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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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,Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-424-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 14, 2002
Common Stock, $1 par value 100 shares
The Company meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q as a wholly-owned subsidiary and is
therefore filing this Form with the reduced disclosure format.
Part I - Financial Information
Item 1. Financial Statements
Boston Edison Company
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Operating revenues $468,628 $622,439 $1,265,744 $1,565,356
Operating expenses:
Purchased power 199,435 343,530 625,950 900,490
Operations and maintenance 56,482 50,426 169,174 143,870
Depreciation and amortization 43,182 42,576 128,865 126,441
Demand side management and
renewable energy programs 12,344 13,707 34,367 40,764
Taxes - property and other 17,187 16,428 52,828 51,257
Income taxes 47,550 53,042 76,099 92,937
Total operating expenses 376,180 519,709 1,087,283 1,355,759
Operating income 92,448 102,730 178,461 209,597
Other income (deductions):
Other income, net 1,892 816 3,075 4,794
Other deductions, net (33) (474) (257) (1,188)
Total other income, net 1,859 342 2,818 3,606
Interest charges:
Long term debt 10,878 11,685 33,091 35,213
Transition property
securitization certificates 9,229 10,337 28,359 31,566
Short-term debt and other 3,016 (476) 7,512 5,382
Allowance for borrowed funds
used during construction (315) (776) (584) (1,951)
Total interest charges 22,808 20,770 68,378 70,210
Net income $ 71,499 $ 82,302 $ 112,901 $ 142,993
======== ======== ========== ==========
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Balance at the beginning of the $412,372 $346,850 $428,150 $352,832
period
Add:
Net income 71,499 82,302 112,901 142,993
Subtotal 483,871 429,152 541,051 495,825
Deduct:
Dividends declared:
Dividends to Parent 28,100 5,354 84,300 68,927
Preferred stock 490 1,490 1,470 4,470
Subtotal 28,590 6,844 85,770 73,397
Provision for preferred stock
redemption and issuance costs - 60 - 180
Balance at the end of the period $455,281 $422,248 $455,281 $422,248
======== ======== ======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
September 30, December 31,
2002 2001
Assets
Utility plant in service, at original cost $2,682,251 $2,641,759
Less: accumulated depreciation 846,296 875,158
1,835,955 1,766,601
Construction work in progress 72,499 38,818
Net utility plant 1,908,454 1,805,419
Equity investments 13,211 13,611
Current assets:
Cash and cash equivalents 17,171 13,549
Restricted cash 3,616 3,625
Accounts receivable customers, net 201,303 264,633
Accrued unbilled revenues 40,594 29,081
Materials and supplies, at average cost 18,109 15,461
Other 295 24,170
Total current assets 281,088 350,519
Deferred debits:
Regulatory assets - other 685,182 768,776
Regulatory assets - power contracts 265,723 -
Prepaid pension cost 238,315 218,713
Other 23,571 27,763
Total assets $3,415,544 $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)
September 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 455,281 428,150
Total common equity 984,076 956,945
Cumulative non-mandatory redeemable preferred
stock 43,000 43,000
Long-term debt 559,705 551,803
Transition property securitization
certificates 445,890 513,904
Total long-term debt 1,005,595 1,065,707
Total capitalization 2,032,671 2,065,652
Current liabilities:
Transition property securitization
certificates 59,122 40,972
Long-term debt 151,238 667
Notes payable - 191,500
Accounts payable -
Affiliates 9,442 73,243
Other 130,493 91,522
Accrued interest 5,808 10,738
Other 112,109 67,098
Total current liabilities 468,212 475,740
Deferred credits:
Accumulated deferred income taxes 544,296 559,516
Accumulated deferred investment tax credits 18,502 19,249
Power contracts 285,135 22,697
Other 66,728 41,947
Total deferred credits 914,661 643,409
Commitments and contingencies
Total capitalization and liabilities $ 3,415,544 $ 3,184,801
=========== ===========
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)
Nine Months Ended September 30,
2002 2001
Operating activities:
Net income $112,901 $142,993
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 128,865 126,441
Deferred income taxes and investment
tax credits 1,052 (61,696)
Allowance for borrowed funds used during
construction (584) (1,951)
Change in other current assets 73,053 (82,725)
Change in other current liabilities (1,021) 82,868
Prepaid pension (19,602) (29,867)
Regulatory assets 11,793 (67,496)
Other, net 52,942 (19,579)
Net cash provided by operating activities 359,399 88,988
Investing activities:
Plant expenditures (excluding AFUDC) (159,515) (92,178)
Other investments 400 10,585
Net cash used in investing activities (159,115) (81,593)
Financing activities:
Transition property securitization
certificates redemptions (49,864) (47,628)
Capital Contribution - Parent - 66,346
Redemptions of long term debt (61,028) (14,020)
Net change in notes payable - 64,000
Dividends paid (85,770) (73,397)
Net cash used in financing activities (196,662) (4,699)
Net increase in cash and cash equivalents 3,622 2,696
Cash and cash equivalents at beginning of year 13,549 12,125
Cash and cash equivalents at end of period $ 17,171 $ 14,821
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 66,013 $ 74,267
========= =========
Income taxes $ 17,625 $ 80,818
========= =========
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 September 30, 2002 and
for the periods ended September 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 the Company's management, all
adjustments (which are of a normal recurring nature) necessary
for a fair presentation of the financial information for the
periods indicated have been included. Certain reclassifications
have been made to the prior year data to conform with the current
presentation.
The results of operations for the three or nine months ended
September 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, economic
and other variable conditions.
C) Critical Accounting Policies
The results of operations, as presented on the accompanying
financial statements, are based on the application of accounting
principles generally accepted in the United States. The
application of these principles often requires management to make
judgements, assumptions and estimates that may result in
different financial presentations. Boston Edison believes that
the accounting principles presented herein are critical in terms
of understanding its financial statements. These principles
include the use of estimates for long-lived assets, equity method
investments and long-term obligations.
1. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make judgements, estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Certain of these accounting
principles require subjective and complex judgements used in the
preparation of financial statements. Accordingly, a different
financial presentation could result depending on the judgement,
estimates or assumptions that are used. Such estimates and
assumptions, include, but are not specifically limited to:
depreciation rates set by regulator, amortization terms, future
interest rates, future discount rates, mark-to-market valuations,
investment returns, impact of new accounting standards, future
costs associated with long-term contractual obligations, future
compliance costs associated with environmental regulations and
continuing creditworthiness of third parties. Actual results
could materially differ from these estimates.
2. Pension and Other Postretirement Benefits
Boston Edison is the sponsor of NSTAR's Pension Plan (the Plan).
As its sponsor, Boston Edison allocates the costs of the Plan
among itself and the other NSTAR subsidiary companies based on a
percentage of total direct labor charged to the Company.
The Company's pension and other postretirement costs are
dependent upon several factors and assumptions, such as the
discount rate, the long-term rate of return of plan assets and
health care trends.
The Company's plan assets have been affected by significant
declines in the equity markets in the past three years. These
conditions are expected to impact the funded status of the Plan
at year-end and pension and postretirement costs for 2003. Based
on current estimates, the Company anticipates recognizing pension
and other postretirement costs for 2003 of $25 million to $55
million above the 2002 level of $37 million. These costs would
result in approximately $20 million to $40 million of incremental
net pension and other postretirement expenses charged to expense
in 2003. Boston Edison will record approximately 60% of the
pension and other postretirement costs.
As a result of the negative investment performance, it is
probable that at December 31, 2002 the accumulated benefit
obligation will exceed Plan assets. Therefore, it is also
probable that the Company will be required to recognize an
additional minimum liability as prescribed by the Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions" (SFAS 87) and SFAS No. 132, "Employers' Disclosures
about Pensions and Postretirement Benefits." The additional
minimum liability would result in the removal of Prepaid pension
cost from Boston Edison's Consolidated Balance Sheet.
The Company's prepaid pension balance was $238 million as of
September 30, 2002. The liability and Prepaid pension adjustment
would be recorded as a non-cash charge to Other Comprehensive
Income (OCI), and would not affect the results of operations for
2002. The charge to OCI would be reversed in future periods at
the time that the fair value of the trust assts exceeds the
accumulated benefit obligation. Assuming there is no significant
change in interest rates or equity market performance for the
remainder of the year, the Company anticipates that the after-tax
charge to OCI will be approximately $200 million to $300 million.
The ultimate impact of the Plan's investment performance on the
Company's financial position, results of operations and cash
flows will not be known until the Plan's assets and liabilities
are valued at December 31, 2002.
The Plan currently meets the minimum funding requirements of the
Employment Retirement Income Security Act of 1974. However,
management is currently evaluating the extent to which it may
make additional optional cash contributions to the Plan, the
timing of each contribution and the impact on the additional
minimum liability. Should management elect to increase the level
of its cash contributions to the Plan, such cash requirements
could be material to its cash flows. Management believes it has
adequate access to capital resources to support these
contributions. Pension and other postretirement costs and cash
contributions beyond 2003 are largely dependent on the financial
markets.
In addition, the Company anticipates filing a request with the
MDTE seeking an order to mitigate the non-cash charge to OCI and
the increases in expected pension and other postretirement
benefit costs and cash contributions. If approved, this request
could potentially allow the Company to record a regulatory asset
in lieu of a charge to OCI. The Company cannot determine whether
the request to the MDTE will be approved or whether the approval
would be sufficient to record a regulatory asset under SFAS 71.
D) 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 costs to achieve (CTA) of $111 million over 10
years. CTA are the costs incurred to execute the merger
including the employee costs for a voluntary severance program,
costs of financial advisers, legal costs, and other transaction
and systems integration costs. Boston Edison expects to be
required by the 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 actual consolidated NSTAR CTA
is approximately $143 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. The
CTA and goodwill amounts were filed and approved as part of the
rate plan. The annual allocation of CTA amortization expense to
the Company is approximately $7.2 million.
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 (FASB) 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.
The annual allocation of goodwill amortization expense to the
Company is approximately $8 million. 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.
E) New Accounting Standards
On July 5, 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). This Statement, which
is effective for Boston Edison on January 1, 2003, establishes
accounting and reporting standards 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. SFAS 143 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. Management has
identified several minor long-lived assets, including lease
arrangements, and has determined that it is legally responsible
to remove such property and comply with the requirement of this
standard. However, based on Boston Edison's assessment of its
potential liability and rate regulatory treatment for the
identified assets, the adoption of SFAS 143 is not expected to
have an 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, among other things, 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. The
implementation of SFAS 144 had no effect on Boston Edison's
results of operations or financial position.
The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146) that 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 anticipates that the implementation of this
standard will not have an adverse impact on its financial
position or 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 accompanying Condensed Consolidated Balance
Sheets.
Refer to Note F "Derivative Instruments" for further discussion.
F) 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 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 contains
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 beginning 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 September 30,
2002 of approximately $266 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 pursuant to SFAS 133 and C15 and have not been recorded
on the accompanying Condensed Consolidated Balance Sheets. The
above market portion of this contract 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 net assets.
G) Service Quality Index
On October 29, 2001, and as subsequently updated, NSTAR Electric
filed proposed service quality plans for each company 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. NSTAR Electric is required to report
annually concerning its 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 its 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 as if such
guidelines were in effect during the period. 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 that was refunded to customers as a credit to their
bills during the month of May 2002. As a result of the accrual
for this estimated penalty during 2001, this refund had no effect
on Boston Edison's consolidated financial position or results of
operations in 2002.
Through September 30, 2002 Boston Edison's performance has
resulted in a minimal penalty situation based on both actual
results through September 2002 and forecasted results for the
remaining three-month period. However, these results may not be
indicative of the results for the remainder of the year. Boston
Edison accounts for its service quality penalties pursuant to
SFAS No. 5, "Accounting for Contingencies." Accordingly, these
penalties are monitored on a monthly basis to determine Boston
Edison's contingent liability, and if Boston Edison determines it
is probable that a liability has been incurred and is estimable,
Boston Edison would then accrue an appropriate liability.
Annually, each NSTAR Electric company, including Boston Edison,
makes a service quality performance filing with the MDTE.
Any settlement or rate order that would result in a different
liability (or credit) level from what has been accrued would
be adjusted in the period an agreement is received from the MDTE.
H) 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 were filed on August
30, 2002 and September 9, 2002, respectively. Reply briefs were
filed by TEC/Harvard and the AG on September 27, 2002 and October
3, 2002, respectively. On November 4, 2002, oral arguments
occurred before the SJC. 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 the reporting period in which the unfavorable
outcome occurs.
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 September 30, 2002 and December 31, 2001, respectively,
related to the non-recoverable portion of these cleanup
liabilities and is the gross amount of NSTAR's estimated
environmental clean-up obligations that is not certain to be
recoverable in rates. Accordingly, this amount has not been
reduced by any potential rate recovery treatment of these costs
or any potential recovery from the company's insurance carriers.
Prospectively, should NSTAR be allowed regulatory rate recovery
of these specific costs, it would record an offsetting regulatory
asset and record a credit to operating expenses equal to
previously expensed costs. 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.
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.
3. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are also involved in certain legal matters,
including civil lawsuits. Management is unable to fully
determine a range of reasonably possible court-ordered damages,
settlement amounts, and related litigation costs ("legal
liabilities") that would be in excess of amounts accrued. Based
on the information currently available, the Company does not
believe that it is probable that any such additional legal
liability will have a material impact on its consolidated
financial position. However, it is reasonably possible that
additional legal liabilities costs that may result from changes
in estimates could have a material impact on its results of
operations for a reporting period.
I) Income Taxes
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 $61.2 million and $62.1
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of
September 30, 2002 and December 31, 2001, respectively. The
regulatory assets represent the additional future revenues to be
collected from customers for deferred 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 benefit 4.4 4.4
Investment tax credits (0.4) (0.4)
Other 2.1 1.8
Effective tax rate 41.1% 40.8%
==== ====
J) Subsequent Events
Long-Term Debt Issuance
On October 15, 2002, Boston Edison sold $400 million of 4.875% 10-
year debentures and $100 million of 3-year floating rate
debentures priced at LIBOR plus 50 basis points. The net
proceeds were used to repay consolidated outstanding short-term
debt balances. For financial reporting purposes, short-term debt
has been reclassified on the accompanying Condensed Consolidated
Balance Sheets as Long-term debt.
Item 2. Management's Discussion and Analysis of Results of
Operations
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 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). Its wholesale
electric subsidiary is Canal Electric Company (Canal). 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. NSTAR's non-utility operations include
telecommunications - NSTAR Communications, Inc. (NSTAR Com),
district heating and cooling operations (Advanced Energy Systems,
Inc. and NSTAR Steam Corporation) and a liquefied natural gas
service company (Hopkinton LNG Corp.).
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
above paragraphs 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 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 costs to achieve (CTA) of $111 million over 10
years. CTA are the costs incurred to execute the merger
including the employee costs for a voluntary severance program,
costs of financial advisers, legal costs, and other transaction
and systems integration costs. 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 actual consolidated NSTAR CTA is
approximately $143 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. The
CTA and goodwill amounts were filed and approved as part of the
rate plan. The annual allocation of CTA amortization expense to
the Company is approximately $7.2 million.
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 (FASB) 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.
Critical 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 September
30, 2002 and December 31, 2001, Boston Edison has recorded
regulatory assets of $951 million and $769 million, respectively.
Boston Edison continuously reviews these assets to assess its
ultimate recoverability within the approved regulatory
guidelines. Boston Edison anticipates to fully recover in its
rates these regulatory assets. However, 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
"Critical Accounting Policies," Item d. "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 coincides with the
contractual terms of these purchased power agreements.
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. Pension and Other Postretirement Benefits
Boston Edison is the sponsor of NSTAR's Pension Plan (the Plan).
As its sponsor, Boston Edison allocates the costs of the Plan
among itself and the other NSTAR subsidiary companies based on a
percentage of total direct labor charged to the Company.
The Company's pension and other postretirement costs are
dependent upon several factors and assumptions, such as the
discount rate, the long-term rate of return of plan assets and
health care trends.
The Company's plan assets have been affected by significant
declines in the equity markets in the past three years. These
conditions are expected to impact the funded status of the Plan
at year-end and pension and postretirement costs for 2003. Based
on current estimates, the Company anticipates recognizing pension
and other postretirement costs for 2003 of $25 million to $55
million above the 2002 level of $37 million. These costs would
result in approximately $20 million to $40 million of incremental
net pension and other postretirement expenses charged to expense
in 2003. Boston Edison will record approximately 60% of the
pension and other postretirement costs.
As a result of the negative investment performance, it is
probable that at December 31, 2002 the accumulated benefit
obligation will exceed Plan assets. Therefore, it is also
probable that the Company will be required to recognize an
additional minimum liability as prescribed by the Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions" (SFAS 87) and SFAS No. 132, "Employers' Disclosures
about Pensions and Postretirement Benefits." The additional
minimum liability would result in the removal of Prepaid pension
cost from Boston Edison's Consolidated Balance Sheet.
The Company's prepaid pension balance was $238 million as of
September 30, 2002. The liability and Prepaid pension adjustment
would be recorded as a non-cash charge to Other Comprehensive
Income (OCI), and would not affect the results of operations for
2002. The charge to OCI would be reversed in future periods at
the time that the fair value of the trust assts exceeds the
accumulated benefit obligation. Assuming there is no significant
change in interest rates or equity market performance for the
remainder of the year, the Company anticipates that the after-tax
charge to OCI will be approximately $200 million to $300 million.
The ultimate impact of the Plan's investment performance on the
Company's financial position, results of operations and cash
flows will not be known until the Plan's assets and liabilities
are valued at December 31, 2002.
The Plan currently meets the minimum funding requirements of the
Employment Retirement Income Security Act of 1974. However,
management is currently evaluating the extent to which it may
make additional optional cash contributions to the Plan, the
timing of each contribution and the impact on the additional
minimum liability. Should management elect to increase the level
of its cash contributions to the Plan, such cash requirements
could be material to its cash flows. Management believes it has
adequate access to capital resources to support these
contributions. Pension and other postretirement costs and cash
contributions beyond 2003 are largely dependent on the financial
markets.
In addition, the Company anticipates filing a request with the
MDTE seeking an order to mitigate the non-cash charge to OCI and
the increases in expected pension and other postretirement
benefit costs and cash contributions. If approved, this request
could potentially allow the Company to record a regulatory asset
in lieu of a charge to OCI. The Company cannot determine whether
the request to the MDTE will be approved or whether the approval
would be sufficient to record a regulatory asset under SFAS 71.
c. New Accounting Standards
On July 5, 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). This Statement, which
is effective for NSTAR on January 1, 2003, establishes accounting
and reporting standards 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. SFAS 143 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. Management has identified several minor long-lived
assets, including lease arrangements, and has determined that it
is legally responsible to remove such property and comply with
the requirement of this standard. However, based on the
company's assessment of its potential liability and rate
regulatory treatment for certain identified assets, the adoption
of SFAS 143 had no 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, among other things, 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. The
implementation of SFAS 144 had no effect on the Company's results
of operations or financial position.
The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146) that 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 anticipates that the implementation of this standard will
not have an adverse impact on its financial position or 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 the company'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 accompanying Condensed Consolidated Balance
Sheets.
The impact of SFAS 133 is discussed in the following paragraph.
d. 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 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 contains
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 beginning 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 September 30,
2002 of approximately $266 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 pursuant to SFAB 133 and C15 and have not been recorded
on the accompanying Condensed Consolidated Balance Sheets. The
above market portion of this contract 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 net assets.
e. Revenue Recognition
Boston Edison's revenues are based on authorized rates approved
by the FERC and the MDTE and are recorded as energy services are
delivered. 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.
In determining its unbilled electric based revenues, Boston
Edison compares the actual delivery of megawatthours (mWh)
demanded (its territory load) to its actual monthly billed mWh
sales. The difference in volume represents the level of unbilled
mWhs. Dollars associated with the unbilled mWhs are calculated
by multiplying these units by Boston Edison's approved
distribution revenue rates. There is no inherent volatility in
the rate used to determine unbilled revenue. Using this
estimation methodology, there is minimal volatility in estimating
this component of operating revenues.
f. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make judgements, estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Certain of these accounting
principles require subjective and complex judgements used in the
preparation of financial statements. Accordingly, a different
financial presentation could result depending on the judgement,
estimates or assumptions that are used. Such estimates and
assumptions, include, but are not specifically limited to:
depreciation rates set by regulator, amortization terms, future
interest rates, future discount rates, mark-to-market valuations,
investments returns, impact of new accounting standards, future
costs associated with long-term contractual obligations, future
compliance costs associated with environmental regulations and
continuing creditworthiness of third parties. Actual results
could materially differ from those estimates.
Rate and Regulatory Proceedings
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 were filed on August
30, 2002 and September 9, 2002, respectively. Reply briefs were
filed by TEC/Harvard and the AG on September 27, 2002 and October
3, 2002, respectively. On November 4, 2002, oral arguments
occurred before the SJC. 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 the reporting period in which the unfavorable
outcome occurs.
Service Quality Plans
On October 29, 2001, and as subsequently updated, NSTAR Electric
filed proposed service quality plans for each company 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. NSTAR Electric is required to report
annually concerning its 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 its 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 as if such
guidelines were in effect during the period. 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 that was refunded to customers as a credit to their
bills during the month of May 2002. As a result of the accrual
for this estimated penalty during 2001, this refund had no effect
on Boston Edison's consolidated financial position or results of
operations in 2002.
Through September 30, 2002 Boston Edison Electric's performance
has resulted in a minimal penalty situation based on both actual
results through September 2002 and forecasted results for the
remaining three-month period. However, these results may not be
indicative of the results for the remainder of the year. Boston
Edison accounts for its service quality penalties pursuant to
SFAS No. 5, "Accounting for Contingencies." Accordingly, these
penalties are monitored on a monthly basis to determine Boston
Edison's contingent liability, and if Boston Edison determines it
is probable that a liability has been incurred and is estimable,
Boston Edison would then accrue an appropriate liability.
Annually, each NSTAR Electric Company, including Boston Edison,
makes a service quality performance filing with the MDTE. Any
settlement or rate order that would result in a different
liability (or credit) level from what has been accrued would be
adjusted in the period an agreement is received from the MDTE.
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 February 2005 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 September 30,
2002 and December 31, 2001, Boston Edison had approximately 27%
and 19%, respectively, of its load requirements provided by
competitive suppliers.
As of December 31, 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. Furthermore, when
combined with the reduction in energy supply costs experienced in
2001 and through the first half of 2002, rates were reduced on
January 1, 2002, April 1, 2002 and July 1, 2002.
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, NSTAR 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 Massachusetts Attorney General 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 and its
subsidiaries are also involved in certain legal matters,
including civil lawsuits. Management is unable to fully
determine a range of reasonably possible court-ordered damages,
settlement amounts, and related litigation costs ("legal
liabilities") that would be 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
liabilities costs that may result from changes in estimates could
have a material impact on its results of operations for a
reporting period.
Results of Operations - Three Months Ended September 30, 2002 vs.
Three Months Ended September 30, 2001
The following section of MD&A compares the results of operations
for each of the three months ended September 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 $71.5 million for the three months ended September
30, 2002 compared to $82.3 million for the same period in 2001, a
14% decrease.
The results of operations for the three-month period are not
indicative of the results that may be expected for the entire
year due to the seasonality of kilowatt-hour (kWh) sales and
revenues. Refer to Note B to the accompanying Unaudited
Condensed Consolidated Financial Statements.
Operating revenues
Operating revenues decreased $153.8 million or 25% for the three-
month period ended September 30, 2002 as compared to the same
period in 2001 as follows:
(in thousands)
Retail electric revenues $ (143,794)
Wholesale revenues (5,560)
Other revenues (4,457)
Decrease in operating revenues $ (153,811)
The most significant factor contributing to this decrease in
operating revenues was the reduction in standard offer and
default service rates charged to customers.
Retail revenues were $432.4 million in the third quarter of 2002
compared to $576.2 million in the same period of 2001, a decrease
of $143.8 million, or 25%. Lower rates implemented in January,
April and July 2002 for standard offer and default services
accounted for a decrease in retail revenues of $72.1 million and
$55.1 million, respectively. Transition revenues increased by
$19.7 million due primarily to the securitization true-up
adjustment, as noted below, and to higher rates for transition
cost recovery offset by a $2.2 million decline in earned
mitigation incentive revenues that were allowed for successfully
lowering transition charges. Transmission revenues increased by
$1.7 million partially due to the Company's recently completed
true-up filing. 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.
On October 7, 2002, Boston Edison and the AG (Settling Parties),
submitted for approval by the MDTE a Joint Motion for Approval of
Settlement Agreement and a Settlement Agreement resolving issues
in Boston Edison's reconciliation of costs and revenues for the
year 2001. Among other issues, the Settlement Agreement includes
an adjustment relating to the true-up of costs relating to
securitization. As a result of this Settlement Agreement with
the AG and an opinion from NSTAR's regulatory counsel, Boston
Edison recognized approximately $11.4 million in transition
charge revenues. This benefit was significantly offset by other
regulatory true-up adjustments. Management anticipates final
approval by the MDTE in the fourth quarter. However, should the
MDTE issued a final adverse decision, it could have a material
impact on its results of operations for a particular reporting
period.
Warmer weather conditions that were 34% above normal for the
third quarter of 2002 impacted the margin for electric sales.
Below is comparative information on cooling degree days for the
three-month periods ending September 30, 2002 and 2001 and the
number of degree days in a "normal" third quarter period as
represented by a 30-year average. A "cooling degree-day" is a
unit measuring how much the outdoor mean temperature rises above
a base of 65 degrees. Each degree below or above the base, is
measured in one degree day.
Normal
30-Year
Average
2002 2001
Cooling degree days 792 526 593
Percentage change from prior year 50.6% 26.1%
Percentage change from 30-year average 33.6% (11.3)%
Wholesale electric revenues were $12.4 million in the third
quarter of 2002 compared to $17.9 million in the same period of
2001, a decrease of $5.5 million, or 31%. This decrease in
wholesale revenues primarily reflects decreased kWh sales of
35.14% due to expiration of two municipal power supply contracts
on May 31, 2002 and a decline in rates. Amounts collected from
wholesale customers have no impact on results of operations.
Other revenues were $23.7 million in the third quarter of 2002
compared to $28.2 million in the same period of 2001, an decrease
of $4.5 million, or 16%. The decrease reflects the absence in
2002 of a $4.2 million FERC-approved settlement with transmission
contract customers.
Operating expenses
Purchased power costs were $199.4 million in the third quarter of
2002 compared to $343.5 million in the same period of 2001, a
decrease of $144 million, or 42%. The decrease in expense
reflects a 31% decrease in wholesale sales and lower costs that
reflect the prices of natural gas and oil. The net change in
the current quarter also reflects the impact of the
under-recovery of standard offer and default service supply
costs of $27.1 million as a credit to expense as compared to
an over-recovery of these costs of a $67.1 million change
in the same period last year. 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 $56.4 million in 2002
compared to $50.4 million in 2001, an increase of $6.0 million,
or 12%. This increase reflects an increase in pension costs as
well as increases in other benefit costs due to a downturn in the
equity markets, lower interest costs and health care 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 $43.1 million in 2002
compared to $42.5 million in 2001, an increase of $0.6 million,
or 1%. The increase reflects a slightly higher level of
depreciable plant in service.
Demand side management (DSM) and renewable energy programs
expense was $12.3 million in the third quarter of 2002 compared
to $13.7 million in the same period of 2001, a decrease of $1.4
million, or 11%, 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 $17.1 million in 2002 compared to
$16.4 million in 2001, an increase of $0.7 million, or 5%. The
increase is due to higher overall municipal property taxes,
particularly for the City of Boston, offset by lower payroll
taxes relating to other communities.
Income taxes from operations were $47.5 million in 2002 compared
to $53.0 million in 2001, a decrease of $5.5 million, or 11%.
This decrease reflects lower pre-tax operating income in 2002.
Other income, net
Other income, net was $1.9 million in 2002 compared to other income,
net of $0.3 million in the same period of 2001, a net increase
in other income, net of $1.6 million, due primarily from income
earned in connection with the sale of certain property.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $20.1 million in 2002 compared to $22.0 million
in 2001, a decrease of $1.9 million, or 9%. 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 the retirement of $24.3 million, 9.375%
debentures in August 2001.
Short-term debt and other interest charges were $3 million in
2002 compared to a net benefit of $0.5 million in 2001, an
increase of $3.5 million due to a reduction in regulatory
interest resulting from reductions in the under-collection of
regulatory deferrals offset by a significant decline in short-
term borrowing rates.
Results of Operations - Nine Months Ended September 30, 2002 vs.
Nine Months Ended September 30, 2001
Net income was $112.9 million for the nine months ended September
30, 2002 compared to $143 million for the same period in 2001, a
21% decrease.
The results of operations for the nine month period are not
indicative of the results which may be expected for the entire
year due to the seasonality of kWh sales and revenues. Refer to
Note B to the accompanying Condensed Consolidated Financial
Statements.
Operating revenues
Operating revenues decreased $299.6 million or 19% during the
nine months ended September 30, 2002 as follows:
(in thousands)
Retail electric revenues $ (285,759)
Wholesale revenues (15,476)
Other revenues 1,623
Decrease in operating revenues $ (299,612)
==========
Retail revenues were $1,158.9 million in 2002 compared to
$1,444.6 million in 2000, a decrease of $285.7 million, or 20%.
The change in retail revenues includes lower rates implemented in
January, April and July 2002 for standard offer and default
service and a 0.3% decrease in retail kilowatt-hour (kWh)
electric sales. Transition revenues increased by
$29.3 million due primarily to the securitization true-up
adjustment, as noted below, and to higher rates for transition
cost recovery offset by a $6.3 million decline in earned
mitigation incentive revenues that were allowed for successfully
lowering transition charges. 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 $44.8 million in 2002 compared
to $60.3 million in 2001, a decrease of $15.5 million, or 26%.
This decrease in wholesale revenues reflects decreased kWh sales
of 20.7%, primarily as the result of decreased demand resulting
from the expiration of two municipal contracts on May 31, 2002.
After October 31, 2005, the Company will no longer have contracts
for the supply of wholesale power. Amounts collected from
wholesale customers are credited to retail customers through the
transition charge. Therefore, the expiration of these contracts
has no impact on results of operations.
Other revenues were $62 million in 2002 compared to $60.4 million
in 2001, an increase of $1.6 million, or 3%. The increase
reflects higher Regional Network Services transmission revenues.
Operating expenses
Purchased power costs were $625.9 million in 2002 compared to
$900.5 million in 2001, a decrease of $274.6 million, or 31%.
The decrease reflects lower purchased power requirements due to a
0.3% decrease in retail sales, a 26% decrease in wholesale sales
and lower costs that reflect the lower prices of natural gas and
oil. The net change in the current nine-month period also reflects
the impact of the under-recovery of standard offer and default
service supply costs of $9.4 million as a credit to expense as
compared to an over-recovery of these costs of a $152.3 million
change in the same period last year. 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 $169.1 million in 2002
compared to $143.9 million in 2001, an increase of $25.2 million,
or 18%. This increase primarily reflects non-recurring
corrective electric systems maintenance costs and increased
pension related benefit costs of $13.2 million.
Depreciation and amortization expense was $128.9 million in 2002
compared to $126.4 million in 2001, an increase of $2.5 million,
or 2%. The increase reflects higher level of depreciable plant
in service.
Demand side management (DSM) and renewable energy programs
expense was $34.4 million in 2002 compared to $40.8 million in
2001, a decrease of $6.4 million, or 16% 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 $52.8 million in 2002 compared to
$51.3 million in 2001, an increase of $1.5 million, or 3% due to
higher municipal property taxes for the City of Boston of $3.5
million offset by a decrease in rates of approximately $1.7
million in municipal property taxes in the Company's service
area, excluding the City of Boston.
Income taxes from operations were $76.0 million in 2002 compared
to $92.9 million in 2001, an decrease of $16.9 million, or 18.2%.
This decrease reflects lower pretax operating income in 2002.
Other income, net
Other income, net was $2.8 million in 2002 compared to income of
$3.6 million in the same period of 2001, a net decrease in other
income, net of $0.8 million. The decrease was primarily due to
the absence in 2002 of the sale of equity securities in
connection with the demutualization of John Hancock and MetLife.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $61.5 million in 2002 compared to $66.8 million
in 2001, a decrease of $5.3 million, or 8%. Approximately $3.2
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 $1.7 million due to the retirement
of $24.3 million of 9.375% debentures during the third quarter of
2001.
Other interest charges were $7.5 million in 2002 compared to $5.3
million in 2001, an increase of $2.2 million. The increase
reflects a $6.5 million increase in the carrying charges due the
Company associated with reductions in the level of under-
collected regulatory deferrals. The higher level of short-term
borrowings were offset by a significantly lower rates resulting
in lower interest cost savings of $3.9 million.
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. These agreements are
generally for a term of six months to twelve months. The company
is currently negotiating with suppliers and anticipates having
purchased power agreements in place to service its Default
Service and Standard Offer obligation in 2003 under similar terms
as those in the past. Boston Edison currently is recovering
payments it is making to suppliers from its customers. Most of
the Boston Edison'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 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 required to provide additional security for performance.
Boston Edison's policy is to enter into power supply arrangements
only if the supplier (or its parent guarantor has 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 distribution company receives a credit rating below
investment grade, that company 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.
Item 4. Controls and Procedures
Boston Edison's disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports
that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities
and Exchange Commission.
Within 90 days prior to the date of filing this Quarterly Report
on Form 10-Q, Boston Edison carried out an evaluation, under the
supervision and with the participation of Boston Edison's
management, including Boston Edison's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of Boston Edison's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer
concluded that Boston Edison's disclosure controls and procedures
are effective in timely alerting them to material information
relating to Boston Edison's information required to be disclosed
by Boston Edison in the reports that it files or submits under
the Securities Exchange Act of 1934. These reports are recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and
forms.
Subsequent to the date of that evaluation, there have been no
significant changes in Boston Edison's internal controls or in
other factors that could significantly affect internal controls,
nor were any corrective actions required with regard to
significant deficiencies and material weaknesses.
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 September 30, 2002:
Ratio of earnings to fixed charges 2.60
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.54
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 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) No Form 8-K was filed during the third 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: November 14, 2002 /s/ R. J. WEAFER, JR.
Robert J. Weafer, Jr.
Vice President,
Controller and Chief
Accounting Officer
Sarbanes - Oxley Section 302(a) Certifications
I, Thomas J. May, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boston
Edison;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of Boston Edison as of,
and for, the periods presented in this quarterly report;
4. Boston Edison's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for Boston Edison and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to Boston Edison,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Boston Edison's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report are our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. Boston Edison's other certifying officer and I have disclosed,
based on our most recent evaluation, to Boston Edison's
auditors and the audit committee of NSTAR's board of trustees:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Boston
Edison's ability to record, process, summarize and report
financial data and have identified for Boston Edison's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. Boston Edison's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ THOMAS J. MAY
Thomas J. May
Chairman, President and
Chief Executive Officer
I, James J. Judge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boston
Edison:
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of Boston
Edison as of, and for, the periods presented in this quarterly
report;
4. Boston Edison's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for Boston Edison and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to Boston
Edison, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of Boston Edison's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report are our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. Boston Edison's other certifying officer and I have disclosed,
based on our most recent evaluation, to Boston Edison's
auditors and the audit committee of NSTAR's board of trustees:
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect Boston
Edison's ability to record, process, summarize and report
financial data and have identified for Boston Edison's
auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in Boston Edison's internal controls; and
6. Boston Edison's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14,2002 By: /s/ JAMES J. JUDGE
James J. Judge
Senior Vice President, Treasurer
and Chief Financial Officer