the result of requirements of existing financial
accounting standards, provides for more timely recovery of costs
from or refunds of gains to customers, provides for an annual
filing, true-up and review by the MDTE, carves out pension and
PBOP costs from regular distribution rates so that the MDTE may
review them annually, and ensures that benefit trust funds are
sufficient to provide NSTAR employees with the benefits to which
they are entitled.
The MDTE has historically permitted the recovery of prudently
incurred expenditures relating to pension and PBOP benefits for
the Company's employees. The Company consistently contributes to
trust funds that hold and invest the contributions until benefits
are paid.
The Company is requesting that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003.
The Company cannot determine the timing and ultimate outcome of
this request.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
The accompanying MD&A should be read in conjunction with the MD&A
in NSTAR's 2002 Annual Report on Form 10-K.
Overview
NSTAR is an energy delivery company serving approximately 1.4
million customers in Massachusetts, including approximately 1.1
million electric customers in 81 communities and 300,000
customers in 51 communities. NSTAR's retail utility subsidiaries
are Boston Edison Company (Boston Edison), Commonwealth Electric
Company (ComElectric), Cambridge Electric Light Company
(Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). NSTAR's
three retail electric companies operate under the brand name
"NSTAR Electric." Reference in this report to "NSTAR" shall mean
the registrant NSTAR or one or more of its subsidiaries as the
context requires. Reference in this report to "NSTAR Electric"
shall mean each of Boston Edison, ComElectric and Cambridge
Electric. NSTAR also conducts non-utility, unregulated
operations.
Cautionary Statement
This MD&A contains certain forward-looking statements such as
forecasts and projections of expected future performance or
statements of management's plans and objectives. These
statements are based on the current expectations, estimates or
projections of management and are not guarantees of future
performance. Some or all of these forward-looking statements may
not turn out to be what NSTAR expected. Actual results could
potentially differ materially from these statements. Therefore,
no assurance can be given that the outcomes stated in such
forward-looking statements and estimates will be achieved. The
effects of cost control procedures, changes in weather, economic
conditions, tax rates, interest rates, technology, and prices and
availability of operating supplies could materially affect actual
results quarter to quarter and projected operating results.
NSTAR's forward-looking information is based in large measure on
prevailing governmental policies and regulatory actions,
including those of the Massachusetts Department of
Telecommunications and Energy (MDTE) and the Federal Energy
Regulatory Commission (FERC), with respect to allowed rates of
return, rate structure, continued recovery of regulatory assets,
financings, purchased power and cost of gas recovery, acquisition
and disposition of assets, operation and construction of
facilities, changes in tax laws and policies and changes in and
compliance with environmental and safety laws and policies. The
impacts of various environmental, legal, and regulatory matters
could differ from current expectations.
You are advised to consider all further disclosures NSTAR makes
in its filings to the Securities and Exchange Commission (SEC).
This report also describes changes to NSTAR's material
contingencies and critical accounting policies and estimates in
this MD&A and in the accompanying Notes to Condensed Consolidated
Financial Statements, and NSTAR encourages you to review these
disclosures. You are also advised to consider the "Cautionary
Statements" NSTAR made in its 2002 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
For a complete discussion of critical accounting policies, refer
to "Critical Accounting Policies and Estimates" in Item 7 of
NSTAR's 2002 Form 10-K. There have been no substantive changes
to those policies and estimates.
Asset Retirement Obligations
On January 1, 2003, NSTAR adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS)
No. 143, "Accounting for Asset Retirement Obligations" (SFAS
143). This Statement establishes accounting and reporting
standards for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-
lived asset, except for certain obligations of lessees. SFAS 143
requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted
to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement.
NSTAR has identified certain insignificant long-lived assets,
including obligations under lease and easement arrangements, and
has determined that it is legally responsible to remove such
property.
For its regulated utility businesses, NSTAR has identified legal
retirement obligations that are currently not material to its
financial statements. The recognition of a potential asset
retirement obligation will have no impact on its earnings. For
NSTAR's regulated utilities, which follow SFAS 71, NSTAR would
establish regulatory assets or liabilities to defer any
differences between the liabilities established for ratemaking
purposes and those recorded as required under SFAS 143.
For NSTAR's regulated utility businesses, cost of removal
(negative net salvage) is recognized as a component of
depreciation expense in accordance with approved regulatory
treatment. Since NSTAR applies SFAS 71 to its regulated utility
businesses, it will continue to include removal costs in
depreciation expense and will quantify the removal costs included
in accumulated depreciation as regulatory liabilities in footnote
disclosure. NSTAR estimates that as of March 31, 2003, there is
approximately $234 million of removal costs, not yet incurred,
included in accumulated depreciation.
NSTAR has identified several long-lived assets, in which it has
legal obligations to remove such property, for its non-regulated
businesses. Based on current information and assumptions, NSTAR
recorded an increase in non-utility plant of approximately $0.6
million, an asset retirement liability of approximately $1
million and a cumulative effect of adoption after tax, reducing
net income by $0.4 million in 2003. The cumulative effect
adjustment is recorded as part of Depreciation and amortization
expense on the accompanying Condensed Consolidated Statements of
Income.
Generating Assets Divestiture
Blackstone Station
On April 8, 2003, Cambridge Electric completed the sale of the
land and buildings constituting Blackstone Station to Harvard
University (Harvard) for $14.6 million; the net proceeds from the
sale were used to reduce Cambridge Electric's transition charge.
The sale by Cambridge Electric was approved by the MDTE during
the first quarter. At the same time, NSTAR Steam completed the
sale of its Blackstone steam assets and contracts to Harvard for
$3 million and will recognize a gain of $2.7 million in the
second quarter of 2003. Under the terms of this agreement, NSTAR
Steam will continue to manage the day-to-day operations of the
steam plant on this site for one year after the sale. Cambridge
Electric divested its electric generating assets consistent with
the provisions of the Massachusetts Electric Restructuring Act of
1997 (Restructuring Act).
Rate and Regulatory Proceedings
a. Pension and Postretirement Benefit Obligations Other Than
Pensions (PBOP)
On April 16, 2003, Boston Edison, Cambridge Electric, ComElectric
and NSTAR Gas (together, "the Company") submitted a request to
the MDTE for approval to establish a reconciliation adjustment
mechanism to provide for the recovery of costs associated with
the Company's obligations to provide its employees pension
benefits and PBOP.
The Company's proposal is intended to give effect to the
accounting treatment previously approved by the MDTE, through a
reconciling ratemaking mechanism that will provide rate stability
and ensure that customers pay no more or no less than the amounts
needed to extend pension and PBOP benefits to the Company's
employees. In addition, this mechanism will ensure that the
financial integrity of the Company is not impaired by financial
reporting requirements and cash flow issues that arise from the
extreme volatility of pension and PBOP funding obligations.
The Company's proposed reconciliation adjustment mechanism does
not result in any immediate change (increase or decrease) in
prices paid by customers and allows the Company to recover the
same types of pension and PBOP costs that have always been
recovered in rates. In addition, the proposed reconciliation
adjustment mechanism removes the extreme volatility in rates that
may be the result of requirements of existing financial
accounting standards, provides for more timely recovery of costs
from or refunds of gains to customers, provides for an annual
filing, true-up and review by the MDTE, carves out pension and
PBOP costs from regular distribution rates so that the MDTE may
review them annually, and ensures that benefit trust funds are
sufficient to provide NSTAR employees with the benefits to which
they are entitled.
The MDTE has historically permitted the recovery of prudently
incurred expenditures relating to pension and PBOP benefits for
the Company's employees. The Company consistently contributes to
trust funds that hold and invest the contributions until benefits
are paid.
The Company is requesting that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003.
The Company cannot determine the timing and ultimate outcome of
this request.
This action does not preclude NSTAR's utility companies from
pursuing a general base rate increase in the future. The
companies' four-year rate freeze expires in the third quarter of
this year.
b. Service Quality Index
On February 28, 2003, NSTAR Electric and NSTAR Gas filed their
2002 Service Quality Reports with the MDTE that reflected
significant improvements in reliability and performance and
indicate that no penalty will be assessed for that period. These
penalties are monitored on a monthly basis to determine NSTAR's
contingent liability, and if NSTAR determines it is probable that
a liability has been incurred and is estimable, NSTAR would then
accrue an appropriate liability. Any MDTE settlement or rate
order that would result in a different liability (or credit)
level from what has been accrued would be adjusted in the period
when such settlement or rate order is issued.
Through March 31, 2003, NSTAR Electric's performance has met or
exceeded the applicable established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year, including the peak-demand period
anticipated during the summer period.
c. Retail Electric Rates
The electric distribution companies obtain and resell power to
retail customers through either standard offer service or default
service for those who choose not to buy energy from a competitive
energy supplier. Standard offer service will be available to
eligible customers through February 2005 at prices approved by
the MDTE, set at levels so as to guarantee mandatory overall rate
reductions provided by the Restructuring Act. New retail
customers in the NSTAR Electric service territories and other
customers who are no longer eligible for standard offer service
and have not chosen to receive service from a competitive
supplier are provided default service. The price of default
service is intended to reflect the average competitive market
price for power. As of March 31, 2003 and December 31, 2002,
customers of NSTAR Electric had approximately 18% and 27%,
respectively, of their load requirements provided by competitive
suppliers. The decline in customers served by competitive
suppliers declined due to changes in market pricing.
Approximately 2,500 customers (totaling approximately 350 mw)
have moved from competitive supply to Default Service in the
first quarter of 2003.
In December 2002, NSTAR Electric filed proposed transition rate
adjustments for 2003, including a preliminary reconciliation of
transition, transmission, standard offer and default service
costs and revenues through 2002. The MDTE subsequently approved
tariffs for each retail electric subsidiary effective January 1,
2003. The filings were updated in February 2003 to include final
costs and revenues for 2002.
d. Natural Gas Rates
NSTAR Gas generates revenues primarily through the sale and/or
transportation of natural gas. Gas sales and transportation
services are divided into two categories: firm, whereby NSTAR Gas
must supply gas and/or transportation services to customers on
demand; and interruptible, whereby NSTAR Gas may, generally
during colder months, temporarily discontinue service to high
volume commercial and industrial customers. Sales and
transportation of gas to interruptible customers do not
materially affect NSTAR Gas' operating income because
substantially all of the margin for such service is returned to
its firm customers as rate reductions.
In addition to delivery service rates, NSTAR Gas' tariffs include
a seasonal Cost of Gas Adjustment Clause (CGAC) and a Local
Distribution Adjustment Clause (LDAC). The CGAC provides for the
recovery of all gas supply costs from firm sales customers or
default service customers. The LDAC provides for the recovery of
certain costs applicable to both sales and transportation
customers. The CGAC is filed semi-annually for approval by the
MDTE. The LDAC is filed annually for approval. In addition,
NSTAR Gas is required to file interim changes to its CGAC factor
when the actual costs of gas supply vary from projections by more
than 5%.
Other Legal Matters
In the normal course of its business, NSTAR and its subsidiaries
are involved in certain legal matters, including civil
litigation. Management is unable to fully determine a range of
reasonably possible court-ordered damages, settlement amounts,
and related litigation costs ("legal liabilities") that would be
in excess of amounts accrued. Based on the information currently
available, NSTAR does not believe that it is probable that any
such additional legal liability will have a material impact on
its consolidated financial position. However, it is reasonably
possible that additional legal liabilities that may result from
changes in estimates could have a material impact on its results
of operations for a reporting period.
Results of Operations - Three Months Ended March 31, 2003 vs.
Three Months Ended March 31, 2002
The following section of NSTAR's MD&A compares the results of
operations for each of the quarters ended March 31, 2003 and
2002, respectively, and should be read in conjunction with the
accompanying condensed consolidated financial statements and
notes included elsewhere in this report.
Earnings per common share were as follows:
Three Months Ended March 31,
2003 2002 % Change
Basic $0.80 $0.65 23.1
Diluted $0.79 $0.64 23.4
Earnings were $42.3 million, or $0.80 and $0.79 per basic and
diluted common share, respectively, for the first three months of
2003. For the same period in 2002, NSTAR reported income of
$34.3 million, or $0.65 and $0.64 per basic and diluted common
share, respectively. Factors that contributed to the $8 million,
or 23.3%, increase in the current quarter's earnings include
higher electric and gas sales due to the unseasonably cold winter
weather conditions during 2003 as compared to milder than normal
conditions experienced during the same period in 2002. This
positive effect was partially tempered by the continued impact on
the region of the current economic slowdown. Retail electric and
firm gas sales increased by 9% and a 27.9%, respectively, and
maintenance expense decreased by $4.8 million. Other factors
occurring during the current quarter included an increase in
pension and other postretirement benefit costs of approximately
$4 million, higher bad debt expense of approximately $2.5
million, the absence in 2003 of the gain realized on the sale of
insurance company demutualized common shares of $1.5 million, a
tax valuation credit of $1.6 million, and higher total debt costs
of approximately $0.7 million.
The results of operations for the three-month period ended March
31, 2003 are not indicative of the results that may be expected
for the entire year due to the seasonality of electric and gas
sales and revenues. Refer to Note A.2 to the accompanying
Condensed Consolidated Financial Statements.
The following is a summary of electric and gas energy sales for
the periods indicated:
Three Months Ended March 31,
2003 2002 % Change
Retail Electric Sales - MWH
Residential 1,764,933 1,529,834 15.4
Commercial 3,017,625 2,787,677 8.2
Industrial 396,560 425,824 (6.9)
Other 78,234 77,781 0.6
Total retail sales 5,257,352 4,821,116 9.0
========= =========
Firm Gas Sales - BBTU
Residential 11,640 9,213 26.3
Commercial 7,167 6,035 18.8
Industrial 2,071 1,132 83.0
Other 1,341 992 35.2
Total firm sales 22,219 17,372 27.9
========= =========
Weather conditions greatly impact the change in electric and, to
a larger extent, gas sales and revenues in NSTAR's service area.
The first quarter period of 2003 was significantly colder than
the same period in 2002 with below normal temperatures throughout
the three-month period. March 2003 was the sixth below normal
month in succession. Below is comparative information on heating
degree days for the three-month periods ending March 31, 2003 and
2002 and the number of degree days in a "normal" first quarter
period as represented by a 30-year average.
Normal
30-Year
2003 2002 Average
Heating degree days 4,283 3,362 3,967
Percentage change from prior year 27.4% (16.1)%
Percentage change from 30-year average 8.0% (15.3)%
Operating revenues
Operating revenues for the first three months of 2003 increased
8% from the same period in 2002, primarily resulting from
increases in gas and electric sales. The major revenue
components were as follows:
(in thousands)
Retail electric revenues $ (30,231)
Wholesale electric revenues (9,593)
Gas revenues 88,846
Other revenues 9,305
Increase in operating revenues $ 58,327
==========
Retail electric revenues were $492.7 million in the first quarter
of 2003 compared to $522.9 million in the same period of 2002, a
decrease of $30.2 million, or 6%. The decrease in retail
revenues reflects lower standard offer and default service rates
that were partially offset by a 9% increase in retail kilowatt-
hour (kWh) sales. Transition revenues were $15.8 million higher
due to an increase in rates. Transmission revenues increased by
$5.9 million and were supplemented by higher distribution
revenues of $10.1 million. The change in NSTAR's retail revenues
related to standard offer and default services are fully
reconciled to the costs incurred and have no impact on net
income.
As shown in the table above, the 9% increase in the current
quarter's retail kWh sales primarily reflects higher sales in the
residential and commercial sectors. NSTAR Electric's sales to
residential and commercial customers were approximately 34% and
57%, respectively, of its total retail sales mix for the current
quarter and provided nearly all of its distribution revenue. The
6.9% decline in industrial sector sales reflects the continued
slowdown in economic conditions that resulted from reduced
production or facility closings. The industrial sector comprises
approximately 8% of NSTAR's energy sales.
Wholesale electric revenues were $9.7 million in the first
quarter of 2003 compared to $19.3 million in the same period of
2002, a decrease of $9.6 million, or 50%. This decrease in
wholesale revenues reflects the expiration of four wholesale
power supply contracts. After October 31, 2005, NSTAR will no
longer have contracts for the supply of wholesale power. Amounts
collected from wholesale customers are credited to retail
customers through the transition charge. Therefore, the
expiration of these contracts has no impact on results of
operations.
Gas sales revenues were $200.7 million in the first quarter of
2003 compared to $111.8 million in the same period of 2002, an
increase of $88.9 million, or 80%. The increase in revenues is
attributable to the 27.9% increase in firm sales and
transportation due to the significantly colder weather, the
higher cost of gas supply and additional customers. NSTAR Gas'
firm sales to residential, commercial and industrial customers
were approximately 52%, 32% and 9%, respectively, of total firm
sales for the current three-month period.
Other revenues were $60.5 million in the first quarter of 2003
compared to $51.2 million in the same period of 2002, an increase
of $9.3 million, or 18%. This increase primarily reflects higher
unregulated steam revenue as a result of the significantly colder
weather.
Operating expenses
The cost of gas sold, representing NSTAR Gas' supply expense, was
$130.1 million for the first quarter of 2003 compared to $55.3
million in the same period of 2002, an increase of $74.8 million,
or 135%, due to the recognition of the higher cost of gas supply
and the significant increase in sales. These expenses are also
fully reconciled to the current level of revenues collected.
Despite higher retail and wholesale electric sales of 5%,
purchased power costs were $304.1 million in the first quarter of
2003 compared to $340.4 million in the same period of 2002, a
decrease of $36.3 million, or 11%. The decrease is primarily the
result of the recognition of $49.1 million relating to the
deferred standard offer and default service supply costs for
current period under-collection of these costs. NSTAR adjusts
its electric rates to collect the costs related to energy supply
from customers on a fully reconciling basis. Due to the rate
adjustment mechanisms, changes in the amount of energy supply
expense have no impact on earnings.
Operations and maintenance expense was $109.9 million in the
first quarter of 2003 compared to $106.3 million in the same
period of 2002, an increase of $3.6 million, or 3%. This
increase reflects approximately $4 million in pension-related and
postretirement benefits expense. As a result of the Accounting
Order received from the MDTE in the fourth quarter of 2002, NSTAR
deferred approximately $8.4 million of pension and other
postretirement benefit expenses in the first quarter. The
increased level of pension costs and other postretirement benefit
costs are anticipated to continue through 2003. Also, bad debt
expense increased by $2.5 million due to higher energy sales and
the negative implications of the downturn in the economy. These
factors were somewhat offset by reduced maintenance expense of
$4.8 million due primarily to improvements made in electric
distribution services in 2002.
Depreciation and amortization expense was $62.1 million in the
first quarter of 2003 compared to $60.6 million in the same
period of 2002, an increase of $1.5 million, or 3%. The increase
primarily reflects higher depreciable plant in service.
Demand side management (DSM) and renewable energy programs
expense was $16.9 million in the first quarter of 2003 compared
to $16.4 million in the same period of 2002, an increase of $0.5
million, or 3%, primarily due to timing of DSM expense which is
consistent with the collection of conservation and renewable
energy revenues. These costs are collected from customers on a
fully reconciling basis and therefore, fluctuations in program
costs have no impact on earnings. In addition, NSTAR earns
incentive amounts in return for increased customer participation.
Property and other taxes were $26.4 million in the first quarter
of 2003 compared to $27 million in the same period of 2002, a
decrease of $0.6 million, or 2%. This slight decrease was due to
lower payroll taxes that were partially offset by higher overall
municipal property taxes, particularly for the City of Boston.
Income taxes attributable to operations were $28.5 million in the
first quarter of 2003 compared to $22.5 million in the same
period of 2002, an increase of $6 million, or 27%, reflecting
higher pre-tax operating income.
Other income, net
Other income was approximately $1.1 million in the first quarter
of 2003 compared to approximately $1.5 million in the same period
of 2002, a decrease in other income of approximately $0.4
million. The decrease was due primarily to the absence in 2003
of $1.5 million in gains realized on the sale of demutualized
insurance company common shares and $1.6 million related to
deferred tax valuation allowance adjustments recognized in 2002.
These current period reductions in other income were partially
offset by higher equity investment earnings of $0.2 million,
higher income from heating products and various other income
items of $2.5 million, including the impact of taxes applicable
to all other income sources in 2003.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $40.5 million in the first quarter of 2003
compared to $37.8 million in the same period of 2002, an increase
of $2.7 million, or 7%. The increase in interest expense
primarily reflects the impact of the October 15, 2002 Boston
Edison issuance of $400 million of 4.875% 10-year debentures and
$100 million of 3-year floating rate debentures (1.87563% for the
period January 15, 2003 to April 14, 2003) priced at three month
LIBOR plus 50 basis points. These new debentures increased
interest expense by $5.4 million in the first quarter of 2003.
Partially offsetting this increase was the absence in 2003 of
$1.2 million in interest on Boston Edison's early redemption of
its $60 million 8.25% Debentures in September 2002 and the
repayment of its transition property securitization certificates
of $69.3 million that resulted in reduced interest expense of
$1.1 million. Securitization interest represents interest on
debt collateralized by the future income stream associated
primarily with the stranded costs of the Pilgrim Unit
divestiture. These certificates are non-recourse to Boston
Edison.
Short-term and other interest expense was $3.9 million in the
first quarter of 2003 compared to $5.9 million in the same period
of 2002, a decrease of $2 million, or 34%. This decrease is
primarily attributable to both lower borrowing rates and a lower
average level of short-term debt outstanding that averaged $223.6
million and $626.5 million in the first quarter of 2003 and 2002,
respectively. Interest rates on these borrowings averaged 1.5%
and 1.9%, respectively.
Liquidity
Period to period fluctuations in the levels of net cash provided
by operating activities are not indicative of the results that
may be expected for an entire year. The fluctuations for the
three-month periods ended March 31, 2003 and 2002 are primarily
due to changes in incurred energy costs and the timing of the
recovery levels of energy costs during the period. Changes
in other working capital requirements also impact the comparison
of operating cash flows.
The net cash provided by operating activities for the quarterly
period ended March 31, 2003 was $72.2 million as compared to
$186.5 million in 2002. Despite the increase in earnings over
the prior year, the comparison of operating cash flows in 2003
vs. 2002 is impacted by an $18 million increase in contributions
to NSTAR's qualified pension plan and $65 million received
in 2002 as part of the completion of a development project. In
addition to these factors, the timing of the recovery of energy
costs reduced operating cash flows by $50 million in comparison
to 2002. These energy costs will be recovered with a return
from customers in future periods. There is no impact on earnings
from timing of the recovery of energy costs.
The net cash used in investing activities of $54.7 million was
utilized primarily for capital expenditures related to
transmission and distribution systems. The net cash used in
financing activities of $43.8 million was primarily the result of
long-term debt redemptions and sinking fund payments of $183.4
million and dividends paid of $29.1 million offsetting short-term
borrowings of $168.8 million.
The IRS is in the process of completing its audit of COM/Energy's
income tax returns for 1997, 1998 and 1999. Before completion of
these audits, and before the end of the third quarter of 2003, it
is expected that the IRS National Office will provide a response
to a Request for Technical Advice to be filed by the IRS
examining agents. Should NSTAR's position be challenged as a
result of the IRS Request for Technical Advice, it is probable
that NSTAR will make a payment to the IRS of approximately $60
million in order to stop the accrual of interest on the potential
tax deficiency. NSTAR intends to vigorously defend its position,
which is supported by an opinion from an independent tax advisor,
relative to this transaction and anticipates pursuing a refund of
the amount paid plus interest. In addition, NSTAR would pursue
regulatory rate recovery for the interest on tax deficiencies
should any amounts ultimately be incurred as a result of this
transaction. It is probable that any amounts incurred as a
result of this transaction will be fully recovered from NSTAR's
customers.
For the first quarter of 2003, actual capital spending was
approximately $55 million primarily including system reliability
infrastructure improvement projects incurred by NSTAR Electric
and Gas operations and expenditures in connection with Advanced
Energy Systems' generation expansion project. Capital
investments in 2003 are expected to be approximately $286
million.
NSTAR's projected primary uses of cash for 2003 include capital
expenditures, dividend payments and debt reductions. In the
first quarter of 2003, debt financing activities included the
retirement of: $150 million of Boston Edison's 6.8% Debentures,
$17 million in securitization certificates and ComElectric's
7.43% $15 million Term Loan.
Future capital spending programs and the related estimates are
subject to revision due to changes in regulatory requirements,
changes in transmission and distribution system requirements,
environmental standards, availability and cost of capital,
interest rates and other assumptions. Management continuously
reviews its capital expenditure and financing programs.
Sources of Additional Capital and Financial Covenant
Requirements
NSTAR and Boston Edison have no financial covenant requirements
under their respective long-term debt arrangements. ComElectric,
Cambridge Electric and NSTAR Gas have financial covenant
requirements under their long-term debt arrangements and were in
compliance at March 31, 2003 and December 31, 2002. NSTAR's long-
term debt other than the Mortgage Bonds of NSTAR Gas is
unsecured.
The Transition Property Securitization Certificates held by
Boston Edison's subsidiary, BEC Funding, LLC, are collaterized
with a securitized regulatory asset with a balance of $476.5
million as of March 31, 2003. Boston Edison, as servicing agent
for BEC Funding, collected $25.8 million in the first quarter of
2003. These collected funds are remitted daily to the trustee of
BEC Funding. These Certificates are non-recourse to Boston
Edison.
NSTAR has a credit facility of $350 million that consists of a
three year, $175 million revolving credit agreement that expires
on November 14, 2005 and a 364-day, $175 million agreement that
expires on November 14, 2003. At March 31, 2003 and December 31,
2002, there were no amounts outstanding under these revolving
credit agreements. These arrangements serve as backup to NSTAR's
$350 million commercial paper program that, at March 31, 2003 and
December 31, 2002, had $86 million and $63.5 million outstanding,
respectively. In October 2002, following receipt of the proceeds
of Boston Edison's $500 million debt issue, the proceeds were
used to pay down short-term debt balances. Under the terms of
this credit agreement, NSTAR is required to maintain certain debt
to capitalization ratios. At March 31, 2003 and December 31,
2002, NSTAR was in full compliance with all of its covenants in
connection with its short-term credit facilities.
Boston Edison has approval from the FERC to issue short-term debt
securities from time to time on or before December 31, 2004, with
maturity dates no later than December 31, 2005, in amounts such
that the aggregate principal does not exceed $350 million at any
one time. Boston Edison has a credit facility with a 364-day,
$350 million revolving credit agreement that expires on November
14, 2003. At March 31, 2003, there was no amount outstanding
under this revolving credit agreement. These arrangements serve
as backup to Boston Edison's $350 million commercial paper
program that had $176 million balance at March 31, 2003 and no
outstanding balance at December 31, 2002. In October 2002,
following receipt of the proceeds of its $500 million debt issue,
its short-term debt balance was reduced to zero. Under the terms
of this agreement, Boston Edison is required to maintain certain
debt to capitalization ratios. At March 31, 2003 and December 31,
2002, Boston Edison was in full compliance with all of its
covenants in connection with its short-term credit facilities.
In addition, ComElectric, Cambridge Electric and NSTAR Gas,
collectively, have $165 million available under several lines of
credit and had $105.4 million and $135.1 million outstanding
under these lines of credit at March 31, 2003 and December 31,
2002, respectively. ComElectric and Cambridge Electric have FERC
authorization to issue short-term debt securities from time to
time on or before November 30, 2004 and June 27, 2004, with
maturity dates no later than November 29, 2005 and June 26, 2005,
respectively, in amounts such that the aggregate principal does
not exceed $125 million and $60 million, respectively, at any one
time. NSTAR Gas is not required to seek approval from FERC to
issue short-term debt.
On November 24, 2002, the MDTE issued an order approving
ComElectric's request for long-term debt financing up to a
maximum level of $150 million to be issued from time-to-time on
or before December 31, 2004. In the second quarter of 2003, it
is anticipated that ComElectric will enter into a $150 million,
three-year variable rate unsecured Term Loan with a group of
banks. The net proceeds will be used to repay outstanding short-
term debt balances. For financial reporting purposes, $150
million of Notes payable has been reclassified on the
accompanying Condensed Consolidated Balance Sheets as Long-term
debt to reflect this transaction.
NSTAR's goal is to maintain a capital structure that preserves an
appropriate balance between debt and equity. Management believes
its liquidity and capital resources are sufficient to meet its
current and projected requirements.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
NSTAR's exposure to financial market risk results primarily from
fluctuations in interest rates. There have been no material
changes to NSTAR's market risks as disclosed in NSTAR's Annual
Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
NSTAR's disclosure controls and procedures are designed to ensure
that information required to be disclosed in reports that it
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and
Exchange Commission.
Within 90 days prior to the date of filing this Quarterly Report
on Form 10-Q, NSTAR carried out an evaluation, under the
supervision and with the participation of NSTAR's management,
including NSTAR's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of
NSTAR's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that NSTAR's
disclosure controls and procedures are effective (1) to timely
alert them to material information relating to NSTAR's
information required to be disclosed by NSTAR in the reports that
it files or submits under the Securities Exchange Act of 1934 (2)
to ensure that appropriate information is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
Subsequent to the date of that evaluation, there have been no
significant changes in NSTAR's internal controls or in other
factors that could significantly affect internal controls, nor
were any corrective actions required with regard to significant
deficiencies and material weaknesses.
Part II - Other Information
Item 1. Legal Proceedings
In the normal course of its business, NSTAR and its subsidiaries
are involved in certain legal matters, including civil
litigation. Management is unable to fully determine a range of
reasonably possible court-ordered damages, settlement amounts,
and related litigation costs ("legal liabilities") that would be
in excess of amounts accrued. Based on the information currently
available, NSTAR does not believe that it is probable that any
such additional legal liability will have a material impact on
its consolidated financial position. However, it is reasonably
possible that additional legal liabilities that may result from
changes in estimates could have a material impact on its results
of operations for a reporting period.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of NSTAR was held on May 1,
2003. The holders of NSTAR's Common Shares elected three Class I
trustees to serve until the Annual Meeting to be held in the year
2006 and until the election and qualification of their respective
successors. In addition, the holders of NSTAR's Common Shares
voted against the adoption of a shareholder proposal, as further
described below. Proxies for 43,347,362 shares, or 81.7%, of the
53,032,546 shares entitled to vote were present at the Annual
Meeting, constituting a quorum.
Proposal 1 - Election of Trustees
The following table sets forth the names of the three persons
elected at the Annual Meeting to serve as trustees until 2006 and
the number of votes cast for or withheld with respect to each
person. Trustees are elected by a plurality of votes present and
entitled to vote at the Annual Meeting.
Class I Trustee Votes For Votes Withheld
Thomas G. Dignan, Jr. 42,254,447 1,092,915
Franklin M. Hundley 41,817,632 1,529,730
Gerald L. Wilson 41,868,060 1,479,302
Proposal 2 - Shareholder Proposal
In the matter of the number of votes cast for, against or
withheld with respect to approval of a shareholder proposal
requesting that the Company annually publish in the proxy
statement an accounting along with explanation of the standards
and procedures governing NSTAR's charitable donations program,
3,849,927 votes were cast for this proposal, 27,613,090 votes
were against and 2,176,669 votes abstained. As a result, the
proposal failed to pass.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits filed herewith or incorporated by reference (as indicated):
Exhibit 4 - Instruments Defining the Rights of Security
Holders, Including Indentures
4.1 Boston Edison Company Revolving Credit
Agreement dated November 15, 2002 (Boston Edison
Form 10-Q for the quarter ended March 31, 2003,
File No. 1-2301).
-- Management agrees to furnish to the Securities
and Exchange Commission, upon request, a copy
of any agreement or instrument defining the
rights of holders of any long-term debt whose
authorization does not exceed 10% of total
assets.
Exhibit 15 - Letter Re Unaudited Interim Financial Information
15.1 PricewaterhouseCoopers LLP Consent.
Exhibit 99 - Additional Exhibits
99.1 Certification Statement of Chief Executive
Officer of NSTAR pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification Statement of Chief Financial
Officer of NSTAR pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.3 Report of Independent Accountants
b) Reports on Form 8-K:
A report on Form 8-K was filed on January 3, 2003 following the
MDTE approval received on December 20, 2002 to allow NSTAR to
defer as a regulatory asset, an additional minimum liability, and
the difference between the level of pension and postretirement
benefits that is included in rates and the amounts that would
have been recorded under SFAS 87 and SFAS 106 in 2003.
A report on Form 8-K was filed on January 23, 2003 that announced
NSTAR's financial and operating results for the fourth quarter
and the year ended December 31, 2002.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
NSTAR
(Registrant)
Date: May 9, 2003 /s/ R. J. WEAFER, JR.
Robert J. Weafer, Jr.
Vice President, Controller
and Chief Accounting Officer
Sarbanes - Oxley Section 302(a) Certification
I, Thomas J. May, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NSTAR;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of NSTAR as of, and for,
the periods presented in this quarterly report;
4. NSTAR's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for NSTAR
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to NSTAR, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of NSTAR's disclosure controls
and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. NSTAR's other certifying officer and I have disclosed, based on
our most recent evaluation, to NSTAR's auditors and the audit
committee of NSTAR's board of trustees:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect NSTAR's
ability to record, process, summarize and report financial
data and have identified for NSTAR's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. NSTAR's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes
in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ THOMAS J. MAY
Thomas J. May
Chairman, President and
Chief Executive Officer
Sarbanes - Oxley Section 302(a) Certification
I, James J. Judge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NSTAR:
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of NSTAR as
of, and for, the periods presented in this quarterly report;
4. NSTAR's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for NSTAR and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to NSTAR,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of NSTAR's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. NSTAR's other certifying officer and I have disclosed, based
on our most recent evaluation, to NSTAR's auditors and the
audit committee of NSTAR's board of trustees:
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect NSTAR's
ability to record, process, summarize and report
financial data and have identified for NSTAR's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in NSTAR's internal controls; and
6. NSTAR's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes
in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ JAMES J. JUDGE
James J. Judge
Senior Vice President, Treasurer
and Chief Financial Officer