10-Q 1 beco10q062001.txt 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, 2001 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 10, 2001 Common Stock, $1 par value 100 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this Form with the reduced disclosure format.
Part I - Financial Information Item 1. Financial Statements Boston Edison Company Condensed Consolidated Statements of Income (Unaudited) (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 Operating revenues $476,755 $399,292 $942,917 $775,735 Operating expenses: Purchased power 280,175 206,805 556,960 401,384 Operations and maintenance 41,895 53,807 93,444 110,167 Depreciation and amortization 41,601 41,093 83,865 82,627 Demand side management and renewable energy programs 13,290 13,716 27,057 27,397 Property and other taxes 16,703 13,857 34,829 30,622 Income taxes 23,507 18,188 39,895 29,681 Total operating expenses 417,171 347,466 836,050 681,878 Operating income 59,584 51,826 106,867 93,857 Other income, net 2,432 2,686 3,264 3,501 Operating and other income 62,016 54,512 110,131 97,358 Interest charges: Long term debt 11,728 13,352 23,528 27,677 Transition property securitization 10,431 11,456 21,229 23,402 certificates Other 3,444 237 5,858 919 Allowance for borrowed funds used during construction (622) (851) (1,175) (1,448) Total interest charges 24,981 24,194 49,440 50,550 Net income $ 37,035 $ 30,318 $ 60,691 $ 46,808 ======== ======== ======== ======== 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, 2001 2000 2001 2000 Balance at the beginning of the period $342,615 $ 1,402 $352,832 $ 1,462 Add: Net income 37,035 30,318 60,691 46,808 Dividends transferred from Premium on common stock (Note B) - 224,201 - 224,201 Subtotal 379,650 255,921 413,523 272,471 Deduct: Dividends declared: Dividends to Parent 31,250 63,573 15,000 Preferred stock 1,490 1,490 2,980 2,980 Subtotal 32,740 1,490 66,553 17,980 Provision for preferred stock redemption and issuance costs 60 60 120 120 Balance at the end of the $346,850 $254,371 $346,850 $254,371 period ======== ======== ======== ======= The accompanying notes are an integral part of the condensed consolidated financial statements
Boston Edison Company Condensed Consolidated Balance Sheets (Unaudited) (in thousands) June 30, December 31, 2001 2000 Assets Utility plant in service, at originalcost $2,560,768 $2,522,682 Less: accumulated depreciation 859,416 825,367 1,701,352 1,697,315 Construction work in progress 55,928 39,820 Net utility plant 1,757,280 1,737,135 Equity investments 15,009 15,512 Other investments 9,553 9,599 Current assets: Cash and cash equivalents 2,081 12,125 Restricted cash 3,616 3,625 Accounts receivable: Customers 274,085 200,479 Affiliates 68,327 54,392 Regulatory assets 113,866 193,641 Accrued unbilled revenues 55,297 66,879 Materials and supplies, at average cost 14,900 15,621 Other 11,424 5,919 Total current assets 543,596 552,681 Deferred debits: Regulatory assets 810,306 780,974 Prepaid pension expense 170,551 149,889 Other deferred debits 47,307 46,250 Total assets $3,353,602 $3,292,040 ========== ========== The accompanying notes are an integral part of the condensed consolidated financial statements.
Boston Edison Company Condensed Consolidated Balance Sheets (Unaudited) (in thousands) June 30, December 31, 2001 2000 Common equity: Common stock, par value $1 per share (100 shares issued and outstanding) $ - $ - Premium on common stock 479,086 482,004 Retained earnings 346,850 352,832 Total common equity 825,936 834,836 Accumulated other comprehensive loss, net (117) (117) Cumulative nonmandatory redeemable preferred stock 43,000 43,000 Long-term debt 551,857 577,618 Transition property securitization certificates 548,000 584,130 Total long-term debt 1,099,857 1,161,748 Total capitalization 1,968,676 2,039,467 Current liabilities: Transition property securitization certificates due within one year 41,871 36,443 Redeemable preferred stock and long-term debt due within one year 75,375 50,186 Notes payable 278,000 96,500 Accounts payable: Affiliates 71,215 116,610 Other 108,540 115,783 Deferred taxes 61,797 99,542 Accrued interest 23,837 24,269 Other 124,973 113,409 Total current liabilities 785,608 652,742 Deferred credits: Accumulated deferred income taxes 493,807 491,098 Accumulated deferred investment tax credits 19,850 20,346 Power contracts 24,124 25,868 Other 61,537 62,519 Total deferred credits 599,318 599,831 Commitments and contingencies Total capitalization and liabilities $3,353,602 $3,292,040 ========== ========== 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, 2001 2000 Operating activities: Net income $ 60,691 $ 46,808 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 83,865 82,627 Deferred income taxes and investment tax credits (35,532) 20,706 Allowance for borrowed funds used during construction (1,175) (1,448) Net changes in working capital (18,989) 34,297 Other, net (95,212) (131,184) Net cash (used in) provided by operating activities (6,352) 51,806 Investing activities: Plant expenditures (excluding AFUDC) (62,308) (45,800) Other investments 549 (570) Net cash used in investing activities (61,759) (46,370) Financing activities: Long-term debt redemptions (25,761) (100,785) Transition property securitization certificates redemptions (30,702) (49,020) Net change in notes payable 181,500 61,500 Dividends paid (66,970) (27,980) Net cash provided by (used in) financing activities 58,067 (116,285) Net decrease in cash and cash equivalents (10,044) (110,849) Cash and cash equivalents at beginning of year 12,125 117,537 Cash and cash equivalents at end of period $ 2,081 $ 6,688 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 46,931 $ 50,671 ========= ========= Income taxes $ 75,301 $ 3,922 ========= ========= The accompanying notes are an integral part of the condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements The accompanying Notes should be read in conjunction with Notes to the Consolidated Financial Statements incorporated in Boston Edison's 2000 Annual Report on Form 10-K. A) The Company Boston Edison Company ("Boston Edison" or "the Company") is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly owned subsidiary of NSTAR. NSTAR is Massachusetts' largest investor-owned combined electric and gas utility and is an exempt public utility holding company. NSTAR is an energy delivery company serving approximately 1.3 million customers in Massachusetts, including more than one million electric customers in 81 communities and 244,000 gas customers in 51 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 Electric). Effective November 1, 2000, NSTAR's three retail electric companies are operating under the brand name "NSTAR Electric." Reference in this report to "NSTAR Electric" shall mean each of Boston Edison, ComElectric and Cambridge Electric. B) Basis of Presentation The financial information presented as of June 30, 2001 and for the periods ended June 30, 2001 and 2000 have been prepared from Boston Edison's books and records without audit by independent accountants. Financial information as of December 31, 2000 was derived from the audited consolidated financial statements of Boston Edison, but does not include all disclosures required by generally accepted accounting principles (GAAP). In the opinion of management, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial information for the periods indicated have been included. Certain reclassifications have been made to the prior year data to conform with the current presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the periods ended June 30, 2001 and 2000 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. The Company's Board of Directors determined and voted that a portion of the dividends declared on June 24, 1999 and July 22, 1999, which were paid out of retained earnings to its sole shareholder, was a partial distribution of a return of capital. As a result, the Company has appropriately transferred the portion of its dividends deemed return of capital against Premium on Common Stock. C) Goodwill and Costs to Achieve Amortization The merger of BEC and COM/Energy was accounted for as an acquisition of COM/Energy by BEC under the purchase method of accounting. In accordance with Accounting Principles Board (APB) No. 16 - Business Combinations, all goodwill was recorded on the books of the subsidiaries of COM/Energy. However, under the merger rate plan approved by the MDTE, all of NSTAR's utility subsidiaries share in the recovery of goodwill in their rates. As a result, goodwill amortization expense has been allocated to Boston Edison from ComElectric, Cambridge Electric and NSTAR Gas through an intercompany charge. The Company is currently recovering such amount in its rates. NSTAR recorded goodwill associated with the merger of BEC Energy and COM/Energy of approximately $490 million and the original estimate of transaction and integration costs to achieve the merger was $111 million. Boston Edison's share of goodwill and costs to achieve are approximately $319 million and $72 million, respectively. For NSTAR, goodwill is being amortized over 40 years and will amount to approximately $12.2 million annually, while the cost to achieve is being amortized over 10 years and will initially be approximately $11.1 million annually. As of June 30, 2001, Boston Edison's portion of goodwill and costs to achieve amortization are approximately $4 million and $3.6 million, respectively. Goodwill is being recovered in Boston Edison's rates and is treated as an intercompany charge among the Company and its affiliated companies, ComElectric, Cambridge Electric and NSTAR Gas. The ultimate amortization of the cost to achieve will reflect the total actual costs. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). This Statement, which is effective for fiscal years beginning after December 15, 2001, establishes accounting and reporting standards for acquired goodwill and other intangible assets. It prohibits entities from continuing amortization of these assets. Instead, goodwill and other intangible assets will be subject to review for impairment. Management is currently assessing the impact of SFAS 142 in light of its regulatory and accounting requirements. Therefore, NSTAR is unable to reasonably estimate the impact of the adoption of this statement. D) Contingencies 1. Environmental Matters Boston Edison is involved in approximately 16 state-regulated properties where oil or other hazardous materials were previously spilled or released. Boston Edison is required to clean up these properties in accordance with specific state regulations. There are uncertainties associated with these costs due to the complexities of cleanup technology, regulatory requirements and the particular characteristics of the different sites. Boston Edison also continues to have potential liability as a potentially responsible party in the cleanup of five multi-party hazardous waste sites in Massachusetts and other states where it is alleged to have generated, transported or disposed of hazardous waste at the sites. Boston Edison generally expects to have only a small percentage of the total potential liability for these sites. Approximately $4.8 million and $5 million is included as a liability in the accompanying Condensed Consolidated Balance Sheets at June 30, 2001 and December 31, 2000, respectively, related to the non-recoverable portion of these cleanup liabilities. Management is unable to fully determine a range of reasonably possible cleanup costs in excess of the accrued amount. 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 the Company's consolidated financial position. However, it is reasonably possible that additional provisions for cleanup costs that may result from a change in estimates could have a material impact on the results of operations for a reporting period in the near term. Estimates related to environmental remediation costs are reviewed and adjusted periodically as further investigation and assignment of responsibility occurs. Boston Edison is unable to estimate its ultimate liability for future environmental remediation costs. However, in view of Boston Edison's current assessment of its environmental responsibilities, existing legal requirements and regulatory policies, management does not believe that these matters will have a material adverse effect on Boston Edison's financial position or results of operations for a reporting period. 2. Industry and Corporate Restructuring Legal Proceedings The MDTE order approving Boston Edison's electric restructuring settlement agreement was appealed by certain parties to the Massachusetts Supreme Judicial Court. One appeal remains pending. However, to date there has been no briefing, hearing or other action taken with respect to this proceeding. However, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position, cash flows and the results of operations for a reporting period. 3. Regulatory proceedings In a Boston Edison 1999 reconciliation filing with the MDTE, the Massachusetts Attorney General contested cost allocations related to Boston Edison's wholesale customers for 1998. On June 1, 2001, the MDTE approved Boston Edison's revenue-credit ratemaking approach for wholesale sales to be consistent with the Company's restructuring settlement and MDTE precedent that predated industry restructuring. The accounting reconciliation of wholesale revenues and costs will be addressed in Boston Edison's outstanding filing covering the 1999 and 2000 reconciliation. In October 1997, the MDTE opened a proceeding to investigate Boston Edison's compliance with a 1993 order that permitted the formation of Boston Energy Technology Group and authorized Boston Edison to invest up to $45 million in non-utility activities. Hearings were completed during 1999. Management is currently unable to determine the timing and outcome of this proceeding. However, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position, cash flows and results of operations for a reporting period. 4. Other litigation In the normal course of its business Boston Edison is also involved in certain other legal matters. Management is unable to fully determine a range of reasonably possible legal costs in excess of amounts accrued. Based on the information currently available, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position E) Income Taxes
The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 2001 and the actual effective income tax rate for the year ended December 31, 2000: 2001 2000 Statutory tax rate 35.0% 35.0% State income tax, net of federal income tax benefit 4.4 4.4 Investment tax credit amortization (0.4) (0.4) Other 1.8 1.8 Effective tax rate 40.8% 40.8% ===== =====
Item 2. Management's Discussion and Analysis 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. NSTAR is Massachusetts' largest investor-owned combined electric and gas utility. NSTAR is an energy delivery company serving approximately 1.3 million customers in Massachusetts including more than one million electric customers in 81 communities and 244,000 gas customers in 51 communities. Boston Edison serves approximately 681,000 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 Electric). Effective November 1, 2000, NSTAR's three retail electric companies are operating under the brand name "NSTAR Electric." Reference in this report to "NSTAR Electric" shall mean each of Boston Edison, ComElectric and Cambridge Electric. The electric industry has continued to change in response to legislative, regulatory and marketplace demands for improved customer service at lower prices. These demands have resulted in an increasing trend in the industry to seek competitive advantages and other benefits through business combinations. NSTAR was created to operate in this new marketplace by combining the resources of its utility subsidiaries and concentrating its activities in the transmission and distribution of energy. Goodwill and Costs to Achieve Amortization The merger of BEC and COM/Energy was accounted for as an acquisition of COM/Energy by BEC using the purchase method of accounting. In accordance with Accounting Principles Board (APB) No. 16 - Business Combinations, all goodwill has been recorded on the books of the subsidiaries of COM/Energy. However, under the merger rate plan approved by the MDTE, all of NSTAR's utility subsidiaries share in the recovery of goodwill in their rates. As a result, goodwill amortization expense is allocated to Boston Edison from ComElectric, Cambridge Electric and NSTAR Gas through an intercompany charge. The Company is currently recovering such amount in its rates. NSTAR recorded goodwill associated with the merger of BEC Energy and COM/Energy of approximately $490 million, resulting in an annual amortization of goodwill of approximately $12.2 million. Boston Edison will be allocated $319 million of goodwill and will expense this amount. Such amount is being recovered in Boston Edison's rates and is treated as an intercompany charge among the Company and its affiliated companies, ComElectric, Cambridge Electric and NSTAR Gas. Costs to achieve are being amortized based on the filed estimate of $111 million over 10 years. As of June 30, 2001, Boston Edison's portion of goodwill and costs to achieve amortization are approximately $4 million and $3.6 million, respectively. NSTAR's retail utility subsidiaries will reconcile the ultimate costs to achieve with that estimate, and any difference is expected to be recovered over the remainder of the amortization period. Retail Electric Rates The 1997 Massachusetts Electric Restructuring Act (Restructuring Act) requires electric distribution companies to obtain and resell power to retail customers which choose not to buy energy from a competitive energy supplier. This is through either standard offer service or default service. As a result of the Restructuring Act, standard offer customers of Boston Edison currently pay rates that are 15% lower, on an inflation-adjusted basis, than rates in effect prior to March 1, 1998, the retail access date. All distribution customers must pay a transition charge as a component of their rate. From March 1, 1998, Boston Edison's accumulated cost to provide default and standard offer service was in excess of the revenues it was allowed to bill. As a result, Boston Edison recorded a regulatory asset of approximately $193.6 million at December 31, 2000 that is reflected as a component of Current assets on the accompanying Condensed Consolidated Balance Sheets. As a result of new rates for standard offer and default service that became effective January 1, 2001, the regulatory asset has declined to $113.9 million as of June 30, 2001. Boston Edison must, on an annual basis, file a forecast reconciliation of its rates for the upcoming year along with any proposed adjustments of prior year revenues and costs for standard offer, default service, transmission and transition charges. The MDTE will approve rates for the coming year before the current year-end to allow the new rates to become effective the first of January. Later in the year, the estimates for the prior year are trued-up to the actual amounts for the year. The MDTE reviews these costs and approves the amounts subject to any required adjustments. Occasionally, an issue will be left to be resolved in a later filing. This was the case with the wholesale revenue credit issue for Boston Edison that was resolved in the June 1, 2001 order. In November 2000, Boston Edison made a similar filing containing proposed rate adjustments for 2001, including a reconciliation of costs and revenues through 2000 (the filing was updated in April 2001 to include final costs for 2000). The MDTE has approved Tariffs effective January 1, 2001. The MDTE has not yet ruled on the reconciliation component of this filing. Management is unable to determine the outcome of the MDTE proceedings. However, based upon past procedures and on information currently available, management does not believe that it is probable that the final MDTE approval will have a material adverse impact on Boston Edison's consolidated financial position, results of operations and cash flows in the near term. In addition to the annual rate filings referenced above, Boston Edison also made separate filings with the MDTE concerning charges for standard offer and default service. In December 2000, the MDTE approved an increase of 1.321 cents per kWh in Boston Edison's standard offer service rates for the first-half of 2001, and in June 2001, the MDTE approved an additional increase of 1.23 cents per kWh based on a fuel adjustment formula contained in its standard offer tariffs that reflects the prices of natural gas and oil. The MDTE has ruled that these fuel adjustments are excluded from the 15% rate reduction requirement under the Restructuring Act. The MDTE will re-examine these rates in January 2002. In December 2000 and June 2001, the MDTE approved market-based default service rates for the first and second six-month periods of 2001, respectively. Approximately one-third of NSTAR Electric's customers are currently on default service and, beginning in July 2001, these customers will automatically be provided with either a fixed or a variable price, depending on their rate class. These and future prices for default service are based upon market solicitations for power supply for default service consistent with provisions of the Restructuring Act and MDTE orders. Long-Term Power Purchase Contracts NSTAR Electric, on behalf of Boston Edison and other affiliated companies, has existing long-term power purchase contracts. These long-term contracts are expected to supply approximately 90%-95% of its standard offer service obligations. NSTAR Electric has entered into six-month and shorter-term agreements to meet the remaining standard offer service obligation. In July 2001, NSTAR Electric issued a request for proposals for standard offer and wholesale service requirements commencing January 1, 2002 for a term of between six and thirty-eight months. In November 2000, NSTAR Electric entered into power purchase agreements to meet its entire default service supply obligation for the period January through June of 2001. In May 2001, NSTAR Electric entered into purchased power agreements to meet the default service obligation for the remainder of 2001. NSTAR Electric expects to continue to make periodic market solicitations for default service power supply consistent with provisions of the Restructuring Act and MDTE orders. The cost of providing standard offer and default service, which includes purchased power costs, is recovered from customers on a fully reconciling basis. Results of Operations - Three Months Ended June 30, 2001 vs. Three Months Ended June 30, 2000 Net income was $37 million for the three months ended June 30, 2001 compared to $30.3 million for the same period in 2000, a $6.7 million or 22.1% 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. Refer to Note B to the Condensed Consolidated Financial Statements. Operating revenues
Operating revenues increased $77.5 million or 19.4% during the second quarter of 2001 as follows: (in thousands) Retail electric revenues $ 75,067 Wholesale revenues 1,285 Other revenues 1,111 Increase in operating revenues $ 77,463 =========
Retail revenues were $439.7 million in 2001 compared to $364.7 million in 2000, an increase of $75 million, or 20.6%. The change in retail revenues includes higher rates implemented in January 2001 for standard offer and default service ($92.3 million), a 0.4% increase in retail kilowatt-hour (kWh) electric sales, the absence in the current quarter of a $0.3 million fuel charge refund to customers in the prior period and the current period recognition of incentive revenue entitlements for successfully lowering transition charges ($5.5 million). These increases in revenue were partially offset by a $14.1 million decline in transition revenues due to a decline in rates charged to customers. Boston Edison recognized revenue for earned mitigation incentives for the years 1998 through September 2000 per the transition charge true-up filed with the MDTE in November 2000. Boston Edison will continue to earn mitigation incentive revenue as it lowers its transition charge through 2009. The revenues related to standard offer and default services are fully reconciled to the costs incurred and have no impact on net income. Wholesale electric revenues were $18.7 million in 2001 compared to $17.4 million in 2000, an increase of $1.3 million, or 7.5%. This increase in wholesale revenues reflects increased kWh sales of 8.8%, primarily as the result of increased demand from a public transit authority and the recovery of higher purchased power costs. Other revenues were $18.3 million in 2001 compared to $17.2 million in 2000, an increase of $1.1 million, or 6.4%. This change reflects higher Regional Network Services transmission revenues partially offset by the absence of a $1.6 million transmission refund relating to Local Network Services transmission revenues as recognized in 2000 due to a Federal Energy Regulatory Commission (FERC)-approved settlement. Operating expenses Purchased power costs were $280.2 million in 2001 compared to $206.8 million in 2000, an increase of $73.4 million, or 35.5%. The increase reflects higher purchased power requirements due to an 8.8% increase in wholesale sales and higher purchased power costs that reflect the higher prices of natural gas and oil. 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 $41.9 million in 2001 compared to $53.8 million in 2000, a decrease of $11.9 million, or 22.1%. This decrease reflects lower payroll and employee- related benefit costs and merger-related operating efficiencies. Depreciation and amortization expense was $41.6 million in 2001 compared to $41.1 million in 2000, an increase of $0.5 million, or 1.2%. The increase reflects a slightly higher level of depreciable plant in service. Demand side management (DSM) and renewable energy programs expense was $13.3 million in 2001 compared to $13.7 million in 2000, a decrease of $0.4 million, or 2.9%. This decrease is primarily due to timing in spending levels for programs. In accordance with legislative and regulatory directives, these costs are collected from customers on a fully reconciling basis. Therefore, these costs have no impact on earnings. Property and other taxes were $16.7 million in 2001 compared to $13.9 million in 2000, an increase of $2.8 million, or 20.1%. The increase was primarily due fact that during 2000, Boston Edison was reimbursed for the majority of to the payments in lieu of property taxes to the Town of Plymouth by Entergy. Entergy purchased the Pilgrim Station in 1999. This increase was partially offset by lower property taxes paid to the City of Boston of $0.3 million. Income taxes from operations were $23.5 million in 2001 compared to $18.2 million in 2000, an increase of $5.3 million, or 29.1%. This increase reflects higher pretax operating income in 2001. Other income Other income was $2.4 million in the second quarter of 2001 compared to income of $2.7 million in the same period of 2000, a net decrease in income of $0.3 million directly attributable to the absence of interest income recognized in the second quarter of 2000 related to $4.5 million from a third party in conjunction with the Pilgrim contract buyout, partially offset by the recognition of $3.0 million of income associated with the receipt of common stock in connection with demutualization of two insurance companies. Interest charges Interest on long-term debt and transition property securitization certificates was $22.2 million in 2001 compared to $24.8 million in 2000, a decrease of $2.6 million, or 10.5%. The decrease primarily reflects the retirement of several long term debt issues during the second half of 2000 by Boston Edison. The current period also reflects a reduction of securitization certificates interest of $1.0 million due to the partial retirement of this debt. Other interest charges were $3.4 million in 2001 compared to $0.2 million in 2000, an increase of $3.2 million. The increase reflects current interest charges associated with the reconciliation to the 1998 and 1999 transition charge true-up filings with the MDTE in November 2000 and a higher level of short-term borrowings primarily resulting from working capital requirements, partially offset by lower short-term interest rates. Results of Operations - Six Months Ended June 30, 2001 vs. Six Months Ended June 30, 2000 Net income was $60.7 million for the six months ended June 30, 2001 compared to $46.8 million for the same period in 2000, a 29.7% increase. The results of operations for the six month period are not indicative of the results which may be expected for the entire year due to the seasonality of kWh sales and revenues. Refer to Note B to the Condensed Consolidated Financial Statements. Operating revenues
Operating revenues increased $ 167.2 million or 21.6% during the six months ended June 30, 2001 as follows: (in thousands) Retail electric revenues $ 157,119 Wholesale revenues 6,634 Other revenues 3,429 Increase in operating revenues $ 167,182 =========
Retail revenues were $864.4 million in 2001 compared to $707.3 million in 2000, an increase of $157.1 million, or 22.2%. The change in retail revenues includes higher rates implemented in January 2001 for standard offer and default service ($168.9 million), a 0.5% increase in retail kilowatt-hour (kWh) electric sales, the absence in the current period of a $23.7 million fuel charge refund to customers and the current period recognition of incentive revenue entitlements for successfully lowering transition charges ($11.0 million). These increases in revenue were partially offset by a $37.6 million decline in transition revenues. Boston Edison recognized revenue for earned mitigation incentives for the years 1998 through September 2000 per the transition charge true-up filed with the MDTE in November 2000. Boston Edison will continue to earn mitigation incentive revenue as it lowers its transition charge through 2009. The revenues related to standard offer and default services are fully reconciled to the costs incurred and have no impact on net income. Wholesale electric revenues were $42.2 million in 2001 compared to $35.6 million in 2000, an increase of $6.6 million, or 18.5%. This increase in wholesale revenues reflects increased kWh sales of 8.8%, primarily as the result of increased demand from a public transit authority and the recovery of higher purchased power costs. Other revenues were $36.2 million in 2001 compared to $32.8 million in 2000, an increase of $3.4 million, or 10.4%. This change reflects higher Regional Network Services transmission revenues partially offset by the absence of a $1.6 million transmission refund relating to Local Network Services transmission revenues as recognized in the second quarter 2000 due to a FERC approved settlement. Operating expenses Purchased power costs were $557 million in 2001 compared to $401.4 million in 2000, an increase of $155.6 million, or 38.8%. The increase reflects higher purchased power requirements due to an 8.8% increase in wholesale sales and higher purchased power costs that reflect the higher prices of natural gas and oil. 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 $93.4 million in 2001 compared to $110.2 million in 2000, a decrease of $16.8 million, or 15.2%. This decrease reflects lower payroll and employee- related benefit costs and merger-related operating efficiencies. Depreciation and amortization expense was $83.9 million in 2001 compared to $82.6 million in 2000, an increase of $1.3 million, or 1.6%. The increase reflects a slightly higher level of depreciable plant in service. Demand side management (DSM) and renewable energy programs expense was $27.1 million in 2001 compared to $27.4 million in 2000, a decrease of $0.3 million, or 1.1%. This decrease is primarily due to timing in spending levels for programs. In accordance with legislative and regulatory directives, these costs are collected from customers on a fully reconciling basis. Therefore, these costs have no impact on earnings. Property and other taxes were $34.8 million in 2001 compared to $30.6 million in 2000, an increase of $4.2 million, or 13.7%. The increase was due to the fact that during 2000, Boston Edison was reimbursed for the majority of its payments in lieu of property taxes to the Town of Plymouth by Entergy. Entergy purchased the Pilgrim Station in 1999. The increase was partially offset by lower property taxes paid to the City of Boston of $1.1 million. Income taxes from operations were $39.9 million in 2001 compared to $29.7 million in 2000, an increase of $10.2 million, or 34.3%. This increase reflects higher pretax operating income in 2001. Other income Other income was $3.3 million in 2001 compared to income of $3.5 million in the same period of 2000, a net decrease in income of $0.2 million directly attributable to the absence of interest income recognized in the second quarter of 2000 related to $4.5 million from a third party in conjunction with the Pilgrim contract buyout, partially offset by the recognition of $3.0 million of income associated with the receipt of common stock in connection with demutualization of two insurance companies. Interest charges Interest on long-term debt and transition property securitization certificates was $44.8 million in 2001 compared to $51.1 million in 2000, a decrease of $6.3 million, or 12.3%. Approximately $2.2 million of the decrease is related to securitization certificate interest reflecting the scheduled retirement of this debt. The decrease in interest on long-term debt is primarily the result of a reduction of approximately $4.8 million due to the following retirements: $65 million of 6.8% debentures, $34 million of 9.875% debentures and $100 million of 6.05% debentures during the third quarter of 2000. Other interest charges were $5.9 million in 2001 compared to $0.9 million in 2000, an increase of $5.0 million. The increase reflects current interest charges associated with the reconciliation to the 1998 and 1999 transition charge true-up filings with the MDTE in November 2000 and a higher level of short-term borrowings primarily resulting from working capital requirements, partially offset by lower short-term interest rates. New Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). This Statement, which is effective for fiscal years beginning after December 15, 2001, establishes accounting and reporting standards for acquired goodwill and other intangible assets. It prohibits entities from continuing amortization of these assets. Instead, goodwill and other intangible assets will be subject to review for impairment. Management is currently assessing the impact of SFAS 142 in light of its regulatory and accounting requirements. Therefore, NSTAR is unable to reasonably estimate the impact of the adoption of this statement. As of January 1, 2001, Boston Edison adopted the FASB Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended by Statements of Financial Accounting Standards No. 137 and 138, and collectively referred to as SFAS 133. SFAS 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in contracts possibly including fixed-price fuel supply and power contracts) be recorded on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. The impact of this adoption has been assessed by the management of the Company. As part of this assessment, the Company formed an implementation team in 2000 consisting of key individuals from various operational and financial areas of the organization. The primary role of this team was to inventory and determine the impact of potential contractual arrangements for SFAS 133 application. The implementation team has performed extensive reviews of critical operating areas of the Company and has documented its procedures in applying the requirements of SFAS 133 to Boston Edison's contractual arrangements in effect on January 1, 2001. Based on Boston Edison's assessment to date, the adoption of SFAS 133 has not had a material adverse effect on its results of operations, cash flows, or financial position. Safe harbor cautionary statement Management occasionally makes forward-looking statements such as forecasts and projections of expected future performance or statements of its plans and objectives. These forward-looking statements may be contained in filings with the Securities and Exchange Commission (SEC), press releases and oral statements. Actual results could potentially differ materially from these statements. Therefore, no assurances can be given that the outcomes stated in such forward-looking statements and estimates will be achieved. The preceding sections include certain forward-looking statements about operating results and environmental and legal issues. The impact of continued cost control procedures on operating results could differ from current expectations. The effects of changes in economic conditions, tax rates, interest rates, technology and the prices and availability of operating supplies could materially affect the projected operating results. The impacts of various environmental, legal issues, and regulatory matters could differ from current expectations. New regulations or changes to existing regulations could impose additional operating requirements or liabilities other than expected. The effects of changes in specific hazardous waste site conditions and cleanup technology could affect estimated cleanup liabilities. The impacts of changes in available information and circumstances regarding legal issues could affect estimated litigation costs. Part II - Other Information Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes since year-end. Item 5. Other Information The following additional information is furnished in connection with the Registration Statements on Form S-3 of the Registrant (File Nos. 33-57840 and 333-55890), filed with the Securities and Exchange Commission on February 3, 1993 and February 20, 2001, respectively.
Ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred stock dividend requirements: Twelve months ended June 30, 2001: Ratio of earnings to fixed charges 3.11 Ratio of earnings to fixed charges and preferred stock dividend requirements 2.88
Item 6. Exhibits and Reports on Form 8-K a) Exhibits filed herewith Exhibit 4 - Instruments defining the rights of security holders, including indentures Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any agreements or instruments defining the rights of holders of any long-term debt whose authorization does not exceed 10% of total assets Exhibit 12 - Computation of ratio of earnings to fixed charges 12.1 - Computation of ratio of earnings to fixed charges for the twelve months ended June 30, 2001 12.2 - Computation of ratio of earnings to fixed charges and preferred stock dividend requirements for the twelve months ended June 30, 2001 Exhibit 15 - Letter re unaudited interim financial information 15.1 - Report of Independent Accountants Exhibit 99 - Additional exhibits 99.1 - Letter of Independent Accountants Form S-3 Registration Statements filed by Boston Edison Company on February 3, 1993 (File No. 33-57840) and February 20, 2001 (File No. 333-55890). b) No Form 8-K was filed during the second quarter of 2001.
Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BOSTON EDISON COMPANY (Registrant) Date: August 14, 2001 /s/ Robert J. Weafer, Jr. Robert J. Weafer, Jr. Vice President, Controller and Chief Accounting Officer