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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 March 31, 2003
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 May 6, 2003
Common Stock, $1 per value 75 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.
Boston Edison Company
Form 10-Q - Quarterly Period Ended March 31, 2003
Index
Part I. Financial Information Page No.
Item 1. Financial Statements -
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of
Retained Earnings 4
Condensed Consolidated Balance Sheets 5 - 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated
Financial Statements 8 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 20
Item 4. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Sarbanes-Oxley Act Section 302(a) Certification Statements 24 - 25
___________________________________
Important Information
Boston Edison Company files its Forms 10-K, 10-Q and 8-K reports
and other information with the Securities and Exchange Commission
(SEC). You may access materials Boston Edison has filed with the
SEC free of charge on the SEC's website at www.sec.gov. In
addition, certain of Boston Edison's SEC filings can be accessed
on NSTAR's website at www.nstaronline.com. Copies of Boston
Edison's filings may also be obtained by writing or calling
Boston Edison's Investor Relations Department using the address
or phone number on the cover of this Form 10-Q.
Part I - Financial Information
Item 1. Financial Statements
Boston Edison Company
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands)
Three Months Ended March 31,
2003 2002
Operating revenues $ 374,060 $ 410,075
Operating expenses:
Purchased power 189,829 232,557
Operations and maintenance 53,439 53,730
Depreciation and amortization 42,991 42,779
Demand side management and renewable
energy programs 12,011 11,221
Taxes:
Property and other 18,232 18,168
Income 12,800 11,861
Total operating expenses 329,302 370,316
Operating income 44,758 39,759
Other income (deductions):
Other income, net 666 525
Other deductions, net (338) (213)
Total other income, net 328 312
Interest charges:
Long term debt 14,976 11,113
Transition property securitization
certificates 8,684 9,805
Short-term debt and other interest 2,457 2,451
Allowance for borrowed funds used during
construction (58) (171)
Total interest charges 26,059 23,198
Net income $ 19,027 $ 16,873
========= =========
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 March 31,
2003 2002
Balance at the beginning of the period $475,993 $428,150
Add:
Net income 19,027 16,873
Subtotal 495,020 445,023
Deduct:
Dividends declared:
Dividends to Parent 25,490 28,100
Preferred stock 490 490
Subtotal 25,980 28,590
Balance at the end of the period $469,040 $416,433
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
March 31, December 31,
2003 2002
Assets
Utility plant in service, at original cost $2,799,582 $2,782,854
Less: accumulated depreciation 864,602 854,857
1,934,980 1,927,997
Construction work in progress 44,007 41,944
Net utility plant 1,978,987 1,969,941
Equity investments 11,410 11,592
Current assets:
Cash and cash equivalents 8,240 44,062
Restricted cash 3,616 3,616
Accounts receivable customers, net 183,843 177,681
Accrued unbilled revenues 14,337 21,468
Materials and supplies, at average cost 13,985 13,291
Deferred tax asset - 18,141
Other 15,965 5,575
Total current assets 239,986 283,834
Deferred debits:
Regulatory assets 1,233,009 1,265,062
Other 177,925 178,429
Total assets $3,641,317 $3,708,858
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
March 31, December 31,
2003 2002
Capitalization and Liabilities
Common equity:
Common stock, par value $1 per share
(75 shares issued and outstanding) $ - $ -
Premium on common stock 278,795 278,795
Retained earnings 469,040 475,993
Total common equity 747,835 754,788
Cumulative non-mandatory redeemable preferred
stock 43,000 43,000
Long-term debt 840,187 840,194
Transition property securitization 411,081 445,890
Total long-term debt 1,251,268 1,286,084
Total capitalization 2,042,103 2,083,872
Current liabilities:
Transition property securitization 58,405 40,555
Long-term debt 275 150,687
Notes payable 176,000 -
Accounts payable -
Affiliates 3,301 32,450
Other 122,498 117,600
Accrued interest 17,752 13,899
Other 48,565 46,971
Total current liabilities 426,796 402,162
Deferred credits:
Accumulated deferred income taxes and
unamortized investment tax credits 614,672 611,469
Power contracts 312,408 350,117
Other 245,338 261,238
Total deferred credits 1,127,418 1,222,824
Commitments and contingencies
Total capitalization and liabilities $3,641,317 $ 3,708,858
========= ==========
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)
Three Months Ended March 31,
2003 2002
Operating activities:
Net income $ 19,027 $ 16,873
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 42,991 42,779
Deferred income taxes and investment
tax credits 22,286 20,100
Allowance for borrowed funds used during
construction (58) (171)
Net changes in working capital (10,777) (5,907)
Deferred debits and credits (63,022) 7,183
Net cash provided by operating activities 10,447 80,857
Investing activities:
Plant expenditures (excluding AFUDC) (29,093) (54,099)
Other investments 182 93
Net cash used in investing activities (28,911) (54,006)
Financing activities:
Redemptions of long-term debt (150,419) -
Transition property securitization
certificates redemptions (16,959) (16,040)
Net change in notes payable 176,000 10,500
Dividends paid (25,980) (28,590)
Net cash used in financing activities (17,358) (34,130)
Net decrease in cash and cash equivalents (35,822) (7,279)
Cash and cash equivalents at beginning of year 44,062 13,549
Cash and cash equivalents at end of period $ 8,240 $ 6,270
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 22,210 $ 25,572
======== ========
Income taxes $ 3,681 $ 8,290
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The accompanying Notes should be read in conjunction with Notes
to the Consolidated Financial Statements included in Boston
Edison's 2002 Annual Report on Form 10-K.
NOTE A. Business Organization and Summary of Significant
Accounting Policies
1. 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 1.4 million customers in Massachusetts,
including approximately 1.1 million electric customers in 81
communities and 300,000 gas customers in 51 communities. Boston
Edison serves approximately 683,000 electric customers in the
city of Boston and 39 surrounding cities and towns. NSTAR's
retail utility subsidiaries are Boston Edison, Commonwealth
Electric Company (ComElectric), Cambridge Electric Light Company
(Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). NSTAR's
three retail electric companies operate under the brand name
"NSTAR Electric." Reference in this report to "NSTAR Electric"
shall mean each of Boston Edison, ComElectric and Cambridge
Electric. NSTAR has a service company that provides management
and support services to substantially all NSTAR subsidiaries -
NSTAR Electric & Gas Corporation (NSTAR Electric & Gas).
2. Basis of Presentation
The financial information presented as of March 31, 2003 and for
the periods ended March 31, 2003 and 2002 have been prepared from
Boston Edison's books and records without audit by independent
accountants. Financial information as of December 31, 2002 was
derived from the audited consolidated financial statements of
Boston Edison, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America (GAAP). In the opinion of management, all adjustments
(which are of a normal recurring nature) necessary for a fair
presentation of the financial information for the periods
indicated have been included. Certain reclassifications have
been made to the prior year data to conform with the current
presentation.
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 distribution
business remains subject to rate-regulation and continues to meet
the criteria for application of SFAS 71.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
these estimates.
The results of operations for the three months ended March 31,
2003 and 2002 are not indicative of the results that may be
expected for an entire year. Kilowatt-hour sales and revenues
are typically higher in the winter and summer than in the spring
and fall, as sales tend to vary with weather conditions.
Note B. Asset Retirement Obligations
On January 1, 2003, Boston Edison adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations" (SFAS 143). This
Statement 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.
Boston Edison has not identified any long-lived assets to which
there is a legal obligation to remove such assets. The
recognition of a potential asset retirement obligation would have
had no impact on its earnings. The Company, which follows SFAS
71, would have established regulatory assets or liabilities to
defer any differences between the liabilities established for
ratemaking purposes and those recorded as required under SFAS
143.
For Boston Edison, cost of removal (negative net salvage) is
recognized as a component of depreciation expense in accordance
with approved regulatory treatment. Since Boston Edison applies
SFAS 71, it will continue to include removal costs in
depreciation expense and will quantify the removal costs included
in accumulated depreciation as regulatory liabilities in footnote
disclosure. The Company estimates that at March 31, 2003, there
is approximately $145 million of removal costs, not yet incurred,
included in accumulated depreciation.
Note C. Derivative Instruments - Power Contracts
Boston Edison accounts for its power contracts in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). 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 No. C15, "Scope Exceptions: Normal Purchases and Normal
Sales Exception for Option-Type Contracts and Forward Contracts
in Electricity," which specifically addressed the interpretation
of clearly and closely related contracts that qualify for the
normal purchases 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 purchases
and sales exception.
Boston Edison has one purchased power contract that contains
components with a pricing mechanism that is based on a pricing
index, such as the GNP or CPI. Although these factors are only
applied to certain ancillary pricing components of this
agreement, as required by the interpretation of DIG Issue C15,
Boston Edison began recording this contract at fair value on its
Consolidated Balance Sheets during 2002. This action resulted in
the recognition of a liability for the fair value of the above-
market portion of this contract at March 31, 2003 and December
31, 2002 of approximately $258 million and $305 million,
respectively, and is a component of Deferred credits - Power
contracts on the accompanying Condensed Consolidated Balance
Sheets. The decline in above-market costs during the current
period was primarily due to an increase in wholesale energy
prices during the first quarter. 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 the Company's
accompanying Condensed Consolidated Balance Sheets does not
result in an earnings impact.
Note D. Other Utility Matters
1. Service Quality Index
On February 28, 2003, Boston Edison filed its 2002 Service
Quality Report with the Massachusetts Department of
Telecommunications and Energy (MDTE) that reflected significant
improvements in reliability and performance and indicated that no
penalty should be assessed for the 2002 period. These penalties
are monitored on a monthly basis to determine the Company's
contingent liability, and if the Company determines it is
probable that a liability has been incurred and is estimable, the
Company would then accrue an appropriate liability. Annually,
each NSTAR utility subsidiary 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 when such settlement
or rate order is issued.
Through March 31, 2003, Boston Edison's performance has met or
exceeded the applicable established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year, including the peak-demand period
anticipated during the summer period.
2. Regulatory Proceedings
In December 2002, NSTAR Electric filed proposed transition rate
adjustments for 2003, including a preliminary reconciliation of
transition, transmission, standard offer and default service
costs and revenues through 2002. The MDTE approved tariffs for
each retail electric subsidiary effective January 1, 2003. The
filings were updated in February 2003 to include final costs and
revenues for 2002.
On April 24, 2003, NSTAR Electric received approval from the MDTE
for a Standard Offer Service Fuel Adjustment of $0.902 per
kilowatt-hour to be effective May 1, 2003. The increase in rates
is in response to continuing high wholesale costs. In the past,
the MDTE has allowed companies to adjust to rapidly changing
market costs of oil and natural gas used to generate electricity.
In accordance with that order, Boston Edison implemented the
adjustment in January 2001 as energy prices soared on world
markets and reduced the charge back to zero in April 2002 when
market energy costs dropped. The Boston Edison Standard Offer
Service Fuel Adjustment remained at zero for the past year. The
MDTE has ruled that these fuel index adjustments are excluded
from the 15% rate reduction requirement under the 1997
Massachusetts Restructuring Act (Restructuring Act).
Note E. 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 $60 million and $60.3
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of March
31, 2003 and December 31, 2002, 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 2003
and the actual effective income tax rate for the year ended
December 31, 2002:
2003 2002
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income
tax benefit 4.4 4.4
Investment tax credit amortization (0.5) (0.5)
Other 1.9 1.9
Effective tax rate 40.8% 40.8%
==== ====
Note F. Commitments and Contingencies
1. Environmental Matters
As of March 31, 2003, Boston Edison is involved in 10 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 remediate 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. Estimates of approximately $0.4 million are
included as liabilities in the accompanying Condensed
Consolidated Balance Sheets at March 31, 2003 and December 31,
2002.
In addition to the MCP sites, Boston Edison also faces possible
liability as a result of involvement in 8 multi-party disposal
sites or third party claims associated with contamination
remediation. Boston Edison generally expects to have only a
small percentage of the total potential liability for these
sites. Estimates of approximately $3.3 million are included as
liabilities in the accompanying Condensed Consolidated Balance
Sheets at March 31, 2003 and December 31, 2002.
Accordingly, the MCP and multi-party disposal site amounts have
not been reduced by any potential rate recovery treatment of
these costs or any potential recovery from Boston Edison's
insurance carriers. Prospectively, should Boston Edison be
allowed to collect these specific costs from customers, 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
evolve or are resolved. Boston Edison's ultimate liability for
future environmental remediation costs may vary from these
estimates. Boston Edison's management does not believe that its
current assessment of its environmental responsibilities,
existing legal requirements and regulatory policies, will have a
material adverse effect on Boston Edison's consolidated financial
position or results of operations for a reporting period.
2. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are involved in certain legal matters, including
civil litigation. 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, Boston Edison 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 that
may result from changes in estimates could have a material impact
on its results of operations for a reporting period.
Note G. Subsequent Event
Pension and Postretirement Benefit Obligations Other Than
Pensions (PBOP) Adjustment Mechanism Tariff Filing
On April 16, 2003, Boston Edison submitted a request to the MDTE
for approval to establish a reconciliation adjustment mechanism
to provide for the recovery of costs associated with the
Company's obligations to provide its employees pension benefits
and PBOP.
The Company's proposal is intended to give effect to the
accounting treatment previously approved by the MDTE, through a
reconciling ratemaking mechanism that will provide rate stability
and ensure that customers pay no more or no less than the amounts
needed to extend pension and PBOP benefits to the Company's
employees. In addition, this mechanism will ensure that the
financial integrity of the Company is not impaired by financial
reporting requirements and cash flow issues that arise from the
extreme volatility of pension and PBOP funding obligations.
The Company's proposed reconciliation adjustment mechanism does
not result in any immediate change (increase or decrease) in
prices paid by customers and allows the Company to recover the
same types of pension and PBOP costs that have always been
recovered in rates. In addition, the proposed reconciliation
adjustment mechanism removes the extreme volatility in rates that
may be the result of requirements of existing financial
accounting standards, provides for more timely recovery of costs
from or refunds of gains to customers, provides for an annual
filing, true-up and review by the MDTE, carves out pension and
PBOP costs from regular distribution rates so that the MDTE may
review them annually, and ensures that benefit trust funds are
sufficient to provide the Company's employees with the benefits
to which they are entitled.
The MDTE has historically permitted the recovery of prudently
incurred expenditures relating to pension and PBOP benefits for
the Company's employees. The Company consistently contributes to
trust funds that hold and invest the contributions until benefits
are paid.
The Company is requesting that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003.
The Company cannot determine the timing and ultimate outcome of
this request.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
The accompanying MD&A should be read in conjunction with the MD&A
in Boston Edison's 2002 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 1.4 million customers in Massachusetts,
including approximately 1.1 million electric customers in 81
communities and 300,000 gas customers in 51 communities. Boston
Edison serves approximately 683,000 electric customers in the
city of Boston and 39 surrounding communities. NSTAR's retail
utility subsidiaries are 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 has a service company that provides
management and support services to substantially all NSTAR
subsidiaries - NSTAR Electric & Gas Corporation (NSTAR Electric &
Gas).
Cautionary Statement
This MD&A contains certain forward-looking statements such as
forecasts and projections of expected future performance or
statements of management's plans and objectives. 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 effects of cost control procedures, changes in weather,
economic conditions, tax rates, interest rates, technology, and
prices and availability of operating supplies could materially
affect actual results quarter to quarter and projected operating
results.
Boston Edison's forward-looking information is based 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, continued recovery of regulatory assets,
financings, purchased power and cost of gas 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, and regulatory matters
could differ from current expectations.
You are advised to consider all further disclosures Boston Edison
makes in its filings to the Securities and Exchange Commission
(SEC). This report also describes changes to Boston Edison's
material contingencies and critical accounting policies and
estimates in this MD&A and in the accompanying Notes to Condensed
Consolidated Financial Statements, and Boston Edison encourages
you to review these disclosures. You are also advised to
consider the "Cautionary Statements" Boston Edison made in its
2002 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
For a complete discussion of critical accounting policies, refer
to "Critical Accounting Policies and Estimates" in Item 7 of
Boston Edison's 2002 Form 10-K. There have been no substantive
changes to those policies and estimates.
Asset Retirement Obligations
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" (SFAS 143). This Statement
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.
The Company has not identified any long-lived assets to which
there is a legal obligation to remove such assets. The
recognition of a potential asset retirement obligation would have
had no impact on its earnings. The Company, which follows SFAS
71, would have established regulatory assets or liabilities to
defer any differences between the liabilities established for
ratemaking purposes and those recorded as required under SFAS
143.
For Boston Edison, cost of removal (negative net salvage) is
recognized as a component of depreciation expense in accordance
with approved regulatory treatment. Since Boston Edison applies
SFAS 71, it will continue to include removal costs in
depreciation expenses and will quantify the removal costs
included in accumulated depreciation as regulatory liabilities in
footnote disclosure. The Company estimates that at March 31,
2003, there is approximately $145 million of removal costs, note
yet incurred, included in accumulated depreciation.
Rate and Regulatory Proceedings
a. Pension and Postretirement Benefit Obligations Other Than
Pensions (PBOP)
On April 16, 2003, Boston Edison submitted a request to the MDTE
for approval to establish a reconciliation adjustment mechanism
to provide for the recovery of costs associated with the
Company's obligations to provide its employees pension benefits
and PBOP.
The Company's proposal is intended to give effect to the
accounting treatment previously approved by the MDTE, through a
reconciling ratemaking mechanism that will provide rate stability
and ensure that customers pay no more or no less than the amounts
needed to extend pension and PBOP benefits to the Company's
employees. In addition, this mechanism will ensure that the
financial integrity of the Company is not impaired by financial
reporting requirements and cash flow issues that arise from the
extreme volatility of pension and PBOP funding obligations.
The Company's proposed reconciliation adjustment mechanism does
not result in any immediate change (increase or decrease) in
prices paid by customers and allows the Company to recover the
same types of pension and PBOP costs that have always been
recovered in rates. In addition, the proposed reconciliation
adjustment mechanism removes the extreme volatility in rates that
may be the result of requirements of existing financial
accounting standards (SFAS Nos. 87 and 106), provides for more
timely recovery of costs from or refunds of gains to customers,
provides for an annual filing, true-up and review by the MDTE,
carves out pension and PBOP costs from regular distribution rates
so that the MDTE may review them annually, and ensures that
benefit trust funds are sufficient to provide NSTAR employees
with the benefits to which they are entitled.
The MDTE has historically permitted the recovery of prudently
incurred expenditures relating to pension and PBOP benefits for
the Company's employees. The Company consistently contributes to
trust funds that hold and invest the contributions until benefits
are paid.
The Company is requesting that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003.
The Company cannot determine the timing and ultimate outcome of
this request.
This action does not preclude Boston Edison from pursuing a
general base rate increase in the future. Boston Edison's four-
year rate freeze expires in the third quarter of this year.
b. Service Quality Index
On February 28, 2003, Boston Edison filed its 2002 Service
Quality Report with the MDTE that reflected significant
improvements in reliability and performance and indicated that no
penalty should be assessed for the 2002 period. These penalties
are monitored on a monthly basis to determine the Company's
contingent liability, and if the Company determines it is
probable that a liability has been incurred and is estimable, the
Company would then accrue an appropriate liability. Annually,
each NSTAR utility subsidiary 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 when such settlement
or rate order is issued.
Through March 31, 2003, Boston Edison's performance has met or
exceeded the applicable established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year, including the peak-demand period
anticipated during the summer period.
c. Retail Electric Rates
The electric distribution companies obtain and resell power to
retail customers through either standard offer service or default
service for those who choose not to buy energy from a competitive
energy supplier. 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 territory 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 March 31, 2003 and December 31, 2002,
customers of Boston Edison had approximately 19% and 28%,
respectively, of their load requirements provided by competitive
suppliers. The decline in customers served by competitive
suppliers declined due to changes in market pricing.
On April 24, 2003, Boston Edison received approval from the MDTE
to include a Standard Offer Service Fuel Adjustment of 0.902
cents per kilowatt-hour (kWh) that will be added to Boston
Edison's standard offer service rate effective May 1, 2003. The
higher rate is necessary due to the increase in prices of natural
gas and oil.
Other Legal Matters
In the normal course of its business, Boston Edison and its
subsidiaries are involved in certain legal matters, including
civil litigation. 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, Boston Edison 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 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 March 31, 2003 vs.
Three Months Ended March 31, 2002
The following section of MD&A compares the results of operations
for each of the quarters ended March 31, 2003 and 2002,
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 $19.0 million for the three months ended March 31,
2003 compared to $16.9 million for the same period in 2002, an
increase of 12%.
The results of operations for the quarter are not indicative of
the results which may be expected for the entire year due to the
seasonality of kilowatt-hour (kWh) sales and revenues. Refer to
the accompanying Note A to the Condensed Consolidated Financial
Statements.
The following is a summary of retail electric energy sales for
the periods indicated:
Three Months Ended March 31,
2003 2002 % Change
Retail Electric Sales -
MWH
Residential 1,178,996 1,022,236 15.3
Commercial 2,305,117 2,127,890 8.3
Industrial 304,205 328,449 (7.4)
Other 40,648 41,274 (1.5)
Total retail sales 3,828,966 3,519,849 8.8
========= =========
Weather conditions greatly impact the change in electric revenues
in Boston Edison's service area. The first quarter period of
2003 was significantly colder than the same period in 2002.
Below is comparative information on heating degree days for the
three-month periods ending March 31, 2003 and 2002 and the number
of degree days in a "normal" first quarter period as represented
by a 30-year average.
Normal
30-Year
2003 2002 Average
Heating degree days 3,181 2,429 2,870
Percentage change from prior year 31.0% (16.8)%
Percentage change from 30-year average 10.8% (15.3)%
Operating revenues
Operating revenues for the first three months of 2003 decreased
8.8% from the same period in 2002, primarily resulting from
decreases in electric rates. The major revenue components were
as follows:
(in thousands)
Retail electric revenues $ (28,405)
Wholesale revenues (9,585)
Other revenues 1,975
Decrease in operating revenues $ (36,015)
==========
Retail revenues were $344.9 million in 2003 compared to $373.3
million in 2002, a decrease of $28.4 million, or 8%. The decline
in retail revenues reflects the significant decreases in both
standard offer and default service rates offset, in part, by the
impact of an 8.8% increase in retail energy sales. The lower
rates implemented in January 2003 for standard offer and default
services accounted for decreases in retail revenues of $41.6
million and $6.1 million, respectively. Transition revenues were
$13.4 million higher in the current quarter while distribution
revenues increased $6.9 million and transmission revenues
increased $2.6 million. The increases in each of these
components of revenue were due primarily to the increase in
retail energy sales. 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.
As shown in the table above, the 8.8% increase in the current
quarter's retail MWH sales primarily reflects higher sales in the
residential and commercial sectors. Boston Edison's sales to
residential and commercial customers were approximately 31% and
60%, respectively, of its total retail sales mix for the current
quarter and provided nearly all of its distribution revenue. The
7.4% decline in industrial sector sales reflects the continued
slowdown in economic conditions that resulted from reduced
production or facility closings. The industrial sector comprises
approximately 8% of Boston Edison's energy sales.
Wholesale revenues were $7.6 million in 2003 compared to $17.2
million in 2002, a decrease of $9.6 million, or 56%. This
decrease in wholesale revenues reflects a decrease in kWh sales
of 62% due to the expiration of three municipal contracts during
2002. Amounts collected from wholesale customers have no impact
on net income.
Other revenues were $21.5 million in the first quarter of 2003
compared to $19.5 million in the same period of 2002, an increase
of $2 million, or 10%. This increase primarily reflects higher
transmission revenues.
Operating expenses
Despite higher retail unit sales of 8.8%, purchased power costs
were $189.8 million in the first quarter of 2003 compared to
$232.6 million in the same period of 2002, a decrease of $42.8
million, or 18%. The decrease in expense reflects the decrease
in wholesale sales and lower prices for natural gas and oil. The
decrease in expense also includes the recognition of $28.4
million relating to the deferred standard offer and default
service supply costs for current period under-collection of these
costs. Boston Edison adjusts its electric rates to collect the
costs related to energy supply from customers on a fully
reconciling basis. Due to the rate adjustment mechanisms,
changes in the amount of energy supply expense have no impact on
earnings.
Operations and maintenance expense was $53.4 million in 2003
compared to $53.7 million in 2002, a decrease of $0.3 million, or
less than 1%. This decrease reflects reduced maintenance expense
of $3.7 million due primarily to improvements made in electric
distribution services in 2002. This decrease was offset by
increases in benefits costs of $1.5 million and customer service
of $1.6 million, the latter reflecting the increase in retail
sales.
Depreciation and amortization expense was $42.9 million in 2003
compared to $42.8 million in 2002, an increase of $0.1 million,
or less than 1%. The increase reflects a slightly higher level
of depreciable plant in service.
Demand side management (DSM) and renewable energy programs
expense was $12 million in the first quarter of 2003 compared to
$11.2 million in the same period of 2002, an increase of $0.8
million, or 7%. The timing of DSM expense 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.
Property and other taxes were $18.2 million in both 2003 and
2002. Higher overall municipal property taxes, particularly for
the City of Boston, were offset by lower payroll taxes.
Income taxes from operations were $12.8 million in 2003 compared
to $11.9 million in 2002, an increase of $0.9 million, or 8%.
This increase reflects higher pre-tax operating income in 2003.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $23.7 million in 2003, compared to $20.9 million
in 2002, an increase of $2.8 million, or 13%. The increase
reflects the impact of the issuance of $500 million in long-term
debt ($400 million of 4.875% 10-year debentures and $100 million
of 3-year floating rate debentures) in October 2002 partially
offset by the absence of $1.2 million in interest on the 8.25%
debentures that were retired in September 2002 and a $1.1 million
decline in interest on the securitization certificates due to the
scheduled retirement of this debt.
Other interest charges were $2.5 million in both 2003 and 2002.
The impact of reductions in short-term borrowing rates and levels
of borrowings were offset by an increase in regulatory interest.
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 (1) to timely alert 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 (2) to ensure that
appropriate information is 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 1. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are involved in certain legal matters, including
civil litigation. 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, Boston Edison 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 that
may result from changes in estimates could have a material impact
on its results of operations for a reporting period.
Item 5. Other Information
The following is furnished for informational purposes.
Ratio of earnings to fixed charges and ratio of earnings to fixed
charges and preferred stock dividend requirements:
Twelve months ended March 31, 2003:
Ratio of earnings to fixed charges 2.95
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.87
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits filed herewith or incorporated by reference (as indicated):
Exhibit 4 - Instruments Defining the Rights of Security
Holders, Including Indentures
4.1 Revolving Credit Agreement dated November 15,
2002 (filed herewith)
Management agrees to furnish to the Securities
and Exchange Commission, upon request, a copy
of any agreement or instrument defining the
rights of holders of any long-term debt whose
authorization does not exceed 10% of total
assets
Exhibit 12 - Statement re Computation of Ratios
12.1 Computation of Ratio of Earnings to Fixed
Charges for the Twelve Months Ended March 31,
2003 (filed herewith)
12.2 Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividend
Requirements for the Twelve Months Ended
March 31, 2003 (filed herewith)
Exhibit 99 - Additional Exhibits
99.1 Certification Statement of Chief Executive
Officer of Boston Edison Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
99.2 Certification Statement of Chief Financial
Officer of Boston Edison Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
99.3 Report of Independent Accountants
b) Reports on Form 8-K:
A report on Form 8-K was filed on January 3, 2003 following
the MDTE approval received on December 20, 2002 to allow the
Company to defer as a regulatory asset, an additional minimum
liability, and the difference between the level of pension and
postretirement benefits that is included in rates and the
amounts that would have been recorded under SFAS 87 and SFAS
106 in 2003.
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: May 9, 2003 /s/ Robert J. Weafer,Jr.
Robert J. Weafer, Jr.
Vice President,
Controller and Chief
Accounting Officer
Sarbanes - Oxley Section 302(a) Certification
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 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: May 9, 2003 By: /s/ THOMAS J. MAY
Thomas J. May
Chairman, President and
Chief Executive Officer
Sarbanes - Oxley Section 302(a) Certification
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 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: May 9, 2003 By: /s/ JAMES J. JUDGE
James J. Judge
Senior Vice President, Treasurer
and Chief Financial Officer