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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 June 30, 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 at August 8, 2003
Common Stock, $1 par 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 June 30, 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 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 24
Item 4. Controls and Procedures 24 - 25
Part II. Other Information
Item 1. Legal Proceedings 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25 - 26
Signature 27
___________________________________
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Operating revenues $395,307 $370,593 $769,367 $780,668
Operating expenses:
Purchased power 202,661 177,510 392,490 410,067
Operations and maintenance 51,395 58,962 104,834 112,692
Depreciation and amortization 42,988 42,904 85,979 85,683
Demand side management and
renewable energy programs 10,598 10,803 22,609 22,024
Taxes - property and other 17,470 17,472 35,702 35,640
Income taxes 19,455 16,688 32,255 28,549
Total operating expenses 344,567 324,339 673,869 694,655
Operating income 50,740 46,254 95,498 86,013
Other income (deductions):
Other income, net 604 826 1,213 1,351
Other deductions, net - (179) (281) (392)
Total other income, net 604 647 932 959
Interest charges:
Long term debt 12,605 11,099 27,581 22,212
Transition property
securitization 8,221 9,326 16,905 19,131
Short-term debt and other 2,524 2,045 4,981 4,496
Allowance for borrowed funds
used during construction (148) (98) (206) (269)
Total interest charges 23,202 22,372 49,261 45,570
Net income $ 28,142 $ 24,529 $ 47,169 $ 41,402
======== ======== ======== ========
Per share data is not relevant because Boston Edison Company's common stock is
wholly-owned by NSTAR.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Boston Edison Company
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Balance at the beginning
of the period $469,040 $416,433 $475,993 $428,150
Add:
Net income 28,142 24,529 47,169 41,402
Subtotal 497,182 440,962 523,162 469,552
Deduct:
Dividends declared:
Dividends to Parent 25,490 28,100 50,980 56,200
Preferred stock 490 490 980 980
Subtotal 25,980 28,590 51,960 57,180
Balance at the end of the period $471,202 $412,372 $471,202 $412,372
======== ======== ======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 30, December 31,
2003 2002
Assets
Utility plant in service, at original cost $2,828,059 $2,782,854
Less: accumulated depreciation 871,518 854,857
1,956,541 1,927,997
Construction work in progress 46,675 41,944
Net utility plant 2,003,216 1,969,941
Equity investments 11,259 11,592
Current assets:
Cash and cash equivalents 7,392 44,062
Restricted cash 3,616 3,616
Accounts receivable customers, net 179,566 177,681
Accounts receivable - affiliates 2,300 -
Accrued unbilled revenues 29,707 21,468
Materials and supplies, at average cost 14,391 13,291
Deferred income taxes - 18,141
Other 21,863 5,575
Total current assets 258,835 283,834
Deferred debits:
Regulatory assets 1,213,236 1,265,062
Other 179,440 178,429
Total assets $3,665,986 $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)
June 30, 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 471,202 475,993
Total common equity 749,997 754,788
Cumulative non-mandatory redeemable preferred
stock 43,000 43,000
Long-term debt 838,567 840,194
Transition property securitization 411,081 445,890
Total long-term debt 1,249,648 1,286,084
Total capitalization 2,042,645 2,083,872
Current liabilities:
Transition property securitization 38,959 40,555
Long-term debt 1,513 150,687
Notes payable 208,000 -
Accounts payable -
Affiliates - 32,450
Other 134,709 117,600
Accrued interest 29,912 13,899
Other 42,721 46,971
Total current liabilities 455,814 402,162
Deferred credits:
Accumulated deferred income taxes and
unamortized investment tax credits 630,310 611,469
Power contracts 309,718 350,117
Other 227,499 261,238
Total deferred credits 1,167,527 1,222,824
Commitments and contingencies
Total capitalization and liabilitieS $3,665,986 $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)
Six Months Ended June 30,
2003 2002
Operating activities:
Net income $ 47,169 $ 41,402
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 85,979 85,683
Deferred income taxes and investment
tax credits 40,823 18,272
Allowance for borrowed funds used during
construction (206) (269)
Net changes in working capital (15,248) 55,983
Deferred debits and credits (91,239) (3,960)
Net cash provided by operating activities 67,278 197,111
Investing activities:
Plant expenditures (excluding AFUDC) (73,114) (106,526)
Other investments 333 869
Net cash used in investing activities (72,781) (105,657)
Financing activities:
Transition property securitization
redemptions (36,406) (32,811)
Redemptions of long term debt (150,801) (741)
Net change in notes payable 208,000 (7,500)
Dividends paid (51,960) (57,180)
Net cash used in financing activities (31,167) (98,232)
Net decrease in cash and cash equivalents (36,670) (6,778)
Cash and cash equivalents at beginning of year 44,062 13,549
Cash and cash equivalents at end of period $ 7,392 $ 6,771
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 47,402 $ 41,187
========= =========
Income taxes / (refund) $ 6,773 $ (4,006)
========= =========
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 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 other retail
utility subsidiaries are Commonwealth Electric Company
(ComElectric), Cambridge Electric Light Company (Cambridge
Electric) (together with Boston Edison, collectively operating as
"NSTAR Electric") and NSTAR Gas Company (NSTAR Gas). NSTAR has a
services company that provides management and support services to
substantially all NSTAR subsidiaries, including Boston Edison -
NSTAR Electric & Gas Corporation (NSTAR Electric & Gas).
2. Basis of Presentation
The financial information presented as of June 30, 2003 and for
the periods ended June 30, 2003 and 2002 have been prepared from
Boston Edison's books and records without audit by independent
accountants. However, Boston Edison's independent accountants
have performed a review of these interim financial statements in
accordance with standards established by the American Institute
of Certified Public Accountants. Pursuant to Rule 436(c) under
the Securities Act of 1933, their report of that review should
not be considered as part of any registration statements prepared
or certified by them within the meaning of Section 7 and 11 of
that Act and the independent accountants' liability under Section
11 does not extend to it. 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 Boston
Edison'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 immaterial 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 of Boston Edison and its subsidiaries 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 and six month periods
ended June 30, 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.
3. New Accounting Standards
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150). This Statement establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity. The Statement is intended to improve the accounting
for these financial instruments that, under previous guidance,
issuers could account for as equity. This Statement requires
that these instruments be classified as liabilities on the
balance sheet. Boston Edison adopted SFAS 150 effective July 1,
2003 and assessed the requirements of the standard and has not
identified any financial instruments to which SFAS 150 applies.
In addition, Boston Edison has not entered into, nor modified any
financial instrument since May 31, 2003. As a result, the
implementation of this Statement has not had an impact on its
financial position or results of operations.
In June 2003, the Derivative Implementation Group (DIG), a
working group of the FASB, issued DIG No. C20, "Scope Exceptions:
Interpretation of the Meaning of 'Not Clearly and Closely
Related' in Paragraph 10(b) regarding Contracts with a Price
Adjustment Feature," which clarified the interpretation of
clearly and closely related contracts that include price
adjustments. This interpretation also established transition
guidance for those contracts that had previously met the normal
purchases and sales exception under previous guidance but may not
meet the scope exception under this interpretation. For Boston
Edison, the effective date of DIG Issue No. C20 is October 1,
2003. Boston Edison is currently assessing the impact of this
interpretation on its current derivative contracts. The adoption
of DIG Issue No. C20 would not result in an earnings impact.
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 under lease arrangements. 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. In accordance with SFAS 71, the
Company 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 as of June 30, 2003,
there is approximately $138 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 DIG of FASB. In October 2001, 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 June 30, 2003 and December 31,
2002 of approximately $257 million and $305 million,
respectively, and is a component of Deferred credits - Power
contracts on the accompanying Condensed Consolidated Balance
Sheets. This decline in above-market costs during the current
period was primarily due to an increase in wholesale energy
prices during the first half of 2003. Boston Edison collects all
of its purchased power costs from its customers; therefore, it
has recorded a corresponding regulatory asset to reflect the
future recovery. Therefore, as a result of this regulatory
treatment, the recording of the fair value of this contract on
the Company's accompanying Condensed Consolidated Balance Sheets
does not result in an earnings impact.
In June 2003, as previously mentioned, the DIG issued No. C20
that clarified the interpretation of clearly and closely related
contracts that include price adjustments. DIG Issue No. C20 is
not effective until October 1, 2003. See Note A.3, "New
Accounting Standards," for further discussion on this topic.
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; the report indicates
that no penalty will be assessed for that period. The Company
monitors its service quality continuously to determine its
contingent liability, and if it were determined that a liability
has been incurred and is estimable, an appropriate liability
would be accrued. Any MDTE determination that would result in a
different liability (or credit) level from what has been accrued
would be adjusted in the period when such rate order is issued.
Through June 30, 2003, Boston Edison's performance has met or
exceeded the applicable established benchmarks such that no
liability has been accrued; 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
On August 4, 2003, Boston Edison filed proposed Standard Offer
Service Fuel Adjustment (SOSFA) rates with the MDTE to be
effective September 1, 2003. In the past, the MDTE has allowed
companies to adjust to rapidly changing market costs of oil and
natural gas used to generate electricity. The SOSFA will be
reduced to zero following an increase in this rate adjustment to
0.902 cents per kilowatt-hour that was effective May 1, 2003.
The decrease in this rate is due to lower fuel costs from its
contracted power suppliers. The SOSFA remained at zero from
April 1, 2002 through April 30, 2003 for the NSTAR Electric
companies. 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).
During the second quarter of 2003, Boston Edison submitted to the
Independent System Operator - New England (ISO-NE) its updated
transmission rates including scheduling and dispatch costs
associated with Regional Network Service (RNS). Pursuant to the
Federal Energy Regulatory Commission (FERC)-regulated formula
rates in the Open Access Transmission Tariff, the RNS costs (and
subsequent changes) are trued-up as of June 1 of each year, based
upon the cost information for the prior calendar year. These new
rates went into effect on June 1, 2003.
In addition to the RNS rates, Boston Edison completed the annual
true-up for 2002 costs associated with the FERC-regulated Local
Network Service and set these new rates to become effective on
June 1, 2003.
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 $59.7 million and $60.3
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of June
30, 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 4.1 4.4
Investment tax credit amortization (0.6) (0.5)
Other 2.6 1.9
Effective tax rate 41.1% 40.8%
==== ====
Note F. Commitments and Contingencies
1. Environmental Matters
As of June 30, 2003, Boston Edison is involved in 5 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 $0.3 million are
included as liabilities in the accompanying Condensed
Consolidated Balance Sheets at June 30, 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 $3.4 million are included as
liabilities in the accompanying Condensed Consolidated Balance
Sheets at June 30, 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. Based on its current assessment of its environmental
responsibilities, existing legal requirements and regulatory
policies, Boston Edison's management does not believe that these
environmental remediation costs 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. Pension and Postretirement Benefits Other Than Pensions
(PBOP) Adjustment Mechanism Tariff Filing
On April 16, 2003, Boston Edison, along with NSTAR's other
utility subsidiaries, 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 and PBOP benefits.
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.
The proposed reconciliation adjustment mechanism removes the
volatility in costs 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 and excludes
pension and PBOP costs from regular distribution rates so that
the MDTE may review them annually.
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
amounts over and above the IRS minimum requirements to trust
funds that hold and invest the contributions until benefits are
paid.
The Company had requested that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003. In June,
the MDTE notified the Company that it will issue an order on
October 1, 2003. The Company cannot determine the ultimate
outcome of this proceeding.
In November 2002, the Company filed a request with the MDTE for
an accounting ruling to mitigate the impact of the non-cash
charge to Other Comprehensive Income (OCI) in 2002 and the
increases in expected pension and PBOP costs in 2003. On
December 20, 2002, the MDTE approved the Accounting Order. Based
on this Accounting Order and an opinion from legal counsel
regarding the probability of recovery of these costs in the
future, the Company recorded a regulatory asset in lieu of taking
a charge to OCI at December 31, 2002. In addition, the order
permits the Company to defer, as a regulatory asset or liability,
the difference between the level of pension and PBOP expense that
is included in rates and the amounts that are required to be
recorded under the pension and PBOP accounting rules beginning in
2003.
As of June 30, 2003, the regulatory asset of $269 million,
recorded as a result of this accounting ruling, consists of the
prepaid pension asset ($257 million) and includes the additional
minimum liability ($5.6 million), recorded to reflect the
Company's share of the unfunded liability of NSTAR's pension plan
that was incurred at December 31, 2002, and the 2003 deferral of
pension expenses, allowed under the Accounting Order, of $6.4
million. Additionally, Boston Edison has a receivable of $163.1
million from affiliates for the remaining portion of the
additional minimum liability. Regulatory assets also include the
2003 deferral of PBOP expense, per the Accounting Order, of $1.4
million. These regulatory assets are shown as part of Deferred
debits in the accompanying Condensed Consolidated Balance Sheets.
The ultimate outcome of this proceeding regarding the
reconciliation mechanism mentioned above could impact the
carrying value of these regulatory assets.
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 and its March
31, 2003 Quarterly Report on Form 10-Q.
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 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 other retail
utility subsidiaries are Commonwealth Electric Company
(ComElectric), Cambridge Electric Light Company (Cambridge
Electric) (together with Boston Edison, collectively operating as
"NSTAR Electric") and NSTAR Gas Company (NSTAR Gas). NSTAR has a
services company that provides management and support services to
substantially all NSTAR subsidiaries, including Boston Edison -
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 Boston Edison 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, 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 Financial Accounting
Standards Board (FASB) Statement of Financial Accounting
Standards (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
under lease arrangements. 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. In accordance with SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS
71), the Company 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 as of June 30, 2003,
there is approximately $138 million of removal costs, not yet
incurred, included in accumulated depreciation.
Rate and Regulatory Proceedings
a. Pension and Postretirement Benefits Other Than Pensions
(PBOP)
On April 16, 2003, Boston Edison, along with NSTAR's other
utility subsidiaries, 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 and PBOP benefits.
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.
The proposed reconciliation adjustment mechanism removes the
volatility in costs 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 and excludes
pension and PBOP costs from regular distribution rates so that
the MDTE may review them annually.
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
amounts over and above the IRS minimum requirements to trust
funds that hold and invest the contributions until benefits are
paid.
The Company had requested that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003. In June,
the MDTE notified the Company that it will issue an order on
October 1, 2003. The Company cannot determine the ultimate
outcome of this proceeding.
In November 2002, the Company filed a request with the MDTE for
an accounting ruling to mitigate the impact of the non-cash
charge to Other Comprehensive Income (OCI) in 2002 and the
increases in expected pension and PBOP costs in 2003. On
December 20, 2002, the MDTE approved the Accounting Order. Based
on this Accounting Order and an opinion from legal counsel
regarding the probability of recovery of these costs in the
future, the Company recorded a regulatory asset in lieu of taking
a charge to OCI at December 31, 2002. In addition, the order
permits the Company to defer, as a regulatory asset or liability,
the difference between the level of pension and PBOP expense that
is included in rates and the amounts that are required to be
recorded under the pension and PBOP accounting rules beginning in
2003.
As of June 30, 2003, the regulatory asset of $269 million,
recorded as a result of this accounting ruling, consists of the
prepaid pension asset ($257 million) and includes the additional
minimum liability ($5.6 million) recorded to reflect the
Company's share of the unfunded liability of NSTAR's pension plan
that was incurred at December 31, 2002, and the 2003 deferral of
pension expenses, allowed under the Accounting Order, of $6.4
million. Additionally, Boston Edison has a receivable of $163.1
million from affiliates for the remaining portion of the
additional minimum liability. Regulatory assets also include the
2003 deferral of PBOP expense, per the Accounting Order, of $1.4
million. These regulatory assets are shown as part of Deferred
debits in the accompanying Condensed Consolidated Balance Sheets.
The ultimate outcome of this proceeding regarding the
reconciliation mechanism mentioned above could impact the
carrying value of these regulatory assets.
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; the report indicates
that no penalty will be assessed for that period. The Company
monitors its service quality continuously to determine its
contingent liability, and if it were determined that a liability
has been incurred and is estimable, an appropriate liability
would be accrued. Any MDTE determination that would result in a
different liability (or credit) level from what has been accrued
would be adjusted in the period when such rate order is issued.
Through June 30, 2003, Boston Edison's performance has met or
exceeded the applicable established benchmarks such that no
liability has been accrued; 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
Boston Edison obtains and resells 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 Massachusetts Electric Restructuring
Act of 1997. 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 June 30, 2003 and
December 31, 2002, customers of Boston Edison had approximately
14% 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 August 4, 2003, Boston Edison filed proposed Standard Offer
Service Fuel Adjustment (SOSFA) rates with the MDTE to be
effective September 1, 2003. In the past, the MDTE has allowed
companies to adjust to rapidly changing market costs of oil and
natural gas used to generate electricity. The SOSFA will be
reduced to zero following an increase in this rate adjustment to
0.902 cents per kilowatt-hour that was effective May 1, 2003.
The decrease in this rate is due to lower fuel costs from its
contracted power suppliers. The SOSFA remained at zero from
April 1, 2002 through April 30, 2003 for the NSTAR Electric
companies. 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).
During the second quarter of 2003, Boston Edison submitted to the
Independent System Operator - New England (ISO-NE) its updated
transmission rates including scheduling and dispatch costs
associated with Regional Network Service (RNS). Pursuant to the
Federal Energy Regulatory Commission (FERC)-regulated formula
rates in the Open Access Transmission Tariff, the RNS costs (and
subsequent changes) are trued-up as of June 1 of each year, based
upon the cost information for the prior calendar year. These new
rates went into effect on June 1, 2003.
In addition to the RNS rates, Boston Edison completed the annual
true-up for 2002 costs associated with the FERC-regulated Local
Network Service and set these new rates to become effective on
June 1, 2003.
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 June 30, 2003 Compared
to Three Months Ended June 30, 2002
The following section of MD&A compares the results of operations
for each of the three month periods ended June 30, 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 $28.1 million for the three months ended June 30,
2003 compared to $24.5 million for the same period in 2002, a
14.7% increase.
The results of operations for the quarter 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 and the
impact of variable weather conditions. Refer to Note A.2, "Basis
of Presentation," to the accompanying Condensed Consolidated
Financial Statements.
The following is a summary of retail electric energy sales for
the periods indicated:
Three Months Ended June 30,
2003 2002 % Change
Retail Electric Sales - MWH
Residential 918,184 857,920 7.0
Commercial 2,200,293 2,153,642 2.2
Industrial 307,179 341,428 (10.0)
Other 30,977 29,704 4.3
Total retail sales 3,456,633 3,382,694 2.2
========= =========
Weather conditions impact electric sales in Boston Edison's
service area. The second quarter of 2003 was significantly
cooler than the same period in 2002 with below normal
temperatures throughout the three-month period. The average
daily temperature during the second quarter of 2003 was 3.3
degrees, or 5.7%, below normal.
Operating revenues
Operating revenues for the second quarter of 2003 increased $24.7
million, or 6.7%, from the same period in 2002 and consisted of
the following major component changes:
(in thousands)
Retail electric revenues $ 34,417
Wholesale electric revenues (11,318)
Other revenues 1,615
Increase in operating revenues $ 24,714
=========
Retail electric revenues were $370.9 million in the second
quarter of 2003 compared to $336.5 million in the same period of
2002, an increase of $34.4 million, or 10%. The change in retail
revenues was primarily driven by the 2.2% increase in retail kWh
sales, which resulted in $15.5 million net increase in standard
offer and default service revenues. Transition revenues were
$17.3 million higher due to an increase in rates. Transmission
revenues increased by $2.4 million partially due to increased
transmission revenue requirements. 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 2.2% increase in the current
quarter's retail energy sales primarily reflects higher sales in
the residential and commercial sectors. Boston Edison's sales to
residential and commercial customers were approximately 27% and
64%, respectively, of its total retail sales mix for the current
quarter. The 10% decline in industrial sector sales reflects the
continued slowdown in economic conditions that has resulted in
reduced production or facility closings. The industrial sector
comprises approximately 10% of Boston Edison's energy sales.
Wholesale electric revenues were $3.9 million in the second
quarter of 2003 compared to $15.2 million in 2002, a decrease of
$11.3 million, or 74%. This decrease in wholesale revenues
primarily reflects the expiration of three wholesale power supply
contracts. After October 31, 2005, Boston Edison 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 will have no impact on results of
operations.
Other revenues were $20.5 million in the second quarter of 2003
compared to $18.9 million in the same period of 2002, an increase
of $1.6 million, or 8%. This increase primarily reflects higher
transmission revenues due to an increase in rates.
Operating expenses
Purchased power costs were $202.7 million in the second quarter
of 2003 compared to $177.5 million in the same period of 2002, an
increase of $25.2 million, or 14%, due to higher retail electric
sales of 2.2% and higher standard offer and default service
supply 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 $51.4 million in the
second quarter of 2003 compared to $59.0 million in the same
period of 2002, a decrease of $7.6 million, or 13%. This
decrease primarily reflects a reduction in operations and
maintenance expense in connection with improvements made in
electric distribution services in 2002.
Depreciation and amortization expense was $43.0 million in the
second quarter of 2003 compared to $42.9 million in the same
period of 2002, an increase of $0.1 million, or less than 1%.
The increase reflects a higher level of depreciable plant in
service.
Demand side management (DSM) and renewable energy programs
expense was $10.6 million in the second quarter of 2003 compared
to $10.8 million in the same period of 2002, a decrease of $0.2
million, or 2%, primarily due to the timing of DSM expense which
is consistent with the collection of conservation and renewable
energy revenues. These costs are collected from customers on a
fully reconciling basis and therefore, fluctuations in program
costs have no impact on earnings, other than incentive amounts
earned by the company in return for increased customer
participation.
Property and other taxes were $17.5 million in both second
quarters of 2003 and 2002. Overall municipal property taxes,
particularly for the City of Boston, were slightly higher due to
a true-up of costs and were offset by similarly lower payroll tax
expense due to lower payroll costs.
Income taxes from operations were $19.5 million in the second
quarter of 2003 compared to $16.7 million in the same period of
2002, an increase of $2.8 million, or 17%. This increase
reflects higher pre-tax operating income in 2003.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $20.8 million in the second quarter of 2003
compared to $20.4 million in the same period of 2002, an increase
of $0.4 million, or 2%. The increase in interest expense
primarily reflects the impact of the October 15, 2002 Boston
Edison issuance of $400 million of 4.875% 10-year debentures and
$100 million of 3-year floating rate debentures priced at three
month LIBOR plus 50 basis points (at a weighted average interest
rate of 1.80% for the current three-month period). These new
debentures increased interest expense by $5.3 million in the
second quarter of 2003. Partially offsetting this increase was
the absence in 2003 of $1.2 million in interest on Boston
Edison's early redemption of its $60 million 8.25% Debentures in
September 2002 and the repayment of its transition property
securitization certificates of $19.4 million that resulted in
reduced interest expense of $1.1 million.
Short-term debt and other interest charges were $2.5 million in
the second quarter of 2003 compared to $2 million in the same
period of 2002, an increase of $0.5 million. The increase in
interest is primarily due to regulatory interest charges incurred
related to higher deferred transition costs.
Results of Operations - Six Months Ended June 30, 2003 Compared
to Six Months Ended June 30, 2002
Net income was $47.2 million for the six-month period ended June
30, 2003 compared to $41.4 million for the same period in 2002,
an increase of $5.8 million, or 14%.
The results of operations for the six-month periods ended June
2003 and 2002, are not indicative of the results that may be
expected for the entire year due to the seasonality of kWh sales
and revenues. Refer to Note A.2, "Basis of Presentation," in the
accompanying Condensed Consolidated Financial Statements.
The following is a summary of retail electric energy sales for
the periods indicated:
Six Months Ended June 30,
2003 2002 % Change
Retail Electric Sales - MWH
Residential 2,097,180 1,880,156 11.5
Commercial 4,505,410 4,281,532 5.2
Industrial 611,384 669,877 (8.7)
Other 71,625 70,978 0.9
Total retail sales 7,285,599 6,902,543 5.5
========= =========
Weather conditions impact the change in electric sales in Boston
Edison's service area. The first half of 2003 was significantly
colder than the same period in 2002 with below normal
temperatures throughout the current six-month period. Below is
comparative information on heating degree days for the six-month
periods ending June 30, 2003 and 2002 and the number of degree
days in a "normal" half-year period as represented by a 30-year
average. A "degree-day" is a unit measuring how much the outdoor
mean temperature falls below (heating degree-day) or rises above
(cooling degree-day) a base of 65 degrees. Each degree below or
above the base temperature is measured in one degree day.
Normal
30-Year
2003 2002 Average
Heating degree days 4,245 3,375 3,782
Percentage change from prior year 25.8% (10.8)%
Percentage change from 30-year average 12.2% (10.8)%
Cooling degree days 97 159 176
Percentage change from prior year (39.0)% (42.4)%
Percentage change from 30-year average (44.9)% (9.1)%
Operating revenues
Operating revenues for the six month period ended June 30, 2003
decreased $11.3 million, or 1.4%, from the same period in 2002
and consisted of the following major component changes:
(in thousands)
Retail electric revenues $ 6,012
Wholesale electric revenues (20,903)
Other revenues 3,590
Decrease in operating revenues $ (11,301)
==========
Retail electric revenues were $715.8 million in the first six
months of 2003 compared to $709.8 million in the same period of
2002, an increase of $6 million, or less than 1%. The increase
in retail revenues reflects the impact of the 5.5% increase in
retail energy sales, offset in part, by lower standard offer and
default services rates. The lower rates implemented in January
2003 for standard offer and default services accounted for a
decrease in retail revenues of $34.3 million. Transition
revenues were $30.7 million higher in the current six-month
period while distribution revenues increased $6.8 million and
transmission revenues increased $5 million. The increase in each
of these components of revenue was due to the increase in retail
energy sales and higher rates. 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 5.5% increase in the current six-
month period's retail energy sales primarily reflects higher
sales in the residential and commercial sectors. Boston Edison's
sales to residential and commercial customers were approximately
29% and 62%, respectively, of its total retail sales mix for the
current six-month period. The 8.7% decline in industrial sector
sales reflects the continued slowdown in economic conditions that
has resulted in reduced production or facility closings. The
industrial sector comprises approximately 8% of Boston Edison's
energy sales.
Wholesale electric revenues were $11.5 million in the first half
of 2003 compared to $32.4 million in the same period of 2002, a
decrease of $20.9 million, or 65%. This decrease in wholesale
revenues reflects the expiration of three municipal contracts
during 2002. After October 31, 2005, Boston Edison 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 will have no impact on results of
operations.
Other revenues were $42.1 million in the first half of 2003
compared to $38.5 million in the same period of 2002, an increase
of $3.6 million, or 9%. This increase primarily reflects higher
transmission revenues due to an increase in rates.
Operating expenses
Despite higher retail energy sales of 5.5%, purchased power costs
were $392.5 million in the first half of 2003 compared to $410.1
million in the same period of 2002, a decrease of $17.6 million,
or 4%. The decrease in expense reflects the recognition of $34.3
million relating to the deferred standard offer and default
service supply costs for current period under-collection of these
costs and the decrease in wholesale sales. 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 $104.8 million in the
first half of 2003 compared to $112.7 million in 2002, a decrease
of $7.9 million, or 7%. This decrease reflects a reduction in
operations and maintenance expenses in connection with
improvements 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 $86 million in the
first half of 2003 compared to $85.7 million in the same period
of 2002, an increase of $0.3 million, or less than 1%. The
increase reflects a higher level of depreciable plant in service.
DSM and renewable energy programs expense was $22.6 million in
the first half of 2003 compared to $22 million in the same period
of 2002, an increase of $0.6 million, or 3%. 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 $35.7 million in both the first
half of 2003 and the same period of 2002. Overall municipal
property taxes, particularly for the City of Boston, were
slightly higher due to a true-up of costs and were offset by
similarly lower payroll tax expense due to lower payroll costs.
Income taxes from operations were $32.3 million in the first half
of 2003 compared to $28.5 million in the same period of 2002, an
increase of $3.8 million, or 13%. This increase reflects higher
pre-tax operating income in 2003.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $44.5 million in the first half of 2003,
compared to $41.3 million in the same period of 2002, an increase
of $3.2 million, or 8%. The increase in interest expense
primarily reflects the impact of the October 15, 2002 Boston
Edison issuance of $400 million of 4.875% 10-year debentures and
$100 million of 3-year floating rate debentures priced at three
month LIBOR plus 50 basis points (at a weighted average interest
rate of 1.87% for the current six-month period). These new
debentures increased interest expense by $10.7 million in the
first half of 2003. Partially offsetting the absence in 2003 of
$2.5 million in interest on the 8.25% debentures that were
retired in September 2002 and a $2.2 million decline in interest
on the securitization certificates due to the scheduled
retirement of this debt.
Short-term and other interest charges were $5 million and $4.5
million in the first half of 2003 and 2002, respectively. A
reduction of $1.1 million in interest expense resulting from the
impact of lower short-term borrowing rates and levels of
borrowings was more than offset primarily due to an increase in
regulatory interest charges incurred related to higher deferred
transition costs.
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.
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-15 as of the end of the period
covered by this report. 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.
During the most recent fiscal quarter, there have been no
significant changes in Boston Edison's internal control over
financial reporting that materially affected, or are reasonably
likely to materially affect, internal control over financial
reporting.
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 June 30, 2003:
Ratio of earnings to fixed charges 2.99
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.94
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 - Statement re Computation of Ratios
12.1 Computation of Ratio of Earnings to Fixed
Charges for the Twelve Months Ended June 30,
2003
12.2 Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividend
Requirements for the Twelve Months Ended June
30, 2003
Exhibit 31 - Rule 13 - 15 / 15d - 15(e) Certifications
31.1 Certification Statement of Chief Executive
Officer of Boston Edison Company pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Statement of Chief Financial
Officer of Boston Edison Company pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 - Section 1350 Certifications
32.1 Certification Statement of Chief Executive
Officer of Boston Edison Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Statement of Chief Financial
Officer of Boston Edison Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99 - Additional Exhibits
99.1 Report of Independent Accountants
b) Report on Form 8-K:
A report on Form 8-K was filed on April 18, 2003 following
Boston Edison's filing for approval by the MDTE to establish
a reconciliation adjustment mechanism to provide for the
recovery of costs associated with the Company's obligations
to provide its employees pension and postretirement benefits
other than pensions.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BOSTON EDISON COMPANY
(Registrant)
Date: August 11, 2003 /s/ R. J. WEAFER, JR.
Robert J. Weafer, Jr.
Vice President,
Controller and Chief
Accounting Officer