<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 August 14, 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.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Boston Edison Company
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- ---------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $399,292 $379,144 $775,735 $750,339
-------- -------- -------- --------
Operating expenses:
Fuel and purchased power 206,805 144,510 401,384 297,697
Operations and maintenance 53,807 69,229 110,167 146,644
Depreciation and amortization 41,093 47,561 82,627 94,965
Demand side management and
renewable energy programs 13,716 13,433 27,397 26,701
Taxes - property and other 13,857 19,439 30,622 39,947
Income taxes 18,188 25,421 29,681 40,377
-------- -------- -------- --------
Total operating expenses 347,466 319,593 681,878 646,331
-------- -------- -------- --------
Operating income 51,826 59,551 93,857 104,008
Other income, net 2,686 1,265 3,501 1,874
-------- -------- -------- --------
Operating and other income 54,512 60,816 97,358 105,882
-------- -------- -------- --------
Interest charges:
Long term debt 13,352 19,444 27,677 38,901
Transition property securitization
certificates 11,456 - 23,402 -
Other 237 668 919 1,864
Allowance for borrowed funds used during
construction (851) (474) (1,448) (919)
-------- -------- -------- --------
Total interest charges 24,194 19,638 50,550 39,846
-------- -------- -------- --------
Net income $ 30,318 $ 41,178 $ 46,808 $ 66,036
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
<PAGE>
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at the beginning of the period $ 1,402 $295,655 $ 1,462 $297,347
Net income 30,318 41,178 46,808 66,036
Dividends declared:
Dividends transferred from Paid in
Capital (Note B) 224,201 - 224,201 -
Dividends to Parent (25,000) (15,000) (50,000)
Preferred stock (1,490) (1,490) (2,980) (2,980)
-------- -------- -------- --------
Subtotal 254,431 310,343 254,491 310,403
-------- -------- -------- --------
Provision for preferred stock redemption and issuance
costs (60) (128) (120) (188)
-------- -------- -------- --------
Balance at the end of the period $254,371 $310,215 $254,371 $310,215
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
Assets
------
Utility plant in service, at original cost $2,530,159 $2,494,720
Less: accumulated depreciation 883,603 848,544
---------- ----------
1,646,556 1,646,176
Construction work in progress 68,686 53,647
---------- ----------
Net utility plant 1,715,242 1,699,823
Equity investments 19,966 19,880
Other investments 11,423 10,939
Current assets:
Cash and cash equivalents 6,688 117,537
Restricted cash 3,625 3,625
Accounts receivable:
Customers 228,473 237,841
Affiliates 95,861 84,327
Accrued unbilled revenues 26,651 16,138
Materials and supplies, at average cost 17,066 16,226
Prepaid expenses and other 171,866 177,722
---------- ----------
Total current assets 550,230 653,416
---------- ----------
Regulatory assets 829,351 820,810
Other deferred debits 99,796 38,133
---------- ----------
Total assets $3,226,008 $3,243,001
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
June 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 475,700 716,361
Retained earnings 254,371 1,462
---------- ----------
Total common equity 730,071 717,823
---------- ----------
Cumulative preferred stock:
Nonmandatory redeemable series 43,000 43,000
Mandatory redeemable series 49,399 49,279
---------- ----------
Total preferred stock 92,399 92,279
---------- ----------
Long-term debt 577,779 613,283
Transition property securitization
certificates 616,500 646,559
---------- ----------
Total long-term debt 1,194,279 1,259,842
Total capitalization 2,016,749 2,069,944
---------- ----------
Current liabilities:
Transition property securitization certificates due within
one year 31,961 50,922
Long-term debt due within one year 101,467 165,667
Notes payable 61,500 -
Accounts payable:
Affiliates 37,125 3,902
Other 118,728 99,738
Accrued interest 13,477 15,460
Dividends payable 2,345 993
Other 208,602 218,224
---------- ----------
Total current liabilities 575,205 554,906
---------- ----------
Deferred credits:
Accumulated deferred income taxes 506,395 484,629
Accumulated deferred investment tax credits 20,276 21,336
Power contracts 40,523 45,123
Other 66,860 67,063
---------- ----------
Total deferred credits 634,054 618,151
---------- ----------
Commitments and contingencies
Total capitalization and liabilities $3,226,008 $3,243,001
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
Boston Edison Company
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
--------- --------
<S> <C> <C>
Operating activities:
Net income $ 46,808 $ 66,036
Adjustments to reconcile net income to net cash provided by
operation activities:
Depreciation and amortization 82,627 102,256
Deferred income taxes and investment tax credits 20,706 (7,526)
Allowance for borrowed funds used during construction (1,448) (919)
Power contract buyout - (65,780)
Net changes in working capital 34,297 62,408
Other, net (117,691) (87,051)
--------- --------
Net cash provided by operating activities 65,299 69,424
--------- --------
Investing activities:
Plant expenditures (excluding AFUDC) (45,800) (55,549)
Nuclear fuel expenditures - (15,751)
Investments (570) (7,610)
--------- --------
Net cash used in investing activities (46,370) (78,910)
--------- --------
Financing activities:
Long-term debt redemptions (100,785) (9,000)
Transition property securitization certificates redemptions (62,513) -
Net change in notes payable 61,500 -
Dividends paid (27,980) (52,980)
--------- --------
Net cash used in financing activities (129,778) (61,980)
--------- --------
Net decrease in cash and cash equivalents (110,849) (71,466)
Cash and cash equivalents at beginning of year 117,537 92,563
--------- --------
Cash and cash equivalents at end of period $ 6,688 $ 21,097
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 50,671 $ 38,596
========= ========
Income taxes $ 3,922 $ 87
========= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the Boston Edison 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 include 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 of BEC and COM/Energy 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
six month periods ended June 30, 2000 reflect $2.0 million and $4.0 million of
goodwill amortization and $1.8 million and $3.6 million of cost to achieve
amortization. Goodwill amortization represents an intercompany charge from the
former COM/Energy subsidiaries and reflects the regulatory treatment of
goodwill.
The financial information presented as of June 30, 2000 and for the periods
ended June 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 June 30, 2000 and 1999 are not
indicative of the results which may be expected for an entire year. Kilowatt-
hour sales and revenues are typically higher in the winter and summer than in
the spring and fall as sales tend to vary with weather conditions.
7
<PAGE>
The Company's Board of Directors has recently determined and voted that a
portion of the dividends declared on June 24, 1999 and July 22, 1999, which was
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 Industry 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, companies are required
to clean-up these remaining properties in accordance with a timetable developed
by the Massachusetts Department of Environmental Protection. There are
uncertainties associated with these costs due to the complexities of 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 currently expects to have only a small percentage of the total potential
liability for these sites. Approximately $7 million is included in the June 30,
2000 and December 31, 1999 Condensed Consolidated Balance Sheets related to
these cleanup liabilities. Management is unable to fully determine a range of
reasonably possible cleanup costs in excess of the accrued amount. Based on
preliminary 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 cash flows or financial position.
Public concern continues regarding electro magnetic fields (EMF) associated with
electric transmission and distribution facilities and appliances and wiring in
buildings and homes. Such concerns have included the possibility of adverse
health effects caused by EMF as well as perceived effects on property values.
Boston Edison continues to support research into the subject and participates in
the funding of industry-sponsored studies. It is aware that public concern
regarding EMF in some cases has resulted in litigation, in opposition to
existing or proposed facilities in proceedings before regulators or in requests
for legislation or regulatory standards concerning EMF levels. It has addressed
issues relative to EMF in various legal and regulatory proceedings and in
discussions with customers and other concerned persons; however, to date it has
not been significantly affected by these developments. Boston Edison continues
to monitor all aspects of the EMF issue.
Estimates related to environmental remediation costs are reviewed and adjusted
periodically as further investigation and assignment of responsibility occurs.
8
<PAGE>
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 results of operations for a reporting period.
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. Proceedings 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 settlement will not
have a material impact on Boston Edison's consolidated financial position,
results of operation or cash flows.
3. Industry and Corporate Restructuring Legal Proceedings
In July 1999, the MDTE approved a rate plan filed by the utility subsidiaries of
BEC and COM/Energy in connection with the merger. A group of four intervenors
and the Massachusetts Attorney General filed two separate appeals of the MDTE's
rate plan order with the Massachusetts Supreme Judicial Court (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.
The MDTE order approving the Boston Edison electric industry 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 outstanding 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
Boston Edison filed proposed adjustments to its standard offer and transition
charges with the MDTE in November 1999. The MDTE approved these proposed
adjustments to be effective January 1, 2000. The MDTE continues to examine
Boston Edison's cost recovery mechanisms. Annual proceedings are conducted
before the MDTE for the purpose of reconciliation of costs and revenues related
to Boston Edison's transition charge and the charges for standard offer and
default service. The Attorney General has contested cost allocations related to
Boston Edison's wholesale customers related to 1998 and succeeding years.
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 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. The hearing was completed during the first quarter of
1999. An MDTE ruling is expected by the end of 2000. Management is currently
unable to determine the outcome of these proceedings. 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.
9
<PAGE>
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 benefit 4.4 4.3
Investment tax credit amortization (1.9) (10.1)
Other 3.6 0.8
---- -----
Effective tax rate 41.1% 30.0%
</TABLE>
The effective tax rate for 1999 reflects $20.8 million of investment tax credits
recognized as a result of generation asset divestiture in July 1999. 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 a 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 (ComElectric),
Cambridge Electric Light Company (Cambridge Electric), Canal Electric Company
(Canal Electric) and Commonwealth Gas Company (ComGas).
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
10
<PAGE>
the Massachusetts Supreme Judicial Court (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 on 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
Restructuring Act and authorized by the MDTE. These certificates are non-
recourse to Boston Edison.
Retail Electric Rates
As a result of the 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 Restructuring Act requires regulated utilities to obtain and resell power to
customers that choose not to buy energy from a competitive energy supplier.
This is referred to as "standard offer service." Standard offer service will be
available to customers through 2004 at prices approved by the MDTE. Boston
Edison is currently evaluating proposals from a number of competitive energy
providers to assume full responsibility for providing customers with standard
offer service through 2004. The cost of providing standard offer service, which
includes purchased power costs, is recovered from customers on a fully
reconciling basis. New retail customers in the Boston Edison electric 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.
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, as of June 30, 2000, a regulatory asset of
approximately $61.5 million and is reflected on the accompanying Condensed
Consolidated Balance Sheet as such.
11
<PAGE>
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.
Boston Edison filed proposed adjustments to its standard offer and transition
charges with the MDTE in November 1999. The MDTE approved these proposed
adjustments to be effective January 1, 2000. The MDTE continues to examine
Boston Edison's cost recovery mechanisms. Annual proceedings are conducted
before the MDTE for the purpose of reconciliation of costs and revenues related
to Boston Edison's transition charge and the charges for standard offer and
default service. The Attorney General has contested cost allocations related to
Boston Edison's wholesale customers related to 1998 and succeeding years.
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.
Results of Operations - Three Months Ended June 30, 2000 vs. Three Months
Ended June 30, 1999
Net income was $30.3 million for the three months ended June 30, 2000 compared
to $41.2 million for the same period in 1999, a 26.5% decrease as described
below.
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.
Operating revenues
Operating revenues increased 5.3% during the second quarter of 2000 as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------------------------------------------------------------
<S> <C>
Retail electric revenues $ 32,657
Wholesale electric revenues (16,798)
Other revenues 4,289
--------------------------------------------------------------------
Increase in operating revenues $ 20,148
========
</TABLE>
Retail revenues were $364.7 million in 2000 compared to $332.1 million in 1999,
an increase of $32.6 million or 9.8%. This change reflects a 3.1% 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 addition, Boston Edison increased
its standard offer rate in 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 $17.4 million in 2000 compared to $34.2 million
in 1999, a decrease of $16.8 million or 49%. 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 $17.2 million in 2000 compared to $12.9 million in 1999, an
increase of $4.3 million or 33%. This increase is due to higher transmission
12
<PAGE>
revenues related to refunds to wholesale customers resulting from a FERC
approved settlement for transmission contract customers during 1999.
Operating expenses
Fuel and purchased power expense was $206.8 million in 2000 compared to $144.5
million in 1999, an increase of $62.3 million or 43%. Purchased power expense
increased $54 million reflecting the increase in purchased power due to the sale
of Pilgrim in 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 reflects an increase
of $4.3 million in 2000 and $15.0 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 $2.2 million due to the sale of Pilgrim in July 1999.
Operations and maintenance expense was $53.8 million in 2000 compared to $69.2
million in 1999, a decrease of $15.4 million or 22%. The change primarily
reflects a decrease of nuclear power production expenses due to the sale of the
Pilgrim plant in July 1999.
Depreciation and amortization expense was $41.1 million in 2000 compared to
$47.6 million in 1999, a decrease of $6.5 million or 13.7%. This decrease
primarily reflects the nuclear divestiture in July 1999. This decreases was
partially offset by $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 $13.7
million in 2000 compared to $13.4 million in 1999, an increase 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 $19.4 million in
1999, a decrease of $5.5 million or 28%. The decrease reflects lower municipal
property taxes resulting from the divestiture of Pilgrim.
Income taxes from operations were $18.2 million in 2000 compared to $25.4
million in 1999, a decrease of $7.2 million or 28.3%. This decrease reflects
lower pretax operating income in 2000 and an increase in the effective tax rate.
Refer to Footnote E "Income Taxes" enclosed herewith for further details.
13
<PAGE>
Other income, net
Other income, net of tax was $2.7 million in 2000 compared to $1.3 million in
1999, a net increase of $1.4 million. This change 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 $24.8 million in 2000 compared to $19.4 million in 1999, an increase of $5.4
million or 28%. The increase reflects approximately $12 million related to
securitization. These increases were partially offset by approximately $5.5
million of debt retirements related to $65 million of 6.8% debentures and $34
million of 9.875% debentures during the first half of 2000.
Results of Operations - Six Months Ended June 30, 2000 vs. Six Months
Ended June 30, 1999
Net income was $46.8 million for the six-months ended June 30, 2000 compared to
$66.0 million for the same period in 1999, a 29.1% decrease as described below.
The results of operations for the six months 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.
Operating revenues
Operating revenues increased 3.4% during the six months ended June 30, 2000 as
follows:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------------------------------------------
<S> <C>
Retail electric revenues $ 55,310
Wholesale electric revenues (32,182)
Other revenues 2,272
-----------------------------------------------------------------------
Increase in operating revenues $ 25,400
========
</TABLE>
Retail revenues were $707.3 million in 2000 compared to $652 million in 1999, an
increase of $55.3 million or 8.5%. This change reflects a 4.8% 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. In addition, Boston Edison
increased its standard offer rate in 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 $35.6 million in 2000 compared to $67.8 million
in 1999, a decrease of $32.2 million or 47%. This decrease in wholesale
revenues primarily reflects a decrease in contract sales due to the sale of
Pilgrim in July 1999.
Other revenues were $32.8 million in 2000 compared to $30.5 million in 1999, an
increase of $2.3 million or 7.5% due to higher transmission revenues related to
refunds to wholesale customers as the result of a FERC approved settlement for
transmission contract customers during 1999.
14
<PAGE>
Operating expenses
Fuel and purchased power expense was $401.4 million in 2000 compared to $297.7
million in 1999, an increase of $103.7 million or 35%. Purchased power expense
increased $103.7 million reflecting the increase in purchased power replacing
that previously generated by Pilgrim during 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 $15.1 million in 2000 and $23.7 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 $8.7 million due to
the sale of the plant in July 1999.
Operations and maintenance expense was $110.2 million in 2000 compared to $146.6
million in 1999, a decrease of $36.4 million or 25%. The change primarily
reflects a decrease of nuclear power production expenses due to the sale of the
Pilgrim plant in July 1999.
Depreciation and amortization expense was $82.6 million in 2000 compared to $95
million in 1999, a decrease of $12.4 million or 13.1%. This decrease primarily
reflects the sale of Pilgrim in July 1999. This decreases was partially offset
by $3.6 million from the amortization of costs to achieve related to the merger
and $4 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 $27.4
million in 2000 compared to $26.7 million in 1999, an increase of $0.7 million
or 3%. 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 $30.6 million in 2000 compared to $39.9 million in
1999, a decrease of $9.3 million or 23%. The decrease reflects lower municipal
property taxes resulting from the divestiture of Pilgrim.
Income taxes from operations were $29.7 million in 2000 compared to $40.4
million in 1999, a decrease of $10.7 million or 26%. This decrease reflects
lower pretax operating income in 2000 and an increase in the effective rate.
See Footnote E "Income Taxes" enclosed herewith for further details.
Other income, net
Other income, net of tax was $3.5 million in 2000 compared to $1.9 million in
1999, a net decrease of $1.6 million. This change 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.
15
<PAGE>
Interest charges
Interest on long-term debt and transition property securitization certificates
was $51.1 million in 2000 compared to $38.9 million in 1999, an increase of
$12.2 million or 31%. The increase reflects approximately $23.4 million related
to securitization. These increases were partially offset by approximately $10.4
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 and $34 million
of 9.875% debentures during the first half of 2000.
New Accounting Principles
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (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 adoption
cannot be currently estimated and will be dependent upon the value, nature and
purpose of the derivative instruments held, if any, as of January 1, 2001.
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.
16
<PAGE>
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 June 30, 2000:
--------------------------------------------------------------------
<S> <C>
Ratio of earnings to fixed charges 2.65
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.48
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
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 12 - Computation of Ratio of Earnings to Fixed Charges
12.1 - Computation of ratio of earnings to fixed charges for
the twelve months ended June 30, 2000.
12.2 - Computation of ratio of earnings to fixed charges and
preferred stock dividend requirements for the twelve
months ended June 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).
17
<PAGE>
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 second quarter of 2000.
18
<PAGE>
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: August 14, 2000 /s/ R. J. Weafer Jr.
----------------------------------------------
Robert J. Weafer Jr.
Vice President, Controller and Chief
Accounting Officer
19
