Draft 8/9/02
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, 2002
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, 02199
Massachusetts
(Address of principal executive (Zip Code)
offices)
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, 2002
Common Stock, $1 par value 100 shares
62:
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)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
Operating revenues $375,351 $476,755 $797,116 $942,917
Operating expenses:
Purchased power 182,268 280,175 426,515 556,960
Operations and 58,962 41,895 112,692 93,444
maintenance
Depreciation and 42,904 41,601 85,683 83,865
amortization
Demand side management
and renewable energy 10,803 13,290 22,024 27,057
programs
Taxes - property and 17,472 16,703 35,640 34,829
other
Income taxes 16,688 23,507 28,549 39,895
Total operating 329,097 417,171 711,103 836,050
expenses
Operating income 46,254 59,584 86,013 106,867
Other income, net 647 2,432 959 3,264
Operating and other income 46,901 62,016 86,972 110,131
Interest charges:
Long term debt 11,099 11,728 22,212 23,528
Transition property
securitization 9,326 10,431 19,131 21,229
certificates
Short-term debt and 2,045 3,444 4,496 5,858
other
Allowance for borrowed
funds used during (98) (622) (269) (1,175)
construction
Total interest 22,372 24,981 45,570 49,440
charges
Net income $ 24,529 $ 37,035 $ 41,402 $ 60,691
======== ======== ======== ========
Per share data is not relevant because Boston Edison Company's common stock is
wholly-owned by NSTAR.
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)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Balance at the beginning of $416,433 $342,615 $428,150 $352,832
the period
Add:
Net income 24,529 37,035 41,402 60,691
Subtotal 440,962 379,650 469,552 413,523
Deduct:
Dividends declared:
Dividends to Parent 28,100 31,250 56,200 63,573
Preferred stock 490 1,490 980 2,980
Subtotal 28,590 32,740 57,180 66,553
Provision for preferred
stock redemption and - 60 - 120
issuance costs
Balance at the end of the $412,372 $346,850 $412,372 $346,850
period ======= ======= ======= =======
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
June 30, December 31,
2002 2001
Assets
Utility plant in service, at original $2,713,138 $2,641,759
cost
Less: accumulated depreciation 890,992 875,158
1,822,146 1,766,601
Construction work in progress 52,963 38,818
Net utility plant 1,875,109 1,805,419
Equity investments 12,742 13,611
Current assets:
Cash and cash equivalents 6,771 13,549
Restricted cash 3,625 3,625
Accounts receivable customers, net 179,040 264,633
Accrued unbilled revenues 33,219 29,081
Materials and supplies, at average 16,889 15,461
cost
Other 7,755 24,170
Total current assets 247,299 350,519
Deferred debits:
Regulatory assets - other 721,101 768,776
Regulatory assets - power contracts 274,850 -
Prepaid pension cost 238,114 218,713
Other 23,306 27,763
Total assets $3,392,521 $3,184,801
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
June 30, December 31,
2002 2001
Capitalization and Liabilities
Common equity:
Common stock, par value $1 per
share
(100 shares issued and $ - $ -
outstanding)
Premium on common stock 528,795 528,795
Retained earnings 412,372 428,150
Total common equity 941,167 956,945
Cumulative non-mandatory redeemable
preferred stock 43,000 43,000
Long-term debt 400,216 551,803
Transition property securitization
certificates 479,500 513,904
Total long-term debt 879,716 1,065,707
Total capitalization 1,863,883 2,065,652
Current liabilities:
Transition property securitization
certificates 42,565 40,972
Long-term debt 151,513 667
Notes payable 184,000 191,500
Accounts payable -
Affiliates 41,712 73,243
Other 104,462 91,522
Accrued interest 10,642 10,738
Other 64,125 67,098
Total current liabilities 599,019 475,740
Deferred credits:
Accumulated deferred income taxes 573,414 559,516
Accumulated deferred investment tax 18,751 19,249
credits
Power contracts 295,163 22,697
Other 42,291 41,947
Total deferred credits 929,619 643,409
Commitments and contingencies
Total capitalization and $ 3,392,521 $ 3,184,801
liabilities =========== ===========
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)
Six Months Ended June 30,
2002 2001
Operating activities:
Net income $ 41,402 $ 60,691
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 85,683 83,865
Deferred income taxes and investment
tax credits 18,272 (35,532)
Allowance for borrowed funds used
during construction (269) (1,175)
Net changes in working capital 55,983 (18,989)
Other, net (120,973)
(3,960)
Net cash provided by (used in) operating 197,111 (32,113)
activities
Investing activities:
Plant expenditures (excluding AFUDC) (106,526) (62,308)
Other investments 869 549
Net cash used in investing activities (105,657) (61,759)
Financing activities:
Transition property securitization
certificates redemptions (32,811) (30,702)
Redemptions of long term debt (741) -
Net change in notes payable (7,500) 181,500
Dividends paid (57,180) (66,970)
Net cash (used in) provided by financing
activities (98,232) 83,828
Net decrease in cash and cash equivalents (6,778) (10,044)
Cash and cash equivalents at beginning of 13,549 12,125
year
Cash and cash equivalents at end of period $ 6,771 $ 2,081
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 41,187 $ 46,931
========= =========
Income taxes / (refund) $ (4,006) $ 75,301
========= =========
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 Notes
to the Consolidated Financial Statements included in Boston
Edison's 2001 Annual Report on Form 10-K.
A) The Company
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under Massachusetts
law and is a wholly owned subsidiary of NSTAR. Boston Edison's
wholly owned subsidiaries are Harbor Electric Energy Company
(HEEC) and BEC Funding LLC. NSTAR is an energy delivery company
serving approximately 1.3 million customers in Massachusetts,
including approximately 1.1 million electric customers in 81
communities and 246,000 gas customers in 51 communities. NSTAR
is an exempt public utility holding company. NSTAR's retail
utility subsidiaries are The Company, Commonwealth Electric
Company (ComElectric), Cambridge Electric Light Company
(Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). NSTAR's
three retail electric companies operate under the brand name
"NSTAR Electric." Reference in this report to "NSTAR Electric"
shall mean each of Boston Edison, ComElectric and Cambridge
Electric.
B) Basis of Presentation
The financial information presented as of June 30, 2002 and for
the periods ended June 30, 2002 and 2001 have been prepared from
Boston Edison's books and records without audit by independent
accountants. Financial information as of December 31, 2001 was
derived from the audited consolidated 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 three or six months ended June
30, 2002 and 2001 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.
C) Amortization of Merger Related Costs
The merger creating NSTAR was accounted for under the purchase
method of accounting and resulted in the recognition of an
acquisition premium (goodwill). An integral part of the merger
is the rate plan of the combined retail utility subsidiaries that
was approved by the Massachusetts Department of
Telecommunications and Energy (MDTE) in July 1999. Significant
elements of the rate plan include a four-year distribution rate
freeze through August 2003, recovery of the acquisition premium
(goodwill) of approximately $490 million over 40 years resulting
in annual amortization of approximately $12.2 million, and
recovery of filed transaction and integration costs (costs to
achieve) of $111 million over 10 years. Boston Edison expects to
be required by the Massachusetts Department of Telecommunications
and Energy (MDTE) to reconcile the actual CTA costs incurred with
the original estimate. This reconciliation will include a final
accounting of the deductibility for income tax purposes of each
component of CTA. The total consolidated NSTAR CTA is
approximately $144 million, with the majority of these costs to
be allocated to Boston Edison. This increase from the original
estimate is partially mitigated by the fact that the portion of
CTA that is not deductible for income tax purposes is
approximately $20 million lower than the original estimate.
As disclosed in Boston Edison's Form 10-K for the year ended
December 31, 2001, NSTAR expected that it would transfer $319
million of goodwill to its reporting unit, as a component of
Boston Edison's common equity, effective January 1, 2002.
However, upon further review and consideration of all the
transition provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" (SFAS 142), NSTAR has
determined it will continue to account for goodwill by the
acquired entities as it has done since the date of the merger.
For regulatory purposes, Boston Edison has been allocated $319
million of goodwill and is expensing this amount over 40 years.
This amount is being recovered from Boston Edison's customers and
will continue to be treated as an intercompany charge among the
Company and its affiliated companies, ComElectric, Cambridge
Electric and NSTAR Gas. The annual allocation of goodwill
amortization expense to the Company is approximately $8 million.
D) Accounting Standards
SFAS No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities" (SFAS 146), requires entities to record a
liability for costs related to exit or disposal activities when
the costs are incurred. Previous accounting guidance required
the liability to be recorded at the date of commitment to an exit
or disposal plan. Boston Edison is required to comply with SFAS
146 beginning January 1, 2003. Boston Edison is in the process
of assessing the provisions of SFAS 146 in order to determine its
impact on its financial position and results of operations.
As of January 1, 2001, Boston Edison adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
as amended by SFAS Nos. 137 and 138, (collectively, SFAS 133).
SFAS 133 established accounting and reporting standards requiring
every derivative instrument (including certain derivative
instruments embedded in such contracts as 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. Previously, all of Boston Edison's commodity purchased
power contracts were exempt from this accounting treatment under
the normal purchase and sales exception of SFAS 133. As a
result, these contracts were not marked to market and have not
been reflected on the Consolidated Balance Sheets.
Refer to Note E "Derivative Instruments" for further discussion.
E) Derivative Instruments
Boston Edison adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), effective January
1, 2001. The accounting for derivative financial instruments is
subject to change based on the guidance received from the
Derivative Implementation Group (DIG) of FASB. The DIG issued
C15, on October 10, 2001, which specifically addressed the
interpretation of clearly and closely related contracts that
qualify for the normal purchase and sales exception under SFAS
133. The conclusion reached by the DIG was that contracts with a
pricing mechanism that is subject to future adjustment based on a
generic index that is not specifically related to the contracted
service commodity, generally would not qualify for the normal
purchase and sales exception.
On April 1, 2002, the effective date of DIG C15, Boston Edison
adopted the interpretation of this guidance and began marking to
market certains of its long-term purchased power contracts that
previously qualified for the normal purchase and sale exception.
Boston Edison has one purchased power contract that contain
components with pricing mechanisms that are based on a generic
index, such as the GNP or CPI and are applied to in significant
factors of these agreements. Therefore, as required by the
interpretation of C15, Boston Edison has recorded this contract
at fair value on its accompanying Condensed Consolidated Balance
Sheets in the second quarter of 2002. This action resulted in
the recognition of a liability for the fair value of the above-
market portion of this contract as of June 30, 2002 of
approximately $275 million and is a component of Power contracts
on the accompanying Condensed Consolidated Balance Sheets.
Boston Edison has recorded a corresponding regulatory asset to
reflect the future recovery of the above-market component of
this contract through its transition charge. Therefore, as a
result of this regulatory treatment, the recording of this
contract on its accompanying Condensed Consolidated Balance
Sheets does not result in an earnings impact.
Boston Edison has other purchased power contracts in which the
fair value is significantly above-market. However, these
contracts have met the criteria for normal purchase and sales
exception and have not been recorded on the accompanying
Condensed Consolidated Balance Sheets. The above market portion
of these contracts is currently being recovered through the
transition charge.
Boston Edison will continue to monitor any further guidance that
may result from FASB revisions and clarifications to SFAS 133.
Based on Boston Edison's assessment to date, the adoption of SFAS
133 has not had a material effect on its results of operations,
cash flows, or financial position.
F) Service Quality Index
On October 29, 2001, and as subsequently updated, NSTAR Electric
filed a proposed service quality plan with the MDTE, which
included guidelines that had been established by the MDTE as a
result of its generic investigation of service quality issues.
The service quality plan established performance benchmarks
effective January 1, 2002 for certain identified measures of
service quality relating to customer service and billing
performance, customer satisfaction, and reliability and safety
performance. NSTAR Electric is required to report annually
concerning it's performance as to each measure and is subject to
maximum penalties of up to two percent of transmission and
distribution revenues should performance fail to meet the
applicable benchmarks. NSTAR Electric also filed with the MDTE a
report concerning it's performance on the identified service
quality measures for the two twelve-month periods ended August
31, 2000 and 2001. This report included a calculation of
penalties in accordance with MDTE guidelines. On March 22, 2002,
following hearings on the matter, the MDTE issued an order
imposing a service quality penalty of approximately $3.25 million
on NSTAR Electric of which $3.2 million related specifically to
Boston Edison which was refunded to customers as a credit to
their bills during the month of May 2002. This refund had no
material effect on Boston Edison's consolidated financial
position or results of operations.
Through June 30, 2002 Boston Edison's Electric's performance has
resulted in a minimum penalty situation that is currently
undergoing internal investigation in order to verify that correct
procedures were followed in establishing the benchmarks; however,
these results may not be indicative of the results that may be
expected for the remainder of the year, including the peak-demand
period anticipated during the remainder of the summer period.
Also on October 29, 2001, NSTAR Electric filed with the MDTE a
comprehensive report regarding electric system performance issues
encountered during the summer of 2001. The filing included
detailed analyses of factors affecting performance as well as
NSTAR Electric's plans to address issues that were identified.
On March 22, 2002, following a number of public hearings
throughout the NSTAR Electric service area, the MDTE issued an
order finding that NSTAR Electric had made progress in addressing
the issues that initiated the investigation and requiring that
NSTAR Electric submit further updated reports on specific issues
on a quarterly and annual basis. Boston Edison is unable to
estimate its ultimate liability for future costs or penalties as
a result of any further filings relating to this investigation.
G) Contingencies
1. Merger Rate Appeal
The 1999 MDTE order, which approved the rate plan associated with
the merger of BEC and COM/Energy, was appealed by certain parties
to the Massachusetts Supreme Judicial Court (SJC). In October
2001, the MDTE certified the record of the case to the SJC. The
appeals of the Massachusetts Attorney General (AG) and a separate
group that consists of The Energy Consortium (TEC) and Harvard
University (Harvard) are pending. On June 21, 2002, TEC and
Harvard filed their joint initial brief with the SJC and on June
24, 2002, the AG filed a brief in the consolidated proceeding.
TEC and Harvard allege that, in approving the rate plan and
merger proposal, the MDTE committed errors of law in the
following areas: (1) in adopting a public interest standard, the
MDTE applied the wrong standard of review, and failed to
investigate the propriety of rates and to determine that the
resulting rates of Boston Edison, Cambridge Electric, ComElectric
and NSTAR Gas were just and reasonable; (2) that in permitting
Cambridge Electric and ComElectric to adjust their rates by $49.8
million to reflect demand-side management costs, the MDTE failed
to determine whether such an adjustment was warranted in light of
other cost decreases; (3) that the MDTE's approval results in an
arbitrary and unjustified sharing of benefits and costs between
ratepayers and shareholders; and (4) that the MDTE's approval of
the rate plan guarantees shareholders recovery of future costs
without any future demonstration of customer savings. The AG's
brief includes similar arguments in each of these areas and adds
that, in allowing recovery of the acquisition premium, the MDTE
has improperly deviated from a cost basis in setting approved
rates and the ratemaking policies in other jurisdictions.
Responsive briefs from NSTAR and the MDTE are due on August 26,
2002, with a reply brief to be filed by TEC/Harvard and the AG on
September 23, 2002. Management is currently unable to determine
the outcome of this proceeding. Boston Edison intends to
vigorously defend its position relative to this appeal. 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 the results of operations for
a reporting period.
2. Environmental Matters
Boston Edison is involved in approximately 14 state-regulated
properties ("Massachusetts Contingency Plan, or "MCP sites")
where oil or other hazardous materials were previously spilled or
released. Boston Edison is required to clean up or otherwise
remedy these properties in accordance with specific state
regulations. There are uncertainties associated with the
remediation costs due to the final selection of the specific
cleanup technology and the particular characteristics of the
different sites. In addition to the MCP sites, Boston Edison also
faces possible liability as a potentially responsible party (PRP)
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 $4.7 million and $4.8 million are included as
liabilities in the accompanying Condensed Consolidated Balance
Sheets at June 30, 2002 and December 31, 2001, respectively,
related to the non-recoverable portion of these cleanup
liabilities. 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
possible that additional provisions for cleanup costs that may
result from a change in estimates could have an impact on the
results of operations for 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 and as either additional sites are
identified or Boston Edison's responsibilities for such sites are
resolved. 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 or results of operations for a reporting period.
2. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are also involved in certain legal matters.
Management is unable to fully determine a range of reasonably
possible legal costs in excess of amounts accrued. Based on the
information currently available, the Company 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 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.
H) Income Taxes
The following table reconciles the statutory federal income tax
rate to the annual estimated effective income tax rate for 2002
and the actual effective income tax rate for the year ended
December 31, 2001:
2002 2001
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income tax 4.4 4.4
benefit
Investment tax credits (0.4) (0.4)
Other 1.7 1.7
Effective tax rate 40.7% 40.7%
===== =====
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the future
tax effects of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. In accordance with
SFAS 109, net regulatory assets include $61.5 million and $62.1
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of June
30, 2002 and December 31, 2001, respectively. The regulatory
assets represent the additional future revenues to be collected
from customers for deferred income taxes.
Item 2. Management's Discussion and Analysis
The accompanying Management's Discussion and Analysis (MD&A)
should be read in conjunction with the MD&A in Boston Edison's
2001 Annual Report on Form 10-K.
Overview
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under Massachusetts
law and is a wholly owned subsidiary of NSTAR. Boston Edison's
wholly owned subsidiaries are Harbor Electric Energy Company
(HEEC) and BEC Funding LLC. NSTAR (or "the Company") is an
energy delivery company serving approximately 1.3 million
customers in Massachusetts, including approximately 1.1 million
electric customers in 81 communities and 246,000 gas customers in
51 communities. NSTAR is an exempt public utility holding
company. NSTAR's retail utility subsidiaries are Boston Edison
Company (Boston Edison), Commonwealth Electric Company
(ComElectric), Cambridge Electric Light Company (Cambridge
Electric) and NSTAR Gas Company (NSTAR Gas). NSTAR's three
retail electric companies operate under the brand name "NSTAR
Electric." Reference in this report to "NSTAR Electric" shall
mean each of Boston Edison, ComElectric and Cambridge Electric.
Cautionary Statement
This Management's Discussion and Analysis contains certain
forward-looking statements such as forecasts and projections of
expected future performance or statements of management's plans
and objectives. These forward-looking statements may also be
contained in filings with the Securities and Exchange Commission
(SEC) and in press releases and oral statements. You can
identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning in
connection with any discussion of future operating or financial
performance. These statements are based on the current
expectations, estimates or projections of management and are not
guarantees of future performance. Some or all of these forward-
looking statements may not turn out to be what the Company
expected. Actual results could potentially differ materially
from these statements. Therefore, no assurance can be given that
the outcomes stated in such forward-looking statements and
estimates will be achieved.
The impact of continued cost control procedures on operating
results could differ from current expectations. Boston Edison's
revenues from its electric sales are weather-sensitive,
particularly sales to residential and commercial customers.
Accordingly, Boston Edison's sales in any given period reflect,
in addition to other factors, the impact of weather, with warmer
temperatures generally resulting in increased electric sales.
Boston Edison anticipates that these sensitivities to seasonal
and other weather conditions will continue to impact its sales
forecasts in future periods. The effects of changes in weather,
economic conditions, tax rates, interest rates, technology,
prices and availability of operating supplies could materially
affect the projected operating results.
Boston Edison's forward-looking information depends in large
measure on prevailing governmental policies and regulatory
actions, including those of the Massachusetts Department of
Telecommunications and Energy (MDTE) and the Federal Energy
Regulatory Commission (FERC), with respect to allowed rates of
return, rate structure, financings, purchased power recovery,
acquisition and disposition of assets, operation and construction
of facilities, changes in tax laws and policies and changes in
and compliance with environmental and safety laws and policies.
The impacts of various environmental, legal 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 the specific cleanup technology could affect
the estimated cleanup liabilities. The impacts of changes in
available information and circumstances regarding legal issues
could affect any estimated litigation costs.
Boston Edison undertakes no obligation to publicly update forward-
looking statements, whether as a result of new information,
future events, or otherwise. You are advised, however, to
consult any further disclosures Boston Edison makes in its
filings to the SEC. Also note that Boston Edison provides in the
next paragraph a cautionary discussion of risks and other
uncertainties relative to its business. These are factors that
could cause its actual results to differ materially from expected
and historical performance. Other factors in addition to those
listed here could also adversely affect Boston Edison.
Amortization of Merger Related Costs
The merger creating NSTAR was accounted for under the purchase
method of accounting and resulted in the recognition of an
acquisition premium (goodwill). An integral part of the merger
is the rate plan of the combined retail utility subsidiaries that
was approved by the (MDTE) in July 1999. Significant elements of
the rate plan include a four-year distribution rate freeze
through 2003, recovery of the acquisition premium (goodwill) of
approximately $490 million over 40 years resulting in annual
amortization of approximately $12.2 million, and recovery of
filed transaction and integration costs (costs to achieve) of
$111 million over 10 years. Boston Edison expects to be required
by the Massachusetts Department of Telecommunications and Energy
(MDTE) to reconcile the actual CTA costs incurred with the
original estimate. This reconciliation will include a final
accounting of the deductibility for income tax purposes of each
component of CTA. The total consolidated NSTAR CTA is
approximately $144 million, with the majority of these costs to
be allocated to Boston Edison. This increase from the original
estimate is partially mitigated by the fact that the portion of
CTA that is not deductible for income tax purposes is
approximately $20 million lower than the original estimate.
As disclosed in Boston Edison's Form 10-K for the year ended
December 31, 2001, NSTAR expected that it would transfer $319
million of goodwill to its reporting unit, as a component of
Boston Edison's common equity, effective January 1, 2002.
However, upon further review and consideration of all the
transition provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), NSTAR has
determined it will continue to account for goodwill by the
acquired entities as it has done since the date of the merger.
For regulatory purposes, Boston Edison has been allocated $319
million of goodwill and is expensing this amount over 40 years.
This amount is being recovered from Boston Edison's customers and
will continue to be treated as an intercompany charge among the
Company and its affiliated companies, ComElectric, Cambridge
Electric and NSTAR Gas. The annual allocation of goodwill
amortization expense to the Company is approximately $8 million.
Significant Accounting Policies
The accompanying consolidated financial statements for each
period presented include the activities of Boston Edison's wholly
owned subsidiaries. All significant intercompany transactions
have been eliminated. Certain reclassifications have been made
to the prior year data to conform to the current presentation.
a. Regulatory - Accounting
Boston Edison follows accounting policies prescribed by the FERC
and the MDTE. In addition, Boston Edison is subject to the
accounting and reporting requirements of the SEC. The
accompanying condensed consolidated financial statements conform
to generally accepted accounting principles (GAAP). As a rate-
regulated company, Boston Edison is subject to the Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). The application of
SFAS 71 results in differences in the timing of recognition of
certain expenses from that of other businesses and industries.
The energy delivery business remains subject to rate-regulation
and continues to meet the criteria for application of SFAS 71.
This rate-making process results in the recording of regulatory
assets based on current and future cash inflows. As of June 30,
2002 and December 31, 2001, Boston Edison has recorded regulatory
assets of $721 million and $769 million, respectively. Boston
Edison continuously reviews these assets to assess its ultimate
recoverability within the approved regulatory guidelines.
Impairment risk associated with these assets relates to
potentially adverse legislative, judicial or regulatory actions
in the future. Plant and other regulatory assets related to the
generation business are recovered through the transition charge.
Boston Edison has long-term purchased power agreements that are
used primarily to meet its standard offer obligation. The
majority of these agreements are above-market and are not
reflected on the accompanying Condensed Consolidated Balance
Sheets. However, effective April 1, 2002, Boston Edison has
marked to market one purchased power contract that is reflective
of above-market costs. The above market value of this contract
is reflected as a component of power contracts on the
accompanying Condensed Consolidated Balance Sheets. Refer to
"Significant Accounting Policies," Item c. "Derivative
Instruments" below for a further discussion. The above-market
costs of all these contracts are currently being recovered
through the transition charge as these costs are incurred. This
recovery occurs through 2016. This recovery period coincide with
the contractual term of this purchased power agreement.
Furthermore, standard offer and default service revenues are
adjusted periodically to recover actual costs provided. Standard
offer and default service revenues are recognized based on these
approved rates for energy delivery. Refer to "Retail Electric
Rates" in this MD&A for a further discussion.
b. New Accounting Principles
On July 5, 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). This Statement, which
is effective for fiscal years beginning after June 15, 2002,
establishes accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. This standard requires entities
to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes the cost
by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement.
Management is currently assessing the impact of SFAS 143 in light
of its regulatory and accounting requirements. However, based on
Boston Edison's assessment to date, the adoption of SFAS 143 is
not expected to have a material effect on its results of
operations, cash flows, or financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets," (SFAS 144) was effective January 1, 2002, and
addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and the Long-
Lived Assets to Be Disposed Of" (SFAS 121) and APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business." SFAS 144 retains the
fundamental provisions of SFAS 121 and expands the reporting of
discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. Based on Boston Edison's
assessment to date, the adoption of SFAS 144 has not had a
material effect on its results of operation, cash flows, or
financial position.
SFAS No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities" (SFAS 146), requires entities to record a
liability for costs related to exit or disposal activities when
the costs are incurred. Previous accounting guidance required
the liability to be recorded at the date of commitment to an exit
or disposal plan. NSTAR is required to comply with SFAS 146
beginning January 1, 2003. NSTAR is in the process of assessing
the provisions of SFAS 146 in order to determine its impact on
its financial position and results of operations.
As of January 1, 2001, Boston Edison adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
as amended by SFAS Nos. 137 and 138, (collectively, SFAS 133).
SFAS 133 established accounting and reporting standards requiring
every derivative instrument (including certain derivative
instruments embedded in such contracts as 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. Previously, all of Boston Edison's commodity purchased
power contracts were exempt from this accounting treatment under
the normal purchased and sales exception of SFAS 133. As a
result, these contracts were not marked to market and have not
been reflected on the Consolidated Balance Sheets.
The impact of SFAS 133 is discussed in the following paragraph.
c. Derivative Instruments
The accounting for derivative financial instruments is subject to
change based on the guidance received from the Derivative
Implementation Group (DIG) of FASB. The DIG issued C15, on
October 10, 2001, which specifically addressed the interpretation
of clearly and closely related contracts that qualify for the
normal purchase and sales exception under SFAS 133. The
conclusion reached by the DIG was that contracts with a pricing
mechanism that is subject to future adjustment based on a generic
index that is not specifically related to the contracted service
commodity, generally would not qualify for the normal purchase
and sales exception.
On April 1, 2002, the effective date of DIG C15, Boston Edison
adopted the interpretation of this guidance and began marking to
market certain of its long-term purchased power contracts that
previously qualified for the normal purchase and sale exception.
Boston Edison has one purchased power contract that contain
components with pricing mechanisms that are based on a generic
index, such as the GNP or CPI and are applied to in significant
factors of these agreements. Therefore, as required by the
interpretation of C15, Boston Edison has recorded this contract
at fair value on its accompanying Condensed Consolidated Balance
Sheets in the second quarter of 2002. This action resulted in
the recognition of a liability for the fair value of the above-
market portion of this contract as of June 30, 2002 of
approximately $275 million and is a component of Power contracts
on the accompanying Condensed Consolidated Balance Sheets. Boston Edison
has recorded a corresponding regulatory asset to reflect the
future recovery of the above-market component of this contract
through its transition charge. Therefore, as a result of this
regulatory treatment, the recording of these contracts on its
accompanying Condensed Consolidated Balance Sheets does not
result in an earnings impact.
Boston Edison has other purchased power contracts in which the
fair value is significantly above-market. However, these
contracts have met the criteria for normal purchase and sales
exception and have not been recorded on the accompanying
Condensed Consolidated Balance Sheets. The above market portion
of these contracts are currently being recovered through the
transition charge.
Boston Edison will continue to monitor any further guidance that
may result from FASB revisions and clarifications to SFAS 133.
Based on Boston Edison's assessment to date, the adoption of SFAS
133 has not had a material effect on its results of operations,
cash flows, or financial position.
d. Revenue Recognition
Boston Edison's revenues are based on authorized rates approved
by the FERC and the MDTE. Estimates of transmission,
distribution and transition revenues for electricity delivered to
customers but not yet billed are accrued at the end of each
accounting period. Included as a component of transition revenue
is the recovery of all above market purchased power costs. The
determination of unbilled revenues requires management to
estimate the volume and pricing of electricity delivered to
customers prior to actual meter readings.
e. Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
requires a consideration of all pertinent facts and circumstances
and the use of professional judgment. These factors affect the
carrying values 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.
Rate and Regulatory Proceedings
The 1999 MDTE order, which approved the rate plan associated with
the merger of BEC Energy (former parent of Boston Edison) and
Commonwealth Energy System, was appealed by certain parties to
the Massachusetts Supreme Judicial Court (SJC). In October 2001,
the MDTE certified the record of the case to the SJC. The
appeals of the Massachusetts Attorney General (AG) and a separate
group that consists of The Energy Consortium (TEC) and Harvard
University (Harvard) are pending. On June 21, 2002, TEC and
Harvard filed their joint initial brief with the SJC and on June
24, 2002, the AG filed a brief in the consolidated proceeding.
TEC and Harvard allege that, in approving the rate plan and
merger proposal, the MDTE committed errors of law in the
following areas: (1) in adopting a public interest standard, the
MDTE applied the wrong standard of review, and failed to
investigate the propriety of rates and to determine that the
resulting rates of Boston Edison, Cambridge Electric, ComElectric
and NSTAR Gas were just and reasonable; (2) that in permitting
Cambridge Electric and ComElectric to adjust their rates by $49.8
million to reflect demand-side management costs, the MDTE failed
to determine whether such an adjustment was warranted in light of
other cost decreases; (3) that the MDTE's approval results in an
arbitrary and unjustified sharing of benefits and costs between
ratepayers and shareholders; and (4) that the MDTE's approval of
the rate plan guarantees shareholders recovery of future costs
without any future demonstration of customer savings. The AG's
brief includes similar arguments in each of these areas and adds
that, in allowing recovery of the acquisition premium, the MDTE
has improperly deviated from a cost basis in setting approved
rates and the ratemaking policies in other jurisdictions.
Responsive briefs from NSTAR and the MDTE are due on August 26,
2002, with a reply brief to be filed by TEC/Harvard and the AG on
September 23, 2002. Management is currently unable to determine
the outcome of this proceeding. NSTAR intends to vigorously
defend its position relative to this appeal. 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 the results of operations for a
reporting period.
On October 29, 2001, and as subsequently updated, NSTAR Electric
filed proposed service quality plans with the MDTE, which
included guidelines that had been established by the MDTE as a
result of its generic investigation of service quality issues.
The service quality plans established performance benchmarks
effective January 1, 2002 for certain identified measures of
service quality relating to customer service and billing
performance, customer satisfaction, and reliability and safety
performance. The companies are required to report annually
concerning their performance as to each measure and are subject
to maximum penalties of up to two percent of transmission and
distribution revenues should performance fail to meet the
applicable benchmarks. NSTAR Electric also filed with the MDTE a
report concerning performance on the identified service quality
measures for the two twelve-month periods ended August 31, 2000
and 2001. This report included a calculation of penalties in
accordance with MDTE guidelines. On March 22, 2002, following
hearings on the matter, the MDTE issued an order imposing a
service quality penalty of approximately $3.25 million on NSTAR
Electric of which $3.2 million related specifically to Boston
Edison and was refunded to customers as a credit to their bills
during the month of May 2002. This refund had no material effect
on Boston Edison's consolidated financial position or results of
operations.
Through June 30, 2002 Boston Edison's performance has resulted in
a minimum penalty situation that is currently undergoing internal
investigation in order to verify that correct procedures were
followed in establishing the benchmarks; however, these results
may not be indicative of the results that may be expected for the
remainder of the year, including the peak-demand period
anticipated during the remainder of the summer period.
Also on October 29, 2001, NSTAR Electric filed with the MDTE a
comprehensive report regarding electric system performance issues
encountered during the summer of 2001. The filing included
detailed analyses of factors affecting performance as well as
NSTAR Electric's plans to address issues that were identified.
On March 22, 2002, following a number of public hearings
throughout the NSTAR Electric service area, the MDTE issued an
order finding that NSTAR Electric had made progress in addressing
the issues that initiated the investigation and requiring that
NSTAR Electric submit further updated reports on specific issues
on a quarterly and annual basis. Boston Edison is unable to
estimate its ultimate liability for future costs or penalties as
a result of any further filings relating to this investigation.
However, in view of Boston Edison's current assessment of its
electric distribution system performance responsibilities,
existing legal requirements and regulatory policies, management
believes it would not have a material effect on Boston Edison's
consolidated financial position, cash flows or results of
operations for a reporting period.
Retail Electric Rates
The 1997 Restructuring Act requires electric distribution
companies to obtain and resell power to retail customers who
choose not to buy energy from a competitive energy supplier
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 overall rate reductions provided by the
Restructuring Act. New retail customers in the Boston Edison
service territories and other customers who are no longer
eligible for standard offer service and have not chosen to
receive service from a competitive supplier are provided default
service. The price of default service is intended to reflect the
average competitive market price for power. As of June 30, 2002
and December 31, 2001, Boston Edison had approximately 27% and
19%, respectively, of its load requirements provided by
competitive suppliers.
During 2000, Boston Edison's accumulated cost to provide default
and standard offer service was in excess of the revenues it was
allowed to bill by approximately $193.6 million. On January 1
and July 1, 2001, Boston Edison was permitted by the MDTE to
increase its rates to customers for standard offer and default
service to collect this shortfall. As a result, an over-
collection occurred of $20.4 million and $2.5 million as of June
30, 2002 and December 31, 2001, respectively.
In December 2000, the MDTE approved a standard offer fuel index
of 1.321 cents per kilowatt-hour (kWh) that was added to each
NSTAR Electric company's standard offer service rates for the
first half of 2001. In June 2001, the MDTE approved an
additional increase of 1.23 cents per kWh effective July 1, 2001
based on a fuel adjustment formula contained in its standard
offer tariffs to reflect the prices of natural gas and oil. In
December 2001, the MDTE approved a decrease in this fuel index of
1.125 cents to 1.426 cents per kWh for the first quarter of 2002
based on a decrease in the cost of fuel. Effective April 1,
2002, each NSTAR Electric company's fuel index was set to zero.
The MDTE has ruled that these fuel index adjustments are excluded
from the 15% rate reduction requirement under the Restructuring
Act.
In December 2001, Boston Edison filed proposed transition rate
adjustments for 2002, including a preliminary reconciliation of
costs and revenues through 2001. The MDTE subsequently approved
tariffs for each retail electric subsidiary effective January 1,
2002. The filings were updated in February 2002 to include final
costs for 2001. The MDTE approved the reconciliation of costs
and revenues for Boston Edison through 2000 in its approval on
November 16, 2001 of a Settlement Agreement between Boston Edison
and the(AG)resolving all outstanding issues in Boston Edison's
prior reconciliation filings. As a part of this settlement,
Boston Edison agreed to reduce the costs sought to be collected
through the transition charge by approximately $2.9 million as
compared to the amounts that were originally sought. This
settlement did not have a material adverse effect on Boston
Edison's consolidated financial position, results of operations
or cash flows.
Other Legal Matters
In the normal course of its business, Boston Edison is also
involved in certain other legal matters. Management is unable to
fully determine a range of reasonably possible legal costs in
excess of amounts accrued. 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 costs that may result from changes in estimates
could have a material impact on the results for a reporting
period.
Results of Operations - Three Months Ended June 30, 2002 vs.
Three Months Ended June 30, 2001
The following section of Management's Discussion and Analysis
compares the results of operations for each of the quarters ended
June 30, 2002 and 2001, respectively, and should be read in
conjunction with the condensed consolidated financial statements
and the accompanying notes included elsewhere in this report.
Net income was $24.5 million for the three months ended June 30,
2002 compared to $37 million for the same period in 2001, a 33.8%
decrease.
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 Condensed Consolidated Financial Statements.
Operating revenues
Operating revenues decreased $101.4 million or 21.3% during the
second quarter of 2002:
(in thousands)
Retail electric revenues $ (98,301)
Wholesale revenues (3,508)
Other revenues 405
Decrease in operating revenues $ (101,404)
Retail revenues were $341.4 million in 2002 compared to $439.7
million in 2001, a decrease of $98.3 million, or 22.4%. The
change in retail revenues includes a 3.9% decline in retail(kWh)
sales. In addition, lower rates implemented in January 2002 for
standard offer and default services accounted for a decrease in
retail revenues by $56.1 million and $35.0 million, respectively.
Transition revenues were $5.8 million higher. The increase in
transition revenues is net of a $4.2 million decline in earned
mitigation incentive revenues that were allowed for successfully
lowering transition charges. Transmission revenues increased by
$2.4 million partially due to higher distribution revenues of
$1.0 million. The change in retail revenues related to standard
offer and default services are fully reconciled to the costs
incurred and have no impact on net income.
Weather conditions greatly impact the change in electric revenues
in Boston Edison's service area. Temperatures were slightly
below normal for cooling degree days however slightly above
normal for heating degree days for the second quarter of 2002.
Below is comparative information on heating and cooling degree
days for the three-month periods ending June 30, 2002 and 2001
and the number of degree days in a "normal" second quarter period
as represented by a 30-year average. A "degree-day" is a unit
measuring how much the outdoor mean temperature falls below (for
heating) or rises above (for cooling), a base of 65 degrees.
Each degree below or above the base, is measured in one degree
day.
Normal
30-Year
2002 2001 Average
Heating degree days 854 779 807
Percentage change from prior 9.6% (13.0)%
year
Percentage change from 30-year 5.8% (3.5)%
average
Cooling degree days 159 276 175
Percentage change from prior (42.4)% (66.3)%
year
Percentage change from 30-year (9.1)% (57.7)%
average
Wholesale electric revenues were $15.2 million in 2002 compared
to $18.7 million in 2001, a decrease of $3.5 million, or 18.8%.
This decrease in wholesale revenues primarily reflects decreased
kWh sales of 18.8% and a decline in rates. Amounts collected
from wholesale customers have no impact on net income.
Other revenues were $18.7 million in the second quarter of 2002
compared to $18.3 million in the same period of 2001, an increase
of $0.4 million, or 2.2%. This increase primarily reflects
higher transmission revenues due to an increase in rates
effective January 2002.
Operating expenses
Purchased power costs were $182.3 million in the second quarter
of 2002 compared to $280.2 million in the same period of 2001, a
decrease of $97.9 million, or 34.9%. The decrease in expense
reflects lower purchased power requirements due to a 3.9%
decrease in retail sales, a 18.8% decrease in wholesale sales and
lower costs that reflect the prices of natural gas and oil.
Included in the current and prior period was ($10.8) million and
$42.9 million, respectively, that reflects changes in deferred
balances of standard offer and default service supply costs
resulting from the current period collection of these costs.
Boston Edison adjusts its electric rates to collect the costs
related to energy supply from customers on a fully reconciling
basis. Due to the rate adjustment mechanisms, changes in the
amount of energy supply expense have no impact on earnings.
Operations and maintenance expense was $59 million in 2002
compared to $41.9 million in 2001, an increase of $17.1 million,
or 40.8%. This increase reflects corrective electric systems
maintenance costs of $3.7 million in connection with the System
Improvement Program and increased pension costs of $11.9 million
due to a downturn in the equity market and lower interest costs.
These increases were partially offset by reduced labor costs and
the absence of storm related costs during 2002 resulting from
milder weather conditions.
Depreciation and amortization expense was $42.9 million in 2002
compared to $41.6 million in 2001, an increase of $1.3 million,
or 3%. The increase reflects a slightly higher level of
depreciable plant in service.
Demand side management (DSM) and renewable energy programs
expense was $10.8 million in the second quarter of 2002 compared
to $13.3 million in the same period of 2001, a decrease of $2.5
million, or 19%, primarily due to the timing of DSM expense which
is consistent with the collection of conservation and renewable
energy revenues. These costs are collected from customers on a
fully reconciling basis and therefore, fluctuations in program
costs have no impact on earnings, other than incentive amounts
earned by the company in return for increased customer
participation.
Property and other taxes were $17.5 million in 2002 compared to
$16.7 million in 2001, an increase of $0.8 million, or 4.8%. The
increase is due to higher overall municipal property taxes,
particularly for the City of Boston, offset by lower payroll
taxes.
Income taxes from operations were $16.7 million in 2002 compared
to $23.5 million in 2001, a decrease of $6.8 million, or 28.9%.
This decrease reflects lower pre-tax operating income in 2002.
Other income
Other income was $0.6 million in the second quarter of 2002
compared to $2.4 million in the same period of 2001, a net
decrease in income of $1.8 million due to the prior period
recognition of $3.0 million associated with demutualization of
two insurance companies during second quarter of 2001.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $20.4 million in 2002 compared to $22.2 million
in 2001, a decrease of $1.8 million, or 8.1%. Approximately $1
million of the decrease is related to securitization certificate
interest reflecting the scheduled retirement of this debt. The
remaining decrease relates to a decrease in interest on long-term
debt and is the result of a retirement of $24.3 million, 9.375%
debentures in August 2001.
Short-term debt and other interest charges were $2.0 million in
2002 compared to $3.4 million in 2001, an decrease of $1.4
million. Despite a higher average level of debt outstanding,
this decrease reflects a significant reduction in short-term
borrowing rates and a reduction in regulatory interest due to
reductions in the under-collection of regulatory deferrals.
Results of Operations - Six Months Ended June 30, 2002 vs. Six
Months Ended June 30, 2001
Net income was $41.4 million for the six months ended June 30,
2002 compared to $60.7 million for the same period in 2001, a
31.8% decrease.
The results of operations for the six month period are not
indicative of the results which may be expected for the entire
year due to the seasonality of kWh sales and revenues. Refer to
Note B to the Condensed Consolidated Financial Statements.
Operating revenues
Operating revenues decreased $145.8 million or 15.5% during the
six months ended June 30, 2002 as follows:
(in thousands)
Retail electric revenues $ (137,964)
Wholesale revenues (9,857)
Other revenues 2,020
Increase in operating revenues $ (145,801)
==========
Retail revenues were $726.4 million in 2002 compared to $864.4
million in 2000, an decrease of $138 million, or 16%. The change
in retail revenues includes lower rates implemented in January
2002 for standard offer and default service and a 3.9% decrease
in retail kilowatt-hour (kWh) electric sales. 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. Boston Edison will
continue to earn mitigation incentive revenue as it lowers its
transition charge through 2009. The revenues related to standard
offer and default services are fully reconciled to the costs
incurred and have no impact on net income.
Wholesale electric revenues were $32.4 million in 2002 compared
to $42.3 million in 2001, a decrease of $9.9 million, or 23.4%.
This decrease in wholesale revenues reflects decreased kWh sales
of 23.3%, primarily as the result of decreased demand.
Other revenues were $38.3 million in 2002 compared to $36.2
million in 2001, an increase of $2.1 million, or 5.8%.
Operating expenses
Purchased power costs were $426.5 million in 2002 compared to
$557 million in 2001, a decrease of $130.5 million, or 23.4%.
The decrease reflects lower purchased power requirements due to a
3.9% decrease in retail sales, a 23.3% decrease in wholesale
sales and lower costs that reflect the lower prices of natural
gas and oil. Included in the current and prior period was $17.6
million and $84.6 million, respectively, that reflects the
recognition of previously deferred standard offer and default
service supply costs resulting from the current period collection
of these costs. Boston Edison adjusts its electric rates to
collect the costs related to energy supply from customers on a
fully reconciling basis. Due to the rate adjustment mechanisms,
changes in the amount of energy supply expense have no impact on
earnings.
Operations and maintenance expense was $112.7 million in 2002
compared to $93.4 million in 2001, an increase of $ 19.3 million,
or 20.7%. This increase primarily reflects non-recurring
corrective electric systems maintenance costs of $4.2 million in
connection with the System Improvement Program and increased
pension related benefit costs of $11.6 million.
Depreciation and amortization expense was $85.7 million in 2002
compared to $83.9 million in 2001, an increase of $1.8 million,
or 2.1%. The increase reflects higher level of depreciable plant
in service.
Demand side management (DSM) and renewable energy programs
expense was $22.0 million in 2002 compared to $27.1 million in
2001, a decrease of $5.1 million, or 18.8% primarily due to the
timing of DSM expense which is consistent with the collection of
conservation and renewable energy revenues. These costs are
collected from customers on a fully reconciling basis and
therefore, fluctuations in program costs have no impact on
earnings, other than incentive amounts earned by the company in
return for increased customer participation.
Property and other taxes were $35.6 million in 2002 compared to
$34.8 million in 2001, an increase of $0.8 million, or 2.3%.
Income taxes from operations were $28.5 million in 2002 compared
to $39.9 million in 2001, an decrease of $11.4 million, or 28.6%.
This decrease reflects lower pretax operating income in 2002.
Other income
Other income was $1.0 million in 2002 compared to income of $3.3
million in the same period of 2001, a net decrease in income of
$2.3 million attributable to the recognition of $3.0 million of
income associated with the receipt of common stock in connection
with demutualization of two insurance companies during 2001.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $41.3 million in 2002 compared to $44.8 million
in 2001, a decrease of $3.5 million, or 7.8%. Approximately $2.1
million of the decrease is related to securitization certificate
interest reflecting the scheduled retirement of this debt. The
decrease in interest on long-term debt is primarily the result of
a reduction of approximately $1.3 million due to the following
retirement: $24.3 million of 9.375% debentures during the third
quarter of 2001.
Other interest charges were $4.5 million in 2002 compared to $5.9
million in 2001, an decrease of $1.4 million. The decrease
reflects a higher level of average short-term borrowings offset
by lower short-term interest rates.
Performance Assurances and Financial Guarantees
Boston Edison has entered into a series of purchased power
agreements to meet its default and standard offer service supply
obligations through December 31, 2002. Boston Edison currently
is recovering payments it is making to suppliers from its
customers. Most of the Company's power suppliers are
subsidiaries of larger companies with investment grade or better
credit ratings. In many cases, Boston Edison has financial
assurances and guarantees in place with the parent company of the
supplier, to minimize Boston Edison's risk in the event the
supplier encounters financial difficulties or otherwise fails to
perform. In addition, under these agreements, in the event that
the supplier (or its parent guarantor) fails to maintain an
investment grade credit rating, it is subject to providing
additional security for performance. Boston Edison's policy is
to enter into power supply arrangements only if the supplier (or
its parent guarantor) maintains an investment grade or better
credit rating. In view of current turmoil in the energy supply
industry, Boston Edison is unable to determine whether its
suppliers (or their parent guarantors) will become subject to
financial difficulties, or whether these financial assurances and
guarantees are sufficient. In such event, the supplier (or its
guarantor) may not be in a position to provide the required
additional security, and Boston Edison may then terminate the
agreement. Some of these agreements include a reciprocal
provision, where in the unlikely event that an Boston Edison
receives a credit rating below investment grade, it could be
required to provide additional security for performance, such
as a letter of credit.
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 Statements on Form S-3 of the Registrant
(File Nos. 33-57840 and 333-55890), filed with the Securities and
Exchange Commission on February 3, 1993 and February 20, 2001,
respectively.
Ratio of earnings to fixed charges and ratio of earnings to fixed
charges and preferred stock dividend requirements:
Twelve months ended June 30, 2002:
Ratio of earnings to fixed charges 3.09
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.92
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 4 - Instruments defining the rights of security
holders, including indentures
Management agrees to furnish to the SEC 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
Exhibits filed herewith:
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, 2002
12.2 - Computation of ratio of earnings to
fixed charges and preferred stock
dividend requirements for the twelve
months ended June 30, 2002
Exhibit 15 -
15.1 - Letter of Independent Accountants
Form S-3 Registration Statements filed
by Boston Edison Company on February 3,
1993 (File No. 33-57840) and February
20, 2001 (File No. 333-55890).
Exhibit 99 - Additional exhibits
99.1 - Report of Independent Accountants
99.2 - Certification Statement of Chief
Executive Officer of Boston Edison
pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002
99.3 - Certification Statement of Chief
Financial Officer of Boston Edison
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
b) A form 8-K was filed during the second quarter of 2002.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the
registrant has duly caused this report to be signed on its behalf
by the
undersigned thereunto duly authorized.
BOSTON EDISON COMPANY
(Registrant)
Date: August 14, 2002 /s/ ROBERT J. WEAFER, JR.
Robert J. Weafer, Jr.
Vice President,
Controller and Chief
Accounting Officer