-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIAPj4+Wu58YFyQFGyH9j0bEk8hU844yZBjAC1iJpOFCvt2TVpptsAxIDzBOPVOu wxy7jnDWTAbQqHKvgqDwzw== 0000013372-99-000006.txt : 19990518 0000013372-99-000006.hdr.sgml : 19990518 ACCESSION NUMBER: 0000013372-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON EDISON CO CENTRAL INDEX KEY: 0000013372 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041278810 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02301 FILM NUMBER: 99626403 BUSINESS ADDRESS: STREET 1: 800 BOYLSTON ST STREET 2: ROOM P 344 CITY: BOSTON STATE: MA ZIP: 02199 BUSINESS PHONE: 6174242000 MAIL ADDRESS: STREET 1: 800 BOYLSTON ST STREET 2: ROOM P 344 CITY: BOSTON STATE: MA ZIP: 02199 10-Q 1 BOSTON EDISON COMPANY 1999 1ST QUARTER FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 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 May 10, 1999 - ----- --------------------------- Common Stock, $1 par value 100 shares 2 Part I - Financial Information Item 1. Financial Statements - ----------------------------- Boston Edison Company Consolidated Statements of Income (Unaudited) (in thousands)
Three Months Ended March 31, 1999 1998 -------- -------- Operating revenues $371,195 $394,117 -------- -------- Operating expenses: Fuel and purchased power 153,188 149,661 Operations and maintenance 77,415 96,133 Depreciation and amortization 47,404 46,104 Demand side management and renewable energy programs 13,268 8,067 Taxes - property and other 20,507 29,526 Income taxes 14,956 15,236 -------- -------- Total operating expenses 326,738 344,727 -------- -------- Operating income 44,457 49,390 Other income (expense), net 609 (1,190) -------- -------- Operating and other income 45,066 48,200 -------- -------- Interest charges: Long-term debt 19,458 22,907 Other 1,197 2,710 Allowance for borrowed funds used during construction (446) (276) -------- -------- Total interest charges 20,209 25,341 -------- -------- Net income $ 24,857 $ 22,859 ======== ========
Consolidated Statements of Retained Earnings (Unaudited) (in thousands)
Three Months Ended March 31, 1999 1998 -------- -------- Balance at the beginning of the period $297,347 $328,802 Net income 24,857 22,859 Dividends declared: Dividends to common shareholders - (22,802) Dividends to BEC Energy (25,000) - Preferred stock (1,490) (2,919) -------- -------- Subtotal 295,714 325,940 -------- -------- Provision for preferred stock redemption and issuance costs (59) (157) -------- -------- Balance at the end of the period $295,655 $325,783 ======== ========
Per share data is not relevant because Boston Edison Company's common stock is wholly owned by BEC Energy. The accompanying notes are an integral part of the consolidated financial statements. 3 Boston Edison Company Consolidated Balance Sheets (Unaudited) (in thousands)
March 31, December 31, 1999 1998 ---------- ------------ Assets - ------ Utility plant in service, at original cost $2,734,698 $2,720,681 Less: accumulated depreciation 959,323 926,020 ---------- ---------- 1,775,375 1,794,661 Generation-related regulatory asset, net 357,870 366,336 Nuclear fuel, net 76,727 68,706 Construction work in progress 44,316 40,965 ---------- ---------- Net utility plant 2,254,288 2,270,668 Nuclear decommissioning trust 177,306 172,908 Equity investments 20,910 20,769 Other investments 10,566 10,029 Current assets: Cash and cash equivalents 96,081 92,563 Accounts receivable 207,731 206,003 Accrued unbilled revenues 12,608 14,322 Materials and supplies, at average cost 19,835 15,030 Prepaid expenses and other 101,550 102,404 ---------- ---------- Total current assets 437,805 430,322 ---------- ---------- Other regulatory assets: Power contracts 52,420 58,415 Income taxes, net 52,080 52,168 Redemption premiums 22,822 23,419 Postretirement benefits costs 21,380 21,592 Other 5,034 12,048 ---------- ---------- Total regulatory assets 153,736 167,642 Other deferred debits 35,988 32,140 ---------- ---------- Total assets $3,090,599 $3,104,478 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 4 Boston Edison Company Consolidated Balance Sheets (Unaudited) (in thousands)
March 31, December 31, 1999 1998 ---------- ------------ Capitalization and Liabilities - ------------------------------ Common equity: Common stock, par value $1 per share (100 shares issued and outstanding) $ - $ - Premium on common stock 742,698 742,544 Retained earnings 295,655 297,347 ---------- ---------- Total common equity 1,038,353 1,039,891 ---------- ---------- Cumulative preferred stock: Nonmandatory redeemable series 43,000 43,000 Mandatory redeemable series 49,100 49,040 ---------- ---------- Total preferred stock 92,100 92,040 ---------- ---------- Long-term debt 890,511 955,563 ---------- ---------- Total capitalization 2,020,964 2,087,494 ---------- ---------- Current liabilities: Long-term debt due within one year 65,267 667 Accounts payable 94,806 100,753 Accrued interest 11,654 19,991 Dividends payable 25,993 25,993 Other 182,549 176,823 ---------- ---------- Total current liabilities 380,269 324,227 ---------- ---------- Deferred credits: Accumulated deferred income taxes 346,375 348,557 Accumulated deferred investment tax credits 45,124 45,930 Nuclear decommissioning liability 180,734 176,578 Power contracts 52,420 58,415 Other 64,713 63,277 ---------- ---------- Total deferred credits 689,366 692,757 Commitments and contingencies __________ __________ Total capitalization and liabilities $3,090,599 $3,104,478 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 5 Boston Edison Company Consolidated Statements of Cash Flows (Unaudited) (in thousands) Three Months Ended March 31, 1999 1998 --------- --------- Operating activities: Net income $ 24,857 $ 22,859 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 53,757 56,329 Deferred income taxes and investment tax credits (2,900) 367 Allowance for borrowed funds used during construction (446) (276) Net changes in: Accounts receivable and accrued unbilled revenues (14) 37,868 Fuel, materials and supplies (4,899) 10,616 Accounts payable (5,947) (2,526) Other current assets and liabilities (1,757) 10,156 Other, net 6,814 (26,392) --------- --------- Net cash provided by operating activities 69,465 109,001 --------- --------- Investing activities: Plant expenditures (excluding AFUDC) (20,758) (18,938) Nuclear fuel expenditures (14,160) (959) Investments (4,539) (14,069) --------- --------- Net cash used in investing activities (39,457) (33,966) --------- --------- Financing activities: Long-term debt redemptions - (100,000) Net change in notes payable - 61,987 Dividends paid (26,490) (25,721) --------- --------- Net cash used in financing activities (26,490) (63,734) --------- --------- Net increase in cash and cash equivalents 3,518 11,301 Cash and cash equivalents at beginning of year 92,563 4,140 --------- --------- Cash and cash equivalents at end of period $ 96,081 $ 15,441 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 27,776 $ 36,084 ========= ========= Income taxes $ - $ 10,233 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 6 Notes to Unaudited Consolidated Financial Statements - ---------------------------------------------------- A) Basis of Presentation --------------------- Boston Edison Company (Boston Edison) received final approval of its reorganization plan to form a holding company structure from the Securities and Exchange Commission in May 1998. Effective May 20, 1998 the holding company, BEC Energy (BEC), was formed with Boston Edison as a wholly owned subsidiary of BEC. Under the holding company structure the owners of Boston Edison's common stock became BEC common shareholders. Existing debt and preferred stock of Boston Edison remained obligations of the regulated utility business. Effective June 25, 1998, Boston Energy Technology Group (BETG) ceased being a subsidiary of Boston Edison and became a wholly owned subsidiary of BEC. Therefore, the 1998 consolidated financial statements reflect the results of operations and cash flows of Boston Edison prior to the reorganization. The accompanying unaudited consolidated financial statements should be read in conjunction with the Boston Edison 1998 Annual Report on Form 10-K. The financial information presented as of March 31 has been prepared from Boston Edison's books and records without audit by independent accountants. Financial information as of December 31 has been derived from the audited 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. Under the Boston Edison restructuring settlement agreement, which was approved by the Massachusetts Department of Telecommunications and Energy (DTE), approximately 75% of the net assets of Pilgrim Nuclear Power Station are recoverable through a non-bypassable transition charge of the utility's distribution business. All Boston Edison distribution customers must pay a transition charge as a component of distribution electric rates. The purpose of the transition charge is to allow Boston Edison to collect costs from customers that would not be collected in the competitive energy supply market. The distribution business continues to be subject to rate- regulation. The remaining 25% is collected under Pilgrim's wholesale power contracts with other utilities and municipalities. The consolidated balance sheets reflect a reclassification of the Pilgrim net assets recoverable through the transition charge from utility plant to regulatory asset. This Pilgrim regulatory asset, included in the generation-related regulatory asset on the consolidated balance sheets, continues to be grouped with utility plant for financial statement presentation. The sale of Boston Edison's fossil generating assets to Sithe Energies was completed in May 1998. The amount received above net book value on the sale of these assets is being returned to Boston Edison's customers over the settlement period. That amount is partially offset by certain costs recoverable through the transition charge due to the support of standard offer service provided by Boston Edison's fossil generating assets prior to the divestiture. The net gain on the sale of the fossil assets is included as a 7 reduction to the generation-related regulatory asset on the consolidated balance sheets. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the three-month periods ended March 31, 1999 and 1998 are not indicative of the results which 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. B) Nature of Operations -------------------- Within the restructured electric utility industry, BEC has announced its intention to focus its utility operations on the transmission and distribution of energy. The sale of Boston Edison's fossil generating assets to Sithe Energies was completed in May 1998. In November 1998, Boston Edison signed an agreement with Entergy Nuclear Generating Company to sell Pilgrim, its wholly owned nuclear generating unit. Regulatory approvals were received from the DTE, Federal Energy Regulatory Commission (FERC) and Nuclear Regulatory Commission in 1999. BEC signed a merger agreement with Commonwealth Energy System (CES) in 1998 that, upon completion, will create a new holding company, NSTAR. The utility subsidiaries of NSTAR will serve approximately 1.3 million customers located entirely within Massachusetts, including more than one million electric customers in 81 communities and 240,000 gas customers in 51 communities. The merger is subject to customary closing conditions, including the receipt of the required approvals of BEC and CES shareholders. Shareholder votes on the merger will be held as part of each of BEC's and CES' annual shareholder meetings scheduled for June 24, 1999. Refer to the Boston Edison 1998 Annual Report on Form 10-K for more information on the sale of Pilgrim and the merger with CES. Boston Edison currently supplies electricity at retail to an area of 590 square miles, including the city of Boston and 39 surrounding cities and towns. It also supplies electricity at wholesale for resale to other utilities and municipalities. Boston Edison is required to continue to develop and implement electric demand side management programs as well as to provide funding for renewable energy projects pursuant to Massachusetts law. C) Contingencies ------------- 1. Hazardous Waste Boston Edison is an owner or operator of approximately 20 properties where oil or hazardous materials were spilled or released. As such, Boston Edison is required to clean up these remaining properties in accordance with a timetable 8 developed by the Massachusetts Department of Environmental Protection. 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 faces possible 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 is one of many potentially responsible parties and currently expects to have only a small percentage of the total potential liability for these sites. Through March 31, 1999, BEC had approximately $6 million accrued on its consolidated balance sheet related to 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, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position. However, it is reasonably possible that additional provisions for cleanup costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. 2. Generating Unit Performance Program Boston Edison's generating unit performance program ceased March 1, 1998. Under this program the recovery of incremental purchased power costs resulting from Boston Edison's generating unit outages and outages at units in which it had entitlements was subject to review by the DTE. Proceedings relative to generating unit performance remain pending before the DTE. These proceedings will include the review of replacement power costs associated with the shutdown of the Connecticut Yankee nuclear electric generating unit. Boston Edison is a 9.5% equity investor in Connecticut Yankee Atomic Power Company and was a power purchaser from the generating unit. Management is unable to fully determine a range of reasonably possible disallowance costs in excess of amounts accrued. Based on its assessment of the information currently available, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position. However, it is reasonably possible that additional provisions for disallowance costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. 3. Industry and Corporate Restructuring Legal Proceedings The DTE order approving the Boston Edison restructuring settlement agreement was appealed by certain parties to the Massachusetts Supreme Judicial Court. One settlement agreement appeal remains pending, however there has to date been no briefing, hearing or other action taken with respect to this proceeding. In addition, along with other Massachusetts investor-owned utilities, Boston Edison has been named as a defendant in a class action suit seeking to declare certain provisions of the Massachusetts electric industry restructuring legislation unconstitutional. Management is currently unable to determine the outcome of these outstanding proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. 9 4. Regulatory Proceedings In October 1997, the DTE opened a proceeding to investigate Boston Edison's compliance with the 1993 order which permitted the formation of BETG and authorized Boston Edison to invest up to $45 million in unregulated activities. Hearings began in the fourth quarter of 1998 and were completed during the first quarter of 1999. A DTE ruling is expected in this proceeding in mid-1999. Each of the Reading Municipal Light Department, the Littleton Electric Light Department and the West Boylston Municipal Light Department have filed separate claims for arbitration in Massachusetts alleging that the proposed sale of Pilgrim Station constitutes a breach of their respective power sale agreements and seeking to terminate those agreements. The remaining municipal light departments have also indicated that they plan to file similar claims for arbitration. Boston Edison has requested the FERC to exercise its pre-emptive authority to consider the claims of the municipal light departments. In the event that either the FERC determines, or as a result of the arbitrations, that the contracts should be terminated, Boston Edison would continue to be obligated to purchase power from Entergy that it intended to resell to the municipal light departments. Boston Edison may not be able to resell such power in the short-term power exchange at a price equal to or greater than the price it is required to pay to Entergy. However, Boston Edison has filed at the DTE for recovery of any such shortfall as part of its Pilgrim divestiture filing through the transition charge. Management is currently unable to determine the outcome of these proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. 5. 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. However, it is reasonably possible that additional legal costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. 10 D) Income Taxes ------------ The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 1999 and the actual effective income tax rate for 1998.
1999 1998 ---- ---- Statutory tax rate 35.0% 35.0% State income tax, net of federal income tax benefit 4.3 4.6 Investment tax credit amortization (1.1) (6.2) Other 0.1 1.0 ---- ---- Effective tax rate 38.3% 34.4% ==== ====
The 1998 effective tax rate declined by 4.5% as a result of the recognition in net income of the remaining unamortized investment tax credits related to Boston Edison's fossil generating assets at the time of their sale. This shareholder benefit, which was realized in the second quarter of 1998, is included in other expense, net on the 1998 consolidated statement of income. The 1999 effective tax rate increased by 0.8% as a result of the associated decrease in the amortization of investment tax credits. E) Related Party Transactions -------------------------- The March 31, 1999 consolidated balance sheet of Boston Edison includes an $18 million receivable from BETG's wholly owned subsidiary, BECoCom. The receivable is for construction and construction management services provided by Boston Edison. The March 31, 1999 balance sheet also includes a $10 million payable to BEC. This represents Boston Edison's share of BEC's consolidated federal income tax liability. 11 Item 2. Management's Discussion and Analysis - --------------------------------------------- Results of Operations - Three Months Ended March 31, 1999 vs. Three Months - -------------------------------------------------------------------------- Ended March 31, 1998 - -------------------- Net income was $24.9 million for the three months ended March 31, 1999 compared to $22.9 million for the same period in 1998, an 8.7% increase as described below. The results of operations for the quarter are not indicative of the results which may be expected for the entire year due to the seasonality of kilowatt- hour (kWh) sales and revenues. Refer to Note A to the Consolidated Financial Statements. Operating revenues Operating revenues decreased 5.8% during the first quarter of 1999 as follows:
(in thousands) - ------------------------------------------------------ Retail electric revenues $(17,817) Wholesale revenues 195 Short-term sales and other revenues (5,300) - ------------------------------------------------------ Decrease in operating revenues $(22,922) ======================================================
Retail revenues were $320.1 million in 1999 compared to $337.9 million in 1998, a decrease of $17.8 million or 5%. The decrease in retail revenues reflects the impact of the 10% reduction in retail rates mandated by the Massachusetts Electric Utility Industry Restructuring Law that was implemented in March 1998. A 2.4% increase in retail kWh sales resulting from a strong local economy and colder weather in 1999 than in 1998 partially offset the impact of the rate reduction. Total short-term sales and other revenues were $15.1 million in 1999 compared to $20.4 million in 1998, a decrease of $5.3 million or 26%. This decrease is consistent with the decrease in short-term kWh sales. Beginning December 1, 1998, under an agreement with Select Energy, a subsidiary of Northeast Utilities, Boston Edison is only purchasing enough power to meet its obligations to its retail and wholesale customers. Therefore, Boston Edison has no excess power supply to sell into the New England Power Pool. Operating expenses Fuel and purchased power expense was $153.2 million in 1999 compared to $149.7 million in 1998, an increase of $3.5 million or 2%. The fuel expense related to fossil generation units decreased $47 million reflecting the divestiture of those units in May 1998. Purchased power expense increased $63 million reflecting the increase in Boston Edison's purchased power requirements in the absence of its fossil generating units. Boston Edison collects the costs related to fuel and purchased power from customers on a fully reconciling basis. Fuel and purchased power expense in 1999 includes a net reduction of $11 million related to these mechanisms. Due to the rate adjustment mechanisms, this reduction had no net impact on earnings. 12 Operations and maintenance expense was $77.4 million in 1999 compared to $96.1 million in 1998, a decrease of $18.7 million or 19%. The decrease was primarily due to a $12 million decrease in fossil-related power production expenses due to the fossil divestiture in May 1998. The remaining decrease reflects lower employee benefit expense. Depreciation and amortization expense was $47.4 million in 1999 compared to $46.1 million in 1998, an increase of $1.3 million or 3%. The increase is due to the required increase in depreciation on distribution utility plant under the terms of the Boston Edison settlement agreement partially offset by a reduction in amortization due to the return to customers of the proceeds from the fossil divestiture. Demand side management (DSM) and renewable energy programs expense was $13.3 million in 1999 compared to $8.1 million in 1998, an increase of $5.2 million or 64%. The increase reflects an increase in the required spending for DSM programs in 1999. In addition, renewable energy programs expense increased $3 million as a result of a state mandate for the funding of renewable energy that became effective March 1, 1998. Renewable energy expenses are collected through a separate rate mechanism and, therefore, have no net impact on earnings. Property and other taxes were $20.5 million in 1999 compared to $29.5 million in 1998, a decrease of $9 million or 31%. The decrease is due to a decrease in municipal property taxes of $8.5 million resulting from the fossil divestiture. Other expense, net Other income, net was $0.6 million in 1999 compared to expense of $1.2 million in 1998, a net increase in income of $1.8 million. This reflects BETG equity losses in 1998. Interest charges Interest charges on long-term debt were $19.5 million in 1999 compared to $22.9 million in 1998, a decrease of $3.4 million or 15%. The decrease reflects approximately $2 million due to the maturing of $100 million of 5.95% debentures in March 1998 and the cessation of amortization of the associated discounts and redemption premiums and approximately $2 million due to the redemption of a $100 million 6.662% bank loan in June 1998. Preferred stock dividends Preferred stock dividends were $1.5 million in 1999 compared to $2.9 million in 1998, a decrease of $1.4 million or 49%. The decrease is primarily due to the redemption of 400,000 shares of 7.75% series cumulative preferred stock and the remaining 320,000 shares of 7.27% series in July 1998. Electric Revenues Boston Edison's electric delivery business provides its standard offer customers service at rates designed to give 10% savings from rates in effect prior to the retail access date (March 1, 1998). Under Massachusetts law, 13 Boston Edison will be required to charge rates that provide these customers an additional 5% average savings, after an adjustment for inflation, by September 1, 1999. The cost of providing standard offer service, which includes fuel and purchased power costs, is recovered from customers on a fully reconciling basis. New retail customers in the Boston Edison service territory and previously existing customers that are no longer eligible for the standard offer due to choosing a competitive supplier are on default service. The price of default service is based on the average competitive market price for power. Refer also to the Electric Revenues section of Item 7 of the Boston Edison 1998 Annual Report on Form 10-K. As part of the Boston Edison restructuring settlement agreement, the annual performance adjustment charge ceased and the cost recovery mechanism for Pilgrim Station changed effective March 1, 1998. Approximately 25% of the operations and capital costs, including a return on investment, continues to be collected under wholesale contracts with other utilities and municipalities. Refer to the Electric Revenues section of Item 7 of the Boston Edison 1998 Annual Report on Form 10-K for a description of Pilgrim's cost recovery mechanism. Under the Boston Edison restructuring settlement agreement, the rates of Boston Edison's distribution business will remain unchanged, subject to a minimum and maximum return on average common equity (ROE), until December 31, 2000. Refer to the Electric Revenues section of Item 7 of the Boston Edison 1998 Annual Report on Form 10-K for detail regarding the minimum and maximum ROE. Under the Boston Edison settlement agreement, the cost of providing transmission service to distribution customers is recovered on a fully reconciling basis. Pursuant to the merger agreement between BEC and CES, the utility subsidiaries of the two companies filed a rate plan with the DTE in February 1999. Under the plan, distribution rates of the utility subsidiaries will be frozen for a period of four years upon consummation of the BEC and CES merger. Other highlights of the rate plan include recovery of transaction and integration costs (estimated to be approximately $100 million) over a ten-year period and recovery of the acquisition premium (estimated to be approximately $500 million) over 40 years. The companies have proposed that this recovery be allocated among the utility subsidiaries, including Boston Edison. Completion of the merger is subject to the approval of this rate plan by the DTE. Liquidity - --------- Boston Edison supplements internally generated funds as needed, primarily through the issuance of short-term commercial paper and bank borrowings. Boston Edison has authority from the Federal Energy Regulatory Commission to issue up to $350 million of short-term debt. Boston Edison has a $200 million revolving credit agreement with a group of banks as well as other arrangements with several banks to provide additional short-term credit on an uncommitted and as available basis. No amount was outstanding under these revolving credit agreements as of March 31, 1999. 14 Year 2000 Computer Issue - ------------------------ The year 2000 issue is the result of computer programs that were written using two digits rather than four to define an applicable year. If computer programs with date-sensitive functions are not year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions and engage in other normal business activities. BEC has a year 2000 program in place to address the risk of non-compliant internal business software, internal non-business software and embedded chip technology and external noncompliance of third parties. BEC is addressing the year 2000 issue on a coordinated basis. BEC inventoried and assessed all date-sensitive information and transaction processing computer systems and determined that approximately one-third of business critical systems software needed modification or replacement. BEC defines its business critical systems as those which are necessary for the delivery of and billing and accounting for electricity to its customers. Plans have been developed and are being implemented to correct and test all affected systems, with priorities assigned based on the importance of the supported activity. As systems are being remediated or replaced, they are tested for operational and year 2000 compliance in their own environment. After completion of implementation, the systems are then tested for their integration and compliance with other interactive systems. Management estimates that approximately 85% of the efforts necessary to implement and test its critical computer systems to alleviate the year 2000 issue are complete and expects to complete all efforts by the end of the second quarter of 1999. In addition, all other non-critical systems have been inventoried and assessed. Approximately one-third of these systems required modification or replacement. Under the year 2000 plan, each non-critical system has a form of readiness acceptance commensurate with its business importance. The more important and complex systems are being tested as a means of acceptance. Less important and non-complex systems may refer to industry test results, vendor test results and/or vendor statements of readiness as a means of acceptance. Management expects to complete the remediation, replacement and testing of at least 95% of its non-critical computer systems by the end of the second quarter of 1999. All non-critical systems are scheduled for completion by the third quarter of 1999. BEC has also inventoried its non-information technology systems that may be date-sensitive and that use embedded technology such as micro-controllers or micro-processors. Approximately 27% of these systems require modification or replacement. The three categories of these systems are (1) telecommunications, (2) distribution system controls and (3) other distribution equipment. BEC is approximately 90%, 80% and 90% complete, respectively, with its efforts to resolve and remediate the systems that have been identified as year 2000 non-compliant within each category. BEC expects completion of resolution and testing by the end of the second quarter of 1999. Costs incurred to remediate non-compliant systems are expensed as incurred. In addition, a decision was made to use this opportunity to upgrade some of BEC's inefficient centralized business systems. Systems' replacement costs will be capitalized and amortized over future periods. BEC expects the modification and testing of its information and transaction processing systems to cost $32 million. BEC has expended $21 million on this project through March 31, 1999. BEC has funded and plans on continuing to fund all costs related to year 2000 with internally generated cash flows. 15 In addition to its internal efforts, BEC has initiated formal communications with its significant suppliers, service providers and other vendors to determine the extent to which BEC may be vulnerable to their failure to correct their own year 2000 issues. BEC has received responses from over 500 third party vendors including all business critical vendors. Approximately 40% of the vendors indicated their systems would not be adversely impacted by year 2000 issues. All of the vendors contacted have indicated that they will be year 2000 compliant by the end of the fourth quarter of 1999. In addition, BEC has contacted all of its significant power suppliers. Each has indicated that they either are or will be year 2000 compliant by the end of the fourth quarter of 1999. In addition to the risk faced from its dependence on third party suppliers for year 2000 compliance, BEC has a risk that power will not be available from the New England Power Pool (NEPOOL) for the purchase and distribution to Boston Edison's customers. Should NEPOOL fail to resolve its year 2000 issues as planned, there would be an adverse impact on Boston Edison and its customers. To mitigate this risk, efforts are being coordinated with NEPOOL to establish inter-utility testing guidelines to determine year 2000 readiness. Boston Edison is also a participant in the NEPOOL/ISO New England Year 2000 Joint Oversight Committee which has responsibility for the operational reliability of NEPOOL. Overall regional activities, including those of NEPOOL/ISO New England, will be coordinated by the Northeast Power Coordinating Council, whose activities will be incorporated into the interregional coordinating effort by the North American Electric Reliability Council. The target for the completion of this effort is mid-1999. In addition, parts of the global infrastructure, including national banking systems, electrical power grids, gas pipelines, transportation facilities, communications and government activities, may not be fully functional after 1999 due to the year 2000 issue. Infrastructure failures could significantly reduce BEC's ability to acquire energy and its ability to serve its customers as effectively as they are now being served. BEC believes that its efforts to address the year 2000 issue will allow it to successfully avoid any material adverse effect on its operations or financial condition. However, it recognizes that failing to resolve year 2000 issues on a timely basis would, in a most reasonable worst case scenario, significantly limit its ability to acquire and distribute energy or process its daily business transactions for a period of time, especially if such failure is coupled with third party or infrastructure failures. Similarly, BEC could be significantly affected by the failure of one or more significant suppliers, customers or components of the infrastructure to conduct their respective operations normally after 1999. Adverse effects on BEC could include, among other things, business disruption, increased costs, loss of business and other similar risks. BEC's year 2000 program includes contingency plans. If required, these plans are intended to address both internal risks as well as potential external risks related to vendors, customers and energy suppliers. Plans have been developed in conjunction with available national and regional guidance and are based on system emergency plans that were developed and successfully tested over the past several years. Included within its contingency plans are procedures for the procurement of short-term power supplies and emergency distribution system restoration procedures. The contract with ISO New England requires that ISO New England dispatch at all times sufficient resources to meet total New England load requirements. ISO New England has the responsibility and authority to dispatch all regional generation sources including maintaining sufficient operating reserves to respond to unanticipated system conditions. ISO New England, in conjunction with the New England Power Pool has an extensive year 2000 readiness program underway to ensure that it will have sufficient generation and transmission resources to 16 reliably serve load. In addition, ISO New England plans to increase its operating reserves during the early year 2000 period from approximately 15% to 40%. The foregoing discussion regarding year 2000 project timing, effectiveness, implementation and costs includes forward-looking statements that are based on management's current evaluation using available information. Factors that might cause material changes include, but are not limited to, the availability of key year 2000 personnel, the readiness of third parties and BEC's ability to respond to unforeseen year 2000 complications. 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, 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. Refer also to the safe harbor cautionary statements included in the Boston Edison 1998 Annual Report on Form 10-K. The preceding sections include certain forward-looking statements about environmental and legal issues and year 2000. The impacts of various environmental and legal issues 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 the estimated litigation costs. The timing and total costs related to the year 2000 plan could differ from current expectations. Factors that may cause such differences include the ability to locate and correct all relevant computer codes and the availability of personnel trained in this area. In addition, management cannot predict the nature or impact on operations of third party noncompliance. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- There have been no material changes since year-end. 17 Part II - Other Information Item 5. Other Information - -------------------------- The following additional information is furnished in connection with the Registration Statement on Form S-3 of the Registrant (File No. 33-57840), filed with the Securities and Exchange Commission on February 3, 1993. Ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred stock dividend requirements: Twelve months ended March 31, 1999: ---------------------------------- Ratio of earnings to fixed charges 3.54 Ratio of earnings to fixed charges and preferred stock dividend requirements 3.17 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 March 31, 1999 12.2 - Computation of ratio of earnings to fixed charges and preferred stock dividend requirements for the twelve months ended March 31, 1999 Exhibit 15 - Letter Re Unaudited Interim Financial Information 15.1 - Report of Independent Accountants Exhibit 27 - Financial Data Schedule 27.1 - Schedule UT 18 Exhibit 99 - Additional Exhibits 99.1 - Letter of Independent Accountants Form S-3 Registration Statement filed by Boston Edison Company on February 3, 1993 (File No. 33-57840) b) No Form 8-K was filed during the first quarter of 1999. 19 Signature --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOSTON EDISON COMPANY ----------------------- (Registrant) Date: May 17, 1999 /s/ Robert J. Weafer, Jr. ----------------------------- Robert J. Weafer, Jr. Vice President-Finance, Controller and Chief Accounting Officer EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 20 Exhibit 12.1 Boston Edison Company Computation of Ratio of Earnings to Fixed Charges Twelve Months Ended March 31, 1999 (in thousands) Net income from continuing operations $159,335 Income taxes 84,290 Fixed charges 95,985 -------- Total $339,610 ======== Interest expense $ 86,152 Interest component of rentals 9,833 -------- Total $ 95,985 ======== Ratio of earnings to fixed charges 3.54 ====
EX-12.2 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS 21 Exhibit 12.2 Boston Edison Company Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements Twelve Months Ended March 31, 1999 (in thousands) Net income from continuing operations $159,335 Income taxes 84,290 Fixed charges 95,985 -------- Total $339,610 ======== Interest expense $ 86,152 Interest component of rentals 9,833 -------- Subtotal 95,985 -------- Preferred stock dividend requirements 11,217 -------- Total $107,202 ======== Ratio of earnings to fixed charges and preferred stock dividend requirements 3.17 ====
EX-15.1 4 REPORT OF INDEPENDENT ACCOUNTANTS 22 Exhibit 15.1 Report of Independent Accountants To the Directors of Boston Edison Company We have reviewed the accompanying consolidated balance sheet of Boston Edison Company (Boston Edison) as of March 31, 1999 and the related statements of income for the three-month periods ended March 31, 1999 and 1998 and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Boston, Massachusetts PricewaterhouseCoopers LLP April 22, 1999 EX-99.1 5 SEC LETTER 23 Exhibit 99.1 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Boston Edison Company Registration on Form S-3 We are aware that our report dated April 22, 1999 on our review of the interim financial information of Boston Edison Company (Boston Edison) for the period ended March 31, 1999 and included in this Form 10-Q is incorporated by reference in Boston Edison's registration statement on Form S-3 (File No. 33-57840). Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Boston, Massachusetts PricewaterhouseCoopers LLP April 22, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
UT 1,000 3-MOS DEC-31-1999 MAR-31-1999 PER-BOOK 2,254,288 208,782 437,805 189,724 0 3,090,599 0 742,698 295,655 1,038,353 49,100 43,000 890,511 0 0 0 65,267 0 0 0 1,004,368 3,090,599 371,195 14,956 311,782 326,738 44,457 609 45,066 20,209 24,857 1,490 0 0 0 69,465 0 0
-----END PRIVACY-ENHANCED MESSAGE-----