<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 1-14768
BEC ENERGY
(Exact name of registrant as specified in its charter)
Massachusetts 04-6830187
- ------------- ----------
(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: 1-888-423-2364
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 10, 1998
- ----- ------------------------------
Common Shares, $1 par value 47,684,673 shares
<PAGE> 2
Part I - Financial Information
Item 1. Financial Statements
- -----------------------------
<TABLE>
BEC Energy
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $386,424 $426,835 $780,542 $849,691
-------- -------- -------- --------
Operating expenses:
Energy supply 152,301 194,109 330,340 404,159
Operations and maintenance 89,312 98,917 184,216 197,752
Depreciation and amortization 26,223 20,842 49,715 42,184
Demand side management and
renewable energy programs 8,975 7,107 17,041 14,097
Taxes - property and other 20,597 25,854 47,373 52,155
Income taxes 24,268 20,373 38,990 32,575
-------- -------- -------- --------
Total operating expenses 321,676 367,202 667,675 742,922
-------- -------- -------- --------
Operating income 64,748 59,633 112,867 106,769
Other income (expense), net (4,577) 1,465 (4,498) 1,811
-------- -------- -------- --------
Operating and other income 60,171 61,098 108,369 108,580
-------- -------- -------- --------
Interest charges:
Long-term debt 21,125 22,988 44,033 46,387
Other 5,010 4,521 7,719 7,955
Allowance for borrowed funds
used during construction (287) (389) (564) (677)
-------- -------- -------- --------
Total interest charges 25,848 27,120 51,188 53,665
-------- -------- -------- --------
Net income 34,323 33,978 57,181 54,915
Preferred stock dividends 2,871 3,494 5,790 7,311
-------- -------- -------- --------
Earnings available for common
shareholders $ 31,452 $ 30,484 $ 51,391 $ 47,604
======== ======== ======== ========
Weighted average common shares
outstanding:
basic 48,513 48,515 48,514 48,515
====== ====== ====== ======
diluted 48,675 48,523 48,670 48,519
====== ====== ====== ======
Earnings per common share -
basic and diluted $0.65 $0.63 $1.06 $0.98
===== ===== ===== =====
Dividends declared per common
share $0.47 $0.47 $0.94 $0.94
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE> 3
<TABLE>
BEC Energy
Consolidated Balance Sheets
(Unaudited)
(in thousands)
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Assets
- ------
Utility plant in service, at original cost $2,659,194 $4,458,638
Less: accumulated depreciation 897,283 1,713,079
---------- ----------
1,761,911 2,745,559
Pilgrim regulatory asset 496,970 0
Nuclear fuel, net 58,749 67,935
Construction work in progress 66,295 40,633
---------- ----------
Net utility plant 2,383,925 2,854,127
Nuclear decommissioning trust 163,936 151,634
Equity investments 58,531 35,455
Other investments 8,353 7,107
Current assets:
Cash and cash equivalents 294,122 4,140
Accounts receivable 235,070 207,093
Accrued unbilled revenues 22,175 30,048
Fuel, materials and supplies,
at average cost 17,941 60,834
Prepaid expenses and other 68,598 31,283
---------- ----------
Total current assets 637,906 333,398
---------- ----------
Other regulatory assets:
Power contracts 65,441 71,445
Income taxes, net 52,062 51,096
Redemption premiums 25,436 27,019
Postretirement benefits costs 22,017 22,441
Other 16,359 23,369
---------- ----------
Total regulatory assets 181,315 195,370
Other deferred debits 31,207 45,256
---------- ----------
Total assets $3,465,173 $3,622,347
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
<TABLE>
BEC Energy
Consolidated Balance Sheets
(Unaudited)
(in thousands)
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Capitalization and Liabilities
- ------------------------------
Common equity:
Common shares $ 742,502 $ 744,652
Retained earnings 334,331 328,802
---------- ----------
Total common equity 1,076,833 1,073,454
---------- ----------
Cumulative preferred stock:
Nonmandatory redeemable series 83,000 83,000
Mandatory redeemable series 74,407 78,093
---------- ----------
Total preferred stock 157,407 161,093
---------- ----------
Long-term debt 955,681 1,057,076
---------- ----------
Total capitalization 2,189,921 2,291,623
---------- ----------
Current liabilities:
Long-term debt/preferred stock
due within one year 3,467 102,667
Notes payable 0 137,013
Accounts payable 116,304 87,015
Transition contract payable 90,663 0
Income taxes payable 91,888 (630)
Accrued interest 19,960 24,289
Dividends payable 24,645 24,748
Other 136,683 128,691
---------- ----------
Total current liabilities 483,610 503,793
---------- ----------
Deferred credits:
Accumulated deferred income taxes 363,841 485,738
Accumulated deferred investment tax credits 47,572 60,736
Nuclear decommissioning liability 168,268 155,182
Gain on sale of fossil assets 84,588 0
Power contracts 65,441 71,445
Other 61,932 53,830
---------- ----------
Total deferred credits 791,642 826,931
Commitments and contingencies __________ __________
Total capitalization and liabilities $3,465,173 $3,622,347
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE> 5
<TABLE>
BEC Energy
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Six Months Ended June 30,
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 57,181 $ 54,915
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 116,112 105,885
Deferred income taxes and investment
tax credits (135,704) (8,781)
Allowance for borrowed funds used during
construction (564) (677)
Net changes in:
Accounts receivable and accrued
unbilled revenues (20,104) (2,058)
Fuel, materials and supplies 27,501 6,740
Transition contract and other
accounts payable 119,952 (37,733)
Other current assets and liabilities 58,763 (11,658)
Other, net 3,740 (15,253)
--------- ---------
Net cash provided by operating activities 226,877 91,380
--------- ---------
Investing activities:
Plant expenditures (excluding AFUDC) (37,602) (64,707)
Proceeds from sale of fossil assets 533,732 0
Nuclear fuel expenditures (3,591) (1,828)
Investments (35,378) (10,834)
--------- ---------
Net cash provided by (used in) investing
activities 457,161 (77,369)
--------- ---------
Financing activities:
Issuances:
Common shares 0 145
Long-term debt 0 100,000
Redemptions:
Preferred stock (4,000) (44,000)
Long-term debt (201,600) (101,600)
Net change in notes payable (137,013) 85,436
Dividends paid (51,443) (53,513)
--------- ---------
Net cash used in financing activities (394,056) (13,532)
--------- ---------
Net increase in cash and cash equivalents 289,982 479
Cash and cash equivalents at beginning of year 4,140 5,651
--------- ---------
Cash and cash equivalents at end of period $ 294,122 $ 6,130
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 52,921 $ 49,812
========= =========
Income taxes $ 65,664 $ 41,251
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
Notes to Unaudited Consolidated Financial Statements
- ----------------------------------------------------
A) Basis of Presentation
---------------------
Boston Edison Company (Boston Edison) received final approval of its
reorganization plan to form a holding company structure from the Securities
and Exchange Commission on May 20, 1998. Effective May 20 the holding
company, BEC Energy (BEC), was formed with Boston Edison as a wholly owned
subsidiary of BEC. Under the new holding company structure the holders of
Boston Edison's common stock became holders of BEC's common shares. Existing
debt and preferred stock of Boston Edison remained obligations of the
regulated utility business. 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 accompanying consolidated financial statements
reflect the results of operations and cash flows of Boston Edison prior to the
reorganization. The consolidated balance sheet at December 31, 1997 reflects
the financial position of Boston Edison which also included BETG.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the Boston Edison 1997 Annual Report on Form 10-K and Form
10-Q for the period ended March 31, 1998. The financial information presented
as of June 30 has been prepared from BEC's books and records without audit by
independent accountants. Financial information as of December 31 has been
derived from the audited financial statements of Boston Edison, but does not
include all disclosures required by generally accepted accounting principles
(GAAP). In the opinion of BEC'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
reclassifications have been made to the prior year data to conform with the
current presentation.
Finalization of the sale of Boston Edison's fossil generating assets to Sithe
Energies took place on May 15, 1998. Boston Edison received proceeds from the
sale of $674 million, including $121 million for a six-month transitional
power sales contract. The amount received above net book value on the sale of
these assets is reflected as deferred gain on fossil sale on the consolidated
balance sheet at June 30, 1998. That amount is partially offset by 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
fossil divestiture. The deferred gain on the sale will be returned to Boston
Edison's customers.
Under the Boston Edison restructuring settlement agreement, which was approved
by the Massachusetts Department of Telecommunications and Energy (DTE),
approximately 75% of the net assets of Pilgrim Nuclear Power Station are
recoverable through a 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
life of the unit contracts with other utilities and municipalities.
Consistent with the clarification of guidance from accounting authoritative
bodies regarding any impaired portion of plant assets identified for recovery
in a legislative/rate order, 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
<PAGE> 7
continues to be grouped with utility plant for financial statement
presentation. Refer to Note C of Item 8 in the Boston Edison 1997 Annual
Report on Form 10-K for more information on the accounting implications of the
electric utility industry restructuring and the utility's related settlement
agreement.
Under the terms of Boston Edison's settlement agreement, generation and
purchased power costs are recovered from customers. The settlement agreement
allows for the deferral of the difference between these costs and the amounts
billed to customers with a return for future recovery. The net
undercollection from the settlement recovery mechanisms at June 30, 1998 was
more than offset by an overrecovery of approximately $36 million from the fuel
and purchased power clause and is included in other regulatory assets on the
consolidated balance sheet. The fuel and purchased power clause ceased on
March 1, 1998. The inclusion of the over recovered fuel and purchased power
clause costs as an offset to the settlement recovery mechanisms is consistent
with Boston Edison's proposal made to the DTE. Generation and purchased power
costs recoverable under the settlement agreement have been separately
reflected as energy supply expenses on the consolidated statements of income.
These costs include retail generation-related depreciation and amortization,
decommissioning and other operating costs recovered through the transition
charge. The corresponding 1997 expenses have been reclassified for
comparability.
The preparation of financial statements in conformity with GAAP requires BEC
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 and six-month periods ended June 30,
1998 and 1997 are not indicative of the results which 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. Accordingly, third quarter earnings are typically higher
than the other periods of the year.
B) Nature of Operations
--------------------
Within the currently restructuring electric utility industry, BEC has
announced its intention to focus its utility operations on the transmission
and distribution of energy. In April 1998, Boston Edison began soliciting
expressions of interest for the sale of Pilgrim Nuclear Power Station as part
of the previously announced strategy to exit the generation business. Boston
Edison provides standard offer service to all customers of record as of the
retail access date, March 1, 1998. Default service is provided to customers
who are not eligible for standard offer service or who elect to not contract
with a competitive energy supplier. As of June 30, 1998, 96% of customers are
receiving standard offer service, while 4% are receiving default service. No
customers are receiving service from competitive suppliers. Boston Edison
delivers electricity at retail to an area of 590 square miles, including the
City of Boston and 39 surrounding cities and towns. It also supplies
electricity at wholesale for resale to other utilities and municipal electric
<PAGE> 8
departments. Boston Edison is required to continue to develop and implement
electric demand side management programs as well as to provide funding for
renewable energy projects pursuant to the Massachusetts electric industry
restructuring legislation enacted in November 1997. In addition, BEC will
conduct unregulated activities through its unregulated subsidiaries. Refer to
Note A of Item 8 in the Boston Edison 1997 Annual Report on Form 10-K for
information regarding BEC's telecommunications and energy marketing joint
ventures.
C) Contingencies
-------------
1. 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 continues to evaluate the cleanup costs
of these sites. It 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
June 30, 1998, BEC had approximately $6.5 million accrued on the 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, however based on its assessments of the specific site
circumstances, it does not believe that it is probable that any such
additional costs will have a material impact on its 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.
2. 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 prior to March 1, 1998 are subject to regulatory
review. Proceedings relative to generating unit performance remain pending
before the DTE. Management is unable to fully determine a range of reasonably
possible disallowance costs in excess of amounts accrued, however based on its
assessments 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.
3. Industry Restructuring Legal Proceedings/Referendum Campaign
The DTE order approving the Boston Edison settlement agreement has been
appealed by certain parties to the Massachusetts Supreme Judicial Court. In
<PAGE> 9
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 proceedings or the impact the proceedings may have on its
consolidated financial position or results of operations.
In addition, opponents of the Massachusetts electric industry restructuring
legislation that was enacted in November 1997 have succeeded in placing a
referendum before Massachusetts voters on the November 1998 state-wide general
election ballot that calls for the repeal of the legislation. BEC, along with
a broad-based group of consumer, business and environmental interests, is
opposing this repeal. Management is currently unable to predict the eventual
outcome of this referendum or the impact the referendum may have on its
consolidated financial position or results of operations.
4. Regulatory Proceeding
In October 1997, the DTE opened a proceeding to investigate compliance with
the 1993 order which permitted the formation of BETG and authorized Boston
Edison to invest up to $45 million in unregulated activities. The DTE has
scheduled hearings on this matter for the third quarter. Management is
currently unable to determine the outcome of this proceeding or the impact the
proceeding may have on its consolidated financial position or results of
operations.
5. Litigation
In the normal course of its business BEC and its subsidiaries are 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, however 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 condition. 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.
D) Income Taxes
------------
The following table reconciles the statutory federal income tax rate to the
annual estimated effective income tax rate for 1998 and the actual effective
income tax rate for 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income
tax benefit 4.8 4.5
Investment tax credit amortization (7.1) (3.3)
Other 0.6 0.1
---- ----
Effective tax rate 33.3% 36.3%
==== ====
</TABLE>
The estimate of the 1998 effective tax rate declined by 5% as a result of the
impact of an investment tax credit adjustment related to the fossil
<PAGE> 10
divestiture. This adjustment reflects the recognition in net income of the
remaining unamortized investment tax credits related to Boston Edison's fossil
generating assets. This shareholder benefit, which is included in other
expense, net on the June 30, 1998 consolidated statements of income, resulted
from the sale of the generating stations.
E) Financing Activity
------------------
On May 15, 1998, Boston Edison closed the sale of its fossil generating assets
and received proceeds of $674 million in cash. $202 million of these funds
were used to retire short-term debt securities. BEC has no outstanding short-
term debt on the June 30, 1998 consolidated balance sheet.
In June 1998, a $100 million 6.662% outstanding bank loan was redeemed.
Boston Edison also redeemed $2 million of mandatory and $2 million of the
optional 7.27% sinking fund series preferred stock in May 1998. In March
1998, $100 million of 5.95% debentures matured.
In July 1998, Boston Edison redeemed the remaining $32 million 7.27% sinking
fund series preferred stock along with the $40 million 7.75% series preferred
stock.
F) Earnings Per Common Share
-------------------------
The following table summarizes the reconciling amounts between basic and
diluted earnings per share (EPS) computations.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Three months Six months
Ended June 30, Ended June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $34,323 $33,978 $57,181 $54,915
Less: preferred stock dividends 2,871 3,494 5,790 7,311
------- ------- ------- -------
Earnings available to common
shareholders $31,452 $30,484 $51,391 $47,604
Basic and diluted EPS $0.65 $0.63 $1.06 $0.98
Weighted average common shares
outstanding for basic EPS 48,513 48,515 48,514 48,515
Effect of dilutive securities:
Weighted average potential common
shares related to share-based
compensation 162 8 156 4
Weighted average common shares
outstanding for diluted EPS 48,675 48,523 48,670 48,519
</TABLE>
<PAGE> 11
G) Nuclear Decommissioning
-----------------------
An update of Pilgrim Nuclear Power Station's decommissioning cost study is in
the process of being finalized. The updated study indicates that estimated
decommissioning and fuel storage costs are likely to be approximately $600
million in 1997 dollars.
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
Results of Operations - Three Months Ended June 30, 1998 vs. Three Months
- -------------------------------------------------------------------------
Ended June 30, 1997
- -------------------
Earnings per common share for the three months ended June 30, 1998 were $0.65
as compared to $0.63 for the three months ended June 30, 1997. The increase
reflects higher kilowatt-hour sales to commercial customers as a result of the
continued strong economic conditions in the Boston area. Operations and
maintenance expense decreased due to lower overall spending as a result of
continuing cost control efforts and the fossil divestiture. Municipal
property taxes also decreased as a result of the divestiture. These positive
impacts were partially offset by an increase in unregulated subsidiary losses
and the effect of the 10% retail rate reduction as of the retail access date,
March 1, 1998.
The results of operations for the quarter are not indicative of the results
which may be expected for the entire year due to the seasonality of kWh sales
and revenues. Refer to Note A to the Consolidated Financial Statements.
Operating revenues
Operating revenues decreased 9.5% during the second quarter of 1998 as
follows:
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------
<S> <C>
Retail electric revenues $(42,200)
Wholesale revenues 415
Short-term sales and other revenues 1,374
- ------------------------------------------------------
Decrease in operating revenues $(40,411)
======================================================
</TABLE>
The decrease in retail electric revenues reflects the first full reporting
period of retail open access. Retail electric revenues in the second quarter
of 1998 thus include the impact of the 10% retail rate reduction which became
effective for electricity usage as of March 1, 1998. Cooler temperatures also
negatively impacted quarterly sales, primarily in the residential sector.
Operating expenses
Energy supply expense which includes fuel and purchased power in addition to
retail generation-related depreciation and amortization, decommissioning and
other operating costs recovered through the transition charge decreased
approximately $42 million. Fuel and purchased power expenses decreased
approximately $44 million. This decrease reflects the timing effect of the
fuel and purchased power and standard offer cost collection mechanisms
combined with lower company fuel costs. The lower fuel costs reflect a
decrease in fossil generation as the sale of these generating assets to Sithe
<PAGE> 12
Energies was finalized on May 15, 1998. These decreases were partially offset
by higher purchased power costs that include a six-month transitional power
sales contract with Sithe that began in May. Boston Edison received $121
million from Sithe to enter into the transition contract. The capacity
portion of the Sithe purchased power costs are offset by the recognition of
the payment from Sithe. Therefore, the transition contract has no net effect
on earnings.
Operations and maintenance expense decreased $9.6 million. The decrease is
primarily due to lower overall spending as a result of continuing cost control
efforts. In addition, the decrease reflects lower employee benefits costs and
the impact of the fossil divestiture. The comparison of 1998 and 1997 is also
positively impacted by the April 1997 severe storm that struck the greater
Boston area.
The increase in depreciation and amortization expense is primarily due to an
increase in the composite distribution depreciation rate effective March 1,
1998 in accordance with the settlement agreement.
The decrease in property and other taxes is primarily due to a decrease in
municipal property taxes as a result of the divestiture of the fossil
generating units in May 1998.
Other income (expense), net
The increase in other expense, net reflects certain costs related to the
fossil divestiture, net of the related tax benefits, including the recognition
of previously deferred investment tax credits associated with the fossil
generating stations. Other expense, net also reflects an increase in BETG
equity investment losses in 1998. The final closing of BETG's
telecommunications joint venture with RCN occurred in June 1997.
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.
Preferred stock dividends
Preferred stock dividends decreased as a result of the redemption of 40,000
shares of 7.27% series cumulative preferred stock in May 1998 and 1997 and
400,000 shares of 8.25% series in June 1997.
Results of Operations - Six Months Ended June 30, 1998 vs. Six Months Ended
- ---------------------------------------------------------------------------
June 30, 1997
- -------------
Earnings per common share for the six months ended June 30, 1998 were $1.06 as
compared to $0.98 for the six months ended June 30, 1997. Earnings continued
to be positively impacted by a strong local economy and continued cost
management as well as the divestiture of the fossil generating assets in May.
These positive impacts more than offset the impact of the mandated 10% retail
rate reduction under retail open access.
<PAGE> 13
The results of operations for the six months ended June 30, 1998 are not
indicative of the results which may be expected for the entire year due to the
seasonality of kWh sales and revenues. Refer to Note A to the Consolidated
Financial Statements.
Operating revenues
Operating revenues decreased 8.1% during the first six months of 1998 as
follows:
<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------
<S> <C>
Retail electric revenues $(72,913)
Wholesale revenues 191
Short-term sales and other revenues 3,573
- -------------------------------------------------------
Decrease in operating revenues $(69,149)
=======================================================
</TABLE>
Retail electric revenues decreased primarily 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 period undercollections. Fuel
clause revenues were offset by fuel and purchased power expenses and,
therefore, had no net effect on earnings. Retail electric revenues also
reflect the impact of the 10% retail rate reduction.
Operating expenses
Energy supply expense which includes fuel and purchased power in addition to
retail generation-related depreciation and amortization, decommissioning and
other operating costs recovered through the transition charge decreased
approximately $74 million. Fuel and purchased power expenses decreased
approximately $75 million. This decrease reflects the timing effect of the
fuel and purchased power and standard offer cost collection mechanisms
combined with lower company fuel costs. The lower fuel costs reflect a 32%
decrease in fossil generation as the sale of these generating assets to Sithe
Energies was finalized on May 15, 1998. These decreases were partially offset
by higher purchased power costs that include a six-month transitional power
sales contract with Sithe that began in May. Boston Edison received $121
million from Sithe to enter into the transition contract. The capacity
portion of the Sithe purchased power costs are offset by the recognition of
the payment from Sithe. Therefore, the transition contract has no net effect
on earnings.
Operations and maintenance expense decreased $13.5 million. The decrease is
primarily due to lower overall spending as a result of continuing cost control
efforts. Lower employee benefits costs and the impact of the fossil
divestiture also contributed to the decrease. The comparison of 1998 and 1997
is also positively impacted by the April 1997 Boston area storm.
The increase in depreciation and amortization expense is primarily due to an
increase in the composite distribution depreciation rate effective March 1,
1998 in accordance with the settlement agreement.
<PAGE> 14
The decrease in property and other taxes is primarily due to a decrease in
municipal property taxes as a result of the divestiture of the fossil
generating units in May 1998.
Other income (expense), net
As discussed in the results of operations for the second quarter, the increase
in other expense, net reflects certain costs related to the fossil
divestiture, net of the related tax benefits, including the recognition of
previously deferred investment tax credits associated with the fossil
generating stations. In addition, BETG equity investment losses increased as
a result of BETG's RCN joint venture which began operations in the second
quarter of 1997.
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.
Interest charges on short-term debt decreased due to a lower average
outstanding short-term debt balance in 1998 resulting from the fossil
divestiture. This decrease was partially offset by a slightly higher
effective interest rate in 1998.
Preferred stock dividends
Preferred stock dividends decreased as a result of the redemption of 40,000
shares of 7.27% series cumulative preferred stock in May 1998 and 1997 and
400,000 shares of 8.25% series in June 1997.
Electric Revenues
- -----------------
Effective March 1, 1998, the retail access date, Boston Edison's electric
delivery business provides its standard offer customers service at rates
designed to give 10% savings from rates previously in effect. These customers
will realize an additional 5% average savings, after an adjustment for
inflation, by September 1, 1999. The cost of providing standard offer
service, which includes fuel and purchased power costs, is recovered from
customers on a fully reconciling basis. 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. The price of default service is based on the average
competitive market price for power. Refer also to the Electric Revenues
section of Item 7 of the Boston Edison 1997 Annual Report on Form 10-K.
As part of the restructuring 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 wholesale life of the unit contracts. Refer to the Electric Revenues
section of Item 7 of the Boston Edison 1997 Annual Report on Form 10-K for a
description of Pilgrim's new cost recovery mechanism.
<PAGE> 15
The rates of Boston Edison's distribution business will remain unchanged,
subject to a minimum and maximum return on average common equity (ROE) from
March 1, 1998 through December 31, 2000. Refer to the Electric Revenues
section of Item 7 of the Boston Edison 1997 Annual Report on Form 10-K for
detail regarding the minimum and maximum ROE. Under the Boston Edison
settlement agreement, the cost of providing transmission service to
distribution customers is recovered on a fully reconciling basis.
Liquidity
- ---------
On June 25, 1998, BETG's outstanding line of credit of $35 million was paid in
full. On July 9, 1998, BEC established a $225 million revolving credit
agreement effective through July 2001. The purpose of this agreement is to
provide financing to the holding company for general purposes, investing in
its subsidiaries and funding the stock repurchase program.
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 to
issue up to $350 million of short-term debt in addition to a $200 million
revolving credit agreement and arrangements with several banks to provide
additional short-term credit on an uncommitted and as available basis. It
also has authority to issue up to $220 million of equity and long-term debt
securities under its approved long-term financing plan with the DTE which is
available through 1998. Proceeds from issuances under this plan are to be
used to refinance short and long-term securities and to fund capital
expenditures.
Beginning in June 1998, BEC began repurchasing shares under the common stock
repurchase program that was announced in April. BEC Energy common shares will
continue to be repurchased from time to time on the open market, through block
or privately-negotiated transactions, or a combination. The timing of ongoing
repurchases will depend heavily on market conditions.
Year 2000 Computer Issue
- ------------------------
BEC has a plan to address the year 2000 issue that includes modification of
certain applications and replacement of systems that are not year 2000
compliant. The cost associated with year 2000 compliance will be expensed as
incurred. In addition, a decision has been made to use this opportunity to
upgrade some of BEC's less efficient centralized business systems.
Replacement costs associated with these systems will be capitalized and
amortized over future periods. Management anticipates completion of the year
2000 project in the third quarter of 1999. Management estimates that it will
expend approximately $30 million on these modifications and upgrades.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use (SOP
98-1) in March 1998. SOP 98-1, effective in 1999, provides specific guidance
on whether to capitalize or expense costs within its scope. BEC does not
expect this SOP to have a material impact on its consolidated financial
position or results of operations.
<PAGE> 16
New Accounting Standards
- ------------------------
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131) which is effective in 1998.
This statement requires the reporting of certain additional information about
operating segments as applicable within an enterprise. SFAS 131 disclosure is
not required for interim reporting in the initial year of application. BEC is
currently evaluating the impact that this statement will have on its future
reporting requirements.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities which is effective in 2000. This statement requires
the recognition of all derivative instruments as either assets or liabilities
in the statement of financial position and the measurement of those
instruments at fair value. BEC does not expect this statement to have a
material impact on its consolidated financial position or results of
operations.
Energy Marketing Joint Venture
- ------------------------------
In August 1998, BEC and Williams Energy Services Company (WESCO), a subsidiary
of The Williams Companies, entered into an agreement to transfer BEC's 50%
interest in their joint venture, EnergyVision, to WESCO. BEC does not expect
this transaction to have a material impact on its consolidated financial
position or results of operations.
Safe Harbor Cautionary Statement
- --------------------------------
BEC occasionally makes forward-looking statements such as forecasts and
projections of expected future performance or statements of its plans and
objectives. These forward-looking statements may be contained in filings with
the Securities and Exchange Commission, press releases and oral statements.
Actual results could potentially differ materially from these statements.
Therefore, no assurances can be given that the outcomes stated in such
forward-looking statements and estimates will be achieved. Refer also to the
safe harbor cautionary statements included in the Boston Edison 1997 Annual
Report on Form 10-K.
The preceding sections include certain forward-looking statements about
environmental and legal issues and year 2000.
The impacts of various environmental and legal issues could differ from
current expectations. New regulations or changes to existing regulations
could impose additional operating requirements or liabilities other than
expected. The effects of changes in specific hazardous waste site conditions
and cleanup technology could affect estimated cleanup liabilities. The
impacts of changes in available information and circumstances regarding legal
issues could affect the estimated litigation costs.
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
<PAGE> 17
of personnel trained in this area. In addition, BEC cannot predict the nature
or impact on operations of third party noncompliance.
<PAGE> 18
Part II - Other Information
Item 5. Other Information
- --------------------------
Paul A. La Camera, age 55, was elected as a Class II Trustee of BEC Energy and
member of the Audit, Finance and Risk Management Committee of the Board of
Trustees of BEC Energy, effective July 1, 1998. La Camera has been President
and General Manager of WCVB-TV Channel 5 since 1997. From 1994 to 1997 he was
Vice President and General Manager of the station.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits filed herewith:
Exhibit 15 - Letter Re Unaudited Interim Financial Information
15.1 - Report of Independent Accountants
Exhibit 27 - Financial Data Schedule
27.1 - Schedule UT
Exhibit 99 - Additional Exhibits
99.1 - Letter of Independent Accountants
Form S-3 Registration Statement filed by BEC Energy
on July 2, 1998 (File No. 33-59693); Form S-8
Registration Statements filed by BEC Energy on
June 17, 1998 (File Nos. 33-58457, 33-59662 and
33-59682) and June 29, 1998 (File No. 333-30975-99)
b) A Form 8-K dated May 20, 1998 announced the formation of the holding
company, BEC Energy, and the registration of BEC Energy common shares
under the Securities Act of 1933.
<PAGE> 19
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.
BEC ENERGY
------------
(Registrant)
Date: August 13, 1998 /s/ Robert J. Weafer, Jr.
------------------------------
Robert J. Weafer, Jr.
Vice President-Finance,
Controller, Assistant
Treasurer and Assistant
Clerk
<PAGE> 20
Exhibit 15.1
Report of Independent Accountants
To the Shareholders and Trustees
of BEC Energy
We have reviewed the accompanying consolidated balance sheet of BEC Energy
(BEC) as of June 30, 1998 and the related statements of income for the three
and six-month periods ended June 30, 1998 and 1997 and cash flows for the
six-month periods ended June 30, 1998 and 1997. These financial statements
are the responsibility of BEC's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to
be in conformity with generally accepted accounting principles.
Boston, Massachusetts PricewaterhouseCoopers LLP
July 23, 1998
<PAGE> 21
Exhibit 99.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: BEC Energy
Registration on
Forms S-3 and S-8
We are aware that our report dated July 23, 1998 on our review of the interim
financial information of BEC Energy (BEC) for the period ended June 30, 1998
and included in this Form 10-Q is incorporated by reference in BEC's
registration statements on Form S-3 (File No. 33-59693) and on Form S-8 (File
Nos. 33-58457, 33-59662, 33-59682 and 333-30975-99). Pursuant to Rule 436(c)
under the Securities Act of 1933, this report should not be considered a part
of the registration statements prepared or certified by us within the meaning
of Sections 7 and 11 of that Act.
Boston, Massachusetts PricewaterhouseCoopers LLP
July 23, 1998
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