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, 2000
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 13, 2000
Common Stock, $1 par value 100 shares
The Company meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q as a wholly-owned subsidiary and is
therefore filing this Form with the reduced disclosure format.
Part I - Financial Information
Item 1. Financial Statements
Boston Edison Company
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Operating revenues $490,561 $454,871 $1,266,296 $1,205,210
Operating expenses:
Fuel and purchased power 226,038 182,472 627,422 480,170
Operations and maintenance 47,403 71,457 157,570 218,100
Depreciation and 45,600 40,812 128,227 135,776
amortization
Demand side management and
renewable energy 13,620 13,871 41,017 40,572
programs
Taxes - property and other 13,888 15,329 44,510 55,277
Income taxes 45,318 40,271 74,999 80,648
Total operating expenses 391,867 364,212 1,073,745 1,010,543
Operating income 98,694 90,659 192,551 194,667
Other income, net 3,184 17,362 6,685 19,236
Operating and other income 101,878 108,021 199,236 213,903
Interest charges:
Long term debt 13,327 17,033 41,004 55,934
Transition property
securitization 11,223 8,439 34,625 8,439
certificates
Other 9,531 3,098 10,450 4,962
Allowance for borrowed
funds used during (557) (449) (2,005) (1,368)
construction
Total interest charges 33,524 28,121 84,074 67,967
Net income $ 68,354 $ 79,900 $ 115,162 $ 145,936
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Balance at the beginning
of the period $254,371 $310,215 $ 1,462 $297,347
Net income 68,354 79,900 115,162 145,936
Dividends declared:
Dividends transferred from
Paid in Capital (Note B) 0 0 224,201 0
Dividends to Parent 0 (400,000) (15,000) (450,000)
Preferred stock (1,490) (1,490) (4,470) (4,470)
Subtotal 321,235 (11,375) 321,355 (11,187)
Provision for preferred
stock redemption and (60) 9 (180) (179)
issuance costs
Balance at the end of the
period $321,175 $(11,366) $321,175 $(11,366)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
Assets
Utility plant in service, at original $2,551,309 $2,494,720
cost
Less: accumulated depreciation 898,964 848,544
1,652,345 1,646,176
Construction work in progress 74,266 53,647
Net utility plant 1,726,611 1,699,823
Equity investments 19,542 19,880
Other investments 10,812 10,939
Current assets:
Cash and cash equivalents 9,812 117,537
Restricted cash 3,625 3,625
Accounts receivable:
Customers 251,867 237,841
Affiliates 95,243 84,327
Accrued unbilled revenues 58,153 16,138
Materials and supplies, at average 16,181 16,226
cost
Prepaid expenses and other 161,643 133,397
Total current assets 596,524 609,091
Regulatory assets 892,796 863,135
Other deferred debits 39,068 38,133
Total assets $3,285,353 $3,241,001
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
Capitalization and Liabilities
Common equity:
Common stock, par value $1 per share
(100 shares issued and outstanding) $ - $ -
Premium on common stock 478,040 716,361
Retained earnings 321,175 1,462
Total common equity 799,215 717,823
Cumulative preferred stock:
Nonmandatory redeemable series 43,000 43,000
Mandatory redeemable series 49,459 49,279
Total preferred stock 92,459 92,279
Long-term debt 577,728 613,283
Transition property securitization
certificates 584,130 646,559
Total long-term debt 1,161,858 1,259,842
Total capitalization 2,053,532 2,069,944
Current liabilities:
Transition property securitization
certificates due within one year 64,363 50,922
Long-term debt due within one year 1,067 165,667
Notes payable 167,500 -
Accounts payable:
Affiliates 82,061 3,902
Other 115,178 99,738
Accrued interest 6,468 15,460
Dividends payable 803 993
Other 160,626 218,224
Total current liabilities 598,066 554,906
Deferred credits:
Accumulated deferred income taxes 520,064 484,629
Accumulated deferred investment tax 20,029 21,336
credits
Power contracts 26,849 45,123
Other 66,813 65,063
Total deferred credits 633,755 616,151
Commitments and contingencies
Total capitalization and liabilities $3,285,353 $3,241,001
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
<S> <C> <C>
Operating activities:
Net income $ 115,162 $ 145,936
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 128,227 145,094
Deferred income taxes and investment
tax credits 34,945 45,593
Allowance for borrowed funds used during
construction (2,005) (1,368)
Power contract buyout - (65,781)
Net changes in working capital (1,559) (77,509)
Other, net (165,678) (38,966)
Net cash provided by operating activities 109,092 152,999
Investing activities:
Plant expenditures (excluding AFUDC) (76,900) (85,323)
Nuclear fuel expenditures - (143,178)
Investments 465 (7,712)
Net cash used in investing activities (76,435) (236,213)
Financing activities:
Proceeds from transition property securitization - 725,000
Long-term debt redemptions (200,733) (185,376)
Transition property securitization
certificates redemptions (82,149) -
Net change in notes payable 167,500 -
Dividends paid (25,000) (479,470)
Net cash provided by (used in) financing
activities (140,382) 60,154
Net decrease in cash and cash equivalents (107,725) (23,060)
Cash and cash equivalents at beginning of year 117,537 82,700
Cash and cash equivalents at end of period $ 9,812 $ 59,640
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 87,917 $ 68,949
========= =========
Income taxes $ 5,177 $ 87
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
The accompanying Notes should be read in conjunction with the
Notes to the Consolidated Financial Statements included in Boston
Edison's 1999 Annual Report on Form 10-K.
A) Merger of BEC Energy and Commonwealth Energy System
On August 25, 1999, Boston Edison Company's parent, BEC Energy
(BEC), and Commonwealth Energy System (COM/Energy) completed a
merger to create NSTAR, an energy delivery company serving
approximately 1.3 million customers in Massachusetts including
more than one million electric customers in 81 communities and
240,000 gas customers in 51 communities. NSTAR also supplies
electricity at wholesale for resale to other utilities. NSTAR is
an exempt public utility holding company under the provisions of
the Public Utility Holding Company Act of 1935. NSTAR's utility
subsidiaries are Boston Edison Company, Commonwealth Electric
Company, Cambridge Electric Light Company, Canal Electric Company
and Commonwealth Gas Company. NSTAR's non-utility operations
include telecommunications, district heating and cooling
operations and liquefied natural gas services.
B) Basis of Presentation
The merger was accounted for as an acquisition of COM/Energy by
BEC using the purchase method of accounting. Goodwill amounted
to approximately $486 million while the original estimate of
costs to achieve the merger was $111 million. Goodwill is being
amortized by NSTAR over 40 years and will amount to approximately
$12.2 million annually while the cost to achieve is being
amortized over 10 years and will initially be approximately $11.1
million annually. The ultimate amortization of the cost to
achieve will reflect the total actual costs. The results of
operations of Boston Edison for the three and nine-month periods
ended September 30, 2000 reflect $2.0 million and $6.0 million of
goodwill amortization, respectively and $1.8 million and $5.4
million of cost to achieve amortization, respectively. Goodwill
amortization includes an intercompany charge from the former
COM/Energy subsidiaries and reflects the regulatory treatment of
goodwill.
The financial information presented as of September 30, 2000 and
for the periods ended September 30, 2000 and 1999 have been
prepared from Boston Edison's books and records without audit by
independent accountants. Financial information as of
December 31, 1999 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 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.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
these estimates.
The results of operations for the periods ended September 30,
2000 and 1999 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.
The Company's Board of Directors has determined and voted that a
portion of the dividends declared on June 24, 1999 and July 22,
1999, which were paid out of retained earnings to its sole
shareholder (parent company), was a partial distribution of a
return of capital. As a result, the Company has appropriately
transferred the portion of its dividends deemed return of capital
against Premium on Common Stock.
C) Securitization
On July 27, 1999, BEC Funding LLC, a wholly owned special-purpose
subsidiary of Boston Edison, closed the sale of $725 million of
notes to a special purpose trust created by two Massachusetts
state agencies. The trust then concurrently closed the sale of
$725 million of electric rate reduction certificates as a public
offering. The certificates are secured by a portion of the
transition charge assessed on Boston Edison's retail customers as
permitted under the Massachusetts Electric Restructuring Act (the
Restructuring Act) and authorized by the Massachusetts Department
of Telecommunications and Energy (MDTE). These certificates are
non-recourse to Boston Edison. Principal redemptions will occur
on a semi-annual basis over the life of the certificates.
Furthermore, the Company is required to transfer funds collected,
on a daily basis, to its trustee and are held in escrow. These
funds are used to meet BEC Funding's semi-annual principal and
interest payments.
D) Contingencies
1. Environmental Matters
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 specific state
regulations. There are uncertainties associated with these costs
due to the complexities of clean-up technology, regulatory
requirements and the particular characteristics of the different
sites. Boston Edison also continues to face possible liability
as a potentially responsible party in the cleanup of five multi-
party hazardous waste sites in Massachusetts and other states
where it is alleged to have generated, transported or disposed of
hazardous waste at the sites. Boston Edison generally expects to
have only a small percentage of the total potential liability for
these sites. Approximately $6 million is included as a liability
on the September 30, 2000 and December 31, 1999 Condensed
Consolidated Balance Sheets related to the non-recoverable
portion of these cleanup liabilities. Management is unable to
fully determine a range of reasonably possible cleanup costs in
excess of the accrued amount. Based on its assessments of the
specific site circumstances, management does not believe that it
is probable that any such additional costs will have a material
impact on Boston Edison's 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.
Estimates related to environmental remediation costs are reviewed
and adjusted periodically as further investigation and assignment
of responsibility occurs. Boston Edison is unable to estimate its
ultimate liability for future environmental remediation costs.
However, in view of Boston Edison's current assessment of its
environmental responsibilities, existing legal requirements and
regulatory policies, management does not believe that these
matters will have a material adverse effect on Boston Edison's
financial position, cash flows or financial position.
2. Generating Unit Performance Programs
The MDTE's generating unit performance programs ceased March 1,
1998. Under these programs, the recovery of incremental
purchased power costs resulting from Boston Edison's generating
unit outages occurring through the retail access date was subject
to review by the MDTE. Comprehensive settlements relative to
generating unit performance, including the review of replacement
power costs associated with the shutdown of the Connecticut
Yankee nuclear electric generating unit, were approved by the
MDTE on August 1, 2000. The approved MDTE settlements did not
have a material impact on Boston Edison's consolidated financial
position, results of operations or cash flows.
3. Industry and Corporate Restructuring Legal Proceedings
The MDTE order approving the Boston Edison electric restructuring
settlement agreement was appealed by certain parties to the
Massachusetts Supreme Judicial Court (SJC). One settlement
agreement appeal remains pending. However, there has to date
been no briefing, hearing or other action taken with respect to
this proceeding. Management is currently unable to determine the
outcome of this proceeding. However, if an unfavorable outcome
were to occur, there could be a material adverse impact on
business operations, the consolidated financial position, cash
flows or results of operations for a reporting period.
4. Regulatory Proceedings
Under applicable restructuring plans or settlements approved by
the MDTE, Boston Edison must, on an annual basis, file proposed
adjustments to its rates for the upcoming year along with a
proposed reconciliation of prior year revenues and costs for its
standard offer, default service, transmission and transition
charges. Boston Edison made such a filing with the MDTE in the
Fall of 1999, as to which the MDTE subsequently approved proposed
rate adjustments effective January 1, 2000, and conducted further
hearings for the purpose of reconciliation of prior year's costs
and revenues related to Boston Edison's transition and
transmission charges and the charges for standard offer and
default service. In this proceeding, intervenors have contested
certain cost allocations and other related issues. The MDTE has
not yet rendered a final decision. In November 2000, Boston
Edison made a similar filing containing proposed rate adjustments
for 2001 and included a reconciliation of costs and revenues
through 1999. No action has yet been taken by the MDTE
concerning such filing.
As part of the accounting for the transition charge, a final
reconciliation was performed to the 1998 and 1999 transition
charge true-up filings. Management is unable to determine the
outcome of the MDTE proceedings. However, if an unfavorable
outcome were to occur, there would be a material adverse impact
on Boston Edison's consolidated financial position, results of
operations and cash flows in the near term.
In addition to the annual rate filings referenced above, Boston
Edison has also made separate filings with the MDTE concerning
charges for standard offer and default service. Boston Edison
has filed with the MDTE a request for approval to increase its
standard offer service rates based on a fuel adjustment formula
based on the prices of natural gas and oil contained in its
standard offer tariffs. The adjustments would increase its
standard offer service rate from 4.5 cents per kWh to 5.081 cents
per kWh. The MDTE continues to consider the request for effect
in future months. If the request is approved, Boston Edison
expects to make further monthly filings to adjust customer
billings based on changes in the costs of natural gas and oil.
Boston Edison has also made filings with the MDTE to increase the
price for default service to market-based levels. On October 19,
2000 the MDTE approved the Company's request to increase the
price of generation service for default service to 6.280 cents
per kWh effective December 1, 2000. On November 9, 2000 the
Company filed a request with the MDTE to increase the price for
default service to 6.993 cents per kWh for the period January 1,
2001 through June 30, 2001. These and future prices for default
service are based upon market solicitations for power supply for
default service purposes consistent with provisions for the
Electric Restructuring Act and MDTE orders.
In October 1997, the MDTE opened a proceeding to investigate
Boston Edison's compliance with a 1993 order that permitted the
formation of Boston Energy Technology Group (BETG) and authorized
Boston Edison to invest up to $45 million in unregulated
activities. Hearings were completed during the first quarter of
1999. Management is currently unable to determine the timing of
and the outcome of this proceeding. However, if an unfavorable
outcome were to occur, there could be a material adverse impact
on business operations, the consolidated financial position, cash
flows and results of operations for a reporting period.
The Massachusetts Attorney General has contested cost allocations
related to Boston Edison's wholesale customers since 1998.
Management is unable to determine the outcome of the MDTE
proceedings. However, if an unfavorable outcome were to occur,
there would be a material adverse impact on Boston Edison's
consolidated financial position, results of operations and cash
flows in the near term.
5. Other Matters
In the normal course of its business Boston Edison is also
involved in certain other legal and regulatory matters.
Management is unable to fully determine a range of reasonably
possible costs in excess of amounts accrued. Based on the
information currently available, it does not believe that it is
probable that any such additional costs will have a material
impact on its consolidated financial position. However, it is
reasonably possible that additional legal and regulatory 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 statutory federal income tax
rate to the annual estimated effective income tax rate for 2000
and the actual effective income tax rate for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income tax 4.4 4.3
benefit
Investment tax credit amortization (0.7) (10.1)
Other 2.0 0.8
Effective tax rate 40.7% 30.0%
===== =====
</TABLE>
The effective tax rate for 1999 reflects $20.8 million of
investment tax credits recognized as a result of a generation
asset divestiture in July 1999. Excluding the impact of these
credits, the corresponding estimated effective tax rate for the
same period in 1999 was 38.3%.
Item 2. Management's Discussion and Analysis
Boston Edison is an indirect wholly-owned subsidiary of NSTAR.
NSTAR was created through the merger of BEC Energy (BEC) and
Commonwealth Energy System (COM/Energy) on August 25, 1999 as an
exempt public utility holding company. NSTAR's utility
subsidiaries are Boston Edison, Commonwealth Electric Company,
Cambridge Electric Light Company, Canal Electric Company and
Commonwealth Gas Company. Effective November 1, 2000 Boston
Edison began to operate under the brand name of NSTAR Electric.
Boston Edison will continue to maintain its separate legal
identity and is simply proceeding on a "doing business as" basis
rather than through its formal corporate identity.
The electric industry has continued to change in response to
legislative, regulatory and marketplace demands for improved
customer service at lower prices. These demands have resulted in
an increasing trend in the industry to seek competitive
advantages and other benefits through business combinations.
NSTAR was created to operate in this new marketplace by combining
the resources of its utility subsidiaries and concentrating its
activities in the transmission and distribution of energy. This
is illustrated by the sale of Boston Edison's fossil generating
facilities in 1998 and its nuclear generating facility in 1999.
Merger of BEC Energy and Commonwealth Energy System
An integral part of the merger is the rate plan that was filed by
the retail utility subsidiaries of BEC and COM/Energy, including
Boston Edison, that was approved by the Massachusetts Department
of Telecommunications and Energy (MDTE) on July 27, 1999.
Significant elements of the rate plan include a four-year
distribution rate freeze, recovery of the acquisition premium
(goodwill) over 40 years and recovery of transaction and
integration costs (costs to achieve) over 10 years. A group of
four intervenors and the Massachusetts Attorney General filed two
separate appeals of the MDTE's rate plan order with the SJC in
August 1999. While management anticipates that the MDTE's
decision to approve the rate plan will be upheld by the SJC, it
is unable to determine the ultimate outcome of these appeals.
Refer to the "Retail Electric Rates" section of this discussion
for more information.
Generating Assets Divestiture
To complete its divestiture of generating assets, Boston Edison
sold Pilgrim Nuclear Generating Station (Pilgrim) on July 13,
1999, for $81 million to Entergy Nuclear Generating Company. As
part of the sale, Boston Edison transferred approximately $228
million in decommissioning funds to Entergy. Entergy, by the
contract, assumed all future liability related to the ultimate
decommissioning of the plant. The difference between the total
proceeds from the sale and the net book value of the Pilgrim
assets plus the net amount to fully fund the decommissioning
trust is included in regulatory assets in the accompanying
Condensed Consolidated Balance Sheets as such amounts are
collected from customers.
Securitization of Boston Edison's Transition Charge
On July 27, 1999, BEC Funding LLC, a wholly owned special-purpose
subsidiary of Boston Edison, closed the sale of $725 million of
notes to a special purpose trust created by two Massachusetts
state agencies. The trust then concurrently closed the sale of
$725 million of electric rate reduction certificates as a public
offering. The certificates are secured by a portion of the
transition charge assessed on Boston Edison's retail customers as
permitted under the Massachusetts Electric Restructuring Act and
authorized by the MDTE. These certificates are non-recourse to
Boston Edison.
Retail Electric Rates
As a result of the Electric Restructuring Act, Boston Edison
currently provides its standard offer customers service at
inflation adjusted rates that are 15% lower than rates in effect
prior to March 1, 1998, the retail access date.
All distribution customers must pay a transition charge as a
component of their rate. The purpose of the transition charge is
to allow for the collection of generation-related costs that
would not be collected in the competitive energy supply market.
The plant and regulatory asset balances that will be recovered
through the transition charge until 2009 were approved by the
MDTE.
The Electric Restructuring Act requires electric distribution
companies to obtain and resell power to customers that choose not
to buy energy from a competitive energy supplier. This is
through either "standard offer service" or "default service".
Standard offer service will be available to eligible customers
through 2004 at prices approved by the MDTE set at levels so as
to guarantee mandatory rate reductions provided by the Electric
Restructuring Act. New retail customers in Boston Edison's
service territory and previously existing customers that are no
longer eligible for the standard offer service and have not
chosen to receive service from a competitive supplier, are on
"default service". The price of default service is intended to
reflect the average competitive market price for power. Boston
Edison has actively solicited proposals to transfer all of the
unit output entitlements in its existing power purchase contracts
and in exchange to procure power supplies for its standard offer
service obligations through 2004. The Company has entered into
six-month and shorter term agreements to meet standard offer
service obligations and continue to evaluate further proposals.
In November 2000 Boston Edison entered into power purchase
agreements to meet its default service supply obligations for the
period January through June of 2001. Boston Edison expects to
continue periodic market solicitations for default service power
supply consistent with provisions of the Electric Restructuring
Act and MDTE orders. The cost of providing standard offer and
default service, which includes purchased power costs, is
recovered from customers on a fully reconciling basis.
The Company's cost to provide default service as well as standard
offer service is in excess of the price it is currently allowed
to bill. As a result, the Company has recorded, at September 30,
2000, a deferred asset of approximately $147.6 million that is
reflected as a component of Regulatory assets on the accompanying
Condensed Consolidated Balance Sheet.
Under its restructuring settlement agreement, Boston Edison's
distribution business is subject to a minimum and maximum return
on average common equity (ROE). The ROE is subject to a floor
of 6% and a ceiling of 11.75%. If the ROE is below 6%, Boston
Edison is authorized to add a surcharge to distribution rates in
order to achieve the 6% floor. If the ROE is above 11%, it is
required to adjust distribution rates by an amount necessary to
reduce the calculated ROE between 11% and 12.5% by 50%, and a
return above 12.5% by 100%. No adjustment is made if the ROE is
between 6% and 11%. This rate mechanism expires on December 31,
2000. The cost of providing transmission service to all Boston
Edison's distribution customers is recovered on a fully
reconciling basis.
Under applicable restructuring plans or settlements approved by
the MDTE, Boston Edison must, on an annual basis, file proposed
adjustments to its rates for the upcoming year along with a
proposed reconciliation of prior year revenues and costs for its
standard offer, default service, transmission and transition
charges. Boston Edison made such a filing with the MDTE in the
Fall of 1999, as to which the MDTE subsequently approved proposed
rate adjustments effective January 1, 2000, and conducted further
hearings for the purpose of reconciliation of prior year's costs
and revenues related to Boston Edison's transition and
transmission charges and the charges for standard offer and
default service. In this proceeding, intervenors have contested
certain cost allocations and other related issues. The MDTE has
not yet rendered a final decision. In November 2000, Boston
Edison had made a similar filing containing proposed rate
adjustments for 2001 and included a reconciliation of costs and
revenues through 1999. No action has yet been taken by the MDTE
concerning such filings. Management is unable to determine the
outcome of the MDTE proceedings. However, if an unfavorable
outcome were to occur, there would be a material adverse impact
on Boston Edison's consolidated financial position, results of
operations and cash flows in the near term.
In addition to the annual rate filings referenced above, Boston
Edison has also made separate filings with the MDTE concerning
charges for standard offer and default service. Boston Edison
has filed with the MDTE a request for approval to increase its
standard offer service rates based on a fuel adjustment formula
based on the prices of natural gas and oil contained in its
standard offer tariffs. The adjustments would increase its
standard offer service rate from 4.5 cents per kWh to 5.081 cents
per kWh. The MDTE continues to consider the request for effect
in future months. If the request is approved, Boston Edison
expects to make further monthly filings to adjust customer
billings based on changes in the costs of natural gas and oil.
Boston Edison has also made filings with the MDTE to increase the
price for default service to market-based levels. On October 19,
2000 the MDTE approved the Company's request to increase the
price of generation service for default service to 6.280 cents
per kWh effective December 1, 2000. On November 9, 2000 the
Company filed a request with the MDTE to increase the price for
default service to 6.993 cents per kWh for the period January 1,
2001 through June 30, 2001. These and future prices for default
service are based upon market solicitations for power supply for
default service purposes consistent with provisions of the
Electric Restructuring Act and MDTE orders.
In October 1997, the MDTE opened a proceeding to investigate
Boston Edison's compliance with a 1993 order that permitted the
formation of Boston Energy Technology Group (BETG) and authorized
Boston Edison to invest up to $45 million in unregulated
activities. Hearings were completed during the first quarter of
1999. Management is currently unable to determine the timing of
and the outcome of this proceeding. However, if an unfavorable
outcome were to occur, there could be a material adverse impact
on business operations, the consolidated financial position, cash
flows and results of operations for a reporting period.
Results of Operations - Three Months Ended September 30, 2000 vs.
Three Months Ended September 30, 1999
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 kilowatt-hour (kWh) sales and revenues. Refer to
Note B to the unaudited Condensed Consolidated Financial
Statements.
Net income was $68.4 million for the three months ended September
30, 2000 compared to $79.9 million for the same period in 1999, a
14.4% decrease as described below.
Operating revenues
Operating revenues increased 7.8% during the third quarter of
2000 as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Retail electric revenues $ 41,347
Wholesale electric revenues (5,262)
Other revenues (395)
Increase in operating revenues $ 35,690
==========
</TABLE>
Retail revenues were $456 million in 2000 compared to $414.7
million in 1999, an increase of $41.3 million or 10%. The
increase in retail sales is the result of the higher than normal
summer temperatures in 2000 and the continuing strong local
economy. Additionally, Boston Edison recognized revenue for
earned mitigation incentives for the years 1998 through September
2000 per the transition charge true-up filed with the MDTE in
November 2000. The incentive was earned based on the company's
success in reducing overall stranded costs. Boston Edison will
continue to earn mitigation incentive revenue as it lowers its
transition charge through 2009. Further impacting this increase
was Boston Edison's increased standard offer rate effective
January 2000. The revenues charged for standard offer service
are fully reconciled to the costs incurred and have no impact on
net income. Further impacting this increase was an increase in
residential and commercial sales reflecting consumer confidence,
a robust housing market and continued improvements in economic
conditions.
Wholesale electric revenues were $19.6 million in 2000 compared
to $24.8 million in 1999, a decrease of $5.2 million or 21%.
This decrease in wholesale revenues primarily reflects a decrease
in contract sales due to the sale of Pilgrim station in July
1999.
Other revenues were $14.9 million in 2000 compared to $15.3
million in 1999, a decrease of $0.4 million or 2.6%. This change
reflects higher transmission revenues related to a FERC approved
settlement for transmission contract customers during 1999, an
increase in average transmission rates by approximately 18%
effective September 1, 1999, and offset by a lower provision for
transmission refunds during 2000.
Operating expenses
Fuel and purchased power expense were $226 million in 2000
compared to $182.5 million in 1999, an increase of $43.5 million
or 23.8%. Purchased power expense increased $91 million
reflecting the increase in purchased power due to the sale of
Pilgrim in July 1999. Boston Edison adjusts its electric rates
to collect the costs related to fuel and purchased power from
customers on a fully reconciling basis. Fuel and purchased power
expenses in the year 2000 reflect an increase of $83 million in
2000 and $13.9 million in 1999 related to these rate recovery
mechanisms. Due to the rate adjustment mechanisms, changes in
the amount of fuel and purchased power expense have no impact on
earnings. Offsetting these increases was the absence in the
current period of fuel expense related to Pilgrim which decreased
$0.7 million due to the sale of Pilgrim in July 1999.
Operations and maintenance expense was $47.4 million in 2000
compared to $71.5 million in 1999, a decrease of $24.1 million or
33.7%. The change reflects lower staffing levels, timing of
expenses and permanent savings in pensions and benefits of
approximately $22.1 million as a result of the merger and other
cost control measures implemented by NSTAR. In addition, the
change reflects a decrease of $1.9 million of nuclear power
production expenses due to the sale of the Pilgrim plant in July
1999.
Depreciation and amortization expense was $45.6 million in 2000
compared to $40.8 million in 1999, an increase of $4.8 million or
11.8%. This increase primarily reflects the amortization of
transition charges. This increase also includes $1.8 million
from the amortization of costs to achieve related to the merger
and $2 million from an affiliated company charge for Boston
Edison's portion of goodwill. These amounts are being collected
from Boston Edison's customers in accordance with the rate plan
that was approved by the MDTE on July 27, 1999.
Demand side management (DSM) and renewable energy programs
expense was $13.6 million in 2000 compared to $13.9 million in
1999, a decrease of $0.3 million or 2%. In accordance with
legislative and regulatory directives, these costs are collected
from customers on a fully reconciling basis. Therefore, the
increase has no impact on earnings.
Property and other taxes were $13.9 million in 2000 compared to
$15.3 million in 1999, a decrease of $1.4 million or 9.2%. The
decrease reflects lower municipal property taxes and a true-up
adjustment of $0.8 million for the Town of Plymouth for fiscal
year 2000.
Income taxes from operations were $45.3 million in 2000 compared
to $40.3 million in 1999, an increase of $5.0 million or 12.4%.
This increase reflects higher pretax operating income in 2000 and
an increase in the effective tax rate primarily due to the
investment tax credit utilized in 1999. Refer to Note E "Income
Taxes" to the Condensed Consolidated Financial Statements.
Other income, net
Other income, net of tax was $3.2 million in 2000 compared to
$17.4 million in 1999, a net decrease of $14.2 million or 81.6%.
Income tax benefits in 1999 were $16.1 million, which included
$20.8 million related to the recognition of previously deferred
investment tax credits associated with the Pilgrim nuclear
generating station and partially offset by miscellaneous non-
operating expense of $7.2 million.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $24.6 million in 2000 compared to $25.5 million
in 1999, a decrease of $0.9 million or 3.5%. In addition, the
increase reflects approximately $2.8 million related to
securitization. These increases were partially offset by
approximately $8.9 million of debt retirements related to $65
million of 6.8% debentures, $34 million of 9.875% debentures and
$100 million of 6.05% debentures during the third quarter of
2000.
Other interest charges
Other interest charges were $9.5 million in 2000 compared to $3.1
million in 1999, an increase of $6.4 million. The increase
reflects interest associated with the reconciliation to the 1998
and 1999 transition charge true-up filings with the MDTE in
November 2000.
Results of Operations - Nine Months Ended September 30, 2000 vs.
Nine Months Ended September 30, 1999
The results of operations for the nine-month period are not
indicative of the results which may be expected for the entire
year due to the seasonality of kilowatt-hour (kWh) sales and
revenues. Refer to Note B to the Condensed Consolidated
Financial Statements.
Net income was $115.2 million for the nine-months ended September
30, 2000 compared to $145.9 million for the same period in 1999,
a 21% decrease as described below.
Operating revenues
Operating revenues increased 5.1% during the nine months ended
September 30, 2000 as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Retail electric revenues $ 96,657
Wholesale electric revenues (37,444)
Other revenues 1,873
Increase in operating revenues $ 61,086
==========
</TABLE>
Retail revenues were $1,163.4 million in 2000 compared to
$1,066.7 million in 1999, an increase of $96.7 million or 9.1%.
This change reflects a 2.1% increase in retail kilowatt-hour
(kWh) electric sales. The increase in retail kWh sales is the
result of the higher than normal spring/early summer temperatures
in 2000 and the continuing strong local economy in 2000.
Additionally, Boston Edison recognized revenue for earned
mitigation incentives for the years 1998 through September 2000
per the transition charge true-up filed with the MDTE in November
2000. The incentive was earned based on the company's success in
reducing overall stranded costs. Boston Edison will continue to
earn mitigation incentive revenue as it lowers its transition
charge through 2009. In addition, Boston Edison increased its
standard offer rate effective January 2000. The revenues charged
for standard offer service are fully reconciled to the costs
incurred and have no impact on net income. Further impacting
this increase was an increase in residential and commercial sales
reflecting consumer confidence, a robust housing market and
continued improvements in economic conditions.
Wholesale electric revenues were $55.2 million in 2000 compared
to $92.7 million in 1999, a decrease of $37.5 million or 40%.
This decrease in wholesale revenues primarily reflects a decrease
in contract sales due to the sale of Pilgrim in July 1999.
Other revenues were $47.8 million in 2000 compared to $45.9
million in 1999, an increase of $1.9 million or 4.1% due to
higher transmission revenues related to a FERC-approved
settlement for transmission contract customers during 1999.
Another factor was an increase in average transmission rates by
approximately 18% effective September 1, 1999.
Operating expenses
Fuel and purchased power expense was $627.4 million in 2000
compared to $480.2 million in 1999, an increase of $147.2 million
or 31%. Purchased power expense increased $194.6 million
reflecting the increase in purchased power to replace that
previously generated by Pilgrim during July 1999. Included in
this increase is the impact of recent increases in the cost of
power as a result of increases in fuel costs. Boston Edison
adjusts its electric rates to collect the costs related to fuel
and purchased power from customers on a fully reconciling basis.
Fuel and purchased power expenses in 2000 reflect an increase of
$98.1 million in 2000 and $37.5 million in 1999 related to these
rate recovery mechanisms. Due to the rate adjustment mechanisms,
changes in the amount of fuel and purchased power expense have no
impact on earnings. Offsetting these increases was the absence
in the current period of fuel expense related to Pilgrim which
decreased $9.4 million due to the sale of the plant in July 1999.
Operations and maintenance expense was $157.6 million in 2000
compared to $218.1 million in 1999, a decrease of $60.5 million
or 27.7%. The change primarily reflects a decrease in nuclear
power production expenses of $36.2 million due to the sale of the
Pilgrim plant in July 1999, lower staffing levels, timing of
expenses and permanent savings in pensions and benefits of $22.8
million as a result of the merger and other cost control measures
implemented by NSTAR.
Depreciation and amortization expense was $128.2 million in 2000
compared to $135.8 million in 1999, a decrease of $7.6 million or
5.6%. This decrease primarily reflects the sale of Pilgrim in
July 1999. This decrease was partially offset by $5.4 million
from the amortization of costs to achieve related to the merger
and $6 million from an affiliated company charge for Boston
Edison's portion of goodwill. These amounts are being collected
from Boston Edison's customers in accordance with the rate plan
that was approved by the MDTE on July 27, 1999.
Demand side management (DSM) and renewable energy programs
expense was $41.0 million in 2000 compared to $40.6 million in
1999, an increase of $0.4 million or 1%. In accordance with
legislative and regulatory directives, these costs are collected
from customers on a fully reconciling basis. Therefore, the
increase has no impact on earnings.
Property and other taxes were $44.5 million in 2000 compared to
$55.3 million in 1999, a decrease of $10.8 million or 19.5%. The
decrease primarily reflects lower municipal property taxes
resulting from the divestiture of Pilgrim. In addition, the
change reflects lower municipal property taxes and a true-up
adjustment of $0.8 million for the Town of Plymouth for fiscal
year 2000.
Income taxes from operations were $75.0 million in 2000 compared
to $80.6 million in 1999, a decrease of $5.6 million or 6.9%.
This decrease reflects lower pretax operating income in 2000 and
an increase in the effective rate primarily due to the investment
tax credit utilized in 1999. See Note E "Income Taxes" enclosed
herewith for further details.
Other income, net
Other income, net of tax was $6.7 million in 2000 compared to
$19.2 million in 1999, a net decrease of $12.5 million or 65%.
Income tax benefits in 1999 were $14.9 million, which included
$20.8 million related to the recognition of previously deferred
investment tax credits associated with the Pilgrim nuclear
generating station sold in 1999 and partially offset by
miscellaneous non-operating expense of $7.4 million. Interest
income of $5.0 million in 2000 compared to $2.2 million in 1999,
reflects an increase due to interest received from a third party
of $4.5 million related to Pilgrim contract buyout and partially
offset by a decrease in nonutility revenues.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $75.6 million in 2000 compared to $64.4 million
in 1999, an increase of $11.2 million or 17.4%. The increase
reflects approximately $26.1 million related to securitization.
These increases were partially offset by approximately $14.9
million in reductions related to the following retirements: $19
million of 7.8% debentures, $66 million of 9.875% debentures, $91
million of 9.375% debentures during the third quarter of 1999,
$65 million of 6.8% debentures, $34 million of 9.875% debentures
and $100 million of 6.05% debentures during the third quarter of
2000.
Other interest charges
Other interest charges were $10.5 million in 2000 compared to $5
million in 1999, an increase of $5.5 million. The increase
reflects interest associated with the reconciliation to the 1998
and 1999 transition charge true-up filings with the MDTE in
November 2000.
New Accounting Principles
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and as amended by statement of Accounting
Standards No. 138, collectively referred to as, (SFAS 133). SFAS
133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative
instruments embedded in other contracts possibly including fixed-
price fuel supply and power contracts) be recorded on the
Consolidated Balance Sheets as either an asset or liability
measured at its fair value. SFAS 133, as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No 133", is
effective for fiscal years beginning after June 15, 2000 (January
1, 2001 for calendar year companies). Initial application shall
be as of the beginning of an entity's fiscal quarter.
Boston Edison will adopt SFAS 133 as of January 1, 2001. The
impact of this adoption is currently being assessed by the
Company. NSTAR has formed an implementation team consisting of
responsible key individuals from various operational areas of the
organization. The primary role of this team is to inventory and
discuss potential contractual arrangements for FAS 133
application.
Safe harbor cautionary statement
Management occasionally makes forward-looking statements such as
forecasts and projections of expected future performance or
statements of its plans and objectives. These forward-looking
statements may be contained in filings with the Securities and
Exchange Commission (SEC), press releases and oral statements.
Actual results could potentially differ materially from these
statements. Therefore, no assurances can be given that the
outcomes stated in such forward-looking statements and estimates
will be achieved.
The preceding sections include certain forward-looking statements
about operating results, environmental and legal issues.
The impacts of continued cost control procedures on operating
results could differ from current expectations. The effects of
changes in economic conditions, tax rates, interest rates,
technology and the prices and availability of operating supplies
could materially affect the projected operating results.
The timing and total costs related to the year 2000 plan could
differ from current expectations. Factors that may cause such
differences include the ability to locate and correct all
relevant computer codes and the availability of personnel trained
in this area. In addition, management cannot predict the nature
or impact on operations of third party noncompliance.
The impacts of various environmental, legal issues, and
regulatory matters could differ from current expectations. New
regulations or changes to existing regulations could impose
additional operating requirements or liabilities other than
expected. The effects of changes in specific hazardous waste
site conditions and cleanup technology could affect the estimated
cleanup liabilities. The impacts of changes in available
information and circumstances regarding legal issues could affect
the estimated litigation costs.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
There have been no material changes since year-end.
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.
Ratio of earnings to fixed charges and ratio of earnings to fixed
charges and preferred stock dividend requirements:
<TABLE>
<CAPTION>
Twelve months ended September 30, 2000:
<S> <C>
Ratio of earnings to fixed charges 2.72
Ratio of earnings to fixed charges and
preferred 2.53
stock dividend requirements
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
<S> <C><C> <C> <C>
a) Exhibits filed herewith and incorporated by
reference:
Exhibit 4 - Instruments Defining the Rights of
Security Holders, Including Indentures
Management agrees to furnish to the
Securities and Exchange Commission, upon
request, a copy of any agreements or
instruments defining the rights of holders
of any long-term debt whose authorization
does not exceed 10% of total assets.
Exhibit 10 - Material Contracts
10.1 Waiver and Employment Agreement among
Commonwealth Energy System and certain of
its Subsidiaries, Deborah A. McLaughlin
and NSTAR, dated September 21, 2000 (NSTAR
Form 10-Q for the quarter ended September
30, 2000, File No. 1-14768).
10.2 Change in Control Agreement between James
J. Judge and NSTAR, dated August 28, 2000
(NSTAR Form 10-Q for the quarter ended
September 30, 2000, File No. 1-14768).
10.3 Change in Control Agreement between
Deborah A. McLaughlin and NSTAR, dated
September 21, 2000 (NSTAR Form 10-Q for
the quarter ended September 30, 2000, File
No. 1-14768).
10.4 Master Trust Agreement between NSTAR and
State Street Bank and Trust Company (Rabbi
Trust), dated August 25, 1999 (NSTAR Form
10-Q for the quarter ended September 30,
2000, File No. 1-14768).
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, 2000.
12.2 - Computation of ratio of earnings to fixed
charges and preferred stock dividend
requirements for the twelve months ended
September 30, 2000.
Exhibit 15 - Letter Re Unaudited Interim Financial
Information
15.1 - Letter of Independent Accountants
Form S-4 Registration Statement filed by
NSTAR on May 12, 1999 (File No. 333-
78285); Post-effective Amendment to Form S-
4 on Form S-3 filed by NSTAR on August 19,
1999 (File NO. 333-78285); Post-effective
Amendment to Form S-4 on Form S-8 filed by
NSTAR on August 19, 1999 (File No. 333-
78285); Form S-8 Registration Statement
filed by NSTAR on August 19, 1999 (File
No. 333-85559); and Form S-3 Registration
Statement filed by NSTAR on January 12,
2000 (File No. 333-94735).
Exhibit 27 - Financial Data Schedule
27.1 - Schedule UT
Exhibit 99 - Additional Exhibits
99.1 - Report of Independent Accountants
b) No Form 8-K was filed during the third quarter of
2000.
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
Boston Edison Company
(Registrant)
Date: November 13, 2000 /s/ R. J. Weafer Jr.
Robert J. Weafer Jr.
Vice President, Controller
and Chief Accounting
Officer
</TABLE>
Exhibit 12.1
Boston Edison Company
Computation of Ratio of Earnings to Fixed Charges
Twelve Months Ended September 30, 2000
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
Net income from continuing operations $ 129,540
Income taxes 90,135
Fixed charges (including securitization certificates) 127,401
Total $ 347,076
=========
Interest expense $ 114,501
Interest component of rentals 12,900
Total $ 127,401
=========
Ratio of earnings to fixed charges 2.72
====
</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, 2000
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
Net income from continuing operations $ 129,540
Income taxes 90,135
Fixed charges (including securitization certificates) 127,401
Total $ 347,076
=========
Interest expense $ 114,501
Interest component of rentals 12,900
Subtotal 127,401
Preferred stock dividend requirements 9,767
Total $ 137,168
=========
Ratio of earnings to fixed charges and preferred 2.53
stock dividends requirements ====
</TABLE>
Exhibit 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
<TABLE>
<CAPTION>
<S> <C>
Re: Boston Edison Company
Registration on
Form S-3
</TABLE>
We are aware that our report dated November 13, 2000 on our
review of the condensed consolidated interim financial
information of Boston Edison Company (Boston Edison) as of and
for the period ended September 30, 2000 and included in Boston
Edison's quarterly report on Form 10-Q for the quarter then ended
is incorporated by reference in Boston Edison's registration
statement on Form S-3 (File No. 33-57840). Pursuant to Rule
436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statement prepared or
certified by us within the meaning of Sections 7 and 11 of that
Act.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 13, 2000
Exhibit 99.1
Report of Independent Accountants
To the Board of Directors and Shareholders:
We have reviewed the accompanying condensed consolidated balance
sheet of Boston Edison Company and its subsidiaries as of
September 30, 2000, and the related condensed consolidated
statements of income and of retained earnings for each of the
three-month and nine-month periods ended September 30, 2000 and
September 30, 1999 and the condensed consolidated statement of
cash flows for the nine month periods ended September 30, 2000
and September 30, 1999. These consolidated 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 condensed
consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the
United States of America.
We previously audited in accordance with auditing standards
generally accepted in the United States of America, the
consolidated balance sheet as of December 31, 1999, and the
related consolidated statements of income, retained earnings and
cash flows for the year then ended (not presented herein), and in
our report dated January 26, 2000 we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly
stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 13, 2000
