<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 September 30, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 1-2301
BOSTON EDISON COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1278810
- ------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Boylston Street, Boston, Massachusetts 02199
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-424-2000
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 11, 1997
- ----- --------------------------------
Common Stock, $1 par value 48,514,973 shares
<PAGE> 2
Part I - Financial Information
Item 1. Financial Statements
- -----------------------------
<TABLE>
Boston Edison Company
Consolidated Statements of Income
(Unaudited)
in thousands, except per share amounts)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $519,513 $497,956 $1,368,972 $1,275,561
-------- -------- ---------- ----------
Operating expenses:
Fuel and purchased power 172,744 153,237 518,307 424,367
Operations and maintenance 103,418 103,196 303,514 306,434
Depreciation and amortization 53,924 51,692 144,470 142,163
Demand side management programs 7,463 8,031 21,560 23,029
Taxes - property and other 27,678 26,760 85,573 84,871
Income taxes 46,226 49,522 79,413 81,431
-------- -------- ---------- ----------
Total operating expenses 411,453 392,438 1,152,837 1,062,295
-------- -------- ---------- ----------
Operating income 108,060 105,518 216,135 213,266
Other income, net 284 484 725 900
-------- -------- ---------- ----------
Operating and other income 108,344 106,002 216,860 214,166
-------- -------- ---------- ----------
Interest charges:
Long-term and medium-term debt 23,049 22,847 69,436 71,555
Other 4,148 3,852 12,039 10,952
Allowance for borrowed funds
used during construction (271) (708) (949) (1,482)
-------- -------- ---------- ----------
Total interest charges 26,926 25,991 80,526 81,025
-------- -------- ---------- ----------
Net income 81,418 80,011 136,334 133,141
Preferred stock dividends 2,919 3,841 10,230 11,548
-------- -------- ---------- ----------
Earnings available for common
shareholders $ 78,499 $ 76,170 $ 126,104 $ 121,593
======== ======== ========== ==========
Weighted average common shares
outstanding 48,515 48,327 48,515 48,198
====== ====== ====== ======
Earnings per share of common stock $1.62 $1.58 $2.60 $2.52
===== ===== ===== =====
Dividends declared per share of
common stock $0.47 $0.47 $1.41 $1.41
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 3
<TABLE>
Boston Edison Company
Consolidated Balance Sheets
(Unaudited)
(in thousands)
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Assets
- ------
Utility plant in service, at original cost $4,461,325 $4,393,585
Less: accumulated depreciation 1,677,234 1,550,317
---------- ----------
2,784,091 2,843,268
Nuclear fuel, net 71,820 82,944
Construction work in progress 40,595 30,376
---------- ----------
Net utility plant 2,896,506 2,956,588
Nuclear decommissioning trust 148,624 132,076
Equity investments 35,217 23,054
Other investments 5,591 7,630
Current assets:
Cash and cash equivalents 6,989 5,651
Accounts receivable 220,941 233,024
Accrued unbilled revenues 43,301 34,922
Fuel, materials and supplies,
at average cost 55,952 57,075
Prepaid expenses and other 45,893 45,146
---------- ----------
Total current assets 373,076 375,818
---------- ----------
Regulatory assets:
Power contracts 72,839 88,963
Income taxes, net 49,898 47,483
Redemption premiums 27,943 31,052
Postretirement benefits costs 22,441 15,009
Nuclear outage costs 12,187 3,432
Other 15,086 16,087
---------- ----------
Total regulatory assets 200,394 202,026
Other deferred debits 37,149 32,099
---------- ----------
Total assets $3,696,557 $3,729,291
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
<TABLE>
Boston Edison Company
Consolidated Balance Sheets
(Unaudited)
(in thousands)
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Capitalization and Liabilities
- ------------------------------
Common stock equity:
Common stock $ 744,505 $ 744,233
Retained earnings 346,372 292,191
---------- ----------
Total common stock equity 1,090,877 1,036,424
---------- ----------
Cumulative preferred stock:
Nonmandatory redeemable series 83,000 119,954
Mandatory redeemable series 77,936 81,465
---------- ----------
Total preferred stock 160,936 201,419
---------- ----------
Long-term and medium-term debt 1,057,164 1,058,644
---------- ----------
Total capitalization 2,308,977 2,296,487
---------- ----------
Current liabilities:
Long-term debt/preferred stock
due within one year 103,067 102,667
Notes payable 184,290 201,454
Accounts payable 88,841 134,083
Accrued interest 13,063 24,378
Dividends payable 24,748 25,343
Other 156,310 115,812
---------- ----------
Total current liabilities 570,319 603,737
---------- ----------
Deferred credits:
Power contracts 72,839 88,963
Accumulated deferred income taxes 484,633 498,718
Accumulated deferred investment tax credits 53,685 58,899
Nuclear decommissioning liability 149,923 133,388
Other 56,181 49,099
---------- ----------
Total deferred credits 817,261 829,067
Commitments and contingencies __________ __________
Total capitalization and liabilities $3,696,557 $3,729,291
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
<TABLE>
Boston Edison Company
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Nine Months Ended September 30,
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 136,334 $ 133,141
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 170,395 172,866
Deferred income taxes and investment
tax credits (21,707) (13,925)
Allowance for borrowed funds used during
construction (949) (1,482)
Net changes in:
Accounts receivable and accrued
unbilled revenues 3,704 (66,787)
Fuel, materials and supplies (172) (1,544)
Accounts payable (45,242) (35,299)
Other current assets and liabilities 27,841 (811)
Other, net (4,590) 28,830
--------- ---------
Net cash provided by operating activities 265,614 214,989
--------- ---------
Investing activities:
Plant expenditures (excluding AFUDC) (90,900) (98,308)
Nuclear fuel expenditures (2,811) (35,484)
Investments (28,711) (22,846)
--------- ---------
Net cash used in investing activities (122,422) (156,638)
--------- ---------
Financing activities:
Issuances:
Common stock 144 9,454
Medium-term debt 100,000 0
Redemptions:
Preferred stock (44,000) (4,000)
Long-term debt (101,600) (101,600)
Net change in notes payable (17,164) 114,734
Dividends paid (79,234) (79,452)
--------- ---------
Net cash used in financing activities (141,854) (60,864)
--------- ---------
Net increase (decrease) in cash and cash
equivalents 1,338 (2,513)
Cash and cash equivalents at beginning of year 5,651 5,841
--------- ---------
Cash and cash equivalents at end of period $ 6,989 $ 3,328
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 87,916 $ 87,628
========= =========
Income taxes $ 59,289 $ 69,241
========= =========
</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
---------------------
The accompanying unaudited consolidated financial statements should be read in
conjunction with the Boston Edison Company (the Company) 1996 Annual Report on
Form 10-K and Forms 10-Q for the periods ended March 31, 1997 and June 30,
1997. The financial information presented as of September 30 has been
prepared from the Company's books and records without audit by independent
accountants. Financial information as of December 31 has been derived from
the audited financial statements of the Company, but does not include all
disclosures required by generally accepted accounting principles (GAAP). In
the opinion of the Company's management, all adjustments necessary for a fair
presentation of the financial information for the periods indicated have been
included. These adjustments are of a normal recurring nature, except as
separately disclosed in the following notes to these financial statements.
Certain reclassifications have been made to the prior year data to conform
with the current presentation.
The preparation of financial statements in conformity with GAAP requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
The results of operations for the three and nine-month periods ended
September 30, 1997 and 1996 are not indicative of the results which may be
expected for an entire year. The Company's kilowatt-hour (kWh) sales and
revenues are typically higher in the winter and summer than in the spring and
fall as sales tend to vary with weather conditions. In addition, the Company
bills higher base rates to commercial and industrial customers during the
billing months of June through September as mandated by the Massachusetts
Department of Public Utilities (MDPU). Accordingly, greater than half of the
Company's annual earnings typically occurs in the third quarter.
B) Nature of Operations
--------------------
The Company is an investor-owned regulated public utility operating in the
energy and energy services business. This includes the generation, purchase,
transmission, distribution and sale of electric energy and the development and
implementation of electric demand side management programs. A portion of the
generation is produced by the Company's wholly owned nuclear generating unit,
Pilgrim Nuclear Power Station (Pilgrim). The Company supplies electricity at
retail to an area of 590 square miles, including the City of Boston and 39
surrounding cities and towns. It also supplies electricity at wholesale for
resale to other utilities and municipal electric departments. Electric
operating revenues were 88% retail and 12% wholesale in 1996. In addition,
the Company conducts unregulated activities through its wholly owned
subsidiary, Boston Energy Technology Group (BETG). Refer to Note A of Item 8
in the Company's 1996 Annual Report on Form 10-K and Note B in Forms 10-Q for
the periods ended March 31, 1997 and June 30, 1997 for information regarding
the Company's telecommunications and energy marketing joint ventures.
<PAGE> 7
The Company's shareholders approved a proposal by management to adopt a
holding company structure at the Annual Shareholders Meeting held in May 1997.
The holding company, to be called BEC Energy, is subject to the approval of
the MDPU, Federal Energy Regulatory Commission (FERC), Nuclear Regulatory
Commission and Securities and Exchange Commission. The Company filed for
approval with each of the various regulators during the second quarter and
received approval from the FERC in September 1997. The Company anticipates
that other regulatory agencies will rule on its filings by early 1998.
C) Depreciation Expense
--------------------
In the third quarter of 1997 the Company recorded an $8.7 million nonrecurring
charge to depreciation expense in order to reflect the removal of specific
nuclear-related intangible assets from its balance sheet.
D) Contingencies
-------------
The Company is an owner or operator of approximately 40 properties where oil
or hazardous materials were spilled or released. As such, the Company is
required to clean up these properties in accordance with a timetable developed
by the Massachusetts Department of Environmental Protection and continues to
evaluate the costs associated with their cleanup. There are uncertainties
associated with these costs due to the complexities of cleanup technology,
regulatory requirements and the particular characteristics of the different
sites. The Company also continues to face possible liability as a potentially
responsible party in the cleanup of six 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. The Company 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
September 30, 1997, the Company has approximately $7 million accrued related
to its cleanup liabilities. The Company is unable to fully determine a range
of reasonably possible cleanup costs in excess of the accrued amount, however
based on its assessments of the specific site circumstances, it does not
believe that it is probable that any such additional costs will have a
material impact on its financial condition. However, it is reasonably
possible that additional provisions for cleanup costs that may result from a
change in estimates could have a material impact on the results of a reporting
period in the near term.
Statement of Position 96-1, Environmental Remediation Liabilities (SOP 96-1),
became effective in 1997. SOP 96-1 contains authoritative guidance on
specific accounting issues related to the recognition, measurement, display
and disclosure of environmental remediation liabilities. It requires that an
accrual for environmental liabilities include estimates of the costs to
perform all elements of the remediation effort including the costs of
compensation and benefits for those employees expected to devote a significant
amount of time directly to that effort. SOP 96-1 had no material effect on
the Company's consolidated results of operations or financial position.
The Company was named as a party in a lawsuit by Subaru of New England, Inc.
The plaintiff claimed certain automobiles stored on lots in South Boston
suffered pitting damage caused by emissions from New Boston Station. The
Company settled the lawsuit in September 1997. The settlement did not have a
<PAGE> 8
material impact on the Company's consolidated results of operations or
financial position.
In December 1996, the board of directors of Connecticut Yankee Atomic Power
Company (CYAPC), which owns and operates the Connecticut Yankee nuclear
electric generating unit, unanimously voted to permanently shut down the unit.
This decision was based on an economic analysis of the costs of operating the
unit compared to the costs of closing the unit and incurring replacement power
costs through the period of its operating license. The Connecticut Department
of Public Utility Control (DPUC) has raised concerns to the FERC regarding
CYAPC's estimate of the post-operation costs and the plant operator's prudency
prior to the shut down decision. The FERC set CYAPC's request to recover
certain post-operating expenses, including decommissioning expenses, for
hearing before an Administrative Law Judge. The DPUC subsequently filed
testimony in the proceeding asserting the position that the FERC should deny
recovery of substantial post-operating costs, including a significant amount
related to decommissioning and the return on CYAPC's undepreciated investment.
The litigation is in its initial stages. The Company, a 9.5% equity investor
in CYAPC and power purchaser, is currently unable to determine the ultimate
outcome of this proceeding or its impact on the Company.
In the normal course of its business the Company is also involved in certain
other legal matters. The Company is unable to fully determine a range of
reasonably possible legal costs in excess of amounts accrued, although, based
on the information currently available, it does not believe that it is
probable that any such additional costs will have a material impact on its
financial condition. However, it is reasonably possible that additional 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.
E) Income Taxes
------------
The following table reconciles the federal statutory income tax rate to the
annual estimated effective income tax rate for 1997 and the actual effective
income tax rate for 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income
tax benefit 4.3 4.3
Investment tax credits (3.4) (1.8)
Other 0.5 0.3
---- ----
Effective tax rate 36.4% 37.8%
==== ====
</TABLE>
The estimate of the 1997 effective tax rate declined by 0.8% as a result of
the favorable outcome of an Internal Revenue Service (IRS) appeal related to
investment tax credits.
F) Financing Activity
------------------
In June 1997, $40 million of 8.25% nonmandatory redeemable series preferred
stock was redeemed. The Company also redeemed $2 million of mandatory and
$2 million of the optional 7.27% sinking fund series preferred stock in May
1997.
<PAGE> 9
In March 1997, $100 million of 5.70% debentures matured. These debentures
were replaced with $100 million of 6.662% bank debt due in 1999.
G) Year 2000 Computer Issue
------------------------
The Company has developed a plan to address the year 2000 computer issue. Its
plan includes modification of certain applications which will be expensed and
replacement of systems which are not year 2000 compliant which will be
capitalized and amortized over future periods.
H) Accounting Guidance
-------------------
In July 1997, the Emerging Issues Task Force (EITF) reached consensus on
specific issues raised related to the application of Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation (SFAS 71).
The EITF determined that when deregulation legislation is passed or when a
rate order (whichever is necessary to effect change in the jurisdiction) that
contains sufficient detail for the enterprise to reasonably determine how the
transition plan will affect the separable portion of its business being
deregulated is issued, the enterprise should stop applying SFAS 71 to that
deregulated portion of its business. The EITF further determined that
regulatory assets and liabilities originating in the separable portion of the
business no longer subject to rate regulation should be evaluated on the basis
of where the regulated cash flows to realize and settle these regulated assets
and liabilities will be derived.
The Company entered into a settlement agreement in July 1997 as discussed in
the Outlook for the Future section. Under its settlement agreement, the
Company's electric delivery business will remain subject to rate regulation
and, therefore, will continue to meet the criteria for application of SFAS 71.
In addition, the Company's settlement agreement includes a non-bypassable
access charge to be paid by its delivery business customers which is designed
to recover the remaining net generation utility plant and regulatory assets
that originated in its generation business. The Company, therefore, does not
expect these EITF decisions to have a material effect on its consolidated
results of operations or financial position. Affected regulatory assets and
liabilities will be separately disclosed. Refer to the Outlook for the Future
section for more information regarding the status of the Company's settlement
agreement and legislation in Massachusetts.
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
Results of Operations - Three Months Ended September 30, 1997 vs. Three Months
- ------------------------------------------------------------------------------
Ended September 30, 1996
- ------------------------
Earnings per share of common stock for the three months ended September 30,
1997 were $1.62 as compared to $1.58 for the three months ended September 30,
1996. Sales to the Company's retail customers were generally flat compared to
1996. Increases in sales to residential and commercial sectors were partially
offset by a decline in the industrial sector. Operations and maintenance
expense was consistent with 1996 reflecting the Company's continued cost
control efforts. Earnings were positively impacted by the favorable outcome
<PAGE> 10
of an IRS appeal related to investment tax credits. The comparison of 1997
and 1996 earnings is also impacted by two depreciation adjustments. A
nonrecurring charge of $0.11 per share was recorded as an increase to
depreciation expense in the third quarter of 1997 to reflect the nuclear-
related intangible assets adjustment described in Note C to the Consolidated
Financial Statements. The 1996 third quarter earnings reflect a nonrecurring
$0.07 per share adjustment to correct the accumulated depreciation balance of
certain large computer equipment.
The results of operations for the quarter are not indicative of the results
which may be expected for the entire year due to the seasonality of the
Company's kWh sales and revenues. Refer to Note A to the Consolidated
Financial Statements.
Operating revenues
Operating revenues increased 4.3% during the third quarter of 1997 as follows:
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------
<S> <C>
Retail electric revenues $12,031
Wholesale revenues 2,359
Short-term sales and other revenues 7,167
- ------------------------------------------------------
Increase in operating revenues $21,557
======================================================
</TABLE>
Retail base revenues in the third quarter of 1997 were consistent with 1996.
This reflects a 1% increase in kWh sales to retail customers. The increase
occurred in the residential and commercial sectors reflecting the impact of a
hot July and a growing economy in the Boston area. These positive factors
were partially offset by a decrease in kWh sales to industrial customers
reflecting an overall decline in manufacturing activity in the Company's
service territory. The increase in retail electric revenues is due to the
timing effect of fuel and purchased power cost recovery. The increase in the
Company's fuel and purchased power clause revenues reflects the current
recovery of substantial prior year undercollections. These higher revenues
are offset by higher fuel and purchased power expenses and, therefore, have no
net effect on earnings. Performance revenues, which vary annually based on
the operating performance of Pilgrim Station, decreased due to a lower
forecasted annual capacity factor effective November 1996 reflecting the
scheduled refueling and maintenance outage in the first quarter of 1997.
Refer to the Electric Revenues section for more information regarding Pilgrim
Station's performance adjustment charge.
Wholesale revenues increased due to an increase in Pilgrim contract customer
revenues compared to 1996. These contract customers are billed for their
proportionate share of Pilgrim Station's costs. Revenues in the third quarter
of 1996 reflected a retroactive billing adjustment due to lower than
forecasted actual costs.
Short-term sales revenues increased approximately $6 million primarily due to
an increase in short-term power purchase requirements resulting from a
reduction in the available nuclear energy supply in New England. In addition,
a 21% increase in generation from the Company's fossil units enabled it to
increase sales to the power exchange. Revenues from short-term sales result
<PAGE> 11
in a corresponding reduction to future fuel and purchased power billings to
retail customers and, therefore, have no net effect on earnings.
Operating expenses
Fuel and purchased power expenses increased $19.5 million primarily due to the
timing effect of fuel and purchased power cost recovery and an increase in
Company generation. Fuel and purchased power expenses are substantially
recoverable through fuel and purchased power revenues.
The net increase in depreciation and amortization expense reflects the impact
of two depreciation adjustments. The increase due to the $8.7 million
nonrecurring adjustment to nuclear-related intangible assets described in Note
C to the Consolidated Financial Statements was partially offset by the impact
of a $5.2 million adjustment to correct the accumulated depreciation balance
of certain large computer equipment in the third quarter of 1996.
The effective annual income tax rate for 1997 disclosed in Note E to the
Consolidated Financial Statements reflects the impact of approximately $2
million from the favorable result of an IRS appeal received in the third
quarter related to investment tax credits. The remaining refund will be
reflected as a reduction to income tax expense over the life of the related
assets.
The decrease in other income is primarily due to an increase in BETG pre-tax
losses partially offset by interest income from the IRS appeal.
Interest charges
Allowance for borrowed funds used during construction, which represents the
financing costs of construction, decreased primarily due to a lower average
construction work in progress (CWIP) balance in 1997. The 1996 average CWIP
balance included nuclear fuel purchased in anticipation of Pilgrim Station's
scheduled refueling outage in the first quarter of 1997.
Results of Operations - Nine Months Ended September 30, 1997 vs. Nine Months
- ----------------------------------------------------------------------------
Ended September 30, 1996
- ------------------------
Earnings per share of common stock for the nine months ended September 30,
1997 were $2.60 as compared to $2.52 for the nine months ended September 30,
1996. Operations and maintenance expense in 1997 continued to reflect the
Company's cost control efforts as discussed further in the operating expenses
section. Earnings were positively impacted by the favorable outcome of the
IRS appeal related to investment tax credits received in the third quarter of
1997. In addition, operations and maintenance expense is lower than in 1996
despite an approximately $5 million incremental impact of a severe snow storm
in April 1997. The comparison of 1997 and 1996 earnings is also impacted by
two depreciation adjustments. A nonrecurring charge of $0.11 per share was
recorded as an increase to depreciation expense in the third quarter of 1997
to reflect the nuclear-related intangible assets adjustment described in Note
C to the Consolidated Financial Statements. Earnings in 1996 reflect a
nonrecurring $0.07 per share adjustment to correct the accumulated
depreciation balance of certain large computer equipment.
<PAGE> 12
The results of operations for the nine months ended September 30, 1997 are not
indicative of the results which may be expected for the entire year due to the
seasonality of the Company's kWh sales and revenues. Refer to Note A to the
Consolidated Financial Statements.
Operating revenues
Operating revenues increased 7.3% during the first nine months of 1997 as
follows:
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------
<S> <C>
Retail electric revenues $76,461
Wholesale revenues (3,658)
Short-term sales and other revenues 20,608
- ------------------------------------------------------
Increase in operating revenues $93,411
======================================================
</TABLE>
Retail base revenues in 1997 were consistent compared to 1996. Increases due
to warmer than normal temperatures in June and July and the stronger local
economy were offset by milder than normal winter conditions and lower
industrial sales due to the decline in manufacturing activity in the Company's
service territory. Retail electric revenues increased primarily due to the
timing effect of fuel and purchased power cost recovery. The increase in fuel
and purchased power clause revenues reflects the current recovery of
substantial prior year undercollections. These higher revenues are offset by
higher fuel and purchased power expenses and, therefore, have no net effect on
earnings. Pilgrim performance revenues, as discussed in the results of
operations for the third quarter, decreased due to a lower forecasted annual
capacity factor effective November 1996.
The decrease in wholesale revenues reflects lower sales to certain contract
customers with the ability to purchase lower costing power elsewhere. The
Company's sales were adversely impacted by increased energy prices during
Pilgrim Station's refueling outage.
Short-term sales revenues increased approximately $17 million. As discussed
in the results of operations for the third quarter, this is primarily due to
an increase in short-term power purchase requirements resulting from the
continued reduction in available nuclear energy supply in New England combined
with a 48% increase in the Company's fossil generation allowing for increased
sales to the power exchange.
Operating expenses
Fuel and purchased power expenses increased $93.9 million. The increase is
primarily due to the timing effect of fuel and purchased power cost recovery
and a 48% increase in fossil generation partially offset by a decrease in
power exchange purchases.
Operations and maintenance expense decreased $2.9 million. The decrease is
the result of lower overall spending from the Company's continuing cost
control efforts and significantly less overhaul activity in its fossil
generating units than in 1996. These decreases were partially offset by costs
associated with the April 1997 severe storm that struck the greater Boston
area.
<PAGE> 13
The net increase in depreciation and amortization expense reflects the impact
of the two depreciation adjustments which are discussed in the results of
operations for the third quarter.
Electric Revenues
- -----------------
The annual Pilgrim performance adjustment charge provides the Company with
opportunities to improve its financial results. The most significant
potential impact of this performance incentive is based on Pilgrim Station's
annual capacity factor. Refer to the Electric revenues section of the
Company's 1996 Annual Report on Form 10-K for detail regarding the annual
performance adjustment charge. Pilgrim's actual capacity factor for the
performance year ended October 1997 was 78%. This is a decrease from the
capacity factor of 91% achieved in the performance year ended October 1996 in
which there was no refueling and maintenance outage. The current performance
year's outage, originally scheduled to be completed in March 1997, was
extended through April 1997 due to the replacement of Pilgrim's main
transformer. The power needs usually met by Pilgrim Station were met by other
generating plants or purchased from other suppliers during this period.
Liquidity
- ---------
The Company continues to supplement internally generated funds with external
financings, primarily through the issuance of short-term commercial paper and
bank borrowings. The Company has authority from the FERC to issue up to $350
million of short-term debt. The Company also has a $200 million revolving
credit agreement and arrangements with several banks to provide additional
short-term credit on a committed as well as on an uncommitted and as available
basis. At September 30, 1997 the Company had approximately $184 million of
short-term debt outstanding, none of which was incurred under the revolving
credit agreement. An additional $30 million line of credit, nonrecourse to
the parent company, was obtained by BETG as of October 1, 1997. Proceeds from
this credit arrangement will be used to fund unregulated subsidiary
investments while the Company's holding company structure is pending approval.
Refer to Note B to the Consolidated Financial Statements. The Company has
$220 million remaining under its approved long-term financing plan with the
MDPU 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. The Company expects to incur costs related to the year 2000
computer issue as discussed in Note G to the Consolidated Financial
Statements.
Outlook for the Future
- ----------------------
The Company entered into a comprehensive settlement agreement with the
Massachusetts Attorney General, the Massachusetts Division of Energy Resources
and 15 other interested parties in July 1997 to allow retail electric
customers the ability to choose their electricity supplier as early as
January 1, 1998, contingent upon choice being made available to all customers
of Massachusetts investor-owned utilities (Retail Access Date). The MDPU
conducted public hearings on the settlement agreement in September 1997. The
Company is anticipating an order on its agreement by the end of 1997. Refer
to the Positioning in the Industry section of Item 7 in the Company's 1996
<PAGE> 14
Annual Report on Form 10-K for more information regarding the Company's
settlement agreement.
Included in the Company's settlement agreement is a provision for the
divestiture of its fossil generating assets no later than six months after the
Retail Access Date. The Company filed its divestiture plan along with its
settlement agreement in July 1997. Purchase and sale agreements are expected
to be signed by December 1997 with completion of the sale anticipated in 1998.
Implementation of the divestiture plan will require certain regulatory
approvals including those of the MDPU and FERC. The settlement agreement
includes a provision for the continued operation of Pilgrim Station with a new
revenue mechanism for recovery of Pilgrim's costs. These costs are
recoverable as part of the distribution access charge which is further
discussed in Item 7 of the Company's 1996 Annual Report on Form 10-K. The
variable component of the access charge is designed to fully recover Pilgrim's
fixed operating costs, decommissioning and other post-shutdown costs.
Severance and employee training costs related to the fossil divestiture will
also be recoverable through the distribution access charge.
Implementation of the Company's settlement agreement is subject to the
enactment of enabling Massachusetts legislation. Several proposals have
materialized from the legislature during October and November of 1997. The
most recent of these proposals requires the transition to a competitive
generation market beginning March 1, 1998 with an opportunity for utilities to
recover their stranded costs. Certain provisions of the proposal are
inconsistent with the Company's settlement agreement. Although the Company
expects to collect its stranded costs consistent with its settlement
agreement, it cannot predict at this time the ultimate outcome of the industry
restructuring legislation or the impact on the Company.
Other Matters
- -------------
Safe Harbor Cautionary Statement
The Company occasionally makes forward-looking statements such as forecasts
and projections of expected future performance or statements of its plans and
objectives. These forward-looking statements may be contained in filings with
the Securities and Exchange Commission, press releases and oral statements.
Actual results could potentially differ materially from these statements.
Therefore, no assurances can be given that the outcomes stated in such
forward-looking statements and estimates will be achieved. Refer also to the
safe harbor cautionary statements included in the Company's 1996 Annual Report
on Form 10-K and Forms 10-Q for the periods ended March 31, 1997 and June 30,
1997.
The preceding sections include certain forward-looking statements about
environmental and legal issues and the Company's settlement agreement.
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
<PAGE> 15
impacts of changes in available information and circumstances regarding legal
issues could affect the estimated litigation costs.
The effects of the industry restructuring process currently underway at the
MDPU and the Company's related settlement agreement could differ from current
expectations. The impacts of legislative action may affect the ultimate
results of the industry restructuring and the Company's settlement agreement.
<PAGE> 16
Part II - Other Information
Item 5. Other Information
- --------------------------
The following additional information is furnished in connection with the
Registration Statement on Form S-3 of the Registrant (File No. 33-57840),
filed with the Securities and Exchange Commission on February 3, 1993.
Price and dividend information per share of common stock:
<TABLE>
<CAPTION>
Price
------------------------ Dividend
High Low Paid
------- ------- --------
<S> <C> <C> <C>
First quarter 1997 $27 3/8 $26 $0.470
Second quarter 1997 26 5/8 24 5/8 0.470
Third quarter 1997 30 7/8 26 1/2 0.470
</TABLE>
The market value per share of the Company's common stock as of the close of
business on November 11, 1997 was $32 1/4 per share as reported in the Wall
Street Journal.
Ratio of earnings to fixed charges and ratio of earnings to fixed charges and
preferred stock dividend requirements:
Twelve months ended September 30, 1997:
--------------------------------------
Ratio of earnings to fixed charges 2.95
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.49
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits filed herewith:
Exhibit 4 - Instruments defining the rights of security holders,
including indentures
The Company agrees to furnish to the Securities and
Exchange Commission, upon request, a copy of any
agreements or instruments defining the rights of
holders of any long-term debt whose authorization
does not exceed 10% of the Company's total assets.
Exhibit 12 - Computation of ratio of earnings to fixed charges
12.1 - Computation of ratio of earnings to fixed charges
for the twelve months ended September 30, 1997
12.2 - Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements for the
twelve months ended September 30, 1997
<PAGE> 17
Exhibit 15 - Letter re unaudited interim financial information
15.1 - Report of Independent Accountants
Exhibit 27 - Financial Data Schedule
27.1 - Schedule UT
Exhibit 99 - Additional Exhibits
99.1 - Letter of Independent Accountants
Re Form S-3 Registration Statements filed by the
Company on February 3, 1993 (File No. 33-57840)
and May 31, 1995 (File No. 33-59693); Form S-8
Registration Statements filed by the Company on
October 10, 1985 (File No. 33-00810), July 28, 1986
(File No. 33-7558), December 31, 1990 (File No. 33-
38434), June 5, 1992 (33-48425), March 17, 1993
(33-59662 and 33-59682) and April 6, 1995 (33-58457)
and in the Form S-4 Registration Statement filed
by Boston Edison Holdings, currently known as
BEC Energy, on March 17, 1997 (File No. 333-23439)
b) No Form 8-K was filed during the third quarter of 1997.
<PAGE> 18
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTON EDISON COMPANY
---------------------
(Registrant)
Date: November 12, 1997 /s/ Robert J. Weafer, Jr.
------------------------------
Robert J. Weafer, Jr.
Vice President-Finance,
Controller and Chief
Accounting Officer
<PAGE> 19
<TABLE>
Exhibit 12.1
Boston Edison Company
Computation of Ratio of Earnings to Fixed Charges
Twelve Months Ended September 30, 1997
(in thousands)
<S> <C>
Net income from continuing operations $144,739
Income taxes 86,617
Fixed charges 118,525
--------
Total $349,881
========
Interest expense $108,342
Interest component of rentals 10,183
--------
Total $118,525
========
Ratio of earnings to fixed charges 2.95
====
</TABLE>
<PAGE> 20
<TABLE>
Exhibit 12.2
Boston Edison Company
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements
Twelve Months Ended September 30, 1997
(in thousands)
<S> <C>
Net income from continuing operations $144,739
Income taxes 86,617
Fixed charges 118,525
--------
Total $349,881
========
Interest expense $108,342
Interest component of rentals 10,183
--------
Subtotal 118,525
--------
Preferred stock dividend requirements 22,254
--------
Total $140,779
========
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.49
====
</TABLE>
<PAGE> 21
Exhibit 15.1
Report of Independent Accountants
To the Stockholders and Directors
of Boston Edison Company
We have reviewed the accompanying consolidated balance sheet of Boston Edison
Company (the Company) and subsidiaries as of September 30, 1997 and the
related statements of income for the three and nine-month periods ended
September 30, 1997 and 1996 and cash flows for the nine-month periods ended
September 30, 1997 and 1996. These financial statements are the
responsibility of the Company'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 COOPERS & LYBRAND L.L.P.
October 23, 1997
<PAGE> 22
Exhibit 99.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Boston Edison Company
Registration on Form
S-3, S-4 and Form S-8
We are aware that our report dated October 23, 1997 on our review of the
interim financial information of Boston Edison Company for the period ended
September 30, 1997 and included in this Form 10-Q is incorporated by reference
in the Company's registration statements on Form S-3 (File Nos. 33-57840 and
33-59693), Form S-8 (File Nos. 33-00810, 33-7558, 33-38434, 33-48425, 33-
59662, 33-59682 and 33-58457) and on Form S-4 filed by Boston Edison Holdings,
currently known as BEC Energy (File No. 333-23439). 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 COOPERS & LYBRAND L.L.P.
October 23, 1997
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,896,506
<OTHER-PROPERTY-AND-INVEST> 189,432
<TOTAL-CURRENT-ASSETS> 373,076
<TOTAL-DEFERRED-CHARGES> 237,543
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,696,557
<COMMON> 48,515
<CAPITAL-SURPLUS-PAID-IN> 695,990
<RETAINED-EARNINGS> 346,372
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,090,877
77,936
83,000
<LONG-TERM-DEBT-NET> 1,057,164
<SHORT-TERM-NOTES> 126,790
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 57,500
<LONG-TERM-DEBT-CURRENT-PORT> 101,067
2,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,100,223
<TOT-CAPITALIZATION-AND-LIAB> 3,696,557
<GROSS-OPERATING-REVENUE> 1,368,972
<INCOME-TAX-EXPENSE> 79,413
<OTHER-OPERATING-EXPENSES> 1,073,424
<TOTAL-OPERATING-EXPENSES> 1,152,837
<OPERATING-INCOME-LOSS> 216,135
<OTHER-INCOME-NET> 725
<INCOME-BEFORE-INTEREST-EXPEN> 216,860
<TOTAL-INTEREST-EXPENSE> 80,526
<NET-INCOME> 136,334
10,230
<EARNINGS-AVAILABLE-FOR-COMM> 126,104
<COMMON-STOCK-DIVIDENDS> 68,406
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 265,614
<EPS-PRIMARY> 2.60
<EPS-DILUTED> 0
</TABLE>
