ML20196E215
| ML20196E215 | |
| Person / Time | |
|---|---|
| Site: | Pilgrim |
| Issue date: | 12/31/1998 |
| From: | Alexander J, May T BOSTON EDISON CO. |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| BECO-2.99.062, NUDOCS 9906280117 | |
| Download: ML20196E215 (131) | |
Text
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10CFR50.71(b) l 8 10CFR140.15(b)(1)
BOSTONEDISON Pilgrim Nuclear Power Station 600 Rocky Hill Road Plymouth, Massachusetts 02360 l
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June 23, 1999 BECo Ltr. 2.99.062 U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, DC 20555 Docket No. 50-293 License No. DPR-35 !
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Annual Financial Statement for 1998 In accordance with 10 CFR50.71(b) and 10CFR140.15(b)(1), Boston Edison (BEC Energy) submits the enclosed 1998 Annual Report and the Securities and Exchange Commission (SEC) Form 10-K which corresponds to the 1998 Annual Report, if you have any questions on this documentation, please contact Mr. Robert Cannon M (508) 830-8321. p I
A
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J nder clear Assessment Manager RLC/sc cc: Mr. Alan B. Wang, Project Manager 9 Project Directorate 1-3 Office of Nuclear Reactor Regulation {
Mail Stop: OWFN 1482 U. S. Nuclear Regulatory Commission 1 White Flint North 11555 Rockville Pike
//.j g)[')l Rockville, MD 20852 U.S. Nuclear Regulatory Commission Region i 475 Allendale Road l
King of Prussia, PA 19406 Senio Residentinspector Pilgrim Nuclear Power Station w/o
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9906290117 981231 PDR ADOCK 05000293 I peg _
& BECEnergy 1
1' 1998 Annual Report t
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Chairman's Message 50' 45' I i i r i ! i i I i i I I I I 1 1 T f I i i i i ! ! 1 1 i i i i I T l l' I I T l i I i i i ! i r i i i F 1 I !'I I I I ITTTM
J Welcome to BEC Energy's 1998 Annual Report. Throughout the report, you will see a navigational theme. The reason is quite simple. Over the past several years, I j have been describing in these reports the journey we are on as the electric utility I
industry restructures. I hope I conveyed to you that your company knows where it is going and how it is going to get there.
In last year's report, I wrote of a " dramatic and successful" year with much of the uncertainty of deregulation behind us. The year 1998 was no less dramatic and no less successful. It was a year that put BEC Energy on course for becoming the premier
" wires and pipes" company in the region.
The expression " wires and pipes" refers to the pathways we use to deliver electricity, natural gas and telecommunications services to customers. We have been delivenng electricity for 112 years, and telecommunications for two. The announcement in December of the merger of BEC Energy and Commonwealth Energy adds natural gas to the mix. It is just one more sign of the convergence of energy and telecommunications products and services.
Last year, we wrote in the annual report that " consolidation appears inevitable" because of the restructuring of both the electnc and gas utility industries. That consolidation is well underway. Several natural gas company mergers were announced last year in Massachusetts. We became the first company to announce an electric utility merger.
Actually, our merger with Commonwealth Energy is a combination merger - both electricity and natural gas. So far, this is the only merger that is truly a bringing together of " wires and pipes."
Consolidation was not the only destination we had in sight last year. Other ,
" destinations" included:
- regulatory approvals for the holding company, BEC Energy; e the sale and transfer of our oil and natural gas power plants to Sithe Energies; 2
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- the signing of a purchase and sale agreement for our nudear plant; E
- the efficient introduction of customer choice on March 1; g
- another increase, this time to $2.76, in earnings per share; E
- the defeat of a misguided referendum that would have repealed the :
Massachusetts restructuring law; and, :
2
- internal changes that focused the entire company on one goal- the delivery }
Of exceptional customer service. 5 2
45' All were reached successfully, but not without some turbulence. E On the following pages you wil! read more about each of these events, as well E.
as about our community activities, our actions to address year 2000 computer 5 concerns and the growth in the Massachusetts economy. As you do, it may be 2 m
helpful to reflect on how far we have traveled since restructuring of the industry 2 began following passage of national energy legislation in 1992. E-Throughout much of the 1990's we have displayed a consistent pattern of 2~
strong financial performance. That pattern continued in 1998 as earnings per share 3 -
increased 1.8 percent on the strength of reduced operations and maintenance $
spending and increased retail sales while also providing customers with a E
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10 percent rate reduction. Capital and operations and maintenance spending E combined were the lowest in 12 years. 5 in December we raised the annual dividend $0.06 to $1.94 per common share. E 40 This 3.2 percent increase places us in the top quartile for dividend growth in our !
industry.
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Consistently in recent years, we have executed our plans effectively and efficiently in all aspects of the business. This included our responses to industry h restructuring.
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i i i i ! I i i i 11 I I I I i 1 I i i i i i i ! i i i i i i Tl i I I~I I I i i i i i ! i i i i i I I I l i I I I I rTTIM Today, we are a very different company than we were early in the decade. Certainly, we .-
are just as committed today to the communities in which we operate and the employees t
who make us successful. Yet, we are no longer in the generation business. We have, instead, joined with Commonwealth Energy to create a new energy delivery company. This nearly doubles our customer base, and makes us better able to provide exceptional service to those customers. We have passed through restructuring, and while doing so, protected the interests of our shareholders and addressed the changing needs of consumers.
Our journey is not over. However, n. l we know we are on the right course .. .
and better equipped for the passage. ;;; g x;
Sincerely, $$ I h O*
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'[ 173 gc Thomas J. May Chairman. President and B
Chief Executive Officer I
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L The Tide L Turns 50' 45' IIIII IIIIIIIIIIIIIIIIIIi iIIIIIIIIi1IIIIIIII I IIIEIIIIIi111IIIII l n 1998, the electric utility industry in Massachusetts became smaller, creating the need to evaluate opportu g changed forever with the arrival of competition in the nities for growth, electric generation sector. On March 1, for the first in 1998, we achieved significant milestones that g
time in the history of the industry, customers were able would also work to set our course. On January 28, the to select the company that will generate their power. Department of Telecommunications and Energy (DTE)
In the new marketplace, utilities such as Boston Edison approved our sett!ement agreement with the state will deliver the electricity that is now generated in a Attorney General and the Depa-tment of Energy competitive marketplace Resources (DOER), assuring customers of energy sav-Change was inevitable in our industry. Following ings and a choice of energy suppliers while providing the passage of the National Energy Act of 1992, gov. for full recovery of stranded costs.
ernment, business, utility industry, consumer, academic On April 17, the DTE approved formation of our and environmental leaders worked to restructure the holding company, BEC Energy, a necessary first step if electric utility industry. Boston Edison embraced the our company were to succeed in the rapidly unfolding opportunity to help reshape the utility industry in scenario of utility consolidations sweeping the country.
Massachusetts. Today we are working in a newly Of great significance in 1998, the 1997 legislation restructured industry that fosters competition, and that guided industry restructuring in Massachusetts
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works to provide customers with better rates for their and was passed overwhelmingly by the House and 4 electricity. Electric rates were cut 10 percent in 1998, Senate was called into question. Question 4, a mis-allowing Boston Edison customers to save on their guided referendum question, was placed on the l electric bills in the first year of competition. November ballot. A broad-based statewide coalition Tremendous support from employees throughout worked to secure a YES vote on Question 4. By a mar- i
_ Boston Edison needed to take place to prepare for the - gin of 71-29 percent, the law prevailed and competi-
' March 1 arrival of customer choice. Employees played tion was protected.
key roles in working with state agencies to ensure that in December, we announced exciting plans to our systems and procedures were all in place. New - merge with Commonwealth Energy. The combined I billing systems were needed. Employees received - company will be able to invest more effectively in extensive training. Every employee in the company technology and infrastructure, which will lead to higher I was ready for the March 1 date. levels of customer service.
With the arrival of competition, other aspects of the We are focused on our goal- to become a pre-electric utility industry also began to change. The ser- mier distribution company in the New England region.
vice and attention that we provide to our customers Work done during the past decade has reshaped the became more important than ever. Also, as utilities industry. Work done during the past year has pre-began to divest of their generation assets, companies pared us for the future.
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11 i i i ! i i i i n IT T I T T11 n i i i i ! i i i i i1 T IT I11 r1 i i i i i ! i i i i i n rT111 I r RIM
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Based on transactions alone,1998 was a very busy premier wires and pipes distribution network in 7 ,
year for BEC Energy. Under the settlement agreement the region.
with the Attorney General's office, the oil- and gas- With our subsidiaries, we made the decision in ,
fired plants were sold to open the door to competi. 1998 to leverage the valuable experience we have in tive generation. distribution, and focus our attention on those sub-In May, the sale of the oil- and gas-fired generat- sidiaries that met these criteria. The telecommunica- !
ing plants was finalized and Sithe Energies became tions venture with RCN, in which BEC Energy is a 49 the new owner. Sithe Eregies paid $655 million for percer,t owner, continues to attract attention in com-the plants, citing strong operational performance and munities throughout eastern Massachusetts.
well trained employees. From announcement to clos. Presently, there are agreements to be a cable ing, the sale of the oil- and gas-fired plants was final- provider with 12 cities and towns in Massachusetts. i ized in six months. This was an aggressive schedule This provides yet another cpportunity for customers that required a great deal of time and energy on the to benefit from competition.
part of our employees. Northwind Boston completed construction on its
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The competitive marketplace is evolving. Presently, district cooling plant located at The First Church of !
1,200 Boston Edison customers are receiving their elec- Christ, Scientist H Boston. Northwind is 75 percent i tricity from a competitive supplier. By the close of this owned by E! J Energy and 25 percent owned by year, we expect competitive suppliers will provide close Unicom Thewl of Chicago.
to 200 megawa+ts of electricity to our customers. With the cecision to focus on distribution, it was in November, Entergy Nuclear Generating clear that two ci our subsidiaries, Coneco and Company, a subsidiary of New Orleans-based EnergyVision, did not move the company's agenda for- {
l Entergy Corporation, was selected as the winning ward. In late 1998, The Williams Company purchased j bidder for Pilgrim Station. Entergy was attracted to BEC Energy's interest in EnergyVision. In early 1999, Pilgrim Station based c>n its strong operating perfor- Coneco ceased operations when it no longer fit with mance and a strong safety record. In 1998, Pilgrim the company's strategic decision to focus on distribu- .
Station operated at 97 percent capacity, the best tion and changes in the energy contracting markets j year in the plant's history. heightened uncertainty about its future. .
These transactions have allowed the company to focus on achieving the vision of becoming the i
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i i i i ! i i y i FI r T TT TTl i i i i i ! i i i i i l r1 FTTT TT i i i i i ! i i i i i I T T T ITTTTi i i i 1 l Buoy'ed by a strong and stable Massachusetts Progress resulting from the careful planning of the ,
economy, our company set upon a disciplined yet AIM teams is already beginning to be realized in 1999.
aggressive course very early in 1998 to position itself One example is in the Customer Care Group, which this y
for future success. It is clear from actions undertaken year expanded its automated meter reading capabilities during the year, supported by sound public and to provide more accurate bills for our customers.
regulatory policies and encouraged by dramatic suc- The year closed with the excitement of a !
cesses already achieved, that we know where we are December 7 announced merger between BEC Energy 9oing and how to get there. and Commonwealth Energy System, two financially This is an exciting time for the Massachusetts strong, customer-f acused utilities. The merged j economy. Major improvements in Greater Boston's companies represent a total market capitalization of I I'
transportation network will enhance the city's attractive- $4.4 billion. The aggressive schedules we have set for ness, both from employment and as a convention and ourselves in various arenas throughout the year are no I
tourist destination. Today, the employment base is less ambitious with our merger. Such activity typically j more diversified and less dependent on any single takes 12 to 18 months from conception to reality. We sector than at any time in recent history. New construc- are on a six-month schedute and will be ready to be j operational on July 1. I tion projects are in development. One example is the Seaport District of Boston, once neglected and under. The merger expands the BEC Energy customer j used, which is now experiencing revitalization with the base to 1.3 million - 1,040,000 electric customers in 81 construction of new hotels and office space. communities,240,000 gas customers in 51 communities - !
The excitement we see in the local economy mir- and enables even further customer and shareholder ben-rors the enthusiasm we see in our employees. In 1998, efits by taking full advantage of operational efficiencies.
we launched AIM, a process that Aligns, Integrates and A new look for Boston Edison was unveiled in the Measures all aspects of the company's performance. fall of 1998 with new logo, new signage and a new look AIM is about making and keeping commitments for our fleet with all white vehicles. This was more than to our customer, the communities we serve and the just a new look for the company. Sending a strong mes-shareholders who own our company. It's also about sage that we are focused on sharpening our image and developing our capabilities as employees to meet keeping service our priority meant delivering a tangible ,
those commitments in the very best ways possible. external example of work done internally.
In parallel with the AIM process, the company's That logo, that brand, is fast becoming symbolic of operating model was adapted during 1998 sound the a premier company ready, willing and eminently able to AIM operating plan. The operating model emphasizes serve its customers today and well into many tomer-a keen focus on strategic and core processes, and sup- rows. The Boston Edison logo is expected to carry over port and shared services to optimize internal perfor- into the new company once a new holding company mance. The AIM operating plan also closes perfor- name is selected.
mance gaps identified by employee teams.
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The aggressive pace set in 1998 continues. By July 1, safety record places Boston Edison as one of the safest companies in our industry.
we anticipate that we will have completed the merger ,
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agreement with Commonwealth Energy System. The Demonstrating that the communities we serve are
- I transition to form one company from two will involve always of considerable importance, in 1998 employees each and every employee. Presently, a new name for surpassed company projections for United Way contri-the holdir.g company is in development. This will butions. Pledges from employees place us in a leader-mean that the name BEC Energy will evolve into ship role in the Greater Boston area. !
another name that represents the strength and The company also continued its leadership role in resources of the larger company we will become.
economic development. Employees worked closely A broad coalition of employees from across the with state and local governments spearheading initia-company has been at work for several years to ensure tives to make Masschusetts more attractive for job that the issue of Y2K compliance of our critical systems growth and business expansion.
is fully addressed and resolved by June 30,1999. We The New England utility market is likely to contin-are fully committed to ensuring a smooth transition in ue to deliver news throughout the year. There are the next millennium. Much progress has been made, more than two dozen electric utilities and numerous and this important work continues in earnest. Wr. are gas companies in New England. As companies evalu-on target to meet our goal. An inventory of a' systems ate synergies and opportunities to improve cost-for-was completed mid-1998. By early 1999, the testing of service ratios, consolidation is inevitable.
systems was on target. We are confident that we will This is an exhilarating time in the utility industry.
provide to our customers the sarne level of reliability at Change is the norm. Breaking news is a daily occur-the turn of the new century.
rence. The future promises to be just as exciting. .Your in 1998, employees demonstrated enthusiasm company is well positioned to take advantage of the about the achievements of the company on two fronts. course set for the utility industry. We continue to navi- ,
Of monumental significance, Boston Edison employ- gate toward our goal of becoming a premier wires and ees achieved the best year ever in the area of personal pipes distribution company. ,
safety. In fact, the focus on achieving an exemplary 12 uu m mmtEhl
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Miltli'igetllelil's Disctissioil illid Allillysis provisions of a Massachusetts law enacted in November 1997 establishing a comprehensive framework for the restructuring of Merger with COM/ Energy the electric utility industry. hiajor provisions of the settlement The utiliry industry has continued to change in response to agreement included the ability for retail electric customers to the marketplace demands for improved customer service and choose their electricity supplier (referred to as retail access) lower prices for energy. The.se pressures have resulted in an effective March 1,1998 (the retail access date). Under its set-increasing trend in the industry to seek competitive advantages tiement agreement, Boston Edison provides standard offer serv-and other benefits through business combinations. On ice to all customers of record as of the retail access date.
December 5,1998. HEC Energy (BEC) and Commonweahh Customers continuing to buy electricity under the standard Energy System (CES), headquartered in Cambridge, offer are receiving service at rates designed to give 10% savings Massachusetts, entered into an Agreement and Plan of Merger from the races in effect prior to the retail access date. These (the Merger Agreement). Pursuant to the hierger Agreement, standard offer customers will realize an additional 5% average :
BEC and CES will be merged into a new holding company savings, after an adjustment for inflation, by September 1, which has not yet been named (Newco). Holders of BEC com- 1999. Boston Edison expects to be able to meet this additional mon shares will receive one share of Newco common stock for '
rate reduction as a result of the divestiture of the fossil generat-each share held while CES common shareholders will receive ing assets which is discussed below. New retail customers in tht 1.05 shares of Newco common stock for each share held. Boston Edison service territory and previously existing cus-Alternatively, current BEC and CES common shareholders have comers that are no longer eligible for the standard offer due to the right to receive $44.10 of cash for each share held, up to an choosing a competitive supplier are on default service. Refer aggregate maximum of $300 million. At the close of the merg- also to the Electric revenues section for more information.
er, BEC shareholders are expected to own approximately 68%
of Newco common stock and CES shareholders are expected to Generating Assets Divestiture own approximately 32% The merger is expected to occur The Boston Edison restructuring settlement agreement shortly after the satisfaction of certain conditions, including the included a provision for the divestiture ofits fossil generating i receipt of certain regulatory approvals including that of the assets no later than six months after the retail access date. On j Massachusetts Department ofTelecommunications and Energy May 15,1998, Boston Edison completed the sale ofits non-(DTE). The regulatory approval process is expected to be com- nuclear generating assets to Sithe Energies, Inc. (Sithe). Boston pleted during the second half of 1999. Edison received proceeds from the sale of $655 million, includ-The merger will create an energy delivery company serving ing $121 million for a six-month transitional power purchase approximately 1.3 million customers located entirely within contract. The amount received above net book value on the Massachusetts, including more than one million electric cus- sale of these assets is being returned to Boston Edison's cus- l tomers in 81 communities and 240,000 gas customers in 51 tomers over the settlement period. That amount is partially off- ;
communities. set by certain costs recoverable from customers due to the sup- !
E The Merger Agreement may be terminated under cettain port of standard offer service provided by Boston Edison's fossil l circumstances, including by any party if the merger is not con. generating assets prior to the divestiture.
summated by December 5,1999, subject to an automatic In April 1998, Boston Edison began soliciting expressions extension of six months if the requisite regulatory approvals ofinterest for the sale ofits nuclear generating unit, Pilgrim have not yet been obtained by such date. The merger will be Nuclear Power Station (Pilgrim) as part of the previously accounted for using the purchase method of accounting. announced strategy to exit the generation business. On Upon effectiveness of the merger, Thomas J. May, BEC's November 19,1998, Boston Edison announced that Entergy current Chairman, President and Chief Executive Officer Nuclear Generating Company (Entergy), a subsidiary of New (CEO), will become the Chairman and CEO of Newco. Orleans-based Entergy Corporation, had been selected as the Russell D. Wright, CES' current President and CEO, will winning bidder for Pilgrim. In the nation's Srst competitive bid become the President and Chief Operating Officer of Newco process for a nuclear power plant, Entergy is expected to pur-and will serve on Newco's board of directors. Also, upon the chase Pilgrim in a deal valued at an estimated $121 million. In ,
effective date of the merger, Newco's board of directors will con- addition, under the agreement Boston Edison will fully fund sist of BEC's and CES' current trustees. and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for -
Retail Access decommissioning the Pilgrim site. A purchase and sale agree-BEC's electric utility subsidiary, Boston Edison Company ment has been signed and all required approvals are anticipated (Boston Edison) has been anticipating and responding to the in the second quarter of 1999. The purchase price includes changes in the electric energy business as a result ofit dastry reimbursement for certain costs to be expended by Boston restructuring proceedings at both federal and state levels. In Edison in 1999. Therefore, the actual proceeds could be January 1998, the DTE approved Boston Edison's restructuring impacted by the ultimate timing of the transaction.
settlement agreement. The DTE found that the settlement As part of a benc6ts package offered to employees affected agreement substantially complied or was consistent with key by the nuclear divestiture, eligible non-represented nuclear and 14
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designated nuclear support employees were offered unreduced Rzeults of Opsrgtions retirement and tramition benefits under a voluntary early retire-ment program (VERP). Sixteen employees elected to partici. 1998 versus 1997 p2te in the VERE A retention benefit program was offered to Basic and diluted earnings per common share were $2.76 all non-represented nudear and designated nuclear support and $2.75, respectively in 1998 compared to $2.71 and $2.71 in employees that did not elect or were ineligible to retire under - 1997, a 1.8% increase in basic earnings as described below.
the VERP who continue to work through the sale dosing date.
It is anticipated that approximately 300 non-represented nuclear Opera #ng menues and designated nuclear support employees will receive one-time Operating revenues decreased 8.8% from 1997 as follows:
retention payments under this program. Costs associated with (in thousands) the VERP and retention prograr.i are recoverable under Boston Retail revenues $(148,272) r Edison's settlement agreement. Wholesale revenues (3,721)
For more information on the nuclear divestiture refer to the Short-terrn sales and other revenues (4,023)
November 23,1998, BEC or Boston Edison Report on Form
. Decrease in operating revenues $(156,016)
- 8-K announcing the purchase and sale agreement with Entergy.
BEC Energy Retail revenues reflect the impact of the mandated 10%
Boston Edison received final approval ofits reorganization retail rate reduction. A 2.0% increase in retail kilowatt-hour plan to form a holding company structure from the Securities (kWh) sales in 1998 partially offset the impact of the rate reduc-and Exchange Commission (SEC) in May 1998. Effective May ti n. Retail revenues also reflect a decrease due to the timing 20,1998, BEC was formed with Boston Edison as a wholly e&ct of fuel and purchased power cost recovery. Prior to its ces-owned subsidiary of BEC. Effective June 25,1998, Bomn sation as of March 1,1998, the fuel clause charge was lower than Energy Technology Group (BETG) ceased being a subs .. , of the prior year as the 1997 charge reflected the recovery of sub-Boston Edison and became a wholly owned subsidiary of BEC. stannal prior year undercollections. Fuel clause revenues were The holding company structure clearly separates the unregulat- ffset by fuel and purchased power expenses and, therefore, had ed and regulated operations of BEC and provides management n net effect on earnings.
with greater organizational flexibility in order to take advantage The net decrease in short-term sales and other revenues of utility and nonutility business opportunities in a more timely reflects an 11% decrease in short-term kWh sales. This decrease manner, including the merger with CES. is due to the expiration of certain short-term sales contracts.
This decrease has no net impact on earnings as it is offset by a hint Ventures conesponding decrease in fuel and purchased power expenses.
Unregulated activities continue to be conducted through The decrease in short-term sales was partially offset by an BETG. During 1997, BETG entered into two joint venture increase in other revenues which reflects the recovery of certain agreements. BETG's joint venture agreement with RCN costs through the transition charge due to the support of stan-Telecom Services, Inc. (RCN) established a limited liability dard offer service provided by Boston Edison's fossil generating company (LLC) that competes direcdy with local and long- assets prior to divestiture.
distance telephone, video and Internet access companies for Operating expenses telecommunications-related services. BETG owns 49% of the LLC while RCN owns 51% and maintains day-to-day man- Fuel and purchased power expense decreased $111.3 mil-agement responsibility. As part of the joint venture agree, li n. This decrease is the result of significantly lower company ment, BETG has the option to exchange certain portions of fuel c sts due to the fossil divestiture in May 1998. The;e costs its joint venture interest for shares of RCN Corporation com. were Partially offset by a net increase in purchased power subse-
- mon stock. During 1998, BETG exercised its option to con- quent m the divestiture. Purchased power costs include the six-vert a ponion ofits interest with a cost of $11 million. m nth transitional power purchase contract with Sithe Energies BETG expects to receive approximately 1.1 million RCN that began in May. The capacity portion of the Sithe purchased Corporation common shares during the first quarter of 1999. Power costs is offset by the recognition of the payment from These shares had a fair value of approximately $19.5 million Shhe, resulting in a corresponding reduction to purchased power
. at December 31,1998. expense. The timing effect of the fuel and purchased power and BETG also established an energy marketing venture with standard offer cost collection mechanisms also contributed to the Williams Energy Services Company (WESCO), a subsidiary of decrease in fuel and purchased power expense.
The Williams Companies, Inc. in 1997, in August 1998, BEC Operanons and maintenance expense decreased approximately and WESCO entered into an agreement to transfer BETG's $37 milli n. The decrease is due to the impact of the fossil divesti-50% interest in their joint venture to WESCO. This transac- ture, I wer employee benefit expenses and lower nuclear spending.
tion did not have a material impact on BEC's consolidated The decrease in nuclear spending reflects the impact of the refuel-financial position or results of operations. ing utage in 1997. The comparison of 1998 and 1997 is also pos-itively impacted by the severe April 1997 Boston area storm.
15
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The increase in depreciation and amortization is due to an 1997 v:rs:us 1996 increase in the composite distribution depreciation rate and the Basic and diluted earnings per common share were $2.71 timing of recovery of generation-related assets under the settle- in 1997 compared to $2.61 in 1996, a 3.8% inecase as ment agreement. These increases were partially ofTset by an described below.
$8.7 million nonrecurring charge recorded in 1997 to reflect the removal of specific nuclear-related intangible assets from the Opereting revenues bdance sheet. Operating revenues increased 6.6% over 1996 as follows:
The increase in demand Jde management (DSM) and (in thousands) renewable energy programs expense reflects an increase in the Retail revenues S 88,484 required spending for DSM programs in 1998. In addition, the Wholesale revenues (765) renewable energy programs expense is the result of a new state Short-term sales and other revenues 21,956 mandate for the funding of renewable energy that became efTec-increase .m operating revenues $ 109,675
- tive March 1,1998. Renewable energy expenses are collected through a separate rate mechanism and, therefore, have no net Retail base revenues, consister.t with the 0.8% increase in ,
effect on earnings.
The decrease in property and other taxes is due to the kWh sales in 1997, were relatively flat compared to 1996.
decrease in municipal property taxes resulting from the fossil increases due to warmer than normal temperatures in June and divestiture. July, c ler temperatures in October and December and the The increase in operating income taxes is the result of a stmnger loc I ec nomy were ofTset by milder than normal win-reduction in investment tax credit amortization due to the ter conditions during the first quarter of 1997 and lower indus- 1 trial sales. Industrial sales continued to be adversely affected by divestiture of the fossil generating assets and certain non, deductible expenses incurred at BETG. Refer to Note C to the the decline in manufacturing activity in the Boston Edison serv-J Consolidated Financial Statements for more information on ice territory. In addition, revenues in 1996 reflect one more day l income taxes. f sales due to the leap year. Total retail electric revenues increased $88.5 million primarily due to the timing efTect of Other income (expense), net fuel and purchased power cost recovery. The increase in fuel The increase in other expense, net reflects higher BETG and purchased power clause revenues reflect the recovery of sub-equity losses as its joint venture with RCN began operations in stantial prior year undercollections. These higher revenues are the second quarter of 1997.1998 also includes certain costs offset by higher fuel and purchased power expenses and, there-related to the fossil divestiture, net of the related tax benefits, fore, have no net effect on earnings. Pilgrim performance rev-offset by the recognition of previously deferred investment tax . enues, which varied annually based on the operating perform- !
credits associated with the fossil generating stations. 1997 ance of Pilgrim Station prior to the retail access date, decreased results reflect the charge of approximately $8 million, after tax, due to a lower annual capacity factor effective November 1996 from the nuclear asset impairment which is further discussed in reflecting the scheduled refueling and maintenance outage in Note B to the Consolidated Financial Statements, the first quarter of 1997.
Short-term sales revenues increased approximately $16 mil-Interest cherpes lion. This was due to the continued reduction in available Interest charges on long-term debt decreased due to the nuclear energy supply in New England combined with a 42%
maturing of $100 million of 5.95% debentures in March 1998 increase in fossil generation allowing for increased sales to the and the cessation of amortization of the associated redemption power exchange. Revenues from these short. term sales resulted premiums and the redemption of a $100 million 6.662% bank in a corresponding reduction to future fuel and purchased loan in June 1998. power billings to retail customers and, therefore, had no net The decrease in short-term interest charges is due to the efTect on earnings.
redemption of Boston Edison's outstanding short-term debt with Opereting expenses proceeds from the fossil divestiture. This was partially offset by interest charges from BEC's line of credit entered into in 1998. Fuel and purchased power expenses increased $90.2 mil-lion. This increase reflects $57 million related to the timing Preferred stock dividends effect of fuel and purchased power cost recovery. In addition, ,
Preferred stock dividends decreased as a result of Boston company fuel expense increased $50 million primarily due to Edison's redemption of 40,000 shares of 7.27% series cumula- the 42% increase in fossil generation. These increases were par-tive preferred stock in May 1998 and 1997, the remaining tially offset by a $22 million decrease in power exchange pur-320,000 shares of the 7.27% series and 400,000 shares of chases. These fuel and purchased power expenses are substan-7.75% series cumulative preferred stock in July 1998 and rially recoverable through fuel and purchased power revenues.
400,000 shares of 8.25% series in June 1997. Refer to Note G Operations and maintenance expense increased $0.4 mil-to the Consolidated Financial Statements. lion from 1996. The incremental impact associated with service r noration efTorts resulting from the severe snow storm in April 16 Le
1997 that struck the greater Boston area offset the impact of of a continued strong local economy on commercial customers.
lower spending from cost control efforts and significantly less The commercial sector represents approximately 50% of electric overhaul activity at the fossil generating units. operating revenues. The Boston area commercial office vacancy The increase in depreciation and amortization expense is rate is at a 17-year low. In addition. the Massachusetts employ-due to the net impact of two depreciation adjustments. An ment rate increased 2.8% over 1997. These positive impacts 58.7 million nonrecurring charge was recorded to depreciation associated with the economic conditions along with warmer expense in the third quarter of 1997 to reflect the removal of than normal summer weather were partially offset by the mild specific nuclear-related intangible assets from the balance sheet. winter weather conditions in the first quarter of 1998.
In 1996 a $5.2 million adjustment was recorded to correct the Wholesale sales increased primarily due to a 32% increase in accumulated depreciation balance of certain large computer sales to Pilgrim contract customers. That increase reflects a equipment. 97% capacity factor in 1998, the plant's highest annual per-Income taxes increased as a result of higher ner income off- formance ever achieved. The lower level of sales in 1997
, set by the impact of the favorable outcome of an Internal reflected that year's refueling outage. Short-term sales decreased Revenue Service (IRS) appeal received in the third quarter relat- due to lower sales to other contract customers.
ed to investment tax credits (ITC). This also resulted in an Retail kWh sales increased 0.8% in 1997. This was prima-increase in unamortized ITC which is being reflected as a rity attributable to the commercial sector. The commercial reduction to income tax expense over the life of the related increase reflects the impact of a continued strong economy in assets. Refer to Note C to the Consolidated Financial the Boston area and very warm temperatures in June and July Statements for more information on income taxes. and cooler than normal temperatures in the fourth quarter.
Hotel occupancy rates and non-manufacturing employment Other incorne (expense), not continued to increase in 1997. Residenn. larevenues were also Other expense, net in 1997 reflects the charge of approxi- positively impacted by the weather. These positive impacts were mately $8 million, after tax, from the nuclear asset impairment offset by milder winter weather in the first quarter of 1997 and which is further discussed in Note B to the Consolidated declines in manufacturing employment affecting the industrial Financial Statements in addition to BETG equity lesses. These sector. In addition, revenues in 1996 reflect one more day of decreases were partially offset by approximately $3 million, after sales due to the leap year. Total kWh sales increased 3.1% as a tax, in interest income from the IRS appeal. result of the continued reduction in available nuclear energy interest cherpes supply in New England. This reduction, combined with an increase in fossd generation allowed for increased sales to the Total interest charges on long-term debt decreased due t power exchange.
the maturing of $100 million of 5.70% debentures in March 1997 and the cessation of amortization of the associated Electric revenues redemption premiums. This was partially offset by the March Boston Edison's electric delivery business provides standard 1997 issuance of a $100 million 6.662% bank loan due in offer customers service at rates designed to give 10% savings 1999. The decrease also reflects the maturity of $100 million from the rates in effect [ rior to the retail access date. As part of of 51/8% debentures in March 1996, the Massachusetts restruc uring legislation enacted in November Allowance for borrowed funds used during construction 1997, these customers will realize an additional 5% average sav-(AFUDC), which represents the financing costs of construction, ings, after an adjustment foi inflation, by September 1,1999.
decreased primarily due to a lower average construction work in Boston Edison expects to meet this additional rate reduction as progress (CWIP) balance in 1997. The 1996 average CWIP a result of the proceeds received from the divestiture of the fos-balance included nuclear fuel purchased in anticipation of sil generating assets. Under the settlement agreement, the Pilgrim Station's scheduled refueling outage in the first quarter aggregate amount of the non-bypassable transition charge is of1997. reduced by the net proceeds from fossil divestiture. The cost of Preferred stock dividends providing standard ofrer service, which indudes fuel and pur-
' chased power costs, is recovered from customers on a fully rec-The decrease in preferred stock dividends is the result of onciling basis. The price of default service is intended to reflect the redemption of 20,000 of mandatory and 20,000 of optional the average competitive market price for power.
J shares of 7.27% series cumulative preferred stock in May 1997 As part of the settlement agreement, the annual perform-and 400,000 shares of 8.25% series in June 1997. Refer t ance adjustment charge ceased and the cost recovery mechanism Note G to the Consolidated Financial Statements. for Pilgrim Station changed effective March 1,1998.
Electric Sales and Revenues APProximately 25% of the operations and capital costs, includ-ing a return on investment, continues to be collected under Electric seles wholesale contracts with other utilities and municipalities.
Total kWh sales increased 2.3%. The 2.0% increase in Boston Edison's long-term power sales contracts with the utili-1998 retail kWh sales was primarily due to the positive impact ties, Commonwealth Electnc Company and Montaup Electnc Company, w.dl be terminated upon the clos.mg of the sale of 17
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Pilgrim Station to Entergy. Boston Edison's contracts with the vide additional short-term credit on an uncommitted and as various municipalities remain in place. However, upon the available basis.
Pilgrim sale closing date, Boston Edison will purchase power for In December 1998, Boston Edison filed a securitization resale to the municipalities under a purchase power agreement financing plan with the DTE. Under the plan, a special purpose entesed into with Entergy. Through the sale closing date, entity (SPE) will be formed as a wholly owned subsidiary of Boston Edison will share 25% of any profit or loss from the sale Boston Edison. The SPE will pay Boston Edison an amount of Pilgrim's output with distribution customers through the equal to certain generation-related regulatory assets by issuing transition charge. In addition, Boston Edison will obtain tran- debt securities. A portion of the net proceeds will be used to sition payments up to a maximum of $23 million per year fund the nuclear deco.nmissioning trust. In addition, Boston depending on the level of costs incurred for such items as prop- Edison may also utilize a portion of the proceeds to reduce capi-erty taxes, insurance, regulatory fees and security requirements. talization and for general corporate purposes. Boston Edison will Under its settlement agreement, Boston Edison's distribu- remit amounts to the SPE as these amounts are collected from tion rates will remain unchanged through December 31,2000, customers through a separate component of the transition charge ,
subject to a minimum and maximum return on average com- over the settlement period. A DTE order regarding the securiti- ,
mon equity (ROE). The ROE is subject to a floor of 6% and a zation plan is expected by the second quarter of 1999.
ceiling of 11.75%. If the ROE is below 6%, Boston Edison is BEC established a $225 million revolving credit agreement authorized to add a surcha f to distribution rates in order to with a group of banks effective through July 2001. The pur-achieve the 6% floor. If the ROE is above 11% it is required pose of the credit agreement is to provide financing to the hold-to adjust distribution rates by an amount necessary to reduce ing company for general corporate purposes, invest in its sub-the calculated ROE between 11% and 12.5% by 50% and a sidiaries and fund the common share repurchase program dis-return above 12.5% by 100%. No adjustment is made if the cussed below. Approximately $78 million was outstanding ROE is between 6% and 11% The cost of providing transmis- under this agreement as of December 31,1998.
sion service to distribution customers is recovered on a fully rec- In April 1998, Boston Edison announced a common share onciling basis. repurchase program under which it would repurchase up to four Boston Edison filed proposed adjustments to its standard million ofits common shares. BEC has assumed this program ofter and transition charges with the DTE in November 1998. since the reorganization to a holding company structure.
The DTE approved these proposed adjustments to be effective Through December 31,1998, approximately 1.3 million shares January 1,1999. The DTE is continuing to examine Boston have been repurchased. Under this program, shares are repur-Edison's cost recovery mechanisms. The rates provide an chased through open market, block or privately-negotiated I approximate 12% reduction from inflation-adjusted pre-retail transactions, or a combination. The timing and actual number access date rates. of shares repurchased will be impacted by market conditions. I I
Liquidity Year 2000 Computer issue Cash requirements for utility plant expenditures have been The year 2000 computer issue is the result of computer met in recent years with internally generated funds. These programs that were written using two digits rather than four to l funds are cash flows from operating activities, adjusted to define an applicable year. If computer programs with date-sen-exclude changes in working capital and the payment of divi- sitive functions are not year 2000 compliant, they may recog-dends. During 1998,1997 and 1996 internal generation of nize a date using "00" as the year 1900 rather than the year cash provided 97%,211% and 177% respectively of plant 2000. This could result in system failures or miscalculations expenditures. The capital spending level, excluding nuclear causing disruptions of operations, including, among other fuel, forecasted for 1999 is $233 million which includes things, a temporary inability to process transactions and engage amounts for utility plant and the capital requirements of the in other normal business activities. BEC has a year 2000 pro-nonutility ventures. This spending level also inc!udes the 1999 gram in place that has been addressing the risk of non-compli-portion of business system replacements discussed below. The ant internal business software, internal non-business software capital spending level over the next five years is forecasted to be and embedded chip technology and external noncompliance of ,
approximacely $960 million. In addition to capital expendi- third parties.
tures, debt and preferred stock payment requirements are $1.6 BEC's plan addressing the year 2000 issue includes modifi-million in 1999, $166.6 million in 2000, $51.6 million in cation of certain applications and replacement of systems that 2001, $1.6 million in 2002 and $151.65 million in 2003. are not year 2000 compliant. The cost associated with year Boston Edison supplements internally generated funds as 2000 compliance will be expensed as incurred. In addition, a needed, primarily through the issuance of short-tern commer- decision has been made to use this opportunity to upgrade cial paper and bank borrowings. Boston Edison has authonty some of BEC's less efficient centralized business systems.
from the Federal Energy Regulatory Commission (FERC) to Replacement costs associated with these systems will be capital-issue up to $350 million of short-term debt. Boston Edison has ized and amortized over future periods. Management estimates a $200 million revolving credit agreement with a group of that it will expend approximately $32 million on these system banks as well as other arrangements with several banks to pro- modifications and upgrades of which $19 million was spent 18 w+:rd-
through December 31,1998. For each system designated as Public concern continues regarding electromagnetic fields
" critical" (defined as being necessary to safely provide a reliable (EMF) associated with electric transmission and distribution flow of electricity), BEC's year 2000 program includes system cilities and appliances and wiring in buildings and homes.
testing and a contingency plan. Plans have been developed in .ch concerns have included the possibility of adverse health conjunction with available national and regional guidance and etrects caused by EhiF as well as perceived effects on property are based on system emergency plans which were developed and values. Some scientific reviews conducted to date have suggest-successfully tested over the last several years. _
ed associations between EMF and potential health efTects, As part of the year 2000 program, significant suppliers, while other studies have not substantiated such associations.
service providers and other vendors were contacted to determine The National Research Council previously reported that there year 2000 readiness. Many third parties have noted that they is no conclusive evidence that exposure to EMF from power are already year 2000 compliant or in the process of becoming lines and appliances presents a health hazard. The panel of sci-o compliant. In addition to the risk faced from its dependence entists, working with the National Academy of Sciences, report on other third party suppliers, BEC has a risk that power will that more than 500 studies over the last several years have pro-not be available from the New England Power Pool (NEPOOL) duced no proof that EhiF causes leukemia or other cancers or
( for purchase and distribution to Boston Edison's customers. harms human health in other ways. Boston Edison continues Should NEPOOL fail to resolve its year 2000 issues as planned, to support research into the subject and participates in the there would be an adverse impact to Boston Edison. To miti- funding ofindustry-sponsored studies. It is aware that public gate this risk, efforts are being coordinated with NEPOOL to concern regarding EMF in some cases has resulted in litigation, establish inter-utility testing guidelines to determine year 2000 in opposition to existing or proposed facilities in proceedings readiness. Boston Edison is also a participant in the before regulators or in requests for legislation or regulatory NEPOOUISO New England Year 2000 Joint Oversight standards concerning EMF levels. It has addressed issues rela.
Committee which has been given responsibility for the opera- tive to EMF in various legal and regulatory proceedings and in tional reliability of NEPOOL discussions with customers and other concerned persons; how-The year 2000 program remains on schedule with antici- ever, to date it has not been significantly affected by these pated completion in the third quarter of 1999. However, man- developments. Boston Edison continues to monitor all aspects agement believes it is not possible to determine with complete of the EMF issue.
certainty that all potential year 2000 problems have been identi-fled or will be corrected due to the complex.ity and pervasive-Industry and corporate restructuring legal proceedm.gs ness of the issue, in the event that compliance is not completed The DTE order approving the Boston Edison settlement as anticipated, it is reasonably possible that the year 2000 issue agreement and the DTE order approving the formation of BEC could have an adverse effect on operations. as a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December Other Matters 1998, the SJC dismissed the appeal of the order approving the holding company formation. One settlement agreement appeal EnWonmental remains pending, however there has to date been no briefing, Boston Edison is an owner or operator of approximately 20 hearing or other action taken with respect to this proceeding.
. properties where oil or hazardous materials were spilled or In addition, along with other Massachusetts investor-owned
- released. Boston Edison also continues to face possible liability utilities, Boston Edison has been named as a defendant in a as a potentially responsible party in the cleanup of five multi- class action suit seeking to declare certain provisions of the party hazardous waste sites in Massachusetts and other states Massachusetts electric industry restructuring legislation uncon-where it is alleged to have generated, transported or disposed of stitutional.
hazardous waste at the sites. Refer to Note K.4. to the Management is currently unable to determine the outcome Consolidated Financial Statements for more information of these outstanding proceedings or the impact the proceedings regarding hazardous waste issues. may have on its consolidated results of operations.
Uncertainties continue to exist with respect to the disposal of both spent nuclear fuel and low-level radioactive waste result- Regulatory proceedings ing from the operation of nuclear generating facilities. The in October 1997, the DTE opened a proceeding to investi-
. United States Department of Energy (DOE) is responsible for gate Boston Edison's compliance with the 1993 order which the ultimate disposal of spent nuclear fuel. However, uncertain- permitted the formation of BETG and authorized Boston ties regarding the DOE's schedule of acceptance of spent fuel Edison to invest up to $45 million in unregulated activities.
for disposal continue to exist. Under the purchase and sale Hearings began in the fourth quarter of 1998 and are expected agreement with Entergy, Entergy will assume fullliability and to be completed in the first half of 1999.
responsibility for decommissioning and waste disposal at Each of the Reading Municipal Light Department, the Pilgrim Station. Refer to Note D to the Consolidated Financial Littleton Electric Light Department and the West Boylston Statements for further discussion regarding nuclear decommis- Municipal Light Department have filed separate claims for arbi-sioning and waste disposal. tration in Massachusetts alleging that the proposed transfer of 19 M--+-%&
Pilgrim Station constitutes a breach of their respective power inter:st rat] ri k sale agreements and seeking to terminate those agreements. BEC is exposed to changes in interest rates. Carrying The remaining municipal light departments have also indicated amounts and fair values of mandatory redeemable cumulative that they plan to Gle similar claims for arbitration. Boston preferred stock, sewage facility revenue bonds and unsecured Edison has requested the FERC to exercise its pre-emptive debt as of December 31,1998, are as follows:
authority to consider the clains of the municipal light depart- Weighted ments. In the event that either the FERC determines, or as a Carrying Fair average result of the arbitrations, that the contracts should be terminat- (in thousands) amount value interest rate ed, Boston Edison would continue to be obligated to purchase Mandatory redeemable power from Entergy that it intended to resell to the municipal cumulative light departments. Boston Edison may not be able to resell preferred stock $49,040 $54,190 8.00 %
such power in the short-term power exchange at a price equal to Sewage facility
- or greater than the price it is required to pay to Entergy. revenue bonds $30,900 $33,914 7.32%
However, Boston Edison has filed at the DTE for recovery of Unsecured debt $930,000 $994,294 7.79% ,I any such shortfall as part ofits Pilgrim divestiture filing through the transition charge.
Management is currently unable to determine the outcome Safe harbor cautionary statement of these proceedings or the impact these proceedings may have BEC occasionally makes forward-looking statements such on its consolidated financial position or results of operations. as forecasts and projections of expected future performance or
. statements ofits plans and objectives. These forward-looking Other lits.gation statements may be contained in filings with the SEC, press ;
In October 1998, the town of Plymouth, Massachusetts, releases and oral statements. Actual results could potentially the site of Pilgrim Station, filed suit against Boston Edison. difTer materially from these statements. Therefore, no assur-The town claims that Boston Edison has wrongftdly failed to ances can be given that the outcomes stated in such forward-execute an agreement with the town for payments in addition looking statements and estimates will be achieved.
to taxes due to the town under the Masscchusetts electric indus- The preceding sections include certain forward.looking try restructuring legislation. Boston Edison has disputed the statements about the merger with CES, the divestiture of town's claim and will vigorously defend itself. la addition to nuclear generating assets, operating results, year 2000 and envi-this pending litigation. Boston Edison and the town of ronmental and legal issues.
Plymouth are also parties in proceedings before the Appellate The merger with CES could differ from current expecta-Tax Board and the DTE concerning substantially the same dis- tions. This could occur if the requisite approvals are delayed or pure. Management is unable to determine the ultimate out- not obtained.
come of these proceedings or the impact they may have on its The nuclear divestiture plan could difTer from current expec-consolidated financial position or results of operations- tations. The timing and a final closing of the sale may differ In the normal course ofits business BEC and its sub- from management's expectations if required approvals are delayed sidiaries are also involved in certain other legal matters. or not obtained.
Management is unable :o fully determine a range of reasonably The impacts of continued cost control procedures on oper- ;
possible legal costs in excess of amounts accrued. Based on the ating results could differ from current expectations. The effects I information currently available, it does not believe that it is of changes in economic conditions, tax rates, interest rates, pmbable that any such additional costs will have a material technology and the prices and availability of operating supplies impact on its consolidated financial position. However, it is could materially affect the projected operating results.
reasonably possible that additional legal costs that may result The timing and total costs related to the year 2000 plan from a change in estimate: could have a material impact on the could differ from current expectations. Factors that may cause results of a reporting period in the near term. such difTerences include the ability to locate and correct all rele-Refer to Note K.6. to the Consolidated Financial vant computer codes and the availability of personnel trained in .
Statements for more information on legal matters. this area. In addition, BEC cannot predict the nature or impact on operations of third party noncompliance.
The impacts of various environmental and legal issues could
- difTer from current expectations. New regulations or changes to existing regulations could impose additional operating require-ments or liabilities other than expected. The effects of changes in specific hazardous waste site conditions and cleanup technolo-gy could afTect the estimated cleanup liabilities. The impacts of changes in available information and circumstances regarding legal issues could affect the estimated litigation costs.
2o u u imdm3 i
Consoll(late (1 Statenients of inconle years ended D:cember 31, (in thousands, except earnings per share) 1998 1997 1996 l Operating revenues $ 1,622,515 $ 1,778,531 $ 1,668,856 Oper: ting expenses: l Fuel and purchased power 567,806 679,131 588,893 Operations and maintenance 386,340 423,040 422,642 Depreciation and amortization 191,701 189,489 186,117 51,839 29,790 30,825 !
Demand side management and renewable energy programs Taxes-property and other 84,091 106,428 107,086
- Income taxes 97,798 93,709 88,313 Total operating expenses 1,379,575 1,521,587 1,423,876
( Oper: ting income 242,940 256,944 244,980 Othir income (expense), net (11,811) (6,392) 3,741 Operating and other income 231,129 250,552 248,721 Int:r:st charges:
Long-term debt 82,951 92,489 94,823 Other 8,800 14,610 14,644 Allowance for borrowed funds used during construction (1,668) (1,189) (2,292)
Total interest charges 90,083 105,910 107,175 N t income 141,046 144,642 141,546 Pr:f:rred dividends of subsidiary 8,765 13,149 15,365 Errnings available for common shareholders $ 132,281 $ 131,493 $ 126,181 W:ighted average common shares outstanding:
B: sic 47,973 48,515 48,265 Diluted 48,149 48,562 48,265 Errnings per common shrre:
B: sic $ 2.76 $ 2.71 $ 2.61 Diluted $ 2.75 $ 2.71 $ 2.61 Consoliciate(1 Statements of Retaine(i Earnings years ended December 31, (in thousands) 1998 1997 1996 Bilance at the beginning of the year $ 328,802 $ 292,191 $ 257.,749 Net income 141,046 144,642 141,546 Subtotal 469,848 436,833 399,295 Dividends declared:
Preferred stock 8,765 13,149 15,365
- Common stock 90,610 91,208 90,834 Subtotal 99,375 104,357 106,199
, Provision for preferred stock redemption and issuance costs (a) 7,833 3,674 905 Common share repurchase program 2,131 0 0 Bil:nce at the end of the year $ 360,509 $ 328,802 $ 292,191 (a) Refer to Note A.7. to the Consolidated Financial Statements.
The accortpanying notes are an integral part of the consolidated financial statements.
21 ,
r M23
Consolidated Balance Sheets D:cembar 31, (in thousands) 1998 1997
. Assets Utility plant in service, at original cost $ 2,720,681 $ 4,457,831 Less: accumulated depreciation 926,020 $ 1,794,661 1,713,067 $ 2,744,764
~
Gnneration-related regulatory asset, net 366,336 0 Nuclear fuel, net 68,706 67,935 >
Construction work in progress 40,965 33,291 Net utility plant 2,270,668 2,845,990 Nonutility property 21,565 8,137
- Nuclear decommissioning trust 172,908 151,634 Equity investments 84,770 35,455 )
Other investments 30,206 7,107 Current assets:
Cash and cash equivalents 98,989 4,140 Accounts receivable 202,275 207,093 Accrued unbilled revenues 14,322 30,048 Fuel, materials and supplies, at average cost 15,474 60,834 Prepaids and other 102,448 433,508 31,283 333,398 Dsferred debits:
Regulatory assets 167,642 195,370 Other 32,632 45,256 Total assets $ 3,213,899 $ 3,622,347 Capitalization and Liabilities Common equity $ 1,051,898 $ 1,073,454 Cumulative preferred stock of subsidiary 92,040 161,093 Long-term debt 955,563 1,057,076 l Current liabilities:
Long-term debt / preferred 3 stock due within one year $ 667 $ 102,667 )
Notes payable 78,000 137,013 Accounts payable 110,194 87,015
)
Accrued interest 20,516 24,289 Dividends payable 23,878 24,748 I Other 183,664 416,919 128,061 503,793 D:ferred credits:
Accumulated deferred income taxes 348,557 485,738 Accumulated deferred investment tax credits 45,930 60,736 Nuclear decommissioning liability 176,578 155,182 .
Power contracts 58,415 71,445 Other 67,999 53,830
^
Commitments and contingencies Total capitalization and liabilities $ 3,213,899 $ 3,622,347 The accompanying notes are an integral part of the consolidated financial statements.
22 i merwera
Consolklated statements of Cash Flows years endsd Drcembsr 31,
' (in thousands) 1998 1997 1996 Operating activities:
Net income $ 141,046 $ 144,642 $ 141,546
- Adjustments to reconcile net income to net
. cash provided by operating activities:
Depreciation and amortization 229,668 223,529 228,259 Deferred income taxes and investment tax credits (152,798) (21,664) (4,057)
Allowance for borrowed funds used during construction (1,668) (1,189) (2,292)
,- Net changes in: i Accounts receivable and accrued unbilled revenues 20,544 45,678 (11,719)
, Fuel, materials and supplies 29,565 (5,486) (2,171)
Accounts payable 23,179 (47,068) 609 Other current assets and liabilities -(28,705) 25,428 (44,514)
Other, net 14,021 (4,640) 50,815 Ntt cash provided by operating activities 274,852 359,230 356,476 Invrsting activities: j Plant expenditures (excluding AFUDC) (120,202) (114,110) (145,347)
Proceeds from sale of fossil assets 533,633 0 0 Nuclear fuel expenditures (26,182) (4,089) (52,967)
Investments (81,589) (27,689) (34,314)
Nat cash provided by (used in) investing activities 305,660 (145,888) (232,628)
Financing activities:
Issuances /(repurchases):
Common shares (53,285) 144 12,559 Long-term debt 0 100,000 0 Redemptions:
Preferred stock - (71,519) (44,000) (4,000)
Long-term debt (201,600) (101,600) (101,600)
Net change in notes payable (59,013) (64,441) 75,013 Dividends paid -(100,246) (104,956) (106,010)
Nat cash used in financing activities (485,663) (214,853) (124,038),_
- N t increase (decrease) in cash and cash equivalents 94,849 (1,511) (190) 1 C:sh and cash equivalents at the beginning of the year ~ 4,140 5,651 5,841 !
Cash and cash equivalents at the end of the year $ 98,989 $ 4,140 $ 5,651 l
Supplemental disclosures of cash flow information:
Cash paid during the year for:
e interest, net of amounts capitalized $ 89,720 $ 100,795 $ 100,810 income taxes $ 230,260 $ 99,326 $ 98,668 The accompanying notes are an integral part of the consolidated financial statements.
23 h
Notes to Consolklated 1 Inancial Statements.
N:ta A. Summ:ry cf Significznt Acc:unting Pclicizs 1.. Nature of Operations -
Boston Edison Company (Boston Edison) received final approval ofits reorganization plan to form a holding company structure from the Securities and Exchange Commission (SEC) in May 1998. EfTective May 20,1998 the holding company, BEC Energy (BEC), was formed with Boston Edison as a wholly owned subsidiary of BEC.
Within its newly restructured industry, BEC has announced its intention to focus its utility operations on the transmission and i
' distribution ofenergy. The sale of Boston Edison's fossil generating assets to Sithe Energies, Inc. (Sithe) was completed in May 1998.
In November 1998, Boston Edison signed an agreement with Entergy Nuclear Generating Company (Entergy) to sellits wholly owned nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim). BEC signed a merger agreement with Commonwealth ,
Energy System (CES) in December 1998 that will create an energy delivery company serving approximately 1.3 million customers located entirely within Massachusetts, including more than one million electric customers in 81 communities and 240,000 gas cus-tomers in 51 communities. -
Boston Edison currently supplies electricity at retail to an area of 590 square miles, including the city of Boston and 39 sur-rounding cities and towns. It also supplies electricity at wholesale for resale to other utilities and municipalities. Electric operating revenues are approximately 90% retail and 10% wholesale. Unregulated activities continue to be conducted through Boston Energy Technology Group (BETG). Refer to Note j to these Consolidated Financial Statements for information on BEC's nonutility opera-tions.
- 2. Basis of Consolidation and Accounting Under the new 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 BETG ceased being a subsidiary of Boston Edison and became a wholly owned subsidiary of BEC. The accompanying consolidated financial statements reflect the results of operations and cash flows of Boston Edison prior to the reorganization. The consolidated balance sheet at December 31,1997 reflects the financial position of Boston Edison which also included BETG. The consolidated financial statements also include the activities of Boston Edison's wholly owned subsidiary, Harbor Electric Energy Company
- (HEEC). All significant intercompany transactions have been eliminated. Certain reclassifications have been made to the prior year data to conform with the current presentation.
Boston Edison follows accounting policies prescribed by the Federal Energy Regulatory Commission (FERC) and the Massachusetts Department ofTelecommunications and Energy (I)TE). In addition, BEC and its subsidiaries are subject to the accounting and reporting requirements of the SEC. The consolidated financial statements conform with generally accepted account-ing principles (GAAP).. As a rate-regulated company Boston Edison has been subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS 71), under GAAP. The application of SFAS 71 results in difTerences in the timing of recognition of certain expenses from that of other businesses and industries. As a result of the Massachusetts electric industry restructuring legislation enacted in November 1997 and the DTE order regarding the related Boston Edison settlement agreement, as of December 31,1997, the provisions of SFAS 71 are no longer being applied to the generation business. The distribution business remains subject to rate-regulation and continues to meet the criteria for application of SFAS 71.
Refer to Note B to these Consolidated Financial Statements for more information on the accounting implications of the electric utili-ty industry restructuring.
The preparation of financial statements in conformity with GAAP requires BEC and its subsidiaries to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
- 3. Revenues Estimates of retail base (transmission and distribution) revenues for electricity used by customers but not yet billed are recorded ,
at the end of each accounting period.
- 4. Utility Plant Utility plant is stated at original cost of construction. The costs of replacements of property units are capitalized. Maintenance and repairs and replacements of minor items are expensed as incurred. The original cost of property retired, net of salvage value, and the related costs of removal are charged to accumulated depreciation.
1 24 mtMeri b
- 5. Depreci:ti:n cnd Nucl:cr Fuel Am2rtiz ti:n Depreciation of utility plant is computed on a straight-line basis using composite rates based on the estimated useful lives of the various classes of property. Excluding the effect of the adjustment discussed below, the overall composite depreciation rates were 3.28% 3.30% and 3.33% in 1998,1997 and 1996, respectively.
Upon the completion of a review of Boston Edison's electric generating units, management determined that the oldest and least efTicient fossil units (Mystic 4,5 and 6) were unlikely to provide competitively-priced power beyond the year 2000. Therefore the estimated remaining economic lives of these units was revised to five years in 1996. These units were sold in May 1998. Refer to Note B to these Consolidated Financial Statements.
The cost of decommissioning Pilgrim Station is excluded from depreciation rates. Refer to Note D to these Consolidated Financial Statements for a discussion of nuclear decommissioning. The cost of nulear fuelis amortized based on the amount of energy Pilgrim Station generates. Nuclear fuel expense also includes an amount for the estimated costs of ultimately disposing of
- spent nuclear fuel and for assessments for the decontamination and decommissioning of United States Department of Energy nuclear enrichment facilities.
- 6. Deferred Nuclear Outage Costs The incremental costs associated with nuclear refueling and maintenance outages are deferred when incurred and amortized over Pilgrim Station's two-year operating cycle.
- 7. Costs Associated with issuance and Redemption of Debt and Preferred Stock Consistent with the recovery in electric rates, discounts, redemption premiums and related costs associated with the issuance and redemption oflong-term debt and preferred stock are deferred. The costs related to long-term debt are recognized as an addi-tion to interest expense over the life of the original or replacement debt. Beginning in 1996, consistent with an accounting order received from the FERC, costs related to preferred stock issuances and redemptions are reflected as a direct reduction to retained earnings upon redemption or over the average life of the replacement preferred stock series as applicable.
- 8. Allowance for Borrowed Funds Used During Construction (AFUDC)
AFUDC represents the estimated costs to finance utility plant construction. In accordance with regulatory accounting, AFUDC is included as a cost of utility plant arid a reduction of current interest charges. Although AFUDC is not a current source of cash income, the costs are recovered from customers over the service life of the related plant in the form ofincreased revenues collected as a result of higher depreciation expense. AFUDC rates in 1998,1997 and 1996 were 5.88% 6.04% and 5.87%
respectively, and represented only the cost of short-term debt.
- 9. C:sh and Cash Equivalents Cash and cash equivalents are comprised of highly liquid securities with maturities of 90 days or less when purchased.
Outstanding checks are included in cash and accounts payable until they are presented for payment.
l
- 10. Allowance for Doubtful Accounts i 1
Accounts receivable are substantially recoverable. This recovery occurs both from customer payments and from the portion of customer charges that provides for the recovery of bad debt expense. Accordingly, a significant allowance for doubtful accounts bal-ance has not been maintained.
- 11. Regulatory Assets Regulatory assets represent costs incurred which are expected to be collected from customers through future charges in accor-dance with agreements with regulators. These costs are expensed when the corresponding revenues are received in order to appro-priately match revenues and expenses. The majority of these costs is currently being recovered from customers over varying time
, periods. Refer to Note B to these Consolidated Financial Statements for information regarding the recovery of regulatory assets related to the generation business.
25 m J mxt:mi j
Regulatory assets consisted of the following:
D:ccmbsr 31, 1998 1997 Power contracts S 58,415 $ 71,445 Income taxes, net 52,168 51,096 Ridemption premiums 23,419 27,019 Postretirement benefits costs 21,592 22,441 Decontamination and decommissioning 11,351 12,282 Other 697 11,087
$ 167,642 $ 195,370
- 12. Earnings Per Common Share Basic earnings per common share (EPS) is calculated by dividing net income, after deductions for preferred dividends, by the weighted average common shares outstanding during the year. Statement of Financial Accounting Standards No.128, Earnings per -
Share, requires the disclosure of diluted EPS. Diluted EPS is similar to the computation of basic EPS except that the weighted aver-age common shares is increased to include the number of dilutive potential common shares. Diluted EPS reflects the impact on shares outstanding of the deferred (nonvested) shares and stock options granted under the Stock Incentive Plan.
The following table summarizes the reconciling amounts between basic and diluted EPS:
(in thousands, except per share amounts) 1998 1997 1996 Earnings available for common shareholders $ 132,281 $ 131,493 $ 126,181 B: sic EPS $ 2.76 $ 2.71 $ 2.61 Diluted EPS $ 2.75 $ 2.71 $ 2.61 Wrighted average common shares outstanding for basic EPS 47,973 48,515 48,265 Eff ct of dilutive shares:
W ighted average dilutive potential common shares 176 47 -
Wrighted average common shares outstanding for diluted EPS 48,149 48,562 48,265
- 13. RCN Joint Venture BETG is a participant in a telecommunications venture with RCN Telecom Services, Inc. (RCN). As part of the joint venture agreement, BETG has the option to exchange certain portions ofits joint venture interest for shares of RCN Corporation common stock. During 1998, BETG exercised its option to convert a portion ofits interest with a cost of $11 million. BETG expects to receive approximately 1.1 million RCN Corporation common shares during the first quarter of 1999. These shares had a fair value of approximately $19.5 million at December 31,1998.
Note B. Electric Utility Industry Restructuring
- 1. Accounting implications Under the traditional revenue requirements model, electric rates have been based on the cost of providing electric service. Under this model, Boston Edison has been subject to certain accounting standards that are not applicable to other businesses and industries in general The application of SFAS 71 requires companies to defer the recognition of certain costs when incurred if future rate recovery of these costs is expected. As a result of the Massachusetts electric industry restructuring legislation enacted in November 1997 and the DTE order regarding Boston Edison's related settlement agreement, as of December 31,1997, the provisions of SFAS ,
71 are no longer being applied to the generation business. Under the settlemeat agreement, approximately 75% of the net assets of Pilgrim Station are recoverable through the non-bypassable transition charge of the utility's distribution business. The distribution business continues to be subject to rate-regulation. The remaining 25% is collected under Pilgrim's wholesale power contracts. The 1998 consolidated balance sheet reflects a reclassification of the Pilgrim net assets recoverable through the transition charge from util-icy plant to regulatory asset. This Pilgrim regulatory asset, included in the generation-related regulatory asset on the consolidated bal-ance sheet continues to be grouped with utility plant for financial statement presentation.
Completion of the sale of Boston Edison's fossil generating assets took place in May 1998. Boston Edison received proceeds from the sale of $655 million, including $121 million for a six-month transitional power pu'rchase contract. 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 pro-26 r arrrrhrerl
l vided by Boston Edison's fossil generating assets prior to the divestiture. The net deferred gain is included as a reduction to the generation-related regulatory asset on the 1998 consolidated balance sheet. In addition, Boston Edison received $19 million from I Sithe for inventory and other closing adjustments. l The implementation of the Boston Edison settlement agreement had certain accounting implications. The highlights of these I include:
Generation-related plant and other regulatory assets Plant and other regulatory assets related to the generation business, except for those related to Pilgrim's wholesale contracts, are recovered through the transition charge. This recovery, which includes a return, will occur over a twelve-year period that began on March 1,1998 (the retail access date).
Depreciation The composite depreciation rate for distribution utility plant increased from 2.38% to 2.98% as of the retail access date.
o
, Fuelandpuruhasedpowercharge The fuel and purchased power charge ceased as of the retail access date. The net remaining overcollection of fuel and pur-chased power costs will be reflected in future customer billings. These over recovered costs are included as an offset to the ettle-ment recovery mechanisms on the 1998 consolidated balance sheet.
St:ndard offer charge Customers have the option of continuing to buy power from the electric delivery business at standard ofter prices as of th:
retail access date. The standard offer charge began at 2.8 cents /kWh at the retail access date, increased to 3.2 cents /kWh on June 1, 1998, to 3.69 cents /kWh on January 1,1999 and is scheduled to increase to 5.1 cents /kWh by 2004. The cost of providing stan- )
dard offer service, which includes fuel and purchased power costs, is recovered from standard offer customers on a fully reconciling basis.
Di;tribution and transmission charges Distribution rates are subject to a minimum and maximum return on average common equity (ROE) through December 31, 2000. The ROE is subject to a floor of 6% and a ceiling of 11.75%. If the ROE is below 6%, Boston Edison is authorized to add a surcharge to distribution rates in order to achieve the 6% floor. If the ROE is above 11%, it is required to adjust distribution rates by an amount necessary to reduce the calculated ROE between 11% and 12.5% by 50%, and a return above 12.5% by 100%.
No adjustment is made if the ROE is between 6% and 11%. In addition, distribution rates will be adjusted for any changes in tax laws or accounting principles that result in a change in costs of more than $1 million. The cost of providing transmission service to distribution customers is recovered on a fully reconciling basis.
Nuclear generation Under the 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 Pilgrim's wholesale contracts. Through Pilgrim's sale closing date,25% of any profit or l loss from the sale of Pilgrim's output will be shared with distribution customers through the transition charge. In addition, Boston ;
Edison will obtain transition payments up to a maximum of $23 million per year depending on the level of costs incurred for such items as property taxes, insurance, regulatory fees and security requirements.
- 2. Cenerating Assets Divestiture The Boston Edison restructuring settlement agreement included a provision for the divestiture ofits fossil generating assets no ;
later than six months after the retail access date. In December 1997, Boston Edison entered into a purchase and sale agreement with Sithe Energies, a privately-held company headquartered in New York, to purchase these non-nuclear generating assets. The sale of these assets was finalized on May 15,1998.
. In April 1998, Boston Edison began soliciting expressions ofinterest for the sale ofits nuclear generating unit, Pilgrim Station as part of the previously announced strategy to exit the generation business. On November 19,1998, Boston Edison announced the selection of Entergy, a subsidiary of New Orleans-based Entergy Corporation, as the winning bidder for the purchase of Pilgrim. Entergy is expected to purchase Pilgrim in a deal valued at an estimated $121 million. In addition, under the agreement Boston Edison will fully fund and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning the Pilgrim site. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999. The purchase price includes reimbursement for certain costs to be expended by Boston Edison in 1999. Therefore, the actual proceeds could be impacted by the ultimate timing of the transaction.
As part of a benefits package offered to employees affected by the nuclear divestiture, eligible non-represented nuclear and des-27 m+rrrl
ignated nuclear support employees were ofTered unreduced retirement and transition benefits under a voluntary early retirement pro-gram (VERP). Sixteen employees elected to participate in the VERE A retention benefit program was offered to all non-represented nuclear and designated nuclear suppon employees that did not elect or were ineligible to retire under the VERP who continue to work through the sale closing date. It is anticipated that approximately 300 non-represented nuclear and designated nuclear employ-ces will receive one-time retention payments under this program. Costs associated with the VERP and retention program are recover-able under Boston Edison's settlement agreement.
- 3. Nuclear Asset impairment As part of the settlement agreement, the net investment in Pilgrim Station as of December 31,1995 (adjusted for depreciation through 1997)is recovered through the distribution transition charge. Due to the market pressures in the industry, the ultimate recovery ofinvestments made in Pilgrim since 1995 is not certain. Therefore, in 1997 the investment in Pilgrim was reduced by the
$13 million invested in the plant since January 1,1996 as an impairment loss under Statement of Financial Accounting Standards ,
No.121, Accounting for the Impairment of Long-Lived Assets and for long-Lived Assets to Be Disposed Of. An after tax charge of approximately $8 million due to this reduction was recorded to non-operating expense on the consolidated statement ofincome in the fourth quarter of 1997.
N:te C. Income Taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No.109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of tempo-rary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 109 net regulatory assets of $52.2 million and $51.1 million and corresponding net increases in accumulated deferred income taxes were recorded as of December 31,1998 and 1997, respectively. The regulatory assets represent the additional future revenues to be collected from cus-tomers for deferred income taxes.
Accumulated deferred income taxes consisted of the following:
December 31, (in thousands) 1998 1997 D fstred tax liabilities:
Plant-related $ 412,358 $ 535,460 Other 85,497 79,930 497,855 615,390 Difarred tax assets:
Plant-related 13,174 11,926 investment tax credits 29,622 33,125 Other 106,502 84,601 149,298 129,652 Net accumulated deferred income taxes $ 348,557 $ 485,738 No valuation allowances for deferred tax assets are deemed necessary.
Previously deferred investment tax credits are amortized over the estimated remaining lives of the property giving rise to the credits.
Components ofincome tax expense were as follows:
years ended December 31, (in thousands) 1998 1997 1996 .
. Current income tax expense $ 239,717 $ 115,373 $ 92,370 Def:rred income tax expense (137,992) (14,104) 14 Inysstment tax credit amortization (3,927) (7,560) (4,071)
Income taxes charged to operations 97,798 93,709 88,313 Tax:s on other income (24,116) (11,254) (331)
Total income tax expense $ 73,682 $ 82,455 $ 87,982 28
_ m
The effective income tax rates reflected in the consolidated fmancial statements and the reasons for their differences from the statutory federal income tax rate were as follows:
1998 1997 1996 St:tutory tax rate 35.0 % 35.0% 35.0%
St:ts income tax, net of federal income tax benefit 5.2 4.5 4.3 Inv:stment tax credit amortization (6.9) (3.3) (1.8)
Oth:r 1.0 0.1 0.7 Effective tax rate 34.3% 36.3% 38.2 %
, The 1998 effective tax rate declined by 5.1% 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 is included in other D
expense, net on the 1998 consolidated statement ofincome.
=
The 1997 effective tax rate declined by 0.8% as a result of the favorable outcome of an Internal Revenue Service appeal related to investment tax credits.
N:ta D. Nuclear Decommissioning and Nuclear Waste Disposal
- 1. Nuclear Decommissioning As a nuclear generating facility, Pilgrim Station will be required to be decommissioned upon the expiration ofits operating license. !
Decommissioning means to remove nuclear facilities from service safely and reduce residual radioactivity to a level that permits termina-tion of the Nuclear Regulatory Commission (NRC) license and release of the property for unrestricted use. Estimated decommission-ing costs are recorded to depreciation expense on the consolidated statements ofincome over Pilgrim's expected service life. These costs are recovered through charges to retail and wholesale contract customers. In November 1998, Boston Edison filed an update of Pilgrim Station's decommissioning cost study with the DTE. The updated study includes an estimate cf decommissioning and fuel storage costs of approximately $600 million in 1997 dollars.
- 2. Spent Nuclear Fuel The spent fuel storage facility at Pilgrim Station is expected to provide storage capacity through approximately 2003. Boston Edison has a license amendment from the NRC to modify the facility to provide sufficient room for spent nuclear fuel generated through the end of Pilgrim's operating license in 2012; however, any further modifications are subject to review by the DTE. l Delays in identifying a permanent storage site have continually postponed plans for the United States Department of Energy's
. (DOE) long-term storage and disposal for spent nuclear fuel. The DOE's current estimate for an available site is no earlier than 2010.
In November 1997, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the lack of an interim storage facility does not excuse the DOE from meeting its contract obligation to begin accepting spent nuclear fuel no later than January 31,1998.
This decision was in response to petitions filed by Boston Edison and other interested parties seeking declaratory rulings concerning enforcement and remedies for the DOE's failure to accept spent fuel in a timely manner. The court directed the plaintiffs to pursue relief under terms of their contracts with the DOE. Based on this ruling, the DOE may have to pay contract damages for not taking the spent nuclear fuel as scheduled. Under the Nuclear Waste Policy Act of 1982, it is the ultimate responsibility of the DOE to per-manently dispose of spent nuclear fuel. Boston Edison currendy pays a fee of $1.00 per net megawatthour sold from Pilgrim Station generation under a nuclear fuel disposal contract with the DOE.
The DOE denied Boston Edison's petition to suspend payments to the Nuclear Waste Fund based on its interpretation of the U.S.
Court of Appeal's decision made in November 1997. The DOE has, however, made an offer to consider amendments to existing con-tracts to address the hardships the anticipated delay in accepting spent fuel may cause individual contract holders.
l 3. Nuclear Divestiture As discussed in Note B to these Consolidated Financial Statements, in November 1998 Boston Edison announced the selec-f
' ' tion of Entergy as the winning bidder for the purchase of Pilgrim. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999 Under the agreement Boston Edison will fully fund and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning and
( waste disposal at Pilgrim Station.
I 29 H%r+rra
Not] E. Pension 3 cnd Other Postretirement Benefits The following information is presented in accordance with Statement of Financial Accounting Standards No.132, Employers' Disclosures about Pensions and Other Postretirement Benefits, effective for fiscal years beginning after December 15,1997.
- 1. Pensions Boston Edison has a defined benefit funded retirement plan with certain contributory features that covers substantially all employees and an unfunded supplemental retirement plan for certain management employees.
l The changes in the benefit obligation and plan assets were as follows: J December 31, (in thousands) 1998 1997 Change in benefit obligation:
Benefit obligation at the beginning of the year $ 457,436 $ 409,760 .
Service cost 13,645 12,625 Interest cost 31,981 31,537 Plan participants' contributions 214 248 Plan amendments - 1,081 Actuarial loss 67,564 32,762 Curtailment gain (15,644) (6,916)
Special termination benefits 665 3,530 Settlement payments (16,246) -
Benefits paid (41,627) (27,191)
Benefit obligation at the end of the year $ 497,988 $ 457,436 g Chrnge in plan assets:
Fair value of plan assets at the beginning of the year $ 401,182 $ 331,299 Actual return on plan assets 44,589 60,602 Employer contribution 86,440 36,224 Plan participants' contributions 214 248 Settlement payments (16,246) -
Benefits paid (41,627) (27,191)
Fair value of plan assets at the end of the year $ 474,552 $ 401,182 4
0 e
30
& , m ,1 , , I L
[ l Tne plans' funded status were as follows:
Drc mb3r 31, (in thousands) 1998 1997 Funded status $ (23,436) $ (56,254)
Unrecognized actuarial net loss 96,310 50,646 Unrecognized transition obligation 3,856 5,704 Unr: cognized prior service cost 15,557 19,121 Net amount recognized $ 92,287 $ 19,217 Amount recognized in the consolidated balance sheets consist of:
3
, Prepaid retirement cost $ 94,049 $ 20,584 l 3 Accrued supplemental retirement liability (9,856) (9,763) intangible asset 8,094 8,396 Net amount recognized $ 92,287 $ 19,217 4
The projected benefa obligation, accumulated benefit obligation and fair value of plan assets for the supplemental retirement plan with accumulated benefit obligations in excess of plan assets were $11,387, $9,856 and 50, respectively, as of December 31,1998, and ,
$11.076,59,763 and 50, respectively, as of December 31,1997. l Weighted average assumptions were as follows:
1998 1997 1996 Discount rate at the end of the year 6.50 % 7.25 % 7.75%
Expected return on plan assets for the year 10.00 % 10.00 % 10.00 %
R:.t3 of compensation increase e the end of the year 4.00 % 4.25 % 3.90 %
Components of net periodic benefit cost were as follows:
years ended December 31, (in thousands) 1998 1997 1996 Service cost $ 13,645 $ 12,625 $ 13,452 Interest cost 31,981 31,537 32,325 Expected return on plan assets (39,140) (31,250) (29,826)
Amortization of prior service cost 1,847 1,827 1,831 Amortization of transition obligation 860 934 934 Recognized actuarial loss 808 1,799 3,790 Net periodic benefit cost $ 10,001 $ 17,472 $ 22,506 As a result of the fossil and nuclear divestitures discussed in Note B to these Consolidated Financial Statements, amounts recog-nized for curtailment, settlement and special termination benefa costs were $2,705, $0 and $665, respectively for 1998 and $1,300,
$3,162 and $3,530, respectively for 1997. These amounts are recoverable under Boston Edison's settlement agreement.
Boston Edison experienced a high number of employee retirements from 1994 to 1996. A large number of these retirements were as a direct result of the 1995 corporate restructuring. In 1997, a review of the accounting for the pension expense related to the retire-
, ments revealed that an adjustment to the pension costs related to these employees was necessary. Therefore, pension regulatory asset was increased by $8.6 million in 1997 for the adjustment related to the period covered by the 1992 Boston Edison settlement agree-ment. Through 1995, in accordance with the 1992 settlement agreement, the difference between the net pension cost of the retire-ment plan and its annual funding amount was deferred. The remaining adjustment did not have a material impact on the consolidated results of operations or financial position.
Boston Edison also provides detined contribution 401(k) plans for substantially all employees, it matches a portion of employees'
, v..luntary contributions to the plans. Matching contributions of $8 million were made in 1998,1997 and 1996, respectively.
31 WWrmi
- 2. Other Postratirement Benefits in addition to pensio. . _uefits, Boston Edison also provides health care and other benefits to retired employees who meet certain age and years of service liability nxjuirements. These benefits are not available to management employees hired on or after January 1,1995.
The changes in the benefit obligation and plan awts were as follows:
December 31, (in thousands) 1998 1997
~
Chinge in benefit obligation:
Benefit obligation at the beginning of the year $ 237,616 $ 230,905 Service cost 3,892 3,543 Interest cost 16,895 17,006 .
Plan participants' contributions 1,178 395' g Actuarial loss 27,845 4,093 Curtailment gain (14,665) (5,531) ' j Special termination benefits 75 450 !
Benefits paid (14,080) (13,245) I Benefit obligation at the end of the year $ 258,756 $ 237,616 Chinge in plan assets:
Fair value of plan assets at the beginning of the year $ 103,989 $ 72,702 <
Actual return on plan assets 14,344 18,852 Employer contribution 8,387 25,285 Plan participants' contributions 1,178 395 Benefits paid (14,080) 0 3,245)
Fair value of plan assets at the end of the year $ 113,818 $ 103,989 The plan's funded status and amount recognized in the consolidated balance sheets were as follows:
December 31, (in thousands) 1998 1997
' Funded status $ (144,938) $ (133,627)
Unrecognized actuarial net loss 24,922 12,916 Unrecognized transition obligation 88,814 127,107 Unrecognized prior service cost (9,827) (14,128)
Net amount recognized $ (41,029) $ (7,732)~
Weighted average assumptions were as follows:
1998 1997 1996 Discount rate at the end of the year 6.50 % 7.25% 7.75%
Expected return on plan assets for the year 9.00 % 9.00% 9.00 %
For measurement purposes, a 5% annual rate of mcrease on the per capita cost of covered health care benefits was assumed. A 13%
annual rate ofincrease on the per capita cost of covered prescription drug benefits was assumed, decreasing gradually to 5% in the year 2012 and remaining level thereafter. A 4% annual rate ofincrease on the per capita cost of covered dental benefits was assumed.
l --
A 1% change in the assumed health care cost trend rate would have the following efTects:
One-Percentage-Point increase Decrease Eff:ct on total of service and interest cost components for 1998 $ 3,319 $ (2,605)
Eff:ct on December 31,1998 postretirement benefit obligation $ 34,088 $ (27,270)
Components of net periodic benefit cost were as follows:
years ended December 31, (in thousands) 1998 1997 1996 S:rvice cost $ 3,892 $ 3,543 $ 4,616 Interest cost 16,895 17,006 16,815 Expected return on plan assets (8,563) (6,421) (4,738) 6- Amortization of prior service cost (942) (1,017) (1,614)
. Amortization of transition obligation 8,474 9,151 9,151 R: cognized actuarial loss 662 1,003 1,977 Net periodic benefit cost $ 20,418 $ 23,265 $ 26,207 As a result of the fossil and nuclear divestitures discussed in Note B to these Consolidated Financial Statements, amounts recog-nized for curtailment and special termination benefit costs were $21,187 and $79, respectively for 1998 and $7,895 and $456, respec-tively for 1997. These amounts are recoverable under Boston Edison's settlement agreement.
N:ts F. Stock Based Compensation in 1997, Boston Edison initiated a Stock Incentive Plan (the Plan) which was adopted by the board of directors and approved by common stockholders. The Plan permits a variety of nock and stock-based awards, including stock options and deferred (nonvested) stock to be granted to certain key employees. The Plan limits the terms of awards to ten years. Subject to adjustment for stock-splits and similar events, the aggregate number of shares of common stock that may be delivered under the Plan is 2,000,000, including shares issued in lieu of or upon reinvestment of dividends arising from awards. During 1998,19,150 shares of deferred stock and 419,200 ten-year non-qualified stock options were granted under the plan. During 1997,73,820 shares of deferred stock and 298,400 ten-year non-qualified stock options were granted. The weighted average grant date fair value of the deferred stock issued
'during 1998 and 1997 is $39.75 and $27.26, respectively. The options were granted at the full market price of the stock on the date of the grant. ' Both awards vest ratably over a three-year period.
Compensation cost iur stock-based awards is recognized under the provisions of Accounting Principals Board Opinion 25, which requires compensation cost to be measured by the quoted stock market price at the measurement date less the amount, if any, an employee is required to pay. The required fair value method disclosures are as follows:
(in thousands, except per share amounts) 1998 1997 N:t income Actual $ 141,046 $ 144,642 Pro forma $ 140,661 $ 144,572 BIsic earnings per common share Actual $ 2.76 $ 2.71 )
Pro forma $ 2.75 $ 2.71 l Dilut:d earnings per common share i Actual $ 2.75 $ 2.71
+ Pro forrna $ 2.74 $ 2.71 Stock option activity of the Plan was as follows:
1998 1997 Options outstanding at January 1 - 2Z,000 0 Options granted 419,200 298,400 Options exercised (3,800) 0 Options forfeited (21,800) (25,400)
Options outstanding at December 31 666,600 273,000 w
i
Summarized information regarding stock options outstanding at December 31,1998: -
Range of Weighted Average Remair ing Weighted Average Exercise Prices Contractual Life (Years) Exercise Price
$25.75-$26.00 8.44 $25.85
$39.75-$40.50 9.30 $39.75 There were 87,200 stock options exercisable at December 31,1998 with a weighted average exercise price of $25 85.
The 6tock options granted during 1998 have a weighted average grant date fair value of $4.61. The fair value was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
Expected life (years) 4.0 -
Risk free interest rate SIS % ,,.
l Volatility 10 % , )
Dividends 4.88 % j Compensation cost recognized in the consolidated statements ofincome for stock-based compensation awards in 1998 and 1997 was
$850,000 and $275,000, respectively.
Nr.te G. Capital Stock ,
1 December 31, )
(dollars in thousands, except per share amounts) 1998 1997 Common equity:
Common stock, par value $1 per share, 100,000,000 shares authorized; 47,184,073 and 48,514,973 shares issued ar6 outstanding: $ 47,184 $ 48,515 Przmium a common stock 644,205 696,137
- RLtained earnings 360,509 328,802 Total common equity $ 1,051,898 $ 1,073,454 Dividends declared per share of common stock were $1.895 in 1998 and $1.88 in 1997 and 1996.
Cumulative preferred stock:
Par value $100 per share,2,890,000 shares authorized; issued and outstanding:
Nonmandatory redeemable series:
Current Shares Redemption Series Outstanding Price / Share 4.25 % 180,000 $103.625 $ 18,000 $ 18,000 4.78% 250,000 $102.800 25,000 25,000 7.75% - - -
0 40,000 Total nonmandatory redeemable series $ 43,000 $ 83,000 Mandatory redeemable series:
Current Shares Redemption ,
Series Outstanding Price / Share 7.27 % - -
$ 0 $ 36,000 ,
8.00 % 500,000 - 50,000 50,000 50,000 86,000 Less: redemption and issuance costs (960) (5,907) due within one year 0 (2,000)
'(
- Total mandatory redeemable series $ 49,040 $ 78,093 34 m rm+m-d
E l
l
- 1. Common Stock Common stock issuances and repurchases in 1996 through 1998 were as follows:
Number Total Premium on
. (in thousands) of Shares Par Value Common Stock Balince at December 31,1995 48,003 $ 48,003 $ 683,686 Dividend reinvestment plan 507 507 12,037 Bilance at December 31,1996 48,510 48,510 695,723 Dividend reinvestment plan 5 5 414 Bilance at December 31,1997 48,515 48,515 696,137 Common share repurchase program (1,331) (1,331) (49,823)
Stock incentive plan - - (2,109)
- Balance at December 31,1998 47,184 $ 47,184 $ 644,205 6
' 2. Cumulative Mandatory Redeemable Preferred Stock Bossan Edison redeemed the remaining 360,000 shares of 7.27% sinking fund series cumulative preferred stock during 1998.
The stock was subject to a mandatory sinking fund requirement of 20,000 shares each May at par plus accrued dividends. Boston Edison also had the noncumulative option each May to redeem additional shares, not to exceed 20,000, through the sinking fund at
$100 per share plus accrued dividends. It redeemed, at par value,40,000 shares in 1998,1997 and 1996. In addition,320,000 shares were redeemed in 1998 at 5101.94 per share. ,
Boston Edison is not able to redeem any part of the 500,000 shares of 8% series cumulative preferred stock prior to December 2001. The entire series is subject to mandatory redemption in December 2001 at $100 per share plus accrued dividends.
N:ts H. Indebtedness December 31, (in thousands) 1998 1997 Long-term debt:
D:bantures:
5.950% due March 1998 $ 0 $ 100,000 6.800% due February 2000 65,000 65,000 6.050% due August 2000 100,000 100,000 6.800% due March 2003 150,000 150,000 7.800% due May 2010 125,000 125,000 9.875% due June 2020 100,000 100,000 9.375% due August 2021 115,000 115,000 8.250% due September 2022 60,000 60,000 7.800% due March 2023 200,000 200,000 Total debentures 915,000 1,015,000 Less: due within one year 0 (100,000)
Net long-term debentures 915,000 915,000 S:wzge facility revenue bonds 30,900 32,500 Lass: due within one year (667) (667)
Less: funds held by trustee (4,670) (4,757)
Net long-term sewage facility revenue bonds 25,563 27,076
' Mass:chusetts Industrial Finance Agency bonds:
- 5.750% due February 2014 15,000 15,000 6.662% bank loan, due 1999 0 100,000 Total long-term debt $ 955,563 $ 1,057,076 I
Short-term debt:
Not:s payable:
Bank loans $ 78,000 $ 94,013 Commercial paper 0 43,000 Total notes payable $ 78,000 $ 137,013 35 N
- 1. L:ng-term Debt The 9 7/8% debentures due 2020 are first redeemable in June 2000 at a redemption price of 104.483%, the 9 3/8% series due 2021 are first redeemable in August 2001 at 104.612%, the 8.25% series due 2022 are first redeemable in September 2002 at ,
103.780% and the 7.80% series due 2023 are first redeemable in March 2003 at 103.730%. No other series are redeemable prior to )
maturity. There is no sinking fund requirement for any series of debentures. j i
Sewage facility revenue bonds were issued by HEEC. The bonds are tax. exempt, subject to annual mandatory sinking fund redemption requirements and mature through 2015. Scheduled redemptions of $1.6 million were made in 1998,1997 and 1996. ;
The weighted average interest rate of the bonds is 7.3%. A portion of the proceeds from the bonds is in reserve with the trustee. If I HEEC should have insullicient funds to pay for extraordinary expenses, Boston Edison would be required to make additional capital contributions or loans to the subsidiary up to a maximum of $1 million. ,
The 5.75% tax-exempt unsecured bonds due 2014 are redeemable beginning in February 2004 at a redemption price of 102%.
The redemption price decreases to 101% in February 2005 and to par in February 2006.
- The aggregate principal amounts of Boston Edison's long-term debt (including HEEC sinking fund requirements) due through , l 2003 are $1.6 million in 1999, $166.6 million in 2000, $1.6 million in 2001 and 2002 and $151.6 million in 2003. ,
j
- 2. Short-term Debt In 1998, DEC established a $225 million revolving credit agreement with a group of banks efTective through July 2001. Under the terms of this agreement, it is required to maintain a consolidated common equity ratio of not less than 35% at all times and to main-tain a ratio of consolidated earnings before interest and taxes to consolidated total interest expense of not less than 2 to 1 for each peri-od of four consecutive fiscal quarters. Commitment fees must be paid on the total agreement amount. Approximately $78 million was outstanding under this agreement as of December 31,1998.
Boston Edison currently has regulatory authority to issue up to $350 million of short-term debt. Boston Edison has a $200 mil-lion revolving credit agreement with a group of banks. This agreemem is intended to provide a standby source of short-term borrow-ings. Under the terms of this agreement Boston Edison is required to maintain a common equity ratio of not less than 30% at all times. Commitment fees must be paid on the unused portion of the total agreement amount. It also has arrangements with several banks to provide additional short-term credit on an uncommitted and as available basis.
Information regarding consolidated BEC short-term borrowings is as follows:
(dollars in thousands) 1998 1997 1996 Maximum short-term borrowings $ 219,000 $ 316,100 $ 272,500 Waighted average amount outstanding $ 76,249 $ 212,663 $ 208,914 Weighted average interest rates excluding commitment fees 5.85% 5.85% 5.65 %
Note 1. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of securities for which it is practicable to estimate the value:
Nuclear decommissioning trust:
The cost of $173 million approximates fair value based on quoted market pnces of securities held.
Czh and cash equivalents:
The carrying amount of $99 rnillion approximates fair value due to the short-term nature of these securities.
Mindatory redeemable cumulative preferred stock, sewage facility revenue bonds and unsecured debt:
The fair values of these securities are based upon the quoted market prices of similar issues. Carrying amounts and fair values as of" December 31,1998, are as follows: *
(in thousands) Carrying Amount Fair Value Msndatory redeemable cumulative preferred stock $ 49,040 $ 54,190 S3 wage facility revenue bonds $ 30,900 $ 33,914 .
Un:ecured debt S 930,000 $ 994,294 36 w MewM l_
Nata J. Szgm:nt and Relatsd Informstion Statement of Financial Accounting Standards No.131 Disclosures about Segments of an Enterprise and Related Information, requires the disclosure of certain Gnancial and descriptive information by operating segments. For the purpose of providing segment information, BEC's principal operating segment, or its traditional core business, is the electric utility that provides electric energy service, primarily in the city of Boston and 39 surrounding cities and towns. The utility also supplies electricity at wholesale for resale to other utilities and municipalities. The unregulated operating segment engages in certain nonutility business activities. Such activities include telecommunications, construction management and district energy, and energy utilization and conservation, primarily in the Boston area. Financial data for the operating segments are as follows (dollars in thousands):
Electric Utility Unregulated Nonutility Consolidated 1998 Operations Operations Total
' Opsrating revenues $ 1,622,435 $ 60 $ 1,622,515
$ Intarsst charges 88,516 1,567 90,083
. D:preciation and amortization 188,738 2,963 191,701 Op rating income tax expense (benefit) 101,492 (3,694) 97,798 Srgment net income (loss) 170,374 (29,328)(a) 141,046 Equity income (loss) in investments accounted for by the equity method 1,725 (11,967) (10,242) (b)
Equity investments 20,769 64,001 84,770 Segment assets 3,082,921 130,978 3,213,899 Expenditures for property 108,344 11,858 120,202 1997 Opsrating revenues 1,776,233 2,298 1,778,531 Intsrest charges 105,710 200 105,910 D:preciation and amortization 188,687 802 189,489 Op2 rating income tax expense (benefit) 95,021 (1,312) .93,709 Ssgment net income (loss) 153,738 (9,096)(a) 144,642 Equity income (loss) in investments cccounted for by the equity method 1,534 (5,571) (4,037) (b)
Equity investments 23,326 12,129 35,455 Sagment assets 3,584,384 37,963 3,622,347 Expanditures for property 106,659 7,451 114,110 1996 Optrating revenues 1,666,303 2,553 1,668,856 Intersst charges 107,082 93 107,175 Dspreciation and amortization 185,494 623 186,117 Operating income tax expense (benefit) 88,703 (390) 88,313 Scgment net income (loss) 144,476 (2,930)(a) 141,546 Equity income (loss) in investments accounted for by the equity method 1,880 - 1,880 (b)
Equity investments 23,054 5,698 28,752 Srgment assets 3,719,248 10,043 3,729,291
. Expenditures for property 145,131 216 145,347 (a) I)aring the latter half of 1998 BEC decided to discontinue the operations of Coneco, a wholly owned unregulated subsidiary that provid-ed energy management services and to cease its participation in EnergyVision, an energy marketing joint venture with \Ydliams Energy Services Company. The net income (loss) from these businesses was (511 A50), (53,160) and $209 for 1998,1997 and 1996, respectively.
(b) The net equity income (loss) from equity inves,ments is included in other income (expense), net on the consolidated ;
statements of income.
37 W:ndmdm
Nats K. Ccmmitm:nts and Contingsnciss
- 1. Contractual Commitments At December 31,1998, BEC and its subsidiaries had estimated contractual obligations for plant and equipment of approximate-ly $28 million. This includes $13.5 million for nuclear fuel fabrication. Under the Pilgrim purchase and sale agreement, Entergy will assume any unpaid portion of this obligation upon the sale closing date.
BEC and its subsidiaries also have leases for certain facilities and equipment. The estimated minimum rental commitments under both transmission agreements and noncancellable leases for the years after 1998 are as follows:
(in thousands) 1999 $ 18,905 j 2000 18,188 . ;
2001 15,160 e 2002 13,710 2003 11,617 j Years thereafter 94,484 j Total $ 172,064 The total of future minimum rental income to be received under noncancellable subleases related to the above leases is $146,125.
BEC and its subsidiaries will capitalize a portion oflease rentals as part of plant expenditures in the future. The total expense for both lease rentals and transmission agreements was $29.6 million in 1998, $27.5 million in 1997 and $26.3 million in 1996, net of capitalized expenses of $1.6 million in 1998, $1.2 million in 1997 and $2.9 million in 1996.
Boston Edison had previously entered into various take or pay and throughput agreements, primarily to supply the New Boston fossil generating station with natural gas. As part of the fossil divestiture agreement, Sithe Energies assumed these obligations. The total expense under these agreements was $47.1 million in 1997 and $49.5 million in 1996.
- 2. Electric Company investments Boston Edison has an appmximately 11% equity investment in two companies which own and operate transmission facilities to import electricity from the Hydro-Quebec system in Canada. As an equity participant Boston Edison is required to guarantee, in addition to its own share, the total obligations of those participants who do not meet certain credit criteria. At December 31,1998.
Boston Edison's portion of these guarantees was $15.2 million.
Boston Edison has a 9.5% equity investment of approximately $2 million in Yankee Atomic Electric Company (Yankee Atomic).
In 1992 the board of directors of Yankee Atonde decided to discontinue operations of the Yankee Atomic nuclear generating station permanently and decommission the facility.
Yankee Atomic received approval from the FEPC in continue to collect its investment and decommissioning costs through 2000, the period of the plant's operating license. The estin are of Boston Edison's share of Yankee Atomic's investment and costs of decom-missioning is approximately $8 million as of December 31,1998. This estimate is recorded on the consolidated balance sheet as a power contract liability and an ofTsetting regulatory asset. ,
Boston Edison also has a 9.5% equity investment in Connecticut Yankee Atomic Power Company (CYAPC) of approximately
$10 million, in December 1996, the board of directors of CYAPC, which owns and operates the Connecticut Yankee nuclear elec-tric generating unit (Connecticut Yankee), unanimously vcted to retire the unit. The decision was based on an economic analysis of the costs of operating the unit through 2007, the period ofits operating license, compared to the costs of closing the unit and incur-ring replacement power costs for the same period.
Boston Edison's share of Connecticut Yankee's remaining investment and estimated costs of decommissioning is approximately
$51 million as of December 31,1998. This estimate is recorded on the consolidated balance sheet as a power contract liability and an offsetting regulatory asset similar to Yankte Atomic. j In December 1996, CYAPC fded for rate relief at the FERC seeking to recover certain post-operating costs, including decom- -j' missioning. In August 1998, the FERC Administrative Law Judge (ALJ) released an initial decision regarding CYAPC's fding. This ,
decision called for the disallowance of the common equity return on the CYAPC investment subsequent to the shutdown. The deci-sion also stated that decommissioning collections should continue to be based on a previously approved estimate, with an adjustment )
for in4ation, until a more reliable estimate is developed. In October 1998, both CYAPC and Northeast Utilities, a 49% equity investor in CYAPC, fded briefs on exceptions to the ALJ decision. If the initial decision is upheld, CYAPC could be required to write off a portion ofits investment in the generating unit and refund a portion of the previously collected return on investment.
Management is currently unable to determine the ultimate outcome of this proceeding, however, the estimate of the effect of the ALJ's initial decision does not have a material impact on its consolidated financial position or results of operations.
38
!"L""!L""fm6mi
=
- 3. Nu:l:cr insur:nce The federal Price-Anderson Act currently provides 59.8 billion of financial protection for public liability claims and legal costs arising from a singt: nuclear-related accident. The first $200 million of nuclear liability is covered by commercial insurance.
Additional nuclear liability insurance up to 59.6 billion is provided by a retrospective assessment of up to $88.1 million per incident levied on each of the 109 nuclear generating units currently licensed to operate in the United States, with a maximum assessment of
$10 million per reactor per accident in any year.
Boston Edison has purchased insurance from Nuclear Electric Insurance Limited (NEIL) to cover some of the costs to purchase replacement power during a prolonged accidental outage and the cost of repair, replacement, decontamination or decommissioning of utility property resulting from covered incidents at Pilgrim Station. Boston Edison's maximum potential total assessment for losses which occur during current policy years is 58.1 million under both the replacement power and excess property damage, decontamina-tion and decommissioning policies.
' 4. H:zardous Waste 3
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 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 possi-ble liability as a potentially responsible party in the cleanup of five multi-party hazardous waste sites in hiassachusetts 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 potential-ly responsible parties and currently expects to have only a small percentage of the total potentialliability for these sites. Through December 31,1998, BEC had appmximately $6 million accrued on its consclidated balance sheet related to these cleanup liabilities.
hianagement 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 pos:.., n. 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.
- 5. G:nerating Unit Performance Program Boston Edison's generating unit performance program ceased hiarch 1,1998. Under this program the recovery ofincremental purchased power costs resulting from generating unit outages occurring through the retail access date is 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 which is discussed in item 2. Management is unable to fully dermdne a range of reasonably possibh disallowance costs in excess of amounts accrued.
Based on its assessment of the information cuw.ntly 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 additic.nal 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.
- 6. Lcgal Proceedings Indu:try and corporate restructuring legal proceedings The DTE order approving the Boston Edison settlement agreement and the DTE order approving the formation of BFC e a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December 19% A sjC dismissed the appeal of the order approving the holding company formation. One setdement agreement appeal remains n oding, 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 cenain provisions of the Massachusetts electric industry restructuring legislation unconstitutional. !'
Management is currently unable to determine the outcome of these outstanding proceedings or the impact the proceedings may
- have on its consolidated results of operations.
, A referendum seeking repeal of the Massachusetts electric industry restructuring legislation that was enacted in November 1997 was overwhelmingly defeated by a better than 70% to 30% margin in a state-wide general election held on November 3,1998. This outcome allows the comprehensive framework established for the restructuring of the electric industry to continue as intended under the enacted legislation.
Regulatoryproceedings 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 are expected to be completed in the first half of 1999.
39 m ._imdm3
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 transfer of Pilgrim Station constitutes a breach of their respective power sale agreements and seeking to terminate chase agreements. The remaining municipal light depart-ments have also indicated that they plan to file similar claims for arbitration. Boston Edison has requested the FERC to exercise its pr -
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 arbitratior.s, that the contracts should be termina:cd, 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 ofits Pilgrim divestiture filing through the transition charge.
Management is currently unable to determine the outcome of these proceedings or the impact these proceedings may have on its consolidated financial position or results of operations.
Otherlitigation '
l In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim Station, filed suit against Boston Edison. The town claims that Boston Edison has wrongfully faile0 to execute an agreement with the town for payments in addition to taxes due to the .
town under the Massachusetts electric industry restructuring legislation. Boston Edison has disputed the town's claim and will vigor-ously defend itself. In addition to this pending liription, Boston Edison and the town of Plymouth are also parties in proceedings before the Appellate Tax Board and the DTE concerning substantially the same dispute. Management is unable to determine the ulti-l mate outcome of these proceedings or the impact they may have on its consolidated financial position or results of operations.
In the normal course ofits business BEC and its subsidiaries are 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.
Note L. Long-Term Power Contracts
- 1. Long-Term Contracts for the Purchase of Electricity Boston Edison entered into a 13-month agreement effective December 1,1998 to transfer all of the unit output entitlements from its long-term power purchase contracts to Select Energy (Select), a subsidiary of Northeast Utilities, Inc. In return, Select will provide full energy service requirements to Boston Edison, including NEPOOL capability responsibilities, at FERC approved tariff rates through December 31,1999.
Information relating to the contracts as of December 31,1998 is as follows:
proportionate share (in thousands)
Units of Debt Contract Capacity Minimum Outstanding Expiration Purchased Debt Through Cont. Annual Generating Unit Date % MW Service Exp. Date Cost Canal Unit 1 2002 25.0 141 $ 1,433 $ 4,496 $ 22,936 Mass. Bay Transportation Authority - 1 2005 100.0 34 - - 1,089 Ocean State Power - Unit 1 2010 23.5 72 3,996 15,970 22,120 Ocean State Power - Unit 2 2011 23.5 72 3,420 14,370 23,111 Northeast Energy Associates (a) (a) 219 - - 116,248 L'Energia (b) 2013 73.0 63 - - 28,220 MassPower 2013 44.3 117 10,727 65,127 53,143 i Mess. Bay Transportation Authority - 2 2019 100.0 34 - -
450 _)
Total $ 19,576 $ 99,963 $ 267,317 ,
l (a) Boston Edison purchases 75.5% of the energy output of this unit under two contracts. One contract represents 135MW and expires in the year 2015. The other contract is for 84MW and expires in 2010. Energy is paid for based on a price per kWh actually l received. Boston Edison does not pay a proportionate share of the unit's capital and fixed operating costs.
(b) Boston Edison pays for this energy based on a price per kWh actually received. An agreement has been made with L'Energia to ter-minate this contract. FERC approval of this agreement is pending.
40 taMJ
' Boston Edison's total fixed and vari:ble costs associated with these contracts in 1998,1997 and 1996 were approximately
$267 million, $288 million and $281 million, respectively, Boston Edison's minimum fixed payments under these contracts for the
. years after 1998 are as follows:
. (in thousands) 1999 $ 86,072 2000. 88,291 2001 88,662 2002 91,431 2003. 81,927 Y;ars thereafter 856,790
< Total $ 1,293,173 3 Tottl present value $ 743,716
- 2. Long Term Power Sales Contracts In addition to other wholesale power sales, Boston Edison sells a percentage of Pilgrim Station's output to other utilities and municipalities under long-term contracts. Information relating to these contracts is as follows:
Contract Expiration Units of Capacity Sold Contract Customer (a) Date % MW Commonwealth Electric Company 2012 11,0 73.7 Montaup Electric Company 2012 11.0 73.7 V rious municipalities 2000 (b) 3.7 25.0 Total 25.7 172.4 (a) Under these contracts, the utilities and municipalities pay their proportionate share of the costs of operating Pilgrim Station and associated transmission facilities. These costs include operation and maintenance expense, insurance, local taxes, depreciation, decommissioning and a return on investment. The long-term power sales contracts with Commonwealth Electric Company and Montaup Electric Company will be terminated upon the closing of the sale of Pilgrim Station to Entergy. The contracts with the municipalities remain in place whereby Boston Edison will purchase power for resale to the municipalities under a purchase power agreement entered into with Entergy.
(b) Subject to certain adjustments.
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IWport of 11xiclmtglc;ji ,gcco,jgjg;,,jgg Ta th] Sh:rch:lders cnd Trustees of BEC En:rgy in our opinion, the accompanyir.g consolidated balance sheets and the related consolidated statements ofincome and retained e.unings and of cash flows present fairly, in all material respects, the consolidated financial p -sition of BEC Energy and its sub-sidiaries (BEC) at December 31,1998 and 1997, and the resuhs of their operations and their cash flows for each of the three years in the period ended December 31,1998. in conformity with generally accepted accounting principles. These financial statements are the responsibility of BEC's management; our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the fmanci.d statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presenta- ,
tion. We believe that our audits provide a reasonable basis for the opinion expressed above.
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Boston, Massachusetts PricewaterhouseCoopers 1.1.p January 28,1999 4
t 42 L..__ undhili
Selected Consolidated Quarterly Financial Dina (Unatidited)
(in thousands, except earnings per share)
Earnings Basic Available Earnings Operating Operating Net for Common Per Average Revenues Income income Shareholders Common Share (a)
.1998 First quarter $ 394,117 $ 49,203 $ 22,859 $ 19,940 $ 0.41 S:cond quarter 385,708 64,748 34,323 31,452 0.65 Third quarter 479,537 100,047 75,490 74,004 1.55 Fourth quarter 363,153 28,942 8,374 6,885 0.15 o
. 1997 First quarter $ 422,856 $ 47,138 $ 20,935 $ 17,118 $ 0.35 S:cond quarter 426,835 59,633 33,978 30,484 0.63 Third quarter 520,414 106,673 81,418 78,499 1.62 j Fourth quarter 408,426 43,500 8,311 5,392 0.11 !
i (a) Based on the weighted average number of common shares outstanding during each quarter.
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Selected Quarterly Coninion Stock Data (Unatidited)
The reported high and low market value per share of common stock as reported in the MTzllStrutfournaland the dividends declared per share for eacn of the quarters in 1998 and 1997 was as follows:
1998 1997 High Low Dividends High Low. Dividends Fi,st quarter $41 15/16 $ 35 1/16 $0.470 $27 3/8 $ 26 $0.470 Second quarter 42 5/8 38 7/8 0.470 26 5/8 24 5/8 0.470 Third quarter 44 5/16 37 3/4 0.470 30 7/8 26 1/2 0.470 Fourth quarter 44 15/16 39 5/8 0.485 38 3/8 30 1/4 0.470 a
4 43 u~ual 5 B
l Selected Consolidated Sales Statistics (L'naudited) 1998 1997 1996 1995 1994 Elrctric energy sales (kWh in thousands):
Commercial 8,207,314 7,991,349 7,821,371 7,454,684 7,478,631 Residential 3,598,660 3,566,405 3,549,899 3,563,626 3,534,372 Industrial ' 1,478,642 1,467,600 1,547,630 1,538,218 1,539,385 Other (a) 131,930 131,187 130,678 131,626 130,721 Total retail sales 13,416,546 13,156,541 13,049,578 12,688,154 12,683,109 Wholesale and contract sales (a) 2,613,779 2,674,283 3,127,087 2,805,777 2,367,589 Nsw England Power Pool 1,818,740 1,610,860 741,390 884,336 725,439 ,
Total system 17,849,065 17,441,684 16,918,055 16,378,267 15,776,137 Miscellaneous usage 1,142,146 1,146,584 1,136,616 1,118,856 1,108,194 Total 18,991,211- 18,588,268 18,054,671 17,497,123 16,884,331 Kilowatthour sales - annual growth:
Commercial 2.7 % 2.2 % 4.9 % (0.3:% 3.0 % l Residential 0.9 0.5 (0.4) 0.8 1.6 )
Industrial 0.8 (5.2) 0.6 (0.1) (2.6) l Other 0.6 0.4 (0.7) 0.7 (10.0)
Total retail sales (a) . 2.0 0.8 2.8 - 1,7 1 Wholesale and contract sales (2.3) (14.5) 11.5 18.5 4.2 Nsw England Power Pool 12.9 117.3 (16.2) 21.9 (17.4)
Total system 2.3 % 3,1 % 3.3 % 3.8 % 1.0 %
Eltetric operating revenues by class:
Commercial 51 % 51 % 50 % 50 % 50 %
Residential 27 % 27 % 27 % 28 % 28 %
Industrial 9% 9% 9% 9% 9%
Other- 1% 1 %. 2% 2% 2%
Wholesale and contract 12 % 12 % 12 % 11 % 11 %
Average number of customers 660,032 662,354 657,487 653,757 655,707 i
(a) FEcctive in November 1995, a former retail customer became a wholesale customer as allowed under Massachusetts state law.
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Selected Colisolidated Fitulticiill Sliitistics (L'inunlited) 1998 1997 1996 1995 1994 Op; rating revenues (000) $ 1,622,515 $ 1,778,531 $ 1,668,856 $ 1,628,503 $ 1,544,735 E:rnings availabie for common (000) $ 132,281 $ 131,493 $ 126,181 $ 96,739 (a) $ 109,257 Par common share:
Basic earnings $ 2.76 $ 2.71 $ 2.61 $ 2.08 (a) $ 2.41 Dividends declared $ 1.895 $ 1.880 $ 1.880 $ 1.835 $ 1.775 Dividends paid $ 1.88 $ 1.88 $ 1.88 $ 1.82 $ 1.76 Book value $ 22.29 $ 22.13 $ 21.37 $ 20.61 $ 20.11 s
P:yout ratio 68 % 69 % 72 % 88 % (a) 73 %
R; turn on average common equity 12.3 % 12.4 % 12.4 % 10.0 % (a) 12.1 %
Y ar-end dividend yield 4.7 % 5.0 % 7.0 % 6.4 % 7.6 %
Fix:d charge coverage (SEC) 3.11 2.95 2.91 2.38 2.46 C:pitalization:
Total debt 48 % 51 % 52 % 54 % 56 % j Preferred equity 4% 7% 8% 8% 9%
Common equity 48 % 42 % 40 % 38 % 35 %
Long-term debt (000) $ 955,563 $ 1,057,076 $ 1,058,644 $ 1,160,223 $ 1,136,617 M:ndatory redeemable ,
preferred stock (000) $ 49,040 $ 80,093 $ 83,465 $ 86,837 $ 88,837 Total assets (000) $ 3,213,899 $ 3,622,347 $ 3,729,291 $ 3,637,170 $ 3,608,699 Int:rnal generation after dividends (000) $ 116,002 $ 240,362 $ 257,446 $ 184,492 $ 217,030 Pl:nt expenditures (000) $ 120,202 $ 114,110 $ 145,347 $ 180,822 $ 198,771 Int:rnal generation 97 % 211 % 177 % 102 % 109 %
Common shares outstanding:
Weighted average 47,973,402 48,514,958 48,264,734 46,591,662 45,337,661 Year-end 47,184,073 48,514,973 48,509,537 48,003,178 45,535,477 Stock price:
High 44 15/16 38 3/8 30 1/8 29 1/2 29 7/8 Low 35 1/16 24 5/8 21 3/4 23 1/8 21 1/2 Year-end 41 3/16 37 7/8 26 7/8 29 1/2 24 Year-end market value (000) $ 1,943,394 $ 1,837,505 $ 1,303,694 $ 1,416,094 $ 1,092,851 ;
Tr: ding volume (shares) 33,574,000 37,732,900 41,105,700 23,078,900 25,095,100 Market / book ratio (year-end) 1.85 1.71 1.26 1.43 1.19 Pric:/ earnings ratio (year-end) 14.9 14.0 10.3 14.2 (a) 10.0 Number of utility employees ct year-end 2,919 3,227 3,362 3,812 4,026 (a) Amounts excluding $34 million pre-tax restructuring charge:
!e Earnings available for common (000) $ 117,403 Earnings $ 2.52 Payout ratio 72 %
Return on average common equity 12.2 %
Price / earnings ratio 11.7 %
l Certain redassifications and recalculations were made to the data reponed in prior years to conform with the method of presentation used in 1998.
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130ston IE(lison - - Officers 130ston li(lison -- 11oitr(! of !)irectors ;
Thomas J. May, Chairman of the Board, President and a Gary L. Countryman, Chairman of the Board, Liberty Chief Executive Omcer Mutual Insurance Company Ronald A. Ledgett, Executive Vice President a,c Thomas G. Dignan, Jr., Partner, Ropes & Gray Alison Alden, Senior Vice President - Sales, Services and II""' b"")
Human Resources c Richard J. Egan, Chairman of the Board, EMC Corporation (storage-related computer system products)
L. Carl Gustin, Senior Vice President - Corporate Relations b Charles K. GifTord, Chairman and Chief Executive Douglas S. Horan, Senior Vice President - Strategy and Omcer, BankBoston Corporation Law and General Counsel (bank holding company) and BankBoston, N.A.
James J. Judge, Senior Vice President - Corporate Services a,c Nelson S. Gifford, Principal, Fleetwing Capital and Treasurer (venture investments)
William N. Dimoulas, Vice President - Information Technology a,b Marina S. Horner, Executive Vice President, Teachers i Richard S. Hahn, Vice President - Technology Insurance and Annuity Association and College David M. Samuel, Vice President - Customer Care Retirement Equities Fund Theodore A. Sullivan, Vice President - Nuclear and Station Paul A. LaCamera, President and General Manager, Director WCVB TV Channel 5 Robert J. Weafer, Jr., Vice President - Finance, Controller a.b Thomas J. May, Chairman of the Board, President and and Chief Accounting Omcer Chief Executive Omcer, Boston Edison Company Theodora S. Convisser, Clerk of the Corporation Sherry H. Penney, Chancellor, University of Donald Anastasia, Assistant Treasurer c Herbert Roth,Jr., Former Chairman of the Board and Philip J. Lembo, Assistant Clerk of the Corporan. on Chief Executive Omcer, LFE Corporation (trame and industrial process control systems) c Stephen J. Sweeney, Former Chairman of the Board, President and Chief Executive Omcer, Boston Edison Company l
l a Member of Executive Committee i b Member of Pricing Committee c Member of Nuclear Oversight Committec l l
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~ 13EC Energy - - Officers 13EC Energy - - Trustees Thomas J. May, Chairman of the Board, President and a,c Gary L. Countryman, Chairman of the Board, Liberty Chief Executive Officer Mutual Inst rance Company
' Douglas S. Horan, Senior Vice President - Strategy and a Thomas G. Dignan, Jr., Partner, Ropes & Gray Law and General Counsel (law firm)
James J. Judge, Senior Vice President - Corporate Services c Richard J. Egan, Chairman of the Board, EMC and Treasurer Corporation (storage-related computer system products)
Robert J. Weafer, Jr., Vice President - Finance, Controller b,c,d Charles K. Gifford, Chairman and Chief Executive and Chief Accounting Officer Officer, BankBoston Corporation
, Theodora S. Convisser, Clerk of the Corporation (bank holding company) and BankBoston, N.A.
, a Nelson S. Gifford, Principal, Fleetwing Capital (venture investments) a,b,d Marina S. Horner, Executive Vice President, Teachers Insurance and Annuity Association and College Retirement F4uities Fund b Paul A. LaCamera, President and General Manager, WCVB-TV Channel 5 a,d Thomas J. May, Chairman of the Board, President and Chief Executive Officer, Boston Edison Company b,c Sherry H. Penney, Chancellor, University of Massachusetts at Boston b Herbert Roth,Jr., Former Chairman of the Board and Chief Executive Oflicer, LFE Corporation (traffic and industrial process control systems) ,
l b Stephen J. Sweeney, Former Chairman of the Board, '
President and Chief Executive Officer, Boston Edison Company a Meml:er of Executive Committee b Member of Audit, Finance and Risk Management Committee c Member of Executive Personnel Committee d Member of Pricing Committee l
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In1portant Shareholder Infonnaljon Autom: tic Monthly investm:nt Program Sh r: hold:r Inquiriu .
Shareholders who are participants in the Dividend Reinvestment and Common Stock Purchase Plan may now t ifyou have questions concerning your disidend payments, the make automatic monthly investments of a specified amount Dividend Reinvestment and Common Stock Purchase Plan, direct (not less than S50 per month) through an Automated Clearing deposit service, transfer procedures or other stock account matters, House ("ACH") withdrawal from their savings or checking please contact our stock transfer agent at the following address: account. Once automatic monthly deductions are initiated, EquiServe funds will be drawn from your designated bank account on the Shuholder Services Division 25th of each month and will be invested in common stock on P.O. Box 8040 the next investment date. For more information on the Boston, MA 02266-8040 Automatic Monthly Investment Program, or an enrollment Toll Free Phone: 1-800-338-8446 form, contact our src.ck transfer agent.
Telecommunication Device for the Deaf (TDD) 1-800-952-9245.
Safekeeping Program Shareholders who are participants in the Dividend Reinvestment Dividend Payments Dates and Common Stock Purchase Plan can transfer their common
- Common and Preferred stock certificates into their plan account for safekeeping.
Ist of February, May, August and November Dividends on those shares will be reinvested automatically like any other shares held in the plan. To continue receiving cash T:x Status of 1998 Dividends diEidends, you must hold your shares in certificate form. For Generally, unless you are subject to certain exemptions, all divi- additional information, contact our stock transfer agent.
dends on our common or preferred stock are to be considered 100% taxable. SEC Form 10-K Stockholders may obtain a copy of our annual report .to the Stock Symbol and Exchange Listings Securities and Exchange Commission on Form 10-K, by con-Ticker Symbol: BSE tacting our Investor Relations Department.
New York (NYSE) and Boston stock exchanges Quarterly Report to Shareholders Dividend Payments Direct Deposit Service Beneficial owners of our stock whose shares are registered in Shareholders ieceiving dividend checks can arrange for electron. names other than their own may obtain copies of our Quarterly ic direct deposit. Transfers are made on the dividend payment Reports to Sharehoklers by contacting our Investor Relations dates and confirmation statements are mailed to shareholders. Department. Note that the Annual Report will continue to be To take advantage of this convenient program, contact our mailed to beneficial owners directly by their bank or broker.
stock transfer agent as noted above.
Investor & Shareholder Contacts Dividend Reinvestment and Common Stock Philip J. Lembo Purchase Plan Director, Investor Relations Our Dividend Reinvestment and Common Stock Purch.tse Plan (617) 424-3562 (the plan) is available to our common and preferred shareholders, or our residennal electric customers and employees. Participants do Jean M. Carella not pay brokerage fees or commissions related to the purchase of Investor Relations Specialist shares. Some important features of the plan are as follows: (617) 424-2658
- Optional cash payments invested monthly
- 550 per month minimum not to exceed $40,000 Email Address per calendar year ir@bedison.com
- Safekeeping of common stock certificates Internet Address Beneficial owners of our stock whose shares are registered .m nimes other than their own (e.g., a brol er or bank nominee) www.bostonedison.com must arrange participation with the record holder. If for any '
Company Contact reason you are unable to arrange participation with your broker ..
or bank nominee, you must become a record holder by having Theodora S. Convisser the shares transferred to your own name. Clerk of the Corporation General Offices 800 Boylston Street Boston, MA 02199-8003 (617) 424-2000 48 M z m =l
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& BECEnergy
! 800 Boylston Street Boston, Massachusetts 02199
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UNITED STATES SECURITIES AND EXCIIANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 i For the fiscal year ended December 31,1998 OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~
j For the transition period from to I Commission file number 1-14768 I BEC ENERGY f (Exact name of registrant as specified in its charter) 1 Massachusetts 04-6830187 (State or odierjurisdiction of (1.R.S. Employer incorporation or organization) Idcritification No.)
800 Boylston Street, Boston, Massachusetts 02199 q (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 1-888-423-2364 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered Common stock, par value $1 per sharc New York Stock Exchange Boston Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be Gled by Section 13 er 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the irgistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Pndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S l[is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this E;rm 10-K or any amendment to this Fonn 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 26,1999 computed as the average of the high and low market price of the common stock as reported in the listing of composite transactions for New York Stock Exchange listed securities in the WallStreetJournal; $1,818,184,643.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class Outstandiar at Marth 26.1999 Common Stock, $1 par value 46,471,173 shares
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BEC Energy Form 10-K/A Annual Report l
i December 31, 1998 i
Part I Page 1
Item 'l. Business 2 Item 2. P,roperties and Power Supply 6 Item 3. Legal Proceedings 8 l l
Item 4. Submission' of Matters to a Vote of Security Holders 9 i
Part II' Item 5. Market 'for the Registrant's Common Stock and Related Stockholder Matters 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis 14 Item 8. Financial Statements and Supplementary Financial Information 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58 Part TII Item 10. Trustees and Executive Officers of the Registrant 59 Item 11. Executive-Compensation 62 Item 12. -Sec'; Ly ownership of Certain Beneficial owners and Management 70 Item 13. Certain Relationships and Related Transactions 71 Part'IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 72 1
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Part I y Item 1. Business (a) General Development of Business Boston Edison Company (Boston Edison), an investor-owned regulated public utility incorporated in 1886 under Massachusetts law, received final approval of its reorganization plan to form a holding company structure from the Securities and Exchange Commission (SEC) in May 1998. Effective May 20, 1998 the holding company, BEC Energy (BEC), was fonmed with Boston Edison as a wholly owned subsidiary of BEC. Effective June 25, 1998, Boston Energy Technology Group (BETG) ceased being a subsidiary of Boston Edison and became a wholly owned subsidiary of BEC. Unregulated activities continue to be conducted through BETG.
Within its newly restructured 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, Iac.
(Sithe) was completed in May 1998. In November 1998, Boston Edison signed an agreement with Entergy Nuc] ear. Generating Company (Entergy)Jto sell its wholly <
owned nucleat generating unit, Pilgrim Nuclear Power Station (Pilgrim). BEC signed a merger agreement with Commonwealth Energy System (CES) in Decenber
- 1998 that will create an energy delivery company serving approximately 1.3 ndllion customers located entirely within Massachusetts, including more than one million electric customers in 81 communities and 240,000 gas customers in 51 communities.
(b) Financial Information about Industry Segments BEC's ' principal segment is the electric utility, Boston Edison. As noted above, unregulated activities are conducted through BETG. Such unregulated activities include telecommunications, construction management and district cooling. Refer to Note J to the consolidated Financial Statements in Item 8 for specific financial information related to BEC's electric utility and unregulated segments.
(c) Narrative Description of Business Principal Products and Services
}
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. The population of the area served with electricity at retail is approximately 1.5 million. In 1998 Boston Edison served an average of approximately 660,000 customers. It also supplies electricity at wholesale for resale to other utilities and municipalities. Electric operating revenues j by class for the last three years consisted of the following:
1998 1997 1996 Retail electric revenues:
Commercial 51% 51% 50% I Residential 27% 27% 27%
Industrial 9% 9% 9%
Other 1% 1% 2%
Mholesale and contract revenues 12% 12% 12,1 2
a 1 Sources and Availability of Fuel l
On May 15, 1998. Boston Edison completed the sale of its non-nuclear l generati.ng asse rs to Sithe Energies. In April 1998, Boston Edison began l soliciting exprassions of interest for the sale of its nuclear generating unit, Pilgrim as part of the previously announced strategy to exit the generation business. On November 19, 1998, Boston Edison announced that l Entergy, a subsidiary of New Orleans-based Entergy Corporation, had been selected as the winning bidder for Pilgrim. A purchase and sale agreement has been signed and all required approvals are anticipated ir. th6'second quarter of 1999. Company generation by type of fuel for each of the last five years were as follows:
Percentage of Company ]
Generation by Source (%) j 1998 1997 1996 1995 1994 011 8.1 32.0 16.1 17.5 27.8 Gas 20.8 31.1 33.3 39.9 31.6 Nuclear 71.1 36.9 50.6 42.6 402 6 The decrease in company oil and gas generation resulting from the fossil divestiture was partially offset by higher purchased power in 1998 that included a six-month transitional power purchase contract with Sithe that began in May.
In order to obtain fuel for use at Pilgrim St'a' tion, Boston Edison must obtain supplies of uranium concentrates and secure contracts for these concentrates to go through the processes of conversion, enrichment and fabrication of nuclear fuel assemblies. Boston Edison currently has contracts for supplies of uranium concentrates and the processes of conversion, enrichment and fabrication through 2002, 2000, 2004 and 2012, respectively. Following the planned sale of Pilgrim, it is expected that each of these contracts for future commitments will either be terminated or permitted to expire in ;
accordance with their terms. Boston Edison may be subject to a penalty of approximately $10 million to terminate one of these contracts. Management anticipates any payment will be collected from customers under the terms of q the Boston Edison settlement agreement. None of these supply contracts have 1 been assigned to Entergy. ,
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Franchises i
Through its charter, which is unlimited in time, Boston Edison has the right to engage in the business of producing and selling electricity, steam and other forms of energy, has powers incidental thereto and is entitled to all the rights and privileges of and subject to the duties imposed upon electric companies under Massachusetts laws. The locations in public ways for electric j transmission and distribution lines are obtained from municipal and other i state authorities which, in granting these locations, act as agents for the j state. In some cases the action of these authorities is subject to appeal to j ths Massachusetts Department of Telecommunications and Energy'(DTE). The {'
rights to these locations are not limited in time, but are not vested and are subject to the action of these authorities and the legislature. Pursuant to the Massachusetts electric utility industry restructuring legislation enacted in November 1997, the DTE has defined the service territory of Boston Edison based on the territory actually served on July 1, 1997, and following, to the ;
extent possible, municipal boundaries. The legislation further provided that, j until terminated by effect of law or otherwise, Boston Edison shall have the exclusive obligation to provide distribution service to all retail customers 3
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within such service territory. No other entity shall provide distribution y service within this territory without the written consent of Boston Edison which consent must be filed with the DTE and the municipality so affected.
Seasonal Nature of Business Kilowatt-hour (kWh) 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. Refer to the Selected Consolidated Quarterly Financial Data (Unaudited) in Item 8 for specific financial information by quarter for 1998 and 1997.
Competitive Conditions The utility. industry has continued to change in response to the marketplace demands for improved customer service and lower prices for energy. These pressures have resulted in an increasing trend in the industry to seek competitive advantages and other benefits through business combinations, on December 5, 1998, BEC and CES, headquartered in Cambridge, Massachusetts, entered.into an Agreement and Plan of Merger (the Merger Agteement).
Management's Discussion and Analysis (" Merger with COM/ Energy") in Item 7 provides further details regarding the Merger Agreement.
BEC's electric utility subsidiary, Boston Edison has been anticipating and responding to changes in the electric energy business as a result of industry restructuring proceedings at both the federal and state levels. Management' s Discussion and Analysis (" Retail Access") in Item 7 provides further details regarding Boston Edison's response to the industry clinate, including details of its industry restructuring settlement agreement.
Environmental Matters BEC and its subsidiaries are subject to numerous federal, state and local standards with respect to the management of wastes, air and water quality and other environmental considerations. These standards could require modification of existing facilities or curtailment or termination of ;
operations at these facilities. They could also potentially delay or $
discontinue construction of new facilities and increase capital and operating l costs by substantial amounts. Noncompliance with certain standards can, in some cases, also result in the imposition of monetary civil penalties.
Environmental-related capital expenditures for the years 1998 and 1997 were
$0.6 million and $1.4 million, respectively. Management believes that its remaining operating facilities are in substantial compliance with currently applicable statutory and regulatory environmental requirements. Additional )
expenditures could be required as changes in environmental requirements occur.
Number of Ettployees As of March 26, 1999, BEC had 2,89'3 full-time and 48 part-time u.tility employees including 1,966 represented by two locals of the Utility Workers
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Union of America, AFL-CIO. The locals' labor contracts are effective through May of the year 2000. Management believes it has satisfactory employee relations.
Approximately 600 employees are expected to terminate employment with BEC as a j result of the divestiture'of Pilgrim Station in 1999. Refer to the Generating )
Assets Divestiture section of Item 7 for information regarding employees I affected by the nuclear divestiture. ;
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a b (d) Financial Information about Foreign and Domestic Operations and Export Sales BEC's principal subsidiary, Boston Edison delivers electricity to retail and wholesale customers in the Boston area. Neither Boston Edison, nor BEC's other subsidiaries have any foreign operations or export sales.
(e) Additional Information Regulation BEC's electric utility subsidiary, Boston Edison and its wholly owned subsidiary, Harbor Electric Energy Company (HEEC), operate primarily under the authority of the DTE, whose jurisdiction includes supervision over retail rates for electricity and financing and investing activities. In addition, the Federal Energy Regulatory Commission (FERC) has jurisdiction over various phases of Boston Edison's business including rates for power sold at wholesale for resale, facilities used for the transmission or sale of that power, certain issuances of short-term debt and regulation of the system of accounts.
BEC's subsidiary BETG and its subsidiaries' are not subjept to such regulation.
The Nuclear Regulatory Commission (NRC) has broad jurisdiction over the siting, construction and operation of nuclear reactors with respect to public health and safety, environmental matters and antitrust considerations. A license granted by the NRC may be revoked, suspended or modified for failure to construct or operate a facility in accordance with its terms. Boston Edison currently holds an operating license for Pilgrim Station which expires in 2012. Continuing NRC review of existing regulations and certain operating occurrences at other nuclear plants have periodically resulted in the imposition of additional requirements for all nuclear plants in the United States, including Pilgrim Station. NRC inspections and investigations can result in the issuance of notices of violation. These notices can also be accompanied by orders directing that certain actions be taken or by the imposition of monetary civil penalties.
In addition, management could undertake certain actions regarding Pilgrim Station at the request or suggestion of its insurers or the Institute of Nuclear Power Operations, a voluntary association of r.uclear utilities dedicated to the promotion of safety and reliability in,the operation of nuclear power plants. Nuclear power continues to be a ,pubject of political controversy and public debate manifested from time to time in the form of requests for various kinds of federal, state and local legislative or regulatory action, direct voter initiatives or referenda or litigation.
Management cannot predict the extent, cost or timing of any modifications to Pilgrim which could be necessary as a result of additional regulatory or other requirements. Am discussed in Sources and Availability of Fuel of this item, Boston Edison entered into a purchase and sale agreement with Entergy for the sale of Pilgrim Station. The DTE approved the sale of Pilgrim in March 1999.
Other required approvals are anticipated in the second quarter of 1999. Such approvals are required for the completion of the Pilgrim sale,. Provided that all required approvals are received and the sale of Pilgrim proceeds as ~
planned, Boston Edison will transfer its regulatory and legal liability and responsibility for Pilgrim to Entergy, except for any outstanding liabilities related to pre-closing occurrences. If the required approvals are not received as anticipated, the agreement with Entergy could be terminated. If Boston Edison is ultimately unable to sell Pilgrim, management expects it would recover all stranded Pilgrim costs, including decommissioning under the Boston Edison settlement agreement.
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(d) Financial Information about Foreign and Domestic Operations and Export Sales BEC's principal subsidiary, Boston Edison delivers electricity to retail and wholesale customers in the Boston area. Neither Boston Edison, nor BEC's other subsidiaries have any foreign operations or export sales.
(e) Additional Information Regulation BEC's electric utility subsidiary, Boston Edison and its wholly owned subsidiary, Harbor Electric Energy Company (HEEC), operate primarily under the authority of the DTE, whose jurisdiction includes supervision over retail rates for electricity and financing and investing activities. In addition, the Federal Energy Regulatory Commission (FERC) has jurisdiction over various phases of Boston Edison's business including rates for power sold at wholesale for resale, facilities used for the transmission or sale of that power, certain issuances of short-term debt and regulation of the system of accounts.
BEC's subsidiary BETG and its subsidiaries are not subject to such regulation.
The Nuclear Regulatory Commission (NRC) has broad jurisdiction over the siting, construction and operation of nuclear reactors with respect to public {1 health and safety, environmental matters and antitrust considerations. A license granted by the NRC may be revoked, suspended or modified for failure to construct or operate a facility in accordance with its terms. Boston Edison currently holds an operating license for Pilgrim Station which expires in 2012. Continuing NRC review of existing regulations and certain operating occurrences at other nuclear plants have periodically resulted in the imposition of additional requirements for all nuclear plants in the United
[
States, including Pilgrim Station. NRC inspections and investigations can j result in the issuance of notices of violation. These notices can also be i accompanied by orders directing that certain actions be taken or by the l imposition of monetary civil penalties.
In addition, management could undertake certain actions regarding Pilgrim Station at the request or suggestion of its insurers or the Institute of i Nuclear Power Operations, a voluntary association of r.uclear utilities dedicated to the promotion of safety and reliability in,the operation of nuclear power plants. Nuclear power continues to be a ,pubject of political controversy and public debate manifested from time to time in the form of requests for various kinds of federal, state and local legislative or regulatory action, direct voter initiatives or referenda or litigation.
Management cannot predict the extent, cost or timing of any modifications to Pilgrim which could be necessary as a result of additional regulatory or other ,
requirements. As discussed in Sources and Availability of Fuel of this item, l Boston Edison entered into a purchase and sale agreement with Entergy for the sale of Pilgrim Station. The DTE approved the sale of Pilgrim in March 1999.
Other required approvals are anticipated in the second quarter of 1999. Such approvals are required for the completion of the Pilgrim sale.. Provided that I all required approvals are received and the sale of Pilgrim proceeds as l planned, Boston Edison will transfer its regulatory and legal liability and ,
responsibility for Pilgrim to Entergy, except for any outstanding liabilities I related to pre-closing occurrences. If the required approvals are not received as anticipated, the agreement with Entergy could be terminated. If '
l Boston Edison is ultimately unable to sell Pilgrim, management expects it would recover all stranded Pilgrim costs, including decommissioning under the Boston Edison settlement agreement.
5
/ .. i Capital Expenditures and Financings The most recent estimates of capital expenditures (excluding nuclear fuel),
allowance for funds used during const! action (AFUDC), long-term debt maturities and preferred stock payment requirements for the years 1999 through 2003 are as follows:
(in thousands) 1999 2000 2001 2002 2003
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Capital expenditures (1) $233,000 $200,000 $189,000 $180,000 $158,000 APUDC $ 1,200 $ 1,200 $ 1,200 $ 1,200 $ 1,200 Long-term debt $ 1,600 $166,600 $ 1,600 $ 1,600 $151,650 Preferred stock $ -
S - $ 50,000 $ -
S -
(1) Includes both utility and nonutility ventures.
Management continuously reviews its capital expenditure and financing progranm. These programs and, therefore, the estimates included in this Form 10-K/A are subject to revision due to changes in regulatory: requirements, environmental = standards, availability and cost of capital, -interest rates and other assumptions.
Plant expenditures in 1998 were $120 million and consisted primarily of additions to Boston Edison's distribution and transmission systems and construction expenditures related to BEC's district cooling subsidiary, Northwind Boston, LLC. The majority of these expenditures were for system reliability and control improvements, customer service enhancements and capacity expansion to allow for long range growth in the Boston Edison service territory.
Refer to the Liquidity section of Item 7 for more information regarding capital resources to fund BEC's construction programs. ,
i Item 2. Properties and Power Supply Total electric generation capacity from facilities owned by Boston Edison (
consisted of the following:
7- Year Unit (a) Location Capacity (b) Type Installed Pilgrim Nuclear Plymouth, Mass. 6? Nuclear 1972 Power Station New Boston Station South Boston, Mass. 760 Fossil 1965-1967 Units 1 and 2 Mystic Station Everett, Mass.
Units 4-5-6 388 Fossil 1957-1961 Unit 7 592 Fossil 1975 Combustion turbine 14 Fossil 1969 generator Combustion turbine Various 276 Fossil 1966-1971 l aenerators (nine)
(a) As discussed in Sources and Availability of fuel of this item, Boston Edison completed the sale of its fossil generating assets to Sithe j 6
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e s Energies in May 1998. In addition, Pilgrim Station is expected to be sold to Entergy in 1999.
(b) In megawatts (MW) based on winter capability audit results in 1997.
Boston Edison's high-tension transmission lines are generally located on land either owned or subject to easements in its favor. Its low-tension distribution lines are located principally on public property under permission granted by municipal and other state authorities.
As of December 31, 1998, Boston Edison's transmission system consisted of 376 miles of overhead circuits operating at 115, 230 and 345 kilovolts (kV) and i 171 miles of underground circuits operating at 115 and 345 kV. The substations supported by these lines are 45 transmission or combined 1 transmission and distribution substations with transformer capacity of 11,053 megavolt amperes (MVA), 57 4 kV distribution substations with transformer )
1 capacity of 932 MVA and 16 primary network units with 79 MVA capacity. In addition, high tension service was delivered to 248 customers' substations. )
The overhe'ad and underground distribution systens cover approximately 3,700 and 3,200 circuit miles, respectively. HEEC, Boston Edison's regulated subsidiary, has a distribution system that consists. principally of a 4.1 mile 115 kV submarine distribution line and a substation which is located on Deer Island in Boston, Massachusetts. HEEC provides the ongoing support required to distribute electric energy to its one customer, the Massachusetts Water Resources Authority, at this location.
Purchased Power Contracts Boston Edison entered into a 13-month agreement effective December 1, 1998 to !
transfer all of the unit output entitlements from its long-term power purchase contracts to Select Energy (Select), a subsidiary of Northeast Utilities, Inc.
In return, Select will provide full energy service requirements to Boston Edison, including New England Power Pool (NEPOOL) capability responsibiliti ss, at FERC approved tariff rates through December 31, 1999. For more information regarding these long-term contracts refer to Note L to the consolidated Financial Statements in Item 8. !
Sales Contracts Boston Edison currently sells a percentage of Pilgrim Sjation's output to commonwealth Electric Company (Commonwealth), Montaup Electric Company (Montaup) and various municipalities under long-term contracts. Under these contracts, the utilities and municipalities pay their proportionate share of the costs of operating the station and associated transmission facilities.
The long-term power sales contracts with Commonwealth and Montaup will be r tenninated upon the closing of the sale of Pilgrim Station to Entergy. The 1 contracts with the municipalities remain in place whereby Boston Edison will i purchase power for resale to the municipalities under a purchase power !
agreement entered into with Entergy. Refer to Notes K and L to the Consolidated Financial Statements in Item 8 for more information regarding these contracts. l New England Power Pool Boston Edison is a member of NEPOOL, a voluntary association of electric utilities and other electricity suppliers in New England responsible for the coordination, monitoring and directing of the operations of the major generating and transmission facilities in the region. To obtain maximum benefits of power pooling, the electric facilities of all member companies are 7
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directed by an Independent System Operator (ISO New England) as if they were a single power system. .This is accomplished through the use of a central dispatching system that uses the lowest-priced generation and transmission equipment available at any given time. NEPOOL's goal is to ensure a reliable energy supply for the New England region at the lowest possible price.
During 1997, the power pool was restructured with changes taking effect to the menbership and governance provisions of the power pooling agreement along with the transfer of operating responsibility of the integrated transmission and generation system in New England.to ISO New England. Previously, NEPOOL dispatched generating units for operation based on the lowest op; rating costs of available generation and transmission. Under the new structure, generators will be required _to provide ISO New England with market prices at which they will sell short-term energy supply. .These prices will form the basis for .
dispatch anticipated to begin in the second quarter of 1999. As noted in the l Purchased Power Contracts section above, Boston Edison will receive all of.its power supply requirements from Select in 1999. Therefore, the change to NEPOOL's operations and pricing structure is expected to have no material-impact on Boston Edison's costs'for purchased electric energy.
Item 3. Legal Proceedings .
Industry and corporate restructuring legal proceedings The DTE order approving the Boston Edison settlement agreement and the DTE order. approving the formation of BEC as a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December 1998, the SJC dismissed the appeal of the order approving the holding company formation. 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 outstanoing 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. T.
A referendum seeking repeal of the Massachusetts electric industry restructuring legislation that was enacted in November 1997 was overwhelmingly I defeated by a better than 70% to 30% margin in a state-wide general election held on November 3, 1998. This outcome allows the comprehensive. framework established for the restructuring of the eleciric industry to continue as intended under-the enacted legislation.
Regulatory proceedings p.
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 are expected to
-be completed in the first half of 1999.
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Each of the. Reading Municipal Light Department, the Littleton Electric Light Department and the West Boylston Municipal Light Department have filed separate clains for arbitration in Massachusetts- alleging that .the proposed
~ transfer 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 clains 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
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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,.dhere lould..be.a. material
' adverse impact on business operations, the consolidated financial position or results of operations for a reporting period.
Other litigation In October 1990, the town of Plymouth, Massachusetts, the site of Pilgrim station, filed suit against Boston Edison. The town claimed that Boston
. Edison wrongfully failed to execute an agreement with the town for payments in addition to taxes due to the town under the Massachusetts electric industry trestructuring legislation. Boston Edison and the town agreed on a 15-year,
$141 million property tax package in March 1999. Payments in each of the first four years are approximately $15 million after which payments gradually decline.' All payments under this agreement will be recovered from customers through'the transition charge.
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In"the normal course of its business BEC and its subsidiaries are also involved in certain other legal' matters. ' Management is unable to fully determine a range of reasonably possible-legal costs in yxcess-of amounts accrued.: Based on the information currently available,ylt does not believe that it is probable that any such additional costs will have a material impact
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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.
Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 1998. ,
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Executive Officers of the Registrant
.The names, ages, positions and business experience during the past five years of all the executive officers of BEC Energy (Boston Edison, prior to May, 1998) as'of, March 1, 1999 are listed below. There are no family relationships between any of the officers, nor any arrangement or understanding between any
' officer and another' person pursuant to which the position as officer is held.
Officers hold office until the first meeting of the trustees following the next annual meeting of the stockholders and until their respective successors are chosen _and qualified.
Business Experience Name, Age and Position During Past Five Years Thomas J. May, 51 Chairman of the Board, President Chairman of the Board, President and Chief Executive Of ficer (since and Chief Executive Officer 1995), Chairmai of the Board and Chief Executive Officer (1994-1995), President and Chief Operating Officer (1993-1994);
Director (since 1991)
Chairman of the Board, President and Chief Executive Officer and Director, Boston Energy Technology Group, Inc.; Director, Harbor Electric Energy Company, Boston Edison Services, Inc., SecoCom, /
Inc., Northwind Boston, LLC and Coneco corp.
Douglas S. Horan, 49 Senior Vice President - Strategy Senior Vice President - Strategy and Law and General Counsel and Law and General Counsel' (since 1995), Vice President and General Counseln(1994-1995),
Deputy GeneraT Counsel (1991-1994)
Senior Vice President, General Counsel and Director, Harbor Electric Energy Company; Senior Vice President and Director, BecoCom, Inc.; Director, Boston Energy Technology Group, Inc.,
Boston Edison Services, Inc. and Coneco Corp.
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. 2 Business Experience Name, Age and Position During Past Five Years James J. Judge, 43 benior Vice President - Corporate Senior Vice President - Corporate Services and Treasurer (since Services and Treasurer 1995), Assistant Treasurer (1989-1995), Director .- corporate Planning (1993-1995)
Senior Vice President, Treasurer and Director, Harbor Electric Energy Company and Boston Energy Technology Group, Inc.; Senior Vice President and Director,
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Boston Edison Services, Inc. and BecoCom, Inc.; Director, Northwind Boston, LLC and Coneco Corp.
Robert J. Weafer, Jr., 52 Vice Preside 6t - Finance, Vice President - Finance, Controller and Chief Accounting Controller and Chief Officer (since 1991)
Accounting Officer President and Assistant Treasurer,
.Coneco Corp., Assistant Treasurer, Harbor Electric Energy Company, Boston Energy Technology Group, Inc. and Boston Edison Services, Inc.
Theodora S. Convisser, 51 Clerk of the Corporation (since Clerk of the Corporation 1986) and Assistant General Counsel (since 1984)
Clerk, Harbor Electric Energy Company, Boston Energy Technology Group, Inc.,. Boston Edison Services, Ipc;, BecoCom, Inc.,
Northwind Boston, LLC and Coneco Corp.
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Part II Item 5. - Market for the Registrant's Common Stock and Related Stockholder Matters (a) Market Information l
BEC's common stock is listed on the New York and Boston Stock Exchanges, l Thehighandlowmarketvaluepershareofcommonstockasrepdrtedinthe Wall Street Journal for each of the quarters in 1998 and 1997 was as follows.
(Prior to May 1998, the information listed refers to Boston Edison common stock.)
1998 1997 High Low High Low First quarter- $41 15/16 $35 1/16 $27 3/8 $26 Second quarter- $42 5/8 $38 7/8 $26 $/8 $24 5/8 Third quarter $44 5/16 $37 3/4 $30 7/8 $26 1/2 Fourth cuarter $44 15/16 $39 5/8 S38 3/8 $30 1/4 (b) Holders As of March 26, 1999, there were 29,234 holders of BEC common stock.
(c) Dividends Dividends declared per share of common stock for each of the quarters in 1998 and 1997 were as follows. (Prior to May 1998, the information listed refers to Boston Edison common stock.)
1998 1997 First quarter $0.470 $0.470 Second quarter $0.470 $0.470 Third quarter $0.470 $0.470 Fourth auarter $0.485 $0.470
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Item 6. Selected Financial Data The following table summarizes five years of selected consolidated financial data (in thousands, except per share data).
1998 1997 1996 1995 1994 operating.
revenues $1,622,515 $1,778,531 $1,668,856 $1,628,503 $1,544,735 Net income $ 141,046 $ 144,642 $ 141,546 $ 112,310 $ 125,022 Earnings per share of common stocks-Basic -$ 2.76 $ 2.71 $ 2.61 $ 2.08(a) $ 2.41 Diluted $ 2.75 $ 2.71 $ 2.61 $ 2. 08 (a) $ 2.41 Total- :.
assets $3,213,899 $3,622,347 $35729,291 $3;637,170 $3,608,699 Long-term debt S 955,563 $1,057,076 $1,058,644 $1,160,223 $1,136,617 Redeemable preferred stock $ 92,040 $ 163,093 $ 203,419 $ 206,514 4 208,514 Cash dividends declared per common share $ 1.895 $ 1.880 $ 1.880 $ 1.835 $ 1.775 (a) Includes $0.44 per share restructuring charge. Excluding the restructuring charge, 1995 earnings per share were J2.52.
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Item 7. Management's Discussion and Analysis Merger with COM/ Energy The utility industry has continued to change in response to the marketplace demands for improved customer service and lower prices for energy. These pressures have resulted in an increasing trend in the industry to seek competitive advantages and other benefits through business combinations. On December 5, 1998, BEC Energy (BEC) and Commonwealth Energy System (CES),
headquartered in Cambridge, Massachusetts, entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement, BEC and CES will be merged into a new holding company which has not yet been named (Newco). Holders of BEC common shares will receive one share of Newco common stock for each share held while CES common shareholders will receive 1.05 shares of Newco common stock for each share held. Alternatively, current BEC and CES common shareholders have the right to receive $44.10 of cash for each share held, up to an aggregate maximum of $300 ndllion. At the close of the merger, BEC shareholders are expected to own approximately 68% of Newco common stock and CES shareholders are expected to own approximatelp 32%. The merger is expected to occur shortly after the satisfaction of certain conditions, including the receipt of certain regulatory approvals including that of the Massachusetts Department of Telecommunications and Energy (DTE). The regulatory approval process is expected to be completed during the second half of 1999.
The merger will create an energy delivery company serving 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 Agreement may be terminated under certain circumstances, including by any party if the merger is not consummated by December 5, 1999, subject to an automatic extension of six months if the requisite regulatory approvals have not yet been obtained by such date. The merger will be accounted for using the purchase method of accounting.
Upon effectiveness of the merger, Thomas J. May, BEC's current Chairnan, President and Chief Executive Officer (CEO), will become the Chairman and CEO of Newco. Russell D. Wright, CES' currentPresidentandCfG, will become the President and Chief Operating Officer of Newco and will serve on Newco's board of trustees. Also, upon the effective date of the merger, Newco's board of trustees will consist of BEC's and CES' current trustees.
Retail Access BEC's electric utility subsidiary, Boston Edison Company (Boston Edison) has been anticipating and responding to the changes in the electric energy business as a result of industry restructuring proceedings at both federal and state levels. In January 1998, the DTE approved Boston Edison's, restructuring settlement agreement. The DTE found that the settlement agreement substantially complied or was consistent with key provisions of a Massachusetts law enacted in November 1997 establishing a comprehensive framework for the restructuring of the electric utility industry. Prior to this. settlement agreement, retail electric customers within Boston Edison's service territory received all services related to the provision of electricity from Boston Edison. This included the procurement of the electricity supply (either through purchase contracts or generation) and the transmission and distribution to customers' facilities. Major provisions of 14
the settlement agreement included the ability for retail electric customers to choose their electricity supplier (referred to as retail access) effective March 1, 1998 (the retail access date). Boston Edison will continue to provide all transmission and distribution of electricity services to all of its retail customers. Under its settlement agreement, Boston Edison provides standard offer service to all customers of record as of the retail access date. Customers continuing to buy electricity under the standard offer are receiving service at rates designed to give 10% savings from the rates in effect prior to the retail access date. These standard offer customers will realize an additional 5% average savings, after an adjustment ^for inflation, by September 1, 1999. Boston Edison expects to be able to meet this additional rate reduction as a result of the divestiture of the fossil generating assets which is discussed below. The proceeds from the divestiture are being utilized to reduce customer rates. 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 intended to reflect the average competitive market price for power. As of December 31, 1998, 87%
of customers are receiving standard offer service, while 13% are receiving default service. No customers received generation service from competitive j suppliers during 1998. Refer also to the Electric revendes section for more information.
Generating Assets Divestiture The Boston Edison restructuring settlement agreement included a provision for the divestiture of its fossil generating assets no later than six months after the retail access date. On May 15, 1998, Boston Edison conpleted the sale of its non-nuclear generating assets'to Sithe Energies, Inc. (Sithe). Boston Edison received proceeds from the sale of $655 million, including $121 million for a six-month transitional power purchase contract. The amount received above net book value on the sale of these assets 11rbeiTig~ returned to Boston i Edison's customers over the settlement period. That amount is partially offset by the costs to provide standard offer service incurred by Boston Edison's fossil generating assets prior to the divestiture which are recoverable under Boston Edison's settlement agreement.
In April 1998, Boston Edison began soliciting expressions of interest for the sale of its nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim) as part of the previously announced strategy to exit the: generation business.
On November 19, 1998, Boston Edison announced that Entergy Nuclear Generating Company (Entergy), a subsidiary of New Orleans-based Entergy Corporation, had been selected as the winning bidder for Pilgrim. In the nation's first competitive bid process for a nuclear power plant, Entergy is expected to purchase Pilgrim in a deal valued at an estimated $121 million. In addition, under the agreement Boston Edison will fully fund and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning the Pilgrim site. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999. The purchase price includes reimbursement for costs to be expended by Boston Edison in 1999 primarily related to the refueling and maintenance outage scheduled for May 1999. Therefore, the actual proceeds could be impacted by the ultimate timing of the transaction.
As part of a benefits package offered to employees affected by the nuclear divestiture, eligible non-represented nuclear and designated nuclear support employees were offered unreduced retirement and transition benefits under a voluntary early retirement program (VERP). Sixteen employees elected to participate in the VERP. A retention benefit program was offered to all non-l 15 !
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represented nuclear and designated nuclear support employees that did not elect or were ineligible to retire under the VERP who continue to work through the sale closing date. It is anticipated that approximately 300 non-represented nuclear and designated nuclear support enployees will receive one-time retention payments under this program. Costs associated with the VERP
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and retention program are recoverable under Boston Edison's settlement agreement. At December 31, 1998, approximately $24 million in one-time benefit charges were deferred as a regulatory asset related to the nuclear divestiture. ,
For more information on the nuclear divestiture refer to the November 23, 1998 BEC.or Boston Edison Report.on Form 8-K announcing the purchase and sale agreement with Entergy.
REC Energy Boston EdisoR received final approval of its reorganization plan to form a holding company structure from the Securities and Exchange Commis; ion (SEC) in May 1998. Effective May 20, 1998, BEC was formed with Boston Edison as a wholly owned subsidiary of BEC. Effective June 25, 1998, Boston Energy Technology Group (BETG); ceased being a subsidiary of Bostod Edison and became a wholly owned subsidiary of BEC. The holding company structure clearly separates the unregulated and regulated operations of BEC and provides management with greater organizational flexibility in order to take advantage of utility and nonutility business opportunities in a more timely manner, including the merger,with CES.
Joint Ventures Unregulated activities continue to be conducted through BETG. During 1997, BETG entered into two joint venture agreements. BETG's joint venture agreement with RCN Telecom Services, Inc. (RCN) established a limited W liability company (LLC) that competes directly with local and long-distance telephone,. video and Internet access companies for telecommunications-related services. BETG owns 49% of the LLC'while RCN owns 51% and maintains day-to-day management responsibility. As part of the joint venture agreement, BETG has the option to exchange certain portions of its joint venture. interest for <
shares of RCN Corporation common stock. During 1998, BETG exercised its option to convert a portion of its interest with a cost of $11 million. B E'.*G expects to receive approximately 1.1 million RCN Corporatiqn common shares
-during the first quarter of 1999. As a result of this conversion, BETG's ownership interest in the joint venture is reduced from 49% to 46%.
BETG also established an energy marketing venture with Williams Energy Services Company (WESCO), a subsidiary of The Willians Companies, Inc. in 1997. In August 1998, BEC and WESCO entered into an agreement to transfer 4 BETG's 50% interest in their joint venture to WESCO. This transaction did not have a material impact on BEC's consolidated financial position or results of operations.
Results of Operations e 1998 versus 1997 i
Basic and diluted earnings per common share were $2.76 and $2.75, respectively j in 1998 compared to $2.71 and $2.71 in 1997, a 1.8%' increase in basic earnings )
as described below.
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Operating revenues
. Operating < revenues decreased 8.8%.from 1997 as follows:
(in' thousands)
Retail revenues $(148,272)
Wholesale ~ revenues- .
(3,721);
,Short-term sales'and other revenues (4,023) .
Decrease in operatina revenues $(156,016)
Retail revenues were $1,375 million in'1998 compared to $1,523 'nd111on in i 1997,.a' decrease of $148 million or 10%. Retail revenues reflect the impact of the mandated 10% retail rate reduction. A 2.0% increase in retail kilowatt-hour (kWh). sales in 1998 partially offset the impact of the rate
, reduction. -Retail revenues also' reflect a decrease due to the timing effect of' fuel and purchased power cost recovery. Prior to its cessation as of March 1, 1998,.the fuel clause charge was lower than the prior. year as the 1997.
charge reflected the recovery of substantial prior year undercollections.
Fuel claus'e revenues were offset by fuel and purchased power expenses and, therefore, had no net effect on earnings.
Short-term sales and other revenues were $105 xdllion in 1998 compared to $109 million in 1997, a decrease of $4 million or-4%. -Boston Edison experience ( -
$20 million decrease in short-term power. sales revenues consistent with an ..%
reduction in'short-term kWh sales, primarily as a result of the expiration of .
.certain short-term sales contracts. The decrease has no net impact on
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-earnings as it is offset.by a corresponding decrease in fuel and purchased
-power' expenses. Additional decreases include a $2 million decrease from Boston: Edison's Harbor Electric Energy Company subsidiary and a $2 ndllion decrease?from BETG, These decreases were partially offset by the recognition
'of $20 million of revenue related to the support of standard offer service provided by Boston Edison's fossil generating units prior-to-divestiture.
Qperating expenses l
Fuel and purchased power expense was $568 million in 1998 compared to $679 million in 1997, a decrease of $111 ndllion or 16%. Fuel expense related to j
. fossil generation units decreased approximately $161 million. .This decrease reflects the divestiture of those units in May 1998. Purchased power expense
. increased approximately. $94 sdllion,: an increase of 26%.TvThis increase
' reflects Boston Edison's purchased power requirements in the absence of its l fossil generating units. -Prior to the retail access date, the fuel and 1 purchased power clause component of its electric rates allowed Boston Edison to adjust its rates to fully collect fuel and purchased power costs. Since theiretail access date,: Boston Edison:similarly adjusts its electric rates to fully collect the cost'of providing standard offer and default service. Fuel and purchased power expense reflects a reduction of approximately $7 million related togthese mechanisms.3n 1998. -In 1997, fuel and purchased power expense reflects- an increase of approximately $37 million related to these ,
mechanisms. ! Due to the rate adjustment mechanisms, this net reduction in )
operating l expenses of $44 million had no. net impact on earnings.
. operations and maintenance expense was $386 million in 1998-compared to $423 sm1111on in'1997, a. decrease of $37 million or 9%. .The most significant driver of this decrease was a $28 million decrease in power production expenses primarily due to the fossil divestiture in May 1998. Employee benefit expenses decreased by approximately $24 million due to lower pension and other postratirement benefit costs. These favorable impacts were partially offset by:a $4 million increase in general and administrative expenses primarily due 1
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to spending related to electric industry restructuring and the year 2000 computer issue and a $7 million increase in expenses related to parent company costs and unregulated ventures.
Depreciation and amortization expense was $192 ndllion in 1998 compared to
$189 million in 1997, an increase of $3 million or 1%. Depreciation en distribution utility plant increased approximately $10 ndllion, as Boston Edison was required to increase this depreciation under the terms of its settlement agreement. This increase was partially of fset by an, $8.7 ndllion nonrecurring charge recorded in 1997 to reflect the removal of specific nuclear-related intangible assets from the balance sheet. These intangible assets related to costs incurred for plant design and safety studies. These studies were superceded by updated studies.
Demand side management (DSM) and renewable energy programs expense was $52 million in 1998 compared to $30 ndllion. in 1997, an increase of $22 million or 74%. This increase reflects an increase in the required spending for DSM prograns in 1998. In addition, the renewable energy programs expense of $8 million in 1998 is the result of a new state mandate for the funding of renewable energy that became effective March 1, 1998. Reneyable energy l expenses are collected through a separate rate mechanism and, therefore, have no net effect on earnings.
Property and other taxes were $84 ndllion in 1998 compared to $106 ndllion in 1997, a decrease of $22 ndllion or 21%. The decrease is due to a decrease in municipal property taxes resulting from the fossil divestiture.
Operating income taxes were $98 million in 1998 compared to $94 ndllion in 1997, an increase of $4 million or 4%. The increase in operating income taxes is primarily the result of a $4 million reduction in investment tax credit amortization due to the divestiture of the fossil generating assets and non-deductible expenses incurred at BETG. Refer to Note C to the Consolidated 1 Financial Statements for more information on income taxes.
Other income (expense), net '
other expense, net of tax was $11.8 ndllion in 1998 compared to $6.4 million <
in 1997, an increase of $5.4 million or 85%. Prior to the consideration of tax benefits, other expenses were $35.9 million in 1998 compared to $17.7 million in 1997, an increase of $18.2 million. BETG's equi'ty losses in the RCN and EnergyVision joint ventures were $19.7 ndllion in 3998 compared to
$9.2 million in 1997. The $10.5 million increase is primarily due to RCN which began operations in the second quarter of 1997. 1998 also reflects
$23.2 million of costs related to the fossil divestiture that is offset by the recognition of investment tax credits disclosed below, $3.5 ndllion related to discontinued operations of BETG's subsidiary, Coneco and $2.6 million of costs associated with the referendum that sought to repeal the Massachusetts electric industry restructuring law. These negative amounts are offset in 1998 by $7.6 million of interest income due to levels of cash on hand as a result of the proceeds from the fossil divestiture. In addition to the other items mentioned, 1997 results reflect a charge of $12.9 ndllion from the nuclear asset impairment which is discussed further in Note B to the Consolidated Financ'.al Statements. Offsetting the negative impacts in 1997 was $5.0 million e'
- t-rest income received related to the favorable outcome of an IRS audit. .5 iscellaneous income was $5.5 million in 1998 and other miscellani . + r se was $0.6 million in 1997. Income tax benefits related to other en, , were $24.1 million in 1998 and $11.3 million in 1997. The 1998 it sx benefit includes $10.9 million related to the 18 1
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recognition of previously deferred investment' tax credits associated with the fossil generating stations.
Interest charges JI'nterest charges on long-term debt were $83 million in 1998 compared to $92 million in 1997, a decrease of $9 ndllion or 10%. . The decrease reflects $6 million due to the maturing of $100 ndllion of 5.95% debentures in March 1998 and the cessation of amortization of the associated redemption premiuna and $2
-million due'to the redemption of-a $100 million 6.662% bank lban in June 1998.
Short-term interest charges were $9 ndllion in 1998 compared to $15 ndllion in 1997, a decrease of $6 million or 40%. Approximately $7 million of the decrease is due to the redemption of Boston Edison's outstanding short-term debt with proceeds from the fossil divestiture. This was partially offset by
$1 million in interest charges from BEC's line of credit entered into in 1998.
Preferred stock dividends l Preferred stock dividends were $9 million in.1998 compare.d to.$13 million in-1997, a decrease of $4 million or 33%. Preferred stock dividends decreased $1 million as a result of Boston Edison's redemption of 40,000 shares of 7.27%
. series cumulative preferred stock in May 1998 and 1997 and the remaining 320,000 shares in July 1998. An additional $3 million decrease was due to the redemption of 400,000 shares of 7.75% series cumulative preferred stock in July 1998 and 400,000 shares of 8.25% series in June 1997. Refer to Note G to the Consolidated Financial Statements.
1997 versus 1996 Basic and diluted earnings per connon share were $2.71 in 1997 compared to
$2.61 in 1996, a ' 3.8% increase as described below.
Operating revenues
' Operating revenues increased 6.6% over 1996 as follows: i (in thousands) I
[
R2ta11 revenues $ 88,484
-Wholesale revenues (765)_I- )
Short-term sales and other revenues 21,956 - j Increase in operatina revenues 4109.675 1 Retail revenues were $1,523 udllion in 1997 compared to $1,435 ndllion in -
. 1996, an increase of $88 ndllion or. 6%. Retail base revenues, consistent with the 0.8% increase in kWh sales in 1997, were $923 million compared to $920 million in 1996. Increases due to warmer than normal temperatures in June and July, cooler temperatures in October and December and the~ stronger local economy were offset by milder than normal' winter conditions during the first quarter of-1997 and-lower industrial sales. Industrial sales continued to be i adversely affected by the decline in manufacturing activity in'the Boston l Edison service territory. In addition, revenues in 1996 reflect one more day )
of sales due to the leap year. The. increase in retail electric revenues is primarily due to the timing effect.of fuel and purchased power cost recovery.
=An $88 million increase in fuel and purchased power clause revenues reflects i
, the recovery of substantial prior year undercollections. These higher F
revenues are offset'by higher' fuel and purchased power expenses and, therefore, have no net effect on earnings. Pilgrim performance revenues,
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which varied annually based on the operating performance of Pilgrim Station 19
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prior to the retail access date, decreased $4 million primarily due to a lower annual capacity factor ef fective Noventer 1996 reflecting the scheduled refueling and maintenance outage in the first quarter of 1997.
Short-term sales and other revenues were $109 million in 1997 compared to $87 ndllion in 1996, an increase of $22 ndllion or 25%. Short-term sales revenues increased approximately $16 million. This was due to the continued reduction in available nuclear energy supply in New England combined with a 42% increase in fossil generation allowing for increased sales to the power. exchange.
Revenues from these short-term sales resulted in a corresponding reduction to future fuel and purchased power billings to retail customers and, therefore, had no net effect on earnings.
Operating expenses Fuel and purchased power expense was $679 million in 1997 compared to $589 ndllion in 1996, an increase of $90 ndllion or 15%. This increase reflects
$57 million related to the timing effect of fuel and purchased power cost recovery. In addition, company fuel expense increased $50 million primarily due to the increase in fossil generation. These increases.were partially offset by a $22 million decrease in power exchange purchases. These fuel and purchased power expenses are substantially recoverable through fuel and purchased power revenues.
Operations and maintenance expense was $423 million in both 1997 and 1996.
The $6 million incremental impact associated with service restoration efforts resulting from the severe snow storm in April 1997 that struck the greater Boston area offset the impact of lower spending from cost control efforts and significantly less overhaul activity at the fossil generating units.
Depreciation and amortization expense was $189 million in 1997 compared to
$186 million in 1996, an increase of $3 ndllion or 2%. An'$8.7 million nonrecurring charge was recorded to depreciation expense in the third quarter of 1997 to reflect the removal of specific nuclear-related intangible assets from the balance sheet. These intangible assets related to costs incurred for plant design and safety studies. These studies were superceded by updated studies. In 1996 a $5.2 ndllion adjustment was recorded to correct the 4 accumulated depreciation balance of certain large computer equipment.
Operating income taxes were $94 ndllion in 1997 compared t6 488 ndllion in 1996, an increase of $6 ndllion or 6%. Income taxes incre'ised as a result of higher net income offset by the impact of the favorable outcome of an Internal Revenue Service (IRS) appeal received in the third quarter related to investment tax credits (ITC). This also resulted in an increase in unamortized ITC which is being reflected as a reduction to income tax expense over the life of the related assets. Refer to Note C to the Consolidated Financial Statements for more information on income taxes.
Other income (expense) , net other expense, net was $6 million in 1997 compared to income of $4 million in 1996, a net increase in expense of $10 million. 1997 reflects the charge of approximately $13 million ($8 million after tax) from the nuclear asset impairment which is further discussed in Note B to the Consolidated Financial Statements in addition to BETG equity losses of $9 million ($6 million after
{ tax). These decreases were partially offset by approximately $5 million ($3 million after tax) in interest income from the IRS appeal.
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4 Interest charges Interest charges on long-term debt were $92 million in 1997 compared to $95 ndllion in 1996, a decrease of $3 ndllion or 2%. The decrease reflects $6 l million due to the maturing of $100 million of 5.70% debentures in March 1997 )
and the cessation of amortization of the associated redemption premiums. This was partially offset by a $5 million increase due to the March 1997 issuance l j
of a $100 udllion 6.662% bank loan due in 1999. The decrease also reflects $2 million from the maturity of $100 ndllion of 5 1/8% debentures in March 1996.
Allowance for borrowed funds used during construction (AFUDC), which represents the financing costs of construction, was $1 million in 1997 compared to $2 ndllion in 1996, a decrease of $1 million or 48%. AFUDC I decreased primarily due to a lower average construction work in progress ,
(CWIP) balance in 1997. The 1996 average CWIP balance included nuclear fuel purchased in anticipation of Pilgrim Station's scheduled refueling outage in '
the first quarter of 1997.
Preferred stock dividends Preferred stock dividendt. were $13 million in 1997 compared.to $15 million in 1996, a decrease of $2 million or 14%. The decrease in preferred stock dividends is the result of the redemption of 20,000 of mandatory and 20,000 of optional shares of 7.27% series cumulative preferred stock in May 1997 and 400,000 shares of 8.25% series in June 1997. Refer to Note G to the Consolidated Financial Statements.
Electric Sales and Revenues Electric sales Total kWh sales increased 2.3%. The 2.0% increase in 1998 retail kWh sales was primarily due to the positive impact of a continued strong local economy on commercial customers. The commercial sector represents approximately 50%
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of electric operating revenues. The Boston area commercial office vacancy rate is at a 17-year low. In addition, the Massachusetts employment rate increased 2.8% over 1997. These positive impacts asseeinted with the economic conditions along with warmer than normal summer weather were partially offset by the mild winter weather conditions in the first quarter of 1998. Wholesale sales increased primarily due to a 32% increase in salep-to Pilgrim contract customers. That increase reflects a 97% capacity factor-in 1998, the plant's highest annual performance ever achieved. The lower level of sales in 1997 reflected that year's refueling outage. Short-term sales decreased due to lower sales to other contract customers.
I Retail kWh sales increased 0.8% in 1997. This was primarily ettributable to the commercial sector. The commercial increase reflects the impact of a continued strong economy in the Boston area and very warm temperatures in June and July and cooler than nornal temperatures in the fourth quarter. Hotel occupancy rates and non-manufacturing employment continued to, increase in '
1997. Residential revenues were also positively impacted by the weather.
These positive impacts were offset by milder winter weather in the first quarter of 1997 and declines in manufacturing employment affecting the l t
industrial sector. In addition, revenues in 1996 reflect one more day of sales due to the leap year. Total kWh sales increased 3.1% as a result of the continued reduction in available nuclear energy supply in New England. This reduction, combined with an increase in fossil generation allowed for increased sales to the power exchange.
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Electric revenues ,
LBoston Edison's. electric delivery business prevides standard offer customers service at rates designed to give'10% savings from the rates in effect prior
.to the retail access.date. :As part of the Mr.ssachusetts restructuring
. legislation enacted'in November 1997, these customers will realize an additional-5% average (savings, after an adjuutment for inflation, by September: 1,.1999.. Boston Edison expects,to meet this additional rate reduction as a: result-of the proceeds received from the divestiture of the
-fossil; generating assets. All Boston Edison distribution custosers 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 certain costs zfrom' customers which would.not be collected in the competitive energy supply
. market...Such: costs include the above market' costs related to purchased power contracts'and its own generating stations, as well as the cost to decommission Pilgrim' Station. The plant and regulatory asset balances which will be i recovered through the transition charge until 2009 were approved by the DTE. I The'other costs will be reviewed by the DTE on an annual basis. Under the
-settlement agreement, the aggregate amount of the transition charge is reduced by the net proceeds from fossil divestiture. The cost of providing standard
,. offer service, which includes fuel and purchased power costs, is recovered
! from' customers on a fully reconciling basis. The price of default service is
. intended to reflect the average competitive uarket price for power.
As part of the 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. Boston Edison's long-term power sales contrac 3 with the utilities, commonwealth Electric Company and
'Montaup Electric Company, will be terminated upon the closing of the sale of Pilgrim Station to Entergy. . Boston Edison's contracts with the various municipalities remain in place. However, upon the Pil S im sale closing date, Boston Edison will purchase power for' resale to the municipalities under a purchase power agreement entered into with Entergy. 'Through the sale closing date, Boston Edison will share 25% of any profit or loss from the sale of Pilgrim's output with' distribution customers through the transition charge. >
In addition, Boston Edison will obtain transition payh.ents up to a maximum of
'$23 million'per year depending on the level of costs incurred for such items as property taxes,' insurance, . regulatory fees and security lequirements.
Under its settlement agreement,. Boston Edison's distribution rates will remain unchanged through December 31, 2000, subject to a minimum and maximum return on average common equity (ROE). The ROE is subject to a floor of 6%.and a ceiling of 11.75%. . If the ROE is below 6%, Boston Edison is authorized to add
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a surcharge to distribution rates in order to achieve the 6% floor. If the ROE is above 11%, it is required to adjust distribution rates by an amount necessary to reduce the calculated ROE between 11% and 12.5%'by 50%, and a
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return above 12.5% by 100%. No adjustment is made if the ROE is between 6%
and 11%.- The cost of providing transmission service to distribution customers is. recovered on'a fully reconciling basis.
Boston Edison filed proposed adjustments to its standard offer and transition charges with the DTE in November 1998. The DTE approved these proposcd adjustments to be effective January 1, = 1999. The DTE is continuing to examine Boston Edison's cost recovery mechanisms. The rates provide an approximate 124; reduction'from inflation-adjusted pre-retail access date rates.
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Liquidity Cash requirements for utility plant expenditures have been met in recent years with internally generated funds. These funds are cash flows from operating activities, adjusted to exclude changes in working capital and the payment of dividends. During 1998, 1997 and 1996 internal generation of cash provided 97%, 211% and 177%, respectively of plant expenditures. The capital spending level, excluding nuclear fuel, forecasted for 1999 is $233 million which includes amounts for utility plant and the capital requirements of the nonutility ventures. This spending level also includes the 1999 portion of business system replacements discussed below. The capital spending level over the next five years is forecasted to be approximately $960 ndllion. In addition to capital expenditures, debt and preferred stock payment requirements are $1.6 million in 1999, $166.6 million in 2000, $51.6 ndllion in 2001, $1.6 million in 2002 and $151.65 million in 2003.
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 Conadssion (FERC) 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 the revolving credit agreement as of December 31, 1998.
In December 1998, Boston Edison filed a securitization financing plan with the DTE. Under the plan, a special purpose entity (SPE) will be formed as a wholly owned subsidiary of Boston Edison. The SPE will pay Boston Edison an amount equal to the generation-related regulatory assets to be securitized by issuing debt securities. A portion of the net proceeds will be used to fund the nuclear decommissioning trust. In addition, Boston Edison may also utilize a portion of the proceeds to reduce capitalization and for general i corporate purposes. Boston Edison will remit amounts to the SPE as these ,
amounts are collected from customers through a separate component of the transition charge over the settlement period. A DTE order regarding the securitization plan is expected by the second quarter of 1999.
t BEC established a $225 ndllion revolving credit agreement with a group of banks effective through July 2001. The purpose of the credit agreement is to provide financing to the holding company for general cor~porate purposes, invest in its subsidiaries and fund the common share repurchase program discussed below. Approximately $78 ndllion was outstanding under this agreement as of December 31, 1998.
Refer to Note H to the Consolidated Financial Statements for more information regarding these debt agreements.
In April 1998, Boston Edison announced a common share repurchase program under which it would repurchase up to four ndllion of its common shares. BEC has assumed this program since the reorganization to a holding company structure.
Through December 31, 1998, approximately 1.3 ndllion shares have been repurchased at a total cost of approximately $53 million. Under this program, shares are repurchased through open market, block or privately-negotiated transactions, or a combination. The timing and actual number of shares repurchased will be impacted by market conditions.
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j Year 2000 Computer Issue j 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 recognire 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 has inventoried and assessed all date-sensitive information and transaction processing computer systems and has determined that approximately one-third of
' business, critical systems software need 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 70% 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 require modification or replacement. Under the year 2000 plan, each non-critical system has a form of readiness acceptance conmensurate with its business inportance. -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. 4 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 i third quarter of 1999.
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)i BEC has also inventoried its non-information technology sy3tems 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) l telecommunications, (2) distribution system controls and (3) other :
distribution equipment. BEC is 55%, 30% and 80% 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 . I resolution and testing by the end of the second quarter of 1999.
Costs incurred to remediate non-compliant systens are expensed as incurred.
-In addition, a decision has been made to use this opportunity to upgrade some of BEC's inefficient centralized business systems. Systens' replacement costs will be capitalized and amortized over future periods. BEC expects the modification and testing of its information and transaction processing systems i to cost $32 udllion. BEC has expended $19 million on this project through {
December 31, 1998. BEC has funded and plans on continuing to fund all costs l related to year 2000 with internally generated cash flows.
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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 I 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 I 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 l condition. However, it recognizes that failing to resolve year 2000 issues on a timely basis would, in a nest 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 i coupled with third party or infrastructure failures. Similarly, BEC could be I 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. j 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 25
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 2003 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. -
Other Matters Environmental Boston Edison is an owner or operator of approximately 20 properties where oil or hazardous materials were spilled or released. Boston Edison also continues to face 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. Refer to Note K.4. to the consolidated- Financial Statements for more information regarding hazardous waste issues.
Uncertainties continue to exist with respect to the disposal of both spent nuclear fuel and low-level radioactive waste resulting from the operation of nuclear generating facilities. The United States Department of Energy (DOE) is responsible for the ultimate disposal of spent nuclear fuel. However, uncertainties regarding the DOE's schedule of acceptance of spent fuel for disposal continue to exist. Under the purchase and sale agreement with ,
Entergy, Entergy will assume full liability and responsibility for decommissioning and waste disposal at Pilgrim Station. Refer to Note D to the l' consolidated Financial Statements for further discussion regarding nuclear decommissioning and. waste disposal.
Public concern continues regarding electromagnetic fields ( EMF) associated with electric transmission and distribution facilities and appliances and wiring in buildings and homes. Such concerns have included the possibility of <
adverse health ef fects caused by EMF as well as perceived effects on property values. Some scientific reviews conducted to date have suggested associations between EMF and potential health effects, while other studiis have not substantiated such associations. The National Research Council previously reported that there is no conclusive evidence that exposure to EMF from power ,
lines and appliances presents a health hazard. The panel of scientists, working with the National Academy of Sciences, report that more than 500 studies over the last several years have produced no proof that EMF causes leukemia or other cancers or harms human health in other ways. Boston Edison continues to support research into the subject and participates in the funding of industry-sponsored studies. It is aware that public concern regarding EMF in some cases has resulted in litigation, in opposition to existing or l proposed facilities in proceedings before regulators or in requests for legislation or regulatory standards concerning EMF levels. It hhs addressed issues relative to EMF in various legal and regulatory proceedings and in discussions with customers and other cencerned persons; however, to date it has not been significantly affected by these developments. Boston Edison continues to monitor all aspects of the EMF issue.
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Industry and corporate restructuring legal proceedings '
The DTE order approving the Boston Edison settlement agreement and the DTE order approving the formation of BEC as a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December 1998, the SJC dismissed the appeal of the order approving the holding company formation. 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 j position or results of operations for a reporting period. i 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 ef'1990 and are expected to <
be completed in the first half of 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 transfer 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 clains 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 terminatdd, Boston Edison would
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continue to be obligated to purchase power from Entergy that it intended to resell to the municipal light departments.. Bestan .JLitson may not.be able to j resell such power in the short-term-power exchange at a price equal to or ___
greaterfthan 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 finan'cial position or results of operations for a reporting period.
Other litigation In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim Station, filed suit against Boston Edison. The town claims that Boston Edison has wrongfully failed to execute an agreement with the town for payments in addition'to taxes due to the town under the Massachusetts electric industry l
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restructuring-legislation. : Boston Edison has disputed the town's ' claim and
,lwill vigorously; defend itself. In' addition to this pending litigation, Boston
. -Edison and the; town:of Plymouth'are also' parties in proceedings before the
_ Appellate Tax Board and the DTE concerning substantially the same dispute.
-Management'istune.ble to' determine the ultimate outcome of these proceedings however,;if an unfavorable outcome were to occur, there could be a material l adverse. impact on.businees operations, the consolidated financial position or
.results of operations.for a reporting period.
In.the normal course of its business BEC and its subsidiaries are 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 Lthat additional' legal costs that may result from a change in estimates could
.have a'materialfimpact on the-results of.a reporting period in the near' term.
Refer'to Note K.6. to the Consolidated Financial Statements ifor more information on legal matters.
Interest-rate' risk
'BEC is exposed to changes in interest rates. Carrying amounts and fair values of mandatory redeemable cumulative preferred stock, sewage facility revenue
. bonds ~and unsecured debt as of December 31, 1998, are as follows:
Carrying' Fair Weighted average
. (in thousands)' amount value interest rate Mandatory redeemable cumulative preferred stock .
$49,040 $54,190 8.00%
Sewage facility revenue bonds- $30,900 $33,914 7.32%
Unsecured debt $930,000 $994,294 7.79%
Safe harbor cautionary statement BEC occasionally makes forward-looking statements such as f.orecasts and projections of expected future performance or statements of-its plans and objectives. .These forward-looking statements may be contained in filings with the'SEC, press-releases.and oral statements. Actual results could potentially Ldiffer materially from these statements. Therefore,'no assurances can be
.given that.the outcomes stated in such forwaid-looking statements and estimatt swill be-achieved.
The preceding sections include certain forward-looking statements about the merger _with CES, the divestiture of nuclear generating assets, operating
'results, year.2000 and environmental and legal issues.
The merger with CES could differ from current expectations. Thi$'could occur if the: requisite' approvals are delayed or not obtained.
The nuclear divestiture plan could differ from current expectations. The timing land a : final closing 'of the sale may differ from management's expectations if required approvals are delayed or not obtained.
- The' impacts of continued cost. control procedures on operating results could differ from current expectations. The effects of changes in economic
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conditions, tax rates, interest rates, technology and the prices and availability of operating supplies could materially affect the projected operating results.
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, BEC cannot predict the nature or impact on operations of third party noncompliance.
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 the estimated cleanup liabilities. The impacts of changes in available information and circumstances regarding legal issues could affect the estimated litigation costs.
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Item 8. Fintncisi Statements and Supplementary Financial Information ,' '
Consolidated Statements of Income years ended December 31, (in thousands, except earnings per share) 1998 1997 1996 Operating revenues $1,622,515 $1,778,531 $1,668,856 Operating expenses:
Fuel and purchased power 567,806 679,131 588,893 Operations and maintenance 386,340 423,040 422,642 Depreciation and amortization 191,701 189,489 186,117 Demand side management and renewable energy programs 51,839 29,790L 30,825 Taxes-property and other 84,091 106,428 107,086 Income taxes 97,798 93,709 88,313 Total operating expenses 1,379,575 1,521,587 1,423,876 Operating income 242,940 256,944 244,980 Other income (expense), net (11,811) (6,392) 3,741 Operating and other income 231,129 250,552 248,721 Interest charges: ,
Long-term debt 82,951 92,489 94,823 Other 8,800 14,610 14,644 Allowance for borrowed funds used during construction (1,668) (1,189) (2,292)
Total interest charges 90,083 105,910 107,175 Net income 141,046 144,642 141,546 '
Preferred dividends of subsidiary 8,765 13,149 15,365 Earnings available for common shareholders S 132,281 $ 131,493 $ -126,161 i Weighted average common shares outstanding:
Basic 47,973 48,515 48,265 Diluted 48,149 48,562 48,265 Earningt per common share:
Basic $2.76 $2.71 $2.61 Diluted $2.75 $2.71 $2.61 Consolidated Statements of Retained Earnings years ended December 31, (in thousands) 1998 1997 1996 Balance at the beginning of the year $ 328,802 $ 292,191 $ 257,749 Net income 141,046 144,642 141,546 Subtotal 469,848 436,833 399,295 Dividends declared:
Preferred stock 8,765 13,149 ' 15,365 Common stock 90,610 91,208 90,834 Subtotal 99,375 104,357 106,199 Provision for preferred stock redemption and issuance costs (a) 7,833 3,674 905 Common share repurchase program 2,131 0 0 Balance at the end of the year S 360,509 $ 328,802 S 292,191 (a) Refer to Note A.7. to the Consolidated Financial Statements.
The accompanying notes are an integral part of the consolidated financial statements.
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Consolidated Balance Sheets December 31, (in thousands) 1998 1997 Assets Utility plant in service, at original cost $2,720,681 $4,457,831 Less: accumulated depreciation 926,020 $1,794,661 1,713,067 $2,744,764 Generation-related regulatory asset, net 366,336 0
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Nuclear fuel, net 68,706 67,935 Construction work in progress 40,965 33,291 Net utility plant 2,270,668 2,845,990 Nonutility property 21,565 8,137 Nuclear decommissioning trust 172,908 151,634 Equity investments- 84,770 35,455 Other investments- 30,206 7,107 Current assets:
Cash and_ cash equivalents 98,989 4,140 Accounts receivable 202,275 207,093 Accrued unbilled revenues 14,322 30,048 Fuel, materials and supplies, -
at average cost 15,474 60,834 Prepaids and other 102,448 433,508 31,283 333,398 Deferred debits:
Regulatory-assets 167,642 195,370 Other 32,632 45,256 Total assets $3,213,899 $3,622,347 Capitalization and Liabilities Common equity $1,051,898 $1,073,454 Cumulative preferred stock of subsidiary 92,040 161,093 Long-term debt 955,563 1,057,076 Current liabilities:
Long-term debt / preferred stock due within one year $ 667 $ 102,667 Notes payable 78,000 137,013 i Accounts payable 110,194 87,015 !
Accrued interest 20,516_ ~
24,289 Dividends payable 23,878 , -b 24,748 other 183,664 416,919- 128,061 503,793 Deferred credits:
Accumulated deferred income taxes 348,557 485,738 Accumulated deferred investment tax credits 45,930 60,736
' Nuclear decomadssioning liability 176,578 155,182 .
Power contracts 58,415 71,445 other 67,999 53,830 Commitments and contingencies Total capitalization and liabilities $3,213,899 $3,622,347 The accompanying notes are an integral part of the consolidated financial statements.
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Consolidated Statements of Cash Flows years ended December 31, (in thousands) 1998 1997 1996 Operating activities:
Net income $141,046 $144,642 $141,546 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 229,668 223,529 228,259 Deferred income taxes and investment tax credits (152,798) (217664) (4,057)
Allowance for borrowed funds used during construction (1,668) (1,189) (2,292)
Net changes in:
Accounts receivable and accrued unbilled revenues 20,544 45,678 (11,719)
Fuel, materials and supplies 29,565 (5,486) (2,171)
Accounts payable 23,179 (47,068) 609 Other current assets and liabilities (28,705) 25,428 (44,514)
Other, net 14,021 (4,640) 50,815 Net cash provided by operating activities 274,852 .359,230 356,476 Investing activities:
Plant expenditures (excluding AFUDC) (120,202) (114,110) (145,347)
Proceeds from sale of fossil assets 533,633 0 0 Nuclear fuel expenditures (26,182) (4,089) (52,967)
Investments (81,589) (27,689) (34,314)
Net cash provided by (used in) investing activi ties 305,660 (145,888) (232,628)
Financing activities:
Issuances / (repurchases ) :
Common shares (53,285) 144 12,559 Long-term debt 0 100,000 0 Redemptions:
Preferred stock (71,519) (44,000) (4,000)
Long-term debt (201,600) (101,600) (101,600)
Net change in notes payable (59,013) (64,441) 75,013 Dividends paid (100,246) (104,956) (106,010)
Net cash used in financing activities (485,663) -(214,653) -(124,038)
Net increase (decrease) in cash and cash equivalents 94,849 _ (1,511) (190)
Cash and cash equivalents at the .-
beginning of the year 4,140 - 5,651 5,841 Cash and-cash ecuivalents at the end of the year S 98,989 $ 4,140 $ 5,651
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized S 89,720 $100,795 $100,810 ;
Income taxes $230,260 $ 99,326 $ 98,668 The accompanying notes are an integral part of the consolidated financial -
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Notes.to Consolidated Financial Statements Note A. Susanary of Significant Accounting Policies
- 1. Estuze of Qperations Boston Edison. Company (Boston Edison) received final approval of its reorganization plan to form a holding company structure from;the Securities and Exchange Commission (SEC) in ;4ay 1998. Effective May 20h 1998 the holding company,'BEC Energy-(BEC), was formed with Boston Edison as a wholly owned subsidiary of.BEC.
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Within its. newly restructured 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, Inc.
(Sithe) was. completed in May 1998. In November 1998, Boston . Edison signed an agreement with Entergy Nuclear Generating Company (Entergy) to sell its wholly owned nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim). BEC signed a merger agreement with Commonwealth Energy' System (CES) in December 1998 that will_ create an energy delivery company serving /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.
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. Electric operating revenues are approximately 90% retail and 10% wholesale. Unregulated activities continue to be conducted through Boston' Energy Technology Group (BETG). Refer to Note J to these Consolidated Financial Statements for information on BEC's -monutility operations.
. 2. Basis of Consolidation and Aaaounting Under the new 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, BETG ceased being a subsidiary bf Boston Edison and j - became a wholly owned subsidiary of BEC. The accompanying consolidated financial statements reflect the'results of operations and cash flows of Boston _ Edison prior to the_ reorganization. The consolidated. balance sheet at December 31,1 1997 reflects the financial position of Boston Edison which also included BETG. The consolidated financiel statements also include the activities of Boston Edison's wholly owned subsidiary, Harbor Electric Energy Company (HEEC). All-significant. intercompany _ transactions have been eliminated. Certain reclassifications have been made to the prior year data to" conform with_the current presentation.
Boston Edison follows: accounting policies prescribed by the Federal Energy Regulatory Commission (FERC) and the Massachusetts Department of Telecommunications and Energy (DTE). In addition, BEC and its subsidiaries are subject 1to the accounting and reporting requirements of the SEC. The consolidated financial statements conform with generally accepted accounting principles ( GAAP) '. As a rate-regulated company Boston Edison has been subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation '(SFAS 71), under GAAP. The application
-of.SFAS 71 results in differences in the timing of recognition f certain expenses'from that of other businesses and industries. As a result of the 33
O Massachusetts' electric industry' restructuring legis1,ntion enacted,in November 1997 and the DTE order regarding the related Boston Edison settlement agreement, as of December 31, 1997, the provisions of SEAS 71 are no longer
-being applied to'the generation business. The distribution business remains subject to rate-regulation and continues to meet the criteria for application <
of SEAS'71. Refer to Note B to these Consolidated Financial Statements for
.more'information on the. accounting implications of the electric utility
' industry restructuring.
The preparation ofEfinancial statements in conformity with GAAP*Tequires BEC
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and its subsidiaries to make estimates and assumptions that affect the
- reported amounts.of assets and liabilities and disclosures.of contingent Lassets and liabilities at the date of the financial statements and;the K reported amounts'of revenues and expenses during the reporting period. Actual results could differ from these< estimates.
- 3. Jtevenues . .
Estimate's of retail base (transmission 1and distribution) revenues for electricity used by customers but not yet billed are recorded at the end of each accounting period.
- 4. Utility Plant
' Utility plant is stated at original cost of construction. The costs of replacements of property units are capitalized. Maintenance and repairs and replacements of minor items are expensed as incurred. The original cost of-property retired, s.ot of salvage value, and the'related costs of removal are
' charged to accumulated depreciation.
- 5. Delpzealation and 3Raalear Dnel Amortisation Depreciation of utility plant is computed on a straight-line basis using composite rates based on the estimated useful lives of the various classes of
~ property. . Excluding the effect of the adjustment discussed below, the overall composite depreciation rates were 3.28%, 3.30% and 3.33% in 1998, 1997 and 1996, respectively.
'Upon the completion of a review.of Boston Edison's electric _ generating units, management determined that the oldest and least efficient fossil units (Mystic 4, 5 and 6) ' were unlikely to provide competitively-priced power beyond the year 2000. Therefore the estimated remaining economic lives of these units
.,. _ was revised _to.five_ years in 1996.. ,These units were sold in May 1998. Refer to Note B to these Consolidated Financial Statements.
l The cost of decommissioning Pilgrim Station is excluded from depreciation rates. Refer to Note D to these Consolidated Financial Statements for a )
discussion of nuclear decommissioning.' Tne cost of nuclear fuel is amortized
= based on'the amount of energy Pilgrim Station generates. Nuclear fuel expense also includes an amount for the estimated. costs of ultimately disposing of spent nuclear fuel and for assessments for the decontamination and decommissioning of United States Department of Energy nuclear enrichment i facilities.
~ 6. Deforzed JhacLear Outage Costs .
The incremental costs' associated with nuclear refueling and maintenance F outages are deferred when incurred and amortized over Pilgrim Station's two-year operating cycle.
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- 7. Costs Associated with Zasuance and Bedemption of Debt and Preferred Stock consistent with the recovery in electric rates, discounts, redemption premiums and related costs associated with the issuance and redemption of long-term debt and preferred stock are deferred. The costs related to long-term debt are recognized as an addition to interest expense over the life of the original or replacement debt. Beginning in 1996, consistent with an accounting order received from the FERC, costs related to preferred stock issuanc es and redemptions are reflected as a direct reduction to retained earnings upon redemption or over the average life of the repI~acement preferred stock series as applicable.
- 8. Allowance for Borrowed Funds tised During> Construction (AEDDC)
AFUDC represents the estimated costs to finance utility plant construction.
In accordance with regulatory accounting, AFUDC is included as a cost of utility plant and a reduction of current interest charges. Although AFUDC is not a current source of cash income, the costs are recovered from customers over the service life of the related plant in the form of increased revenues collected as a result of higher depreciation expense. AFUDC rates in 1998, 1997 and 1996 were 5.88%, 6.04% and 5.87%, respectively, *and represented. only the cost of short-term debt.
- 9. Cash and Cash Equivalents cash and cash equivalents are comprised of highly liquid securities with maturities of 90 days or less when purchased. BEC's banking arrangement does not require it to fund checks until they are presented for payment.
Therefore, outstanding checks are included in cash and accounts payable until presented for payment.
- 10. Allowance for Doubtful Accounts Accounts receivable are substantially recoverable. This recovery occurs both from customer payments and from the portion of customer charges that provides for the recovery of bad debt expense. Accordingly, a significant allowance for doubtful accounts balance has not been maintained.
- 11. Regulatory Assets t Regulatory assets represent costs incurred which are expscted to be collected from customers through future charges in accordance with agreements with regulators. These costs are expensed when the corresponding revenues are received in order to appropriately match revenues and expenses. The majority of these costs is currently being recovered from customers over varying time periods. Refer to Note B to these Consolidated Financial Statements for information regarding the recovery of regulatory assets related to the generation business.
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d Regulatory assets consisted of the following:
December 31, 1998 1997 Power contracts $ 58,415 $ 71,445 Income taxes, net 52,168 51,096 Redemption premiums 23,419. 27,019 Postretirement bene.%tt costs .21,592 22,441 Decontamination and decommissioning 11,351 12,282 other- 697 11,087
$167,642 $195,370 l
- 12. Earnings Per Conanon Share Basic earnings per common share (EPS) is calculated by dividing net income, after deductions for preferred dividends, by the weighted average common shares outstanding during the year. Statement of Financial Accounting Standards No. 128, Earnings per Share, requires the disclosure of diluted EPS.
Diluted EPS is similar to the computation of basic EPS except that the weighted average common shares is increased to include the_gumber of dilutive potential common shares. Diluted EPS reflects the impact on' shares outstanding of the deferred (nonvested) shares and stock options granted under I the Stock Incentive Plan.
The following table summarizes the reconciling amounts between basic and diluted EPS:
(in thousands, except per share amounts) 1998 1997 1996 Earnings availabit for common shareholders $132,281 $131,493 $126,181 Basic EPS $2.76 42.71 $2.61 Diluted EPS $2.75 $2.71 $2.61 Weighted average common shares outstanding for basic EPS 47,973 4d,515. . 40,265 Effect of dilutive shares:
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Weighted average dilutive potential common shares 176 47 -
Weighted' average common shares outstanding --
for diluted EPS 48,149 48,562 48,265
- 13. JRCE Jokat Venture BETG is a participant in a telecommunications venture with RCN Telecom Services, Inc. (ACN). As part of the joint venture agreement, BETG has the option to exchange certain portions of its joint venture interest'for shares of RCN Corporation common stock. During 1998, BETG exercised its option to convert a portion of its interest with a cost of $11 million. BETG expects to receive approximately 1.1 million RCN Corporation common shares during the first quarter of 1999, l l
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No te B . Electric Utility Industry Restructuring
- 1. Accounting Zaplications Under the traditional revenue requirements model, electric rates have been based on the cost of providing electric service. Under this model, Boston Edison has been subject to certain accounting standards that are not applicable to other businesses and industries in general. The application of SEAS 71 requires companies to defer the recognition of certain costs when ;
incurred if future rate recovery of these costs is expected. As a result of the Massachusetts electric industry restructuring legislation enacted in November 1997 and the. DTE order regarding Boston Edison's related settlement agreement, as of December 31, 1997, the provisions of SEAS 71 are no longer being applied to the generation business. Under the settlement agreement, )
approximately 75% of the net assets of Pilgrim Station are recoverable through I the non-bypassable transition charge of the utility's distribution business.
The~ distribution business continues to be subject to rate-regulation. The remaining 35% is collected under Pilgrim's wholesale power contracts. The 1998 consolidated balance sheet reflects a reclassification of the Pilgrim net assets recoverable through-the transition charge from utplity plant to regulatory asset. This Pilgrim regulatory asset, .Lacluded in the generation- t related regulatory asset on the consolidated balance sheet continues to be grouped with utility plant for financial statement presentation.
Completion of the sale of Boston Edison's fossil generating assets took place in May 1998. Boston Edison received proceeds from the sale of $655 million, including $121 million for a six-month transitional power purchase contract.
The amount received above net book value on the sale of these assets is being 3 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 deferred gain is included as a reduction to the generation-related regulatory asset on the 1998 consolidated balance sheet. In addition, Boston Edison received $19 million from Sithe for inventory and other closing adjustments.
The implementation of the Boston Edison settlement agreement-had certain accounting implications. The highlights of these include:
Generation-related plaut and other regulatory assets Plant and other regulatory assets related to-the-generation business, except for those related to Pilgrim's wholesale contracts, are recovered through the i l
transition charge. This recovery, which includes a return, will occur over a twelve-year period that began on March 1, 1998 (the retail access date).
l Depreakation i
The composite depreciation rate for distribution utility plant increased from j 2.38% to 2.98% as of the retail access date.
f.
Phel and purchased power charge The fuel and purchased power charge ceased as of the retail access date. The
. net remaining overcollection of fuel and purchased power costs will be reflected in future customer billings. These over recovered costs are included as an offset to the settlement recovery mechanisms on the 1998 consolidated balance sheet.
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Standard offer charge Customers have the option of continuit to buy power from the electric delivery business at standard offer prices as of the retail access date. The j stendard offer charge began at 2.0 cents /kWh at the retail access date, increased to 3.2 cents /kWh on June 1, 1998, to 3.69 cents /kWh on January 1, 1999 and is scheduled to increase to 5.1 cents /kWh by 2004. The cost of providing standard offer service, which includes fuel and purchased power costs, is recovered from standard offer customers on a fully reconciling )j basis. ~
Distribution and tr m mtasion charges Distribution rates are subject to a minimum and maximum return on average common equity (ROE) through December 31, 2000. The ROE is subject to a floor of 6% and a ceiling of 11.75%. If the ROE is below 6%, Boston Edison is authorized to-add a surcharge to distribution rates in order to achieve the 6%
floor. RIf the ROE is above 11%, it is required to adjust distribution rates by an amount necessary to reduce the calculated ROE between 11% and 12.5% by 50%, and a return above 12.5% by 100%. No adjustment is made if the ROE is between 6% and 11%. In addition, distribution rates will be adjusted for any changes in tax laws or accounting principles that result in a change in costs of more than $1 million. The cost of providing transmission service to distribution customers is recovered on a fully reconciling basis.
Nucient generation Under the settlement agreement, the annual perfonmance 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 Pilgrim's wholesale contracts. Through Pilgrim's sale closing date, 25% of any profit '
or loss from the sale of Pilgrim's output will be shared with distribution customers through the transition charge. In addition, Boston Edison will obtain transition payments up to a maximum of $23 million per year depending on the level of costs incurred for such items as property taxes, insurance, regulatory fees and security requirements,
- 2. Generating Assets Divestiture _
The Boston Edison restructuring settlement agreement include a provision for the divestiture of its fossil generating assets no later than six months after ,
the retail access date. In December 1997, Boston Edison entered into a purchase and sale agreement with Sithe Energies, a privately-held company headquartered in New York, to purchase these non-nuclear generating assets.
The sale of these assets was finalized on May 15, 1998.
In April 1998, Boston Edison began soliciting expressions of interest for the sale of its nuclear generating unit, Pilgrim Station as part of the previously j announced strategy to exit the generation business. On November 19, 1998,
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Boston Edison announced the selection of Entergy, a subsidiary of New Orleans- l based Entergy Corporation, as the winning bidder for the purchase of Pilgrim.
Entergy is expected to purchase Pilgrim in a deal valued at an estimated $121 4 million. In addition, under the agreement Boston Edison will fully fund and I transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning the Pilgrim site. )
A purchase and sale agreement has been signed and all required approvals are anticipated in the second ouarter of 1999. The purchase price includes reimbursement for certain costs to be expended by Boston Edison in 1999.
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E Therefore, the actual proceeds could be impacted by the ultimate timing of the transaction.
As part of a benefits package offered to employees affected by the nuclear divestiture, eligible non-represented nuclear and designated nuclear support employees were offered unreduced retirement and transition benefits under a voluntary early retirement program (VERP). Sixteen employees elected to participate in the VERP. A retention benefit program was offered to all non-represented nuclear and designated nuclear support employees.that did not elect or were ineligible to retire under the VERP who continue to work through the sale closing date. 'It is anticipated that approximately 300 non-represented nuclear and designated nuclear employees will receive one-time retention payments under this program. Costs associated with the VERP and retention program are recoverable under Boston Edison's settlement agreement.
- 3. Nuclear Asset Impairmant As part of the settlement agreement, the net investment in Pilgrim Station as of December 31, 1995 (adjusted for depreciation through 1997) is recovered through the distribution transition charge. Due to the market pressures in the industryc the ultimate recovery of investments made in Pilgrim since 1995 is not certain. Therefore, in 1997 the investment in Pilgrim was reduced by the $13 ndllion invested in the plant since January 1, 1996 as an impairment loss under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. An after tax charge of approximately $8 million due to this reduction was recorded to non-operating expense on the consolidated statement of income in 6 the fourth quarter of 1997.
Note C. Income Taxes Income taxes are accounted for in accordance with-Statement of Financial (
Accounting Standards No. 109, Accounting for Income Taxes (SEAS 109) . SEAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax' basis of assets and liabilities. In accordance with SEAS 109 net regulatory assets of $52.2 ndllion and $51.1 -m1111on and corresponding net increases in accumulated deferred income taxes were recorded as of December 31, 1998 and 1997, respectively. The regulatory assets represent the additional future revenues to be collected from customers-for deferred income taxes. "_
l Accumulated deferred income taxes consisted of the following: !
l December 31, (in thousands) 1998 1997 Deferred tax liabilities:
Plant-related $412,358 $535,460 Other 85,497 79,930 497,855 615,390 Deferred tax assets: l 11,926 Plant-related 13,174 Investment tax credits 29,622 33,125 other 106,502 84,601 149,298 129,652 Net accumulated deferred income taxes $348,557 $485,738 No valuation allowances'for deferred tax assets are deemed necessary. I 39
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Previously deferred investment tax credits are amortized over the estimated remaining lives of the property giving rise to the credits.
Components of income tax expense were as follows:
years ended December 31, (in thousands) 1998 1997 1996 Current income tax expense $239,717 $115,373 $92,370
' Deferred income tax expense (137,992) (14,104) 14 Investment tax credit amortization (3,927) (77560) (4,071)
Income taxes charged to operations 97,798 93,709 88,313 Taxes on other income (24,116) (11,254) (331)
Total income tax expense $ 73,682 $ 82,455 $87,982 The effective income tax rates reflected in the consolidated financial statements and the reasons for their differences from the statutory federal income tax rate were as follows:
1998 1997 1996 Statutory tax rate 35.0% ,.
35.0% 35.0%
State income tax, net of federal income tax benefit 5.2 4.5 4.3 Investment tax credit amortization (6.9) (3.3) (1.8)
Other 1.0 0.1 0.7 Effective tax rate 34.3% 36.3% 38.g%
The 1998 effective tax rate declined by 5.1% 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 is included in other expense, net on the 1998 consolidated statement of income.
The 1997 effective t'ax rate declined by 0.8% as a result of the favorable outcome of an In'.ctnal Revenue Service appeal related to investment tax credits.
Note D. Nuclear Decomunissioning and Nuclear Waste Disposal
- 1. Nuclear Decameissioning As a nuclear generating facility, Pilgrim Station will be isquired to be decommissioned upon the expiration of its operating license. Decommissioning means to remove nuclear facilities from service safely and reduce residual s radioactivity to a level that permits termination of the Nuclear Regulatory ;
Commission (NRC) license and release of the property for unrestricted use.
Er/timated decommissioning costs.are recorded to depreciation expense on the consolidated statements of income over Pilgrim's expected service life. These costs are recovered through charges to retail and wholesale contract customers. In November 1998, Boston Edison filed an update of Pilgrim Station's decommissioning cost study with the DTE. The updated study includes an estimate of decommissioning and fuel storage costs of approximately $600 million in 1997 dollars.
- 2. Brent Nuclear fuel The spent fuel storage facility at Pilgrim Station is expected to provide storage capacity through approximately 2003. Boston Edison has a license amendment from the NRC to modify the facility to provide sufficient room for spent nuclear fuel generated through the end of Pilgrim's operating license in 2012; however, any further modifications are subject to review by the DTE.
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. 2.
Delays in identifying a permanent storage site have continually postponed plans for the United States Department of Energy's (DOE) long-term storage and disposal for spent nuclear fuel. The DOE's current estimate for an available site is no earlier than 2010. In November 1997, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the lack of an interim storage facility does not excuse the DOE from meeting its contract obligation to begin l accepting spent nuclear fuel no later than January 31, 1998. This decision !
was in response to petitions filed by Boston Edison and other interested J parties seeking declaratory rulings concerning enforcement and remedies f4r the DOE's failure to accept spent fuel in a timely manner. The court directed the plaintiffs to pursue relief under terns of their contracts with the DOE. i Based on this ruling, the DOE may have to pay contract damages for not taking I the spent nuclear fuel as scheduled. Under the Nuclear Waste Policy Act of 1982, it is the ultimate responsibility of the DOE to permanently dispose of spent nuclear fuel. Boston Edison currently pays a fee of $1.00 per net megawatthour sold from Pilgrim Station generation under a nuclear fuel disposal contract with the DOE.
The DOE denied Boston Edison's petition to suspend payments to the Nuclear Waste Fund based on its interpretation of the U.S. Court;of Appeal's decision made in November 1997. The DOE has, however, made an offer to consider amendments to existing contracts to address the hardships the anticipated delay in accepting spent fuel may cause individual contract holders.
.1, Nuclear Divestiture As discussed in Note B to these Consolidated Financial Statements, in November 1998 Boston Edison announced the selection of Entergy as the winning bidder for the purchase of Pilgrim. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999.
Under the agreement Boston Edison will fully fund and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning and waste disposal at Pilgrim Station.
Note E. Pensions and Other Postratirement Benefits The following information is presented in accordance with Statement of Financial Accounting Standards No. 132, Employers' Discl,osures about Pensions and Other Pestretirement Benefits, effective for fiscal, years beginning after December 15, 1997.
- 1. Pensions Boston Edison has a defined benefit funded retirement plan with certain contributory features that covers substantially all employees and an unfunded supplemental retirement plan for certain management employees.
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The changes in the benefit obligation and plan assets were as fc11ows: .
December 31, (in thousands) 1998 1997 Change in benefit obligation:
Benefit obligation at the beginning of the year S 457,436 $ 409,760 Service cost 13,645 12,625 Interest cost 31,981 31,537 Plan participants' contributions 214 248 Plan amendments - 1,081 Actuarial loss 67,564 32,762 Curtailment gain (15,644) (6,916)
Special termination benefits 665 3,530 Settlement payments (16,246) -
Benefits paid (41,627) (27,191)
Benefit obligation at the end of the year S 497,988 S 457.436 Changeinpla$ assets:
Fair value of plan assets at the beginning of the year S 401,182 $ 331,299 Actual return on plan asrets 44,589 60,602 Employer contribution. 86,440 36,224 Plan participants' contributions 214 248 Settlement payments (16,246) -
Benefits paid (41,627) (27,191)
Fair value of plan assets at the end of the year S 474,552 S 401,182 The plans' funded status were as follows:
December 31, (in thousands) 1998 1997 runded status $ (23,436) 4 (56,254) 4 Unrecognized actuarial net loss 96,310 50,646 Unrecognized transition obligation 3,856 5,704 Unrecognized prior service cost 15,557 19,121 Net amount recoonized S 92,287 S 19,217 Amount recognized in the consolidated balance sheets consist of:
Prepaid retirement cost $ 98,049 $ 20,584 Accrued supplemental retirement liability N9,856) (9,763)
Intangible asset 8,094 8,396 Net amount recoanized S 92,287 $ 19,217 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the supplemental retirement plan with accumulated benefit obligations in excess of plan assets were $11,387,000, $9,856,000 and
$0, respectively, as of December 31, 1998, and $11,076,000, $9,763,000 and $0, respectively, as of December 31, 1997.
Weighted average assumptions were as follows: "- 1 1998 1997 1996 Discount rate at the end of the year 6.50% 7.25% 7.75%
Expected return on plan. assets for the year 10.00% 10.00% 10.00%
Rate of compensation increase at the end of the year 4.00% 4.25% 3.90%
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. 1 l
Components of net periodic benefit cost were as follows:
years ended December 31, (in thousands) 1998 1997 1996 Service cost S 13,645 $ 12,625 S 13,452 Interest cost 31,981 31,537 32,325 Expected return on plan assets (39,140) (31,250) (29,826)
Amortization of prior service cost 1,847 1,827 1,831 Amortization of transition obligation 860 ,934 934 Recognized actuarial loss 808 If799 3,790 Net periodic benefit cost S 10,001 S 17,472 S 22,506 As a result of the fossil and nuclear divestitures discussed in Note B to these Consolidated Financial Statements, amounts recognized for curtailment, settlement and special termination benefit costs were $2,705,000, $0 and
$665,000, respectively for 1998 and $1,300,000, $3,162,000 and $3,530,000, respectivel-y for 1997. These amounts are recoverable under Boston Edison's settlement agreement.
Boston Edison experienced a high number of employee retirements from 1994 to 1996. A large number of these retirements were as a dire'et result of the 1995 corporate restructuring. In 1997, a review of the accounting for the pension expense related to the retirements revealed that an adjustment to the pension costs related to these employees was necessary. Therefore, pension regulatory asset was increased by $8.6 million in 1997 for the adjustment related to the period covered by the 1992 Boston Edison settlement agreement. Through 1995,
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in accordance with the 1992 settlement agreement, the difference between the net pension cost of the retirement plan and its annual funding amount was deferred. .The remaining adjustment did not have a material impact on the consolidated results of operations or financial position.
Boston Edison also provides defined contribution -401(k) plans for substantially all employees. It natches a portion of employees' voluntary i contributions to the plans. Matching contributions of $8 million were made in i 1998, 1997 and 1996, respectively.
- 2. Other Postretirement Benefits In addition to pension benefits, Boston Edison also provides health care and other benefits to retired employees who meet certain ageland years of service liability requirements. These benefits are not available to management employees hired on or after January 1, 1995.
43
s.
The changes in the benefit obligation and plan assets were as follows:
December 31, (in thousands) _
1998 1997 Change in benefit obligation:
Benefit obligation at the beginning of the year S 237,616 S 230,905 Service cost 3,892 3,543 Interest cost 16,895 17,006 Plan participants' contributionc 1,178 395 Actuarial loss 27,849 4,093 curtailment gain (14,665) (5,531)
'Special termination benefits 75 450 Benefits paid = (14,080) (13,245)
Benefit ob1(gation at the end of the year $ 258,756 S 237,616
' Change in plan assets:
Fair value of plan assets at'the beginning of
.the year S 103,989 S 72,702 Actual return on plan assets 14,344 18,852 Employer contribution ., %, 3 8 7 25,285 Plan p'articipants' contributions 1,178 395 Benefits paid (14,080) (13,245)
Fair value of plan assets at the end of the year S,113,818 $ 103,989 The plan's funded status and amount recognized in the consolidated balance sheets were as'follows:
December 31, (in thousands) 1998 1997 Funded status $(144,938) S(133,627)
Unrecognized actuarial net loss 24,922 12,916 Unrecognized transition obligation 88,814 127,107 Unrecognized prior service cost (9,827) (14,128)
Net amount recoonized $ (41,029) $ (7,732)
Weighted average assumptions were as follows:
1998 1997 1996 Discount rate at the end of the year 6.50% 7.25% 7.75%
Expected return on plan assets for the year 9.00% 29 00% 9.00%
?.
For measurement purposes, a 5% annual rate of increase on the per capita cost of covered health care benefits was assumed. A 13% annual rate of increase on the per' capita cost of covered prescription drug benefits was assumed, decreasing gradually to 5% in the year 2012 and remaining level thereafter. A 4% annual rate of increase on the per capita cost of covered dental benefits was assumed.
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44
A 1% change in the assumed health care cost trend rate would have the following effects:
One-Percentage-Point Increase Decrease Effect on total of service and interest cost components for 1998 $ 3,319 $ (2,605)
Effect on December 31, 1998 postretirement benefit obligation S 34,088 $(27,270)
Components of net periodic benefit cost were as follows:
years ended December 31, (in thousands) 1998 1997 1996 Service cost $ 3,892 $ 3,543 $ 4,616 Interest cost 16,895 17,006 16,815 Expected return on plan assets (8,563) (6,421) (4,738) '
Amortization of prior service cost (942) (1,017) (1,614)
Amortization of transition obligation 8,474 9,151 9,151 Recognized actuarial loss 662 , 1,003 1,977 .
Net periodic benefit cost $ 20.418 $- 23,265 $ 26.207 .
As a result of the fossil and nuclear divestitures discussed in Note B to these Consolidated Financial Statements, amounts recognized for curtailment and special termination benefit costs were $21,187,000 and $79,000, respectively for 1996 and $7,895,000 and $456,000, respectively for 1997.
These amounts are recoverable under Boston Edison's settlement agreement.
Note F. Stock-Based Compensation In 1997, Boston Edison initiated a Stock Incentive Plan (the Plan) which was adopted by the board of directors and approved by common stockholders. The' Plan perndts a variety of stock and stock-based awards, including stock options and deferred (nonvested) stock to be granted to certain key employees.
The Plan lindts the terms of awards to ten years. Subject to adjustment for stock-splits and similar events, the aggregate number of shares of common stock that may be delivered under the Plan is 2,000,000, including shares i issued in lieu of or upon reinvestment of dividends arising from awards.
During 1998, 19,150 shares of deferred stock and 419,200 ten-year non-qualified stock options were granted under the plan. Duiing 1997, 73,820 shares of deferred stock and 298,400 ten-year non qualified stock options were granted. The weighted average grant date fair value of the deferred stock issued during 1998 and 1997 is $39.75 and $27.26, respectively. The options were granted at the full market price of the stock on the date of the grant.
Both awards vest ratably over a three-year period.
45 ,.
Compensation cost for stock-based awards is recognized under the provisions of Accounting Principals Board Opinion 25, which requires compensation cost to be I measured by the quoted stock market price at the measurement date less the {
amount, if any, an employee is required to pay. The required fair value I method disclosures are as follows:
)
(in thousands, except per share amounts) 1998 1997
. Net income Actual $141,046, $144,642 Pro forma $140,661- $144,572 Basic earnings per common share Actual $2.76 Pro forma
$2.71
$2.75 $2.71 Diluted earnings per common share.
Actual $2.75 Pro forma
$2.71
$2.74 $2.71
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Stock' option activity of the Plan was as follows:
1998 1997
- options outstanding at January 1 2734000 0 A Options granted Options. exercised 419i200 298,400 (3,800) 0 Options forfeited (21,800) (25,400)
Options outstandina at December 31 666,600 273,000 Summarized information regarding stock options outstanding at December 31, 1998:
Range of Weighted Average Remaining Weighted Average Exercise-Prices Contractual Life (Years) Exercise Price
$25.75-$26.00 8.44 425.85
$39.75-$40.50 9.30 $39.75 There were 87,200 stock options exercisable at December 31, 1998 with a weighted average exercise price of $25.85.
The stock options granted during 1998 have a weighted average grant date fair value of $4.61. The fair value was estinated using the Black-Scholes option pricing model with the following weighted average assumptichs:
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Expected life (years) 4.0 Risk-free interest rate 5.66%
Volatility 16%
Dividends 4.88%
compensation cost recognized in the consolidated statements of income for stock-based compensation awards in 1998 and 1997 was $850,000 and $275,000, respectively.
V-46 L ..
s.
Note G. Capital Stock December 31, Jdo11ars in thousands, except per share amounts) 1998 1997 common equity:
Common stock, par value $1 per share, 100,000,000 shares authorized; 47,184,073 and 48,514,973 shares issued and outstanding: $ 47,184 $ 48,515 Premium on common stock 644,205 696,137 Retained earnings 360,509 328,802 Total common eauity $1,051,898 $1,073,454 Dividends declared per share of common stock were $1.895 in 1998 and $1.88 in
! 1997 and 1996.
Cumulative... preferred stock:
Par value $100 per share, 2,890,000 shares authorized; issued and outstanding: '
Nonmandatory redeemable series: +
Current Shares Redemption ,
Series Outstanding Price / Share 4.25% 180,000 $103.625 $ 18,000 $ 18,000 4.78% 250,000 $102.800 25,000 25,000 7.75% - -
0 40,000 Total nonmandatory redeemable series i
$ 43,000 $ 83,000 Mandatory redeemable series:
Current Shares Redemption Series Outstanding Price / Share 7.27% - -
$ 0 $ 36,000 8.00% 500,000 -
50,000 50,000 )
50,000 86,000 J Less: redemption and issuance costs (960) (5,907) due within one year 0 (2,000)
Total mandatory redeemable series S 49,040 $ 78,093
- 2. Commmon stock Common stock issuances and repurchases in 1996 through 1998 were as follows:
Number Total Premium on !
(in thousands) of Shares Par Value Common Stock Balance at December 31, 1995 48,003 $48,003 $683,686 Dividend reinvestment plan 507 507 12,037 Balance at December 31, 1996 48,510 48,510 695,723 Dividend reinvestment plan 5 5 414 Balance at December 31, 1997 48,515 48,515 696,137 Common share repurchase program (1,331) (1,331) (49,823)
Stock incentive plan - - (2,109)
Balance at December 31, 1998 47,184 $47,184 S644,205
- 2. Cuman1stive Mandatory Stedeemable Preferred Etook Boston Edison redeemed the remaining 360,000 shares of 7.27% sinking fund series cumulative preferred stock during 1998. The stock was subject to a mandatory sinking fund requirement of 20,000 shares each May at par plus accrued dividends. Boston Edfion also had the noncumulative option each May i
47
to redeem additional shares, not to exceed 20,000, through the sinking fund at l
$100 per share plus accrued dividends. It redeemed, at par value, 40,000 shares in 1998, 1997 and 1996. In addition, 320,000 shares were redeemed in )
j 1998 at $101.94 per share.
J Boston Edison;is not able to redeem any part of the 500,000 shares of 8%
series cumulative preferred stock prior to December 2001. The entire series is' subject to mandatory redemption in December 2001 at $100 per share plus accrued dividends.
Note H. Indebtedness December 31, (in thousands) 1998 1997 Long-term debt:
Debentures: ~-
5.950%, due March 1998 $ 0 $ 100,000 6.800%, due February 2000 65,000 65,000 6.050%, due August 2000 100,00& 100,000 6.800%, due March 2003 150,000 150,000 7.800%, due May 2010 125,000 125,000 9 875%, due June 2020 100,000 100,000 9.375%, due August 2021 115,000 115,000 8.250%, due September 2022- 60,000 60,000 7.800%t ,due March 2023 200,000 200,000 Total debentures 915,000- 1,015,000 Less: due within one year 0 (100,000)
, Net long-term debentures 915,000 915,000 Sewage facility' revenue bonds 30,900- 32,500
.Less due within one year (6 67) (667)
_Less: funds held by trustee .(4,670) (4,757)
Net long-term sewage facility revenue bonds 25,563 27,076 Massachusetts' Industrial Finance Agency bonds:
5.750%, due February 2014 15,000 - -
-15,000 6.662% bank loan, due 1999 _0 100,000 Total lona-term debt S 955,563- $1,057,076 short-term debt:
Notes payable:
Bank loans $ 78,000 $ 94,013 Commercial paper 0 43,000 Total notes payable S 78,000 S 137,013
- 2. Laag-team Debt The.97/8%debenturesdue2020arefirstredeemableinJune200h'ata.
redemption price of 104.483%, the 9 3/8% series due 2021 are first redeemable in August 2001 at 104.612%, the 8.25% series due 2022 are first redeemable in September 2002 at 103.780% and the 7.80% series due 2023 are first redeemable in March 2003 at 103.730%. No other series are redeemable prior to maturity.
There is no sinking fund requirement for any series of debentures.
Sewage facility revenue bonds were issued by HEEC. The bonds are tax-exempt, subject to annual mandatory sinking fund redemption requirements and mature
.48
I O .
through 2015. scheduled redemptions of $1.6 ndllion were made in 1998, 1997 and 1996. The weighted average interest rate of the bonds is 7.3%. A portion of the proceeds from the bonds is in reserve with the trustee. If HEEC should have insufficient funds to pay for extraordinary expenses, Boston Edison would be required to make additional capital contributions or loans to the subsidiary up to a maximum of $1 ndllion.
The 5.75% tax-exempt unsecured bonds due 2014 are redeemable beginning in February 2004 at a redemption price of 102%. The redemption. price decreases
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to 101% in February 2005 and to par in February 2006.
The aggregate principal amounts of Boston Edison's long-term debt (including HEEC sinking fund requirements) due through 2003 are $1.6 ndllion in 1999,
$166.6 ndllion in 2000, $1.6 million in 2001 and 2002 and $151.6 ndllion in 2003.
- 2. Short-tezan Debt In 1998, BEC established a $225 million revolving credit agreement with a group of banks effective through July 2001. Under the terms of this agreement, it is required to maintain a consolidated common equity ratio of not less than 35% at all times and to maintain a ratio of consolidated earnings before interest and taxes to consolidated total interest expense of not less than 2 to 1 for each period of four consecutive fiscal quarters.
Commitment fees must be paid on the total agreement amount. Approximately $78 million was outstanding under this agreement as of December 31, 1998.
Boston Edison currently has regulatory authority to issue up to $350 million of sho'rt-term debt. Boston Edison has a $200 million revolving credit agreement with a group of banks. This agreement is intended to provide a standby source of short-term borrowings. Under the terms of this agreement Boston Edison is required to maintain a common equity ratio of not less than -
30% at all times. Commitment fees must be paid on the unused portion of the total agreement amount. It also has arrangements with several banks to provide additional short-term credit on an uncommitted and as available basis.
Information regarding consolidated BEC short-term borrowings is as follows:
(dollars in thousands) 1998 1997 1996 Maximum short-term borrowings $219,06a $316,100 $272,500 Weighted average amount outstanding $76,f49 $212,663 $208,914 Weighted average interest rates excluding commitment fees 5.85% 5.85% 5.65%
Note I. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of securities for which it is practicable to estimate the value:
Nuclear decommissioning trust: ,
The cost of $173 million approximates fair value based on quoted market prices of securities held.
Cash and cash equivalents:
The carrying amount of $99 million approximates fair value due to the short-term nature of these securities.
49 I
- f. !
l .
Mandatory redeemable cumulative preferred stock, sewage facility revenue bonds and unsecured debt:
The fair values of these securities are based upon the quoted market prices of similar issues. Carrying amounts and fair values as of December 31, 1998, are as follows:
Carrying Fair (in thousands) Amount Value Mandatory redeemable cumulative preferred stock $ 49,~040 $ 54,190 Sewage facility revenue bonds 30,900 $
Unsecured debt S 33,914
$ 930,000 $ 994,294 Note J. Segment and Related Information Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, requires the disclosure of certain financial and descriptive information by operating segments. For the purpose of providing segment information, BEC's principal operating segment, or its traditional core business, is the electric utility that provides electric energy service, primarily in the city of Boston an'd 39 surrounding cities and towns. The utility also supplies electricity at wholesale for resale'to other utilities and municipalities. The unregulated operating segment engages in certain nonutility business activities. Such activities include telecommunications, construction management and district energy primarily in the Boston area. Financial data for the operating segments are as follows (dollars in thousands):
M N-50 1
Electric Unregulated Utility Nonutility Consolidated Operations Operations Tctal 1998 Operating revenues $1,622,435 $ 80 $1,622,515 Interest charges $ 88,516 $ 1,567 $ 90,083 Depreciation and amortization $ 188,738 $ 2,963 $ 191,701 Operating income tax expense (benefit) $ 101,492 $ (3,694). S 97,798 Segment net income (loss) $ 170,374 $ (29,328)ra) $ 141,046 Equity income (loss) in investments accounted for by the equity method $ 1,725 $ (11,967) $ (10,242) (b)
Equity investments S 20,769 $ 64,001 $ 84,770 Segment assets $3,082,921 $ 130,978 $3,213,899 Expenditures for property $ 108,344 $ 11,858 $ 120,202 1997 -
Operating revenues $1,776,233 $ 2,298 $1,778,531 Interest charges $ 105,710 $ 200 $ 105,910 Depreciation and amortization S 188,687 $ 0.02
~
$ 189,489 Operating income tax expense (benefit) $ 95,021 $ (1,312) $ 93,709 Segment net income (loss) $ 153,738 $ (9,096) (a) $ 144,642 t Equity income (loss) in investments accounted for by the equity method $ 1,534 $ (5,571) $ (4,037) (b)
Equity investments $ 23,326 $ 12,129 $ 35,455 .
Segment assets $3,514,394 1 -37;963' '43,622,347 -5 Expenditures for property $ 106,659 $ 7,451 $ 114,110 1996 Operating revenues $1,666,303 $ 2,553 $1,668,856 Interest charges $ 107,082 4 93 4 107,175 Depreciation and amortization $ 185,494 $ 623 $ 186,117 Operating income tax expense (benefit) $ 88,703 $ (390) $ 88,313 Segment net income (loss) $ 144,476 $ (2,930) (a) $ 141,546 Equity income (loss) in investments accounted for by the equity method $ 1,880 $ -
$ 1,880 (b) ,
Equity investments S 23,054 $ 5,698 $ 28,752 '
Segment assets $3,719,248 $ 10,~04 3 $3,729,291 Expenditures for property $ 145,131 $ "216 $ 145,347 (a) During the latter half of 1998 BEC decided to discontinue the operations of Coneco, a wholly owned unregulated subsidiary that provided energy management services and to cease its participation in EnergyVision, an energy marketing joint venture with Williams Energy Services Company. ,
The net income (loss) from these businesses was- ($11,450,000),
($3,160,000) and $209,000 for 1998, 1997 and 1996, respectively.
(b) The net equity income (loss) from equity investments is included in other income (expense), net on the consolidated statements of income.
Note K. Comunitments and Contingencies
- 2. Contractual Comunitments At December 31, 1998, BEC and its subsidiaries had estimated contractual obligations for plant and equipment of approximately $28 million. This )
includes $13.5 ndllion for nuclear fuel fabrication. Under the Pilgrim 51 4
l purchase and sale agreement, Entergy will assume any unpaid portion of this obligation for the current refueling and maintenance outage scheduled for May 1999 upon-the sale closing date.
BEC and its subsidiaries also have leases for certain facilities and equipment.
The estimated minimum rental commitments under both transmission agreements and noncancellable leases for the years after 1998 are as follows (in thousands) 1999 $ 18,905 L 2000 18,188 2001 15,160 2002 13,710 2003 11,617 Years thereafter 94,484 Total $17Rt064 The total ofrelated subleases Suturetominimum the aboverental leasesincome to be received under noncancellable is $146,125.
-1 BEC and its subsidiaries will capitalize a portion of lease! rentals as part of plant expenditures in the future. The total expense for both lease rentals and transmission agreements was $29.6 million in 1993, $27.5 million in 1997 and $26.3 million in 1996, net of capitalized expenses of $1.6 million in 1998, $1.2 million in 1997 and $2.9 million in 1996.
Boston Edison had previously entered into various take or pay and throughput agreements, primarily to supply the New Boston fossil generating station with natural gas. As part of the fossil' divestiture agreement, Sithe Energies assumed'these obligations. The total expense under these agreements was $47.1 million in 1997 and $49.5 million in 1996.
2.- Electric company Investaments 4 Boston Edison has an approximately 11% equity investment in two companies which own and operate transmission facilities to import electricity from the Hydro-Quebec system'in Canada. As an equity participant Boston Edison is required to guarantee, in addition to its own share, the total obligations of those participants who do not meet certain credit criteria. At December 31, 1998, Boston Edison's . portion of these guarantees was $15.Zimillion.
~
Boston Edison has a 9.5% equity investment of approximately $2 million in Yankee Atomic Electric Company (Yankee Atomic). In 1992 the board of directors of Yankee Atomic decided to discontinue operations of the Yankee Atomic nuclear generating station permanently and decommission the f acility.
Yankee Atomic received approval from the FERC to continue to collect its investment and decommissioning costs through 2000, the period of the plant's operatingLlicense. The estimate of Boston Edison's . share of Yankee Atomic's investment and costs of decommissioning is approximately $8 million as of December 31, 1998. This estimate is recorded on the consolidated balance sheet as a power contract liability and an offsetting regulatory asset.
Boston Edison also has a 9.5% equity investment in Connecticut Yankee Atomic Power Company'(CYAPC) of approximately $10 ndllion. In December 1996, the board of directors of CYAPC, which owns and operates the connecticut Yankee nuclear electric generating unit (Connecticut Yankee), unanimously voted to retire the unit. The decision was based on an economic analysis of the costs of operating the unit through 2007, the period of its operating license, 52
t compared to the costs of closing the unit and incurring replacement power costs for the same period.
Boston Edison's sha re of Connecticut Yankee's remaining investment and estimated costs of decommissioning is approximately $51 million as of December 31, 1998. This estimate is recorded on the consolidated balance sheet as a power contract liability and an offsetting regulatory asset similar to Yankee Atomic.
In December 1996, CYAPC filed for rate relief at the FERC sesking to recover certain post-operating costs, including decommissioning. In August 1998, the FERC Administrative Law Judge (ALJ) released an initial decision regarding CYAPC's filing. This decision called for the disallowance of the co mon equity return on the CYAPC investment subsequent to the shutdown. The decision also stated that decommissioning collections should continue to be based on a.previously approved estimate, with an adjustment for inflation, '
until a more reliable estimate is developed. In October 1998, both CYAPC and Northeast Utilities, a 49% equity investor in CYAPC, filed briefs on exceptions to the ALJ decision. If the initial decision is upheld, CYAPC could be required to write of f a portion of its investment in the generating unit and refund a portion of the previously collected return on investment.
Management is currently unable to determine the ultimate outcome of this proceeding, however, the estimate of the effect of the ALJ's initial decision ;
does not have a material impact on its consolidated financial position or results of operations. =
.1. Nuclear Insurance The federal Price-Anderson Act currently provides $9.8 billion of financial protection for public liability claims and legal costs arising from a single nuclear-related accident. The first $200 million of nuclear liability is covered by commercial insurance. Add!+1onal nuclear liability insurance up to l
$9.6 billion is provided by a retrospective assessment of up to $88.1 million i per incident levied on each of the 109 nuclear generating units currently licensed to operate in the United States, with a maximum assessment of $10 million per reactor per accident in any year.
Boston Edison has purchased insurance from Nuclear Electric Insurance Lindted (NEIL) to cover some of the costs to purchase replacement power during a prolonged accidental outage and the cost of repair, replacement, decontamination or decommissioning of utility property result. r.; from covered incidents at Pilgrim Station. Boston Edison's maximum potentiaa total assessment for losses which occur during current policy years is $8.1 million under both the replacement power and ex; ens property damage, decontamination and decommissioning policies.
- 4. Basardous 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 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 53
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4 1
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 December 31, 1998, BEC had approximately $6 ndllion 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 j 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 p.rovisions for j cleanup costs that may result from a cha. Je in estimates could have a material
. impact on the results of a reporting period in the near term. :
{
- 5. Generating linit Perfomme Program t Boston Edison's generating unit performance program ceased March 1, 1998. l Under this program the recovery of incremental purchased power costs resulting from generating unit outages occurring through the retail access date is j i
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 shutdgwn of the Connecticut Yankee nuclear electric generating unit which is discussed in item 2. 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 disallowance costs that may result from a change in estimates could <
have a naterial impact on the results of a reporting period in the near term.
- 6. Legal Proceedings Industry and corporate restructuring legal proceedings The DTE order approving the Boston Edison settlement agreement and the DTE order approving the formation of BEC as a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December 1998, the SJC disudssed the appeal of the order approving the holding <
company formation. One settlement agreement appeal remains pending, however there has to date been no briefing, hearing or other action taken with respect to this proceeding.
J ]
In addit' ion, along with other Massachusetts investor-owned utilities, Boston Edison has been named as a defendant in a class action suit seeking to declare certaineprovisions 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 j material adverse impact on business operations, the consolidated financial l pcsition or results of operations for a reporting period. .-
A referendum seeking repeal of the Massachusetts electric industry restructuring legislation that was enacted in November 1997 was overwhelmingly defeated by a better than 70% to 30% margin in a state-wide general election held on November 3, 1998. This outcome allows the comprehensive framework established for the restructuring of the electric industry to continue as intended under the enacted legislation.
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_ _ _ _ _ - -___-___-_-___-_a
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 are expected to be completed in the first half of 1999.
Each of the Reading Municipal Light Department, the Littletoh Electric Light Department and the West Boylston Municipal Light Department have filed separate clains for arbitration in Massachusetts alleging that the proposed transfer 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-emptivi authority to consider the clains 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.
Other litigation In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim Station, filed suit against Boston Edison. The town claims that Boston Edison has wrongfully failed to execute an agreement with the town for payments in addition to taxes due to the town under the Massachusetts electric industry !
restructuring legislation. Boston Edison has disputed th~e town's claim and I
will vigorously defend itself. In addition to this pendlng litigation, Boston Edison and the town of Plymouth are also parties in proceedings before the Appellate Tax Board and the DTE concerning substantially the same dispute.
Management is unabic to determine the ultimate 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.
In the normal course of its business BEC and its subsidiaries,are 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 additicnal 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.
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j l e Note L. Long-Term Power' Contracts
- 1. Long-Tessa Contracts for the Purchase of Electrickly Boston Edison entered into a 13-month agreement effective December 1, 1998 to transfer all of the unit output entitlements from its long-term power purchase contracts to Select Energy (Select), a subsidiary of Northeast Utilities, Inc.
In return, Select will provide full. energy service requirements to Boston Edison, including NEPOOL capability responsibilities, at FERC approved tariff rates through December.31, 1999.
Information relating to the contracts as of December 31, 1998 is as follows:
proportionate share (in thousands)
Units of Debt Contract Capacity Minimum Outstanding
. Expiration Purchased Debt Through Cont. Annual Generating Unit- Date % MW Service Exp. Date Cost Canal Unit 1 2002 25.0 141 $ 1,433 -$ 4,496 $ 22,936 Mass. Bay Trans-portation Authority - 1 2005 100.0 34 - -
1,089 Ocean State Power -
Unit 1 2010 23.5 72 3,996 15,970 22,120 Ocean State Power -
Unit 2 2011 23.5 *i 2 3,420 14,370 23,111 Northeast Energy Associates (a) (a) 219 - -
116,248 L'Energia '(b) 2013 73.0 63 - -
28,220 MassPower' 2013 44.3 117 10,727 65,127 53,143 Mass. Bay Trans-portation Authority - 2 2019 100.0 34 - -
450 Total $19,576 $99,963 $267,317
.(a) Boston Edison purchases 75.5% of the energy output of.this unit under two contracts. One contract represents 135MW and expires in the year 2015. The other contract is for 84MW and expires in 2010. Energy is paid for based on a price per kWh actually received. ~ Boston Edison does not pay a proportionate share of the unit's capital and fixed operating Costs.
(b) Boston Edison pays for this energy based on a price per kWh actually received. An agreement has been made with L'Energia to terminate this contract. _FERC approval of this agreement is pending.
c.
56 o
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Boston Edison's total fixed and variable costs associated with these contracts in 1998, 1997 and 1996 were approximately $267 million, $288 million and $281 million, respectively. Boston Edison's minimum fixed payments under these contracts for the years after 1998 are as follows:
(in thousands) 1999 $ 86,072 2000 88,291 2001 88,662 2002 91,431 -
2003- 81,927 Years thereafter- 856,790 Total $1,293,173 Total present value S 743,716
- 2. Long-E'ezan Power Sales Contracts In addition to other wholesale power sales, Boston Edison sells a percentage of PilgrimL Station's output to other utilities and municipalities under long-term contracts. Information relating to these contracts;As as follows:
Contract Expiration Units of Capacity Sold Contract Custon.er (a) Date % MW commonwealth Electric Company 2012 11.0 73.7 Hontaup Electric Company 2012 11.0 73.7 Various municipalities 2000 (b) 3.7 25.0 Total 25.7 172.4 (a) Under these contracts, the utilities and municipalities pay their proportionate share of the costs of opor= ring Elleri= . Station and associated transmission facilities. These coats include operation and maintenance expense, insurance, local taxes, depreciation, decommissioning and a return on investment. The long-term power sales contracts with Commonwealth Electric Company and Montaup Electric Company will be terminated upon the closing of the sale of Pilgrim Station to Entergy. The contracts with the municipalities remain in place whereby Boston Edison will purchase power for resale to the municipalities under a purchase power agreement entered into with Entergy.
-(b) Subject to certain adjustments.
c.
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er, Selected Consolidated-Quarterly Financial Data (Unaudited)
(in thousands, except earnings per share)
Earnings Basic Available Earnings Operating Operating Net -for Common Per Average Revenues Income 1998 Income Shareholders Common Share (*8 First quarter $394,117 $ 49,203 $22,859 $19,940 Second quarter 385,708
$0.41 64,748 34,323 31,452 0.65 Third quarter 479,537 100,047 75,490 74,004 1.55 Fourth quarter 363,153 28,942 8,374 6,885 0.15 1997 First quarter $422,856 $ 47,138 $20,935 $17,118 Second quarter 426,835 59,633
$0.35 33,978 30,484 0.63 Third quarter 520,414 106,673 81,418 78, A99 1.62 Fourth quarter 408,426 43,500 8,311 5,'392 0.11 (a) Based on the weighted average number of common shares outstanding during each quarter.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
.Not applicable.
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l Part III Item 10. Trustees and Executive Officers of the Registrant j (a) Identification of Trustees Information about Nominees and Incumbent Trustees Throughout Item 10, there are references to Trustees / Directors of BEC Energy and Boston Edison. Note that prior to the reorganization into the holding company structure, Boston Edison Company was the parent company of the consolidated group.
The BEC Energy board has fixed the number of trustees at eleven as permitted under its bylaws. BEC Energy's declaration of trust provides for the classification of the BEC Energy board into three classes serving staggered three-year ~ terne. The four persons named below have been nominated by the BEC Energy board for election as Class II trustees for a term expiring at the year 2002 annual meeting and until their successors are duly chosen and qualified.
The remaining trustees will continue to serve as providedibelow, with the Class III trustees having terms expiring in 2000.and the' class I trustees having terms expiring in 2001. If any of the nominees shall be unavailable as a candidate at the BEC Energy annual meeting by reason of death, disability or resignation, votes exercised through the proxies will be cast for a substitute candidate as may be designated by the BEC Energy toard, or in the absence of a designation, in a manner the trustees may determine in their discretion.
Alternatively, in this situation, the BEC Energy board may take action to fix the number of trustees for the ensuing year at the number of nominees named herein who are then able to serve.
The BEC Energy board has adopted the following trustee retirement policy.
Trustees who are employees of BEC Energy or Boston Edison Company, with the exception of the chief executive officer, retire from the BEC Energy board when they retire from employment with BEC Energy or Boston Edison Company.
Under the BEC Energy board's current policy, trustees who are not employees of -
BEC Energy or Boston Edison Company or who have served as chief executive officer retire from the board at the annual shareholder meeting following their seventieth birthday.
The BEC Energy board, which held five regular meetings 4Ed two special meetings in 1998 since the establishment of BEC Energy on May 20, 1998, has an Executive Committee, an Audit, Finance and Risk Management Committee, an Executive Personnel Committee, and a Pricing Committee. During 1998, the Executive Committee met three times. The Executive Committee is authorized to act as a nominating committee and to review trustee compensation during the intervals between BEC Energy's board meetings. The Audit, Finance and Risk Management Committee met one time. Its responsibilities include recommendations as to the selection of independent auditors, review of the scope of the independent audit, annual financial statements, internal audit reports, and financial and accounting controls and procedures, and review of BEC Energy's financial requirements, insurance coverages, and' legal compliance progranm. The Executive Personnel Committee, which is responsible for reviewing executive officer compensation, personnel planning and performance, some company benefit programs, and human resources policies, also met one time. The Pricing Committee, which is authorized to approve the terms of debt and equity offerings, did not meet in 1998. All trustees attended at least 75% of the aggregate of the total number of meetings of the BEC Energy board i and the total number of meetings held by all committees of the BEC Energy l
59
E I
/s board on which he or she served, with the exception of Mr. Egan, who attended 65% of these meetings.
l (b) Identification of Executive Officers
)
The information required by this item is included at the end of Part I of this i Form 10-K/A under the caption Executive Officers of the Registrant.
(c) Identification of Certain Significant Employees _
Not' applicable.
(d) Family Relationships Not applicable.
(e) Business Experience-The names of' the. nominees as Class II trustees and the incumbent Class I and Class III trustees and selected information concerning them are shown in the table below. Unless a specific time period is indicated, each nominee and trustee has. held the position first listed across from his or her name for at least.five years.
Nominees as class II Trustees - Terms Expiring in 2002 Nominees Principal Occupation and Directorships Charles K. Gifford Chairman (since 1997 and from 1995-1996) and Age: 56 Chief Executive Officer (since 1995), formerly Trustee.since: 1998 President (1989-1995), BankBoston Corporation Boston Edison Company (Bank Holding Company), and Chairman and Chief
- Director since: 1990 Executive Officer (since 1995), formerly Members' Audit, Finance President (1989-1996), BankBoston, N.A.;
and Risk Management, Director, Boston Edison Company, BankBoston Executive' Personnel Corporation, BankBoston, N.A., . Massachusetts And Pricing Committees Mutual' Life Insurance company.
. Paul A. LaCamera President and General Manager 74since 1997),
Age: 55 WCVB-TV Channel 5, formerly fice President and Trustee.and Boston General Manager (1994-1997); Director, Boston Edison Company Director Edison Company.
since: 21998 Member: , Audit, Finance and Risk Management committee Thomas J. May Chairman, President and Chief Executive Officer Age: 51 (since 1998), BEC Energy, and Chairman, Trustee'aince: 1998 President (since 1995) and Chief Ekstutive Boston Edison Company Officer,' Boston Edison Company; Director, Boston Director since: 1991 Edison Company, BankBoston Corporation, Member: Executive BankBoston, N.A., Liberty Mutual Insurance and Pricing Committees Company, Liberty Mutual Fire Insurance Company, Liberty Financial Companies, Inc., RCN Corporation.
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Nominees Principal Occupation and Directorships Sherry H.-Penney Chancellor (1988-1995 and 1996 to present),
Age: 61 University of Massachusetts at Boston, formerly Trustee since: 1990 President (1995) (interim), University of Boston Edison Company Massachusetts; Director, Boston Edison Company.
Director since: 1990 j Member: Audit, Finance I and Risk Management and
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Esecutive Personnel l Committees Incumbent Class III Trustees - Terms Expiring in 2000 Trustees Principal Occupation and Directorships Gary L. Countryman Chairman of the Board, Liberty Mutual Insurance Age: 59 - Company and Liberty Life Assurance Company of Trustee since: 1998 Boston, formerly Chief Exeegtive Officer (1985-Boston Edison 1998), Liberty Mutual Insura'nce Company and Company Director Liberty Life Assurance Company of Boston; since 1986 Director, Boston Edison Company, Liberty Mutual Member: Executive Insurance Company, Liberty Life Assurance And Executive Company of Boston, Liberty Mutual Fire Insurance Personnel Committees Company, Liberty Financial Companies, Inc.,
BankBoston Corporation,-BankBeston, N.A., The Neiman-Marcus Group, Inc., Alliance of American Insurers.
Thomas G. Dignan, Jr. (1) Partner, Ropes & Gray (Law Firm); Director, Age: 58 Boston Edison Company.
Trustee since: 1998 Boston Edison Company Director since: 1983 Member: Executive Committee ;
Herbert Roth, Jr. Former Chairman of the Board (1978-1985) and Age 70 Chief Executive Officer (19EB-1985), LFE Trustee since: 1998 Corporation (Traf fic and rhdustrial Process Boston Edison Company Control Systems); Director / Trustee, Boston Director since: 1978 Edison Company, Landauer, Inc., Tech / Ops Sevcon, Member: Audit, Inc., Phoenix Home Life Mutual Insurance Finance and Risk Company, Phoenix Series Fund, Phoenix Total Management Committee Return Fund, Inc., Phoenix Multi-Portfolio Fund, The Bid Edge Series Fund, Mark IV Industries.
Stephen J. Sweeney Former Chairman of the Board (1986-1992) and Age: 70 Chief Executive Officer (1984-1990), Boston Trustee since: 1998 Edison Company; Director, BostonFEdison Company, Boston Edison Company Selecterm, Inc., Liberty Mutual Insurance Director since: 1983 Company, Liberty Mutual Fire Insurance Company, Member: Audit, Liberty Life Assurance Company of Boston, Finance and Risk Liberty Financial Companies, Inc., Uno Management Committee Restaurant Corporation.
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/m Incumbent Class I Trustees - Terms Expiring in 2001 Trustees . Principal Occupation and Directorships ._
Nelson S. Gifford Principal, Fleetwing Capital (Venture Age -68 Investments); formerly Chairman (1986-1990) and Trustee since: 1998 Chief Executive Officer (1975-1990), Dennison Boston Edison Company , Manufacturing Company (Stationery Products, Director since: 1981- . Systems and Packaging); Director, Boston Edison Member Executive Company, John Hancock Mutual Life Insurance Committee Company, Reed and Barton, J.M. Huber Corp.,
Nypro Inc, Partners Fund.
Richard J. Egan Chairman of the Board, EMC Corporation (Storage Age: 163 Related Computer System Products); Director, Trustee since: 1998 Boston Edison Company, Cognition Inc., Shiva Boston Edison-Company Corporation, New York Stock Exchange Listed Director since 1997 Company Advisory Committee.
Members. Exec'utive Personnel Committee -I i
Matina S. Horner Executive Vice President, Teachers Insurance and AgeE 59 Annuity Association / College Retirement Equities Trustee since: 1998 Funds formerly President (1972-1989), Radcliffe Boston Edison Company College; Director, Boston Edison Company, The i
. Director since:
1988 Neiman-Marcus Group, Inc.
Member: Executive, Audit, Finance and Risk Management and Pricing Committees (1) During 1998, Boston Edison Company and BEC Energy paid legal Tees "to the firm of Ropes & Gray.
(f) Involvement in Certain Legal Proceedings i
Not applicable.
(g) Promoters and Control Persons
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Not applicable.
Item 11'. . Executive Compensation Trustee. Compensation In 1998, the compensation programs for trustees were reviewed and revised with the assistance of an external compensation consultant. The review was initiated to assure that the level of compensation be appropriate in reference to comparable programs, the plan design supports BEC Energy's stFategic objectives, and the interests of the trustees'are aligned with those of shareholders.
Each trustee who.is not an employee of BEC Energy receives an annual board retainer of $20,000 in cash.
Each trustee also receives an annual retainer of
$20,000 worth of BEC Energy common shares which is deferred until the trustee retires from the board. Each non-employee trustee who is a member of the l Executive Committee receives an additional retainer of $3,000 and each trustee who chairs. a. BEC Energy board committee receives an additional retainer of {
{
i
)
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$3,000. All other retainers were discontinued as of October 1998. Each trustee who is not an employee of'BEC Energy receives $1,000 for attendance in person at each meeting of the BEC Energy board or a committee and $500 for participating in a meeting by telephone. Trustees may elect to defer part or all of their trustees' fees under BEC Energy's deferred fee plan. Two programs were discontinued: the 1991 Director Stock Plan and the 1993 Directors' Retirement Benefit. An amount equal to the present value of the benefit each outside trustee accrued under the Directors' Retirement Benefit was deposited in deferred accounts. Receipt is deferred until the trustee's
~
retirement from the BEC Energy board.
Report of the Executive Personnel Comunittee Under the rules estcblished by the SEC, BEC Energy is required to provide specified data and information with regard to the compensation and benefits provided to its-executive officers, including BEC Energy's chief executive officer and the four other most highly compensated executive officers. The disclosure _ requirements for these officers (the
- Named Executive Officers")
include tables summarizing total compensation and a report explaining the
-rationale and considerations that led to fundamental executive compensation decisions affecting those individuals for the. prior year 2 The Executive Personnel Committee BEC Energy's executive compensation program is administered by the Executive Personnel Committee, a committee of the BEC Energy board composed of the four non-employee trustees listed as signatories to this report. Except as discussed below, none of these non-employee trustees has any interlocking or other relationship with BEC Energy that would require disclosure to the SEC.
Generally, all decisions of the Executive Personnel Committee regarding the compensation of the chief executive officer are subject to the approval of the non-employee trustees of BEC Energy, none of whom is
- eligible -to participate -
4 in the incentive plans described below. The Executive Personnel Committee administers the 1997 Stock Incentive Plan discussed below.
The Named Executive Officers The officers identified as the five most highly compensated executive officers of BEC Energy are all employees of Boston Edison Companyt BEC Energy's principal subsidiary. Three of the Named Executive Of ficers, Messrs. May, Horan and Judge, also serve as officers of BEC Energy, in the following capacities: Mr. May as Chairman, President and Chief Executive Officer; Mr. Horan as Senior Vice President and General Counsel; and Mr. Judge as Senior Vice President and Treasurer. BEC Energy does not have any employees l of its own.
Conpensation Philosophy' l
-The executive compensation philosophy of BEC Energy is to provide competitive levels of compensation that advance BEC Energy's annual and 1png-term performance objectives, reward corporate perfornance, and assist BEC Energy in attracting, retaining and motivating highly qualified executives. The framework for the compensation committee's executive compensation program is to establish' base salaries which are competitive with electric utilities in general and to incentivize excellent performance by providing executives with the opportunity to earn additional remuneration under the annual and long-term incentive plans. The incentive plan goals are designed to improve the effectiveness and enhance the ef ficiency of BEC Energy's operations and to i create value for shareholders. The committee also seeks to link executive and i
63 2
shareholder interests through equity-based incentive plans. Accordingly, in 1997, upon the committee's recommendation, the Boston Edison board approved stock ownership guidelines of three times base salary for the chief executive officer and one to one-and one-half times base salary for the other executive officers of BEC Energy and Boston Edison Company. These guidelines allow the executives five years to acquire this amount of stock.
Conponents of Convensation Compensation paid to the Named Executive Officers, as reflected'in the following tables, consists of three primary elements: base salary, annual incentive awards, and long-term incentive awards. BEC Energy compares its compensation levels against those of other growth-oriented investor-owned electric utility companies. BEC Energy's strategy is to establish total compensation, i.e., base salary and annual incentives, at the 60" percentile of the utility industry, and to compare its long-term incentive plan to those of more aggressive utilities and general industry companies that focus on value creation.
During 1998, the committee thoroughly reviewed data collecAgd by nationally recognized compensation experts as well as by Boston Edison's human resources group The to determine whether BEC Energy's compensation strategy was being met.
review evaluated base salary and annual incentives of nearly all electric utility companies, and long-term incentives of a blend of utilities and general industry. The data demonstrated that BEC Energy was in conformity with its compensation strategy to the satisfaction of the committee.
The income tax deductions of publicly traded companies may be limited to the extent total compensation for particular executive officers exceeds one million dollars during any year. This deduction limit, however, does not apply to payments which qualify as " performance based". The committee has reviewed the regulations issued by the Internal Revenue Service and will ,
continue to review the application of these rules to future compensation.
However, the committee intends to continue basing its executive compensation decisions primarily upon performance achieved, both corporate and individual, while retaining the right to make subjective decisions and to award compensation that may or may not meet all of the Internal Revenue requirements for deductibility.
Annual Incentive Plan 2-Annual incentive payments to the Named Executive Officers, reported in the fourth column of the Summary Compensation Table below, are based on both corporate and business unit performance objectives which are derived from the
, corporate operating plan and approved by the committee. Corporate performance objectives include a comparison of target to actual earnings per share from operations.
Business unit performanco objectives include predetermined levels for operating and capital budgets, as well as key operating goals. The annual incentive plan award for Mr. May is based solely on BEC Energy's achieving the earnings-per share objective. In 1998, basic earnings per share were $2.76, which exceeded the plan target. The annual incentive plan awards for Messrs.
Gustin, Horan, Judge and Ledg tt were based 50% on earnings per share and 50%
on specific business unit performance objectives to achieve various budget and operating plan targets. All four officers exceeded the specified business unit performance levels.
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Long-Term Conpensa tion Under the 1997 Stock Incentive Plan, executive officers and other key employees are eligible.to receive grants from time to time of stock-related awards of seven general types. (1) stock options, (ii) stock appreciation rights, (iii)-restricted stock awards,-(iv) deferred stock awards, (v) performance unit awards, (vi) dividend equivalent awards, and (vii) other i stock-based awards. The long-term grant in May of 1998 consisted of non-qualified stock options, deferred shares and dividend equival_ents on the .
deferred shares, and was based upon the committee's evaluation of performance !
towards key strategic objectives, and competitive award data provided by an external consultant. The committee did not weight any of these factors. The options and the deferred shares vest at the rate of 33% per year over a three-year period.from the date of grant, and the options may be exercised over a ten-year period.
Other Plans At various times in the past, BEC Energy and Boston Edison Company have adopted various broad-based employee benefit plans in whiich officers are permitted to participate on the same terms as non-executive employees who meet applicable eligibility criteria. These plans include pension, life, and health insurance plans, as well as a section 401(k) savings plan which includes a company matching contribution equal to the first six percent of pay contributed by the employee up to a naximum excludable 401(k) contribution allowed by the Internal Revenue Code. In addition, Boston Edison Company has a deferred compensation plan in which officers and senior managers may elect to participate.
In 1996, the committee implemented a supplemental executive retirement plan which provides eligible participates with supplementary retirement income of up to 60% of final average cash compensation, depending upon each +
participant's years of service, reduced by 50% of the participant's social security benefit and further reduced by benefits the participant receives under Boston Edison's pension plan.
Mr. May's 1998 conpensation The Executive Personnel Committee makes decisions regarding the compensation of the chief executive officer using the same philosophy and criteria described above. As.with the compensation of all officers, BEC Energy compares compensation levels for the chief executive officer to those of all other investor-owned electric utility companies.
Each year BEC Energy approves the adjustment of salary ranges for the chief executive officer and other corporate officers based on studies conducted by external executive compensation consultants and Bnc ton Edison Company's human resources group. The 1998 studies found BEC Energy's executive compensation levels to be within the approved 60'h percentile position to market. Mr. May received a 5% increase to his base salary in 1998. ,,
Mr. May's annual incentive award, shown in ths fourth column of the summary i compensation Table below, was in conformity with the provisions of the annual {
incentive plan described above, and was-based on BEC Energy surpassing its j operating plan targets. The committee's policy is to base individual long-term incentive awards on an annual study by the compensation consultant comparing the value of long-term incentive grants to salary-levels for a blend of electric utility and general industry companies. The 6,000 deferred shares and 60,000 options granted Mr. May in 1998 reflect this policy.
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Compensation Committee Interlocks and Insider Participation Charles K. Gifford, who is a member of BEC Energy's Executive Personnel Committee,.is Chairman and Chief Executive Officer of BankBoston Corporation and BankBoston, N.A. Thomas J. May, BEC Energy's Chairman, President and Chief Executive Officer, serves on the boards of directors of BankBoston Corporation and BankBoston, N.A. {
Gary L. ' Countryman, who is the Chairman of. BEC Energy's Executive Personnel Committee, is Chairman of the Board and Chief Executive Officer of Liberty Mutual Insurance. company and Liberty Mutual Fire Insurance Company and Chairman of the Board of Liberty Financial Companies, Inc. Mr. May serves on the boards of directors of Liberty Mutual Insurance Company, Liberty Mutual Fire. Insurance Company, and Liberty Financial Companies, Inc.
By the Executive Personnel Committee, Gary L. Countryman (Chairman)
' Richard J. Egan -4 Charles K. Gifford Sherry H. Penney Executive compensation Tables The following information is given regarding annual and long-teon compensation earned.by the chief executive officer and the four other most highly compensated executive officers of BEC Energy and Boston Edison Company with respect to the years 1996, 1997 and 1998.
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e Summary Compensation Table Annual Long-Term Compensation Compensation Awards Payouts securities Other Deferred Underlying Name and Annual Share Options / LTIP All Other Principal Position- M Salary Bonus compensationti) Awards (2) SARs(f) Payouts Compensation (3)
Thomas J. May..... 1998 4519,583 4600,000 - 238,500 60,000 - 8 9,600 1
Chairman, 1997 496,875 498,750 - 426,400 100,000 - 9,600 i President and 1996 463,625 324,750 - - -
9,000 Chief Executive ,
officer BEC Energy and Boston Edison Company Ronald A. Ledgett. 1998 277,815 248,850 - 99,375 27,000 -
84,600 Executive Vice 1997 232,500 216,150 - 118,450 28,600 -
9,600 President, 1996 193,667 119,300- - - - -
9,000 Boston Edison
- Company Douglas S. Horan., 1998 208,750 196,150 - 59,625 14,000 - 59,600 Senior Vice 1997 195,417 140,000 - 103,000 25,000 - 9,600 President, 1996 175,833 83,750 - -
- .A - 9,000 BEC Energy and #
Boston Edison Company James J. Judge.... 1998 205,417 196,750 - 59,625 14,000 - 59,600 Senior Vice 1997 183,667 136,400 - 97,850 23,400 - 9,600 President, 1996 167,000 80,000 - - - - 9,000 BEC Energy and Boston Edison Company L. Carl Gustin.... 1998 194,375 163,875 - 51,675 12,000 - 9,600 Senior Vice 1997 101,013 121,250 - 97,850 23,800 - 9,600 Presidant, 1996 182,507 67,262 - - - - 9,000 Boston Edison Company (1) None of the Named Executive Officers received amounts of other annual I compensation in 1996, 1997, or 1998 which would require disclosure I under SEC rules.
1 (2) Deferred common share awards are valued at the closing market price as of the date of the grant. The awards vest one-third on each of the first, second and third anniversaries of the date of the grant.
Dividends will accrue on the awards from the date.pf grant and will be be payable in the form of additional shares which will vest at the same time the awards vest. Aggregate deferred common share holdings and values based on the closing price of the common shares on December 31, 1998 are as follows: Mr. May, 16,933 shares ($697,428); Mr. Ledgett, 5,567 shares ($229,291); Mr. Gustin, 3,833 shares ($157,872); Mr. Horan, 4,167 shares ($171,628) and Mr. Judge, 4,033 shares ($166,109).
(3) Messrs. Ledgett, Horan and Judge received payments in the amounts of
$75,000, $50,000 and $50,000 respectively, under retention agreements entered into in 1996. All other amounts in this column represent Boston ~~
Edison's matching contribution under its 401(k) plan.
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/s Option Grants in Last Fiscal Year Individual Grants
% of Total Options Grant Number of- Granted Exercise Date Securities to or Present Underlying Employees Base Expiration Value Name Options Granted (l) in 1998 Price Date (2)
Thomas J. May..... 60,000 14.3% $39.75 4/22/08 $276,600 Ronald A. Ledgett, 27,000' 6.4% $39.75 4/22/08 $124,470 L. Carl Gustin.... 12,000 2.9% $39.75 4/22/08 $ 55,320 Douglas S. Horan.. 14,000 3.3% $39.75 4/22/08 $ 64,540 James J. Judge.... 14,000 3.3% $39.75 4/22/08 $ 64,540 (1) Options est one-third annually beginning April 22, 1999.
(2) -The grant date present values were determined using the Black-Scholes option pricing mode'l. There is no assurance that the value realized would be at or near the value estimated by the Black-Scholes model.
Assumptions used for the model are as follows: stock volatility, 16%;
risk-free interest rate, 5.66%; dividend yield, 4.88%; and time to exercise, four years.
Aggregated Option /SAR Exercises and Fiscal Year-End Option Value Table Number of Securities Value of Securities Underlying Underlying I'nexercised Shares /SARs Unexercised Options In-the-Money Options Acquired on Value At Fiscal Year-End . At Fiocal Year-End (1) y N Exercise Realized Exercisable /Unexercisable Exercisable /Unexercisable Thomas J. May..... 0 $0 33,333 / 126,667 $506,245 / $1,098,755 Ronald A. Ledgett. 0 $0 9,533 / 46,067 $147,166 / $ $333,159 L. Carl Gustin.... 0 $0 7,933 / 27,867 $122,466 / $ $262,197 Douglas S. Horan.. 0 $0 0,333 / 30,667 $128,641 / $ $277,422 James J. Judge.... 0 $0 7,000 / 29,600 $120,413 / $ $260,950 (1) Based on the closing price of BEC Energy common shares-on December 31,-
1998 of $41,1875.
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A Pension Plan Table The following table shows the estimated annual retirement benefits payable to executive officers under the qualified pension plan and the supplemental executive retirement plan, assuming retirement at age 65. The supplemental executive retirement plan is a non-qualified pension plan providing a maximum benefit of 60% of compensation-after the executive has accumulated.20 years of credited service and has reached age 60. The supplemental executive retirement plan provides the incremental benefits in excess of the benefits paid under the qualified plan necessary to reach the benefit shown in the 1
. table.. Each of the officers named in the Summary Compensation Table l participates in the supplemental executive retirement plan. The benefits j
. presented are based on a straight life annuity and do not take into account a reduction in benefits of up to 50% of the participant's primary social ]
security benefit.
Average Annual Years of Credited Service compensation 10 15 20
$200,000.'...................................... $ 60,00S $ 90,000 $120,000
$300,000....................................... 90,000 135,000 180,000
$400,000.'...................................... 120,000 180;000 240,~000
$500,000...... ................................ 150,000 225,000 300,000
$600,000....................................... 180,000 270,000 360,000
$700,000....................................... 210,000 315,000 420,000
'$800,000............ .......................... 240,000 360,000 480,000
$900,000....................................... 270,000 405,000 540,000 For purposes of the retirement plans, Messrs. May, Ledgett, Gustin, Horan and
' Judge currently have 23, 18, 18, 21 and 21 years of credited service, reppsetively.
Final average compensation for purposes of calculating the benefits under the supplemental executive retirement plan is the highest average annual compensation of the participant during'any consecutive 36-month period.
. Compensation taken into account in calculating the benefits described above includes salary and annual bonus, including any_ amounts deferred under the
)
.terum of the deferred compensation plan.
Mr. May can elect,.and Mr. Ledgett receives, an alternative supplemental retirement benefit equal to 33%'of final base salary anhually for 15 years,
=whichist the current level would provide Mr. Ledgett with approximately $7,000
.in excess of the amounts shown in the table above.
Change of control Agreements BEC Energy, through its Boston Edison Company subsidiary has change of control agreements with various key employees, including those-named in the Summary compensation Table, which provide severance benefits in the event of specified
. terminations of employuent following a change in control of Boston Edison.
Events which constitute a change of control under these agreements are
' described below.- If, following aL change in control, the employee's employment is.tenminated without cause or the employee terminates employment for good reason,-the employee receives severance pay in an amount equal to two times, three times in the case of Mr. May, the sum of annual base salary (at the rate in effect immediately prior to the date of termination or immediately before the change of control, whichever is higher) plus actual bonus paid in respect of the most recently completed fiscal, year or target bonus for the fiscal year in.which the-termination occurs, whichever is higher. In addition, the change 69 1
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of control agreements provide for a pro rated bonus payment for the year in j
~which the termination occurs, the immediate vesting of bonus awards, immediate {
payment of deferred compensation amounts upon the termination and payments I equal to the benefit the employee would have received under Boston Edison Company's retirement plan assuming the executive was vested and remained employed for an additional two years, three years in the case of Mr. May. For two years, three years in the case of Mr. May, following termination of employment, the employee would be entitled to continue to participate in all welfare plans provided by Boston Edison Company. The change of control agreements further provide for a " gross-up" payment under which,-if amounts paid under these agreements would be effectively reduced a federal excise tax on " excess parachute payments," Boston Edison Company will pay the employee an additional amount of cash, so that, after payment of all parachute taxes by the employee, the employee will have received the amount the employee would have received in the absence of any such tax. A change of control under these
' agreements generally includes the following events: (i) a person or group becomes the beneficial owner of more than 30% of the voting power of Boston Edison Company's securities; (ii) continuing directors cease to be a majority of the Boston-Edison Company board; (iii) a consolidation, merger or other reorganization or sale or other disposition of all or substAptially all of the assets of Boston Edison Company, other than certain defined transactions; or (iv) approval by the stockholders of a complete liquidation or dissolution of Boston Edison Company.
Item 12. Security ownership of Certain Beneficial owners and Management (a) Security ownership of Certain Beneficial owners To the knowledge of management, no person owns beneficially more than five percent of the BEC Energy common shares.
(b) Security ownership of Management The following table sets forth certain information regarding the beneficial ownership of BEC Energy common shares as of January 31, 1999, assuming the exercise of all options exercisable on, or within 60 days of, such date, by (i) each trustee, (ii) the chief executive officer and each of the other four (
most highly compensated executive officers of BEC Energy / Boston Edison Company, (iii) all executive officers and trustees as a group. None of the individual or collective holdings below exceeds 1% of the eutstanding BEC Energy common shares. No member of the group is the beneficial owner of Boston Edison Company's cumulative preferred stock.
c.
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Number of Shares of BEC Energy Common Name of Beneficial Owner Stock Beneficially Owned Gary L. Countryman................................ 4,614 Thomas G. Dignan, Jr.............................. 5,290 Richard J. Egan................................... 1,777 Charles K. Gifford................................ 3,515 Nelson S. Gifford................................. 8,412 I L. Carl Gustin.................................... ~18,684 '
Douglas S. Horan.................................. 17,609 Matina S. Horner.................................. 4,365 James J. Judge.................................... 16,437 !
Paul A. LaCamera.................................. 233 l Ronald A. Ledgett.................................
Thomas J. May.....................................
22,523 74,445 ) i Sherry H. Penney.................................. 4,342 Herbert Roth, Jr.................................. 8,759 Stephen J."Sweeney................................ 5,873 ;
All trustees and executive officers as a group, -1 including those named above (18 persons)......... 228,586 (1) The following BEC Energy common shares are held in Boston Edison company's Deferred Compensation Trust due to deferrals by the following participants under Boston Edison Company's Deferred Compensation Plan:
Mr. Horan, 1,564 shares; Mr. Judge, 1,351 shares; Mr. Ledgett, 4,052 shares; Mr. May, 13,813 shares; all executive officers as a group, 25,725 shares. Trustees and officers who are participants in Boston Edison Company's Deferred Compensation Plan may instruct the trustee to vote BEC Energy common shares held in the trust in accordance with their allocable share-of such deferrals, but trustee participants have no dispositive power with respect to shares held in the trust.
(2) These totals include the following number of BEC Energy common shares held in Boston Edison Company's 401(k) Plan: Mr. Gustin, 4,346 shares; Mr. Horan, 2,772 shares; Mr. Judge, 2,655 shares; Mr. Ledgett, 3,062 shares; Mr. May, 8,163 shares; all executive officers as a group, 28,713 shares.
(
(3) 3,629 of Mr. Sweeney's 5,873 shares are held in a charitable annuity ~
remainder trust, of which he, as a co-trustee of tle trust, shares dispositive and voting power with respect to the shares.
(c) ' Changes in Control J
Not applicable, f
Item 13. Certain Relationships and Related Transactions 1
Not applicable, m i
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- a Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this Form 10-K/A: 1
- 1. Financial Statements:
Page s consolidated Statements of Income for the years ended -
{
December 31, 1998, 1997 and 1996 30 I
(
consolidated Statements of Retained Earnings for the years ended December 31, 1998, 1997 and 1996 30 )
1 Consolidated Balance Sheets as of December 31, 1998 and 1997 31 l
Consolidated $tatementsofCashFlowsfortheyears ended December 31, 1998, 1997 and 1996 32
-b Notes to Consolidated Financial Statements 33 Selected Consolidated Quarterly Financial Data (Unaudited) 58 Report of Independent Accountants 81
- 2. Financial Statement Schedules:
No financial statement schedules are included as they are either not required or not applicable. l
- 3. Exhib'its: I
{
Refer to the exhibits listing beginning on the following page.
(b) Reports on Form 8-K:
- A Form 8-K dated November 23, 1998, was filed during the fourth quarter of 1998 disclosing that Entergy Nuclear Generating Company was selected as the winning bidder for the purchase of P1.' grim Station. In addition, a Form 8-K dated December 10, 1998, was filed announcing that BEC and Commonwealth Energy System entered into an Agreement and Plan of Merger.
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,, a 1 Exhibit SEC Docket
. Exhibit 2: 'Planiof Acquisition, Reorganization, Arrangement, Liquidation or Succession Incorporated herein by reference:
)
12 . 1 ' Agreement and Plan of Merger by and 2.1 1-14768 {
among BEC. Energy, Boston Energy - Form 8-K j
' Technology Group, Inc., Commonwealth dated j Energy System, COM/ Energy Resources, December 10, '
Inc. and BEC Newco, Inc., dated 1998 December 5, 1998 Exhibit 3 __ Articles of Incorporation and By-Laws Incorporated herein by reference:
~~
3.1' Restated Articles of Organization 3.1 1-2301-Form 10-Q for the quarter ended June 30, 1994 3.2 Boston Edison company Bylaws 3.1 1-2301 April 19, 1977, as amended Form 10-Q January 22, 1987, January 28, 1988, for the May 24, 1988 and November 22, 1989 quarter ended June 30, 1990 3.3 BEC Energy Declaration of Trust 3.1.1 Registration on Form S-4 (File No.
333-23439) 3.4 BEC Energy Bylaws "I.1.2 Registration on Fonn S-4 l (File No.
333-23439)
Exhibit 4 Instruments Defining the Rights of Security Holders, Including Indentures Incorporated herein by reference:
4.1 Medium-Term Notes Series A - Indenture 4.1 1-2301 dated September 1, 1988, between Form 10-Q Boston Edison Company and Bank of for the Montreal Trust Company quarter ended September 30, 1908 73 j
i o o-Exhibit SEC Docket 4.1.1 First Supplemental Indenture 4.1 1-2301 dated June 1, 1990 to Form 8-K Indenture dated September 1, 1988 dated with Bank of Montreal Trust Company - June 28, 1990 9 7/8% debentures due June 1, 2020 4.1.2 Indenture of Trust and Agreement among- 4.1.26 -2301 the City of Boston, Massachusetts Form 10-K (acting by and through its Industrial for the Development Financing Authority) and year ended Harbor Electric Energy Company and December 31, Shawmut Bank, N.A., as Trustee, dated 1991
,, November 1, 1991 4.1.3 votes of the Pricing Committee of the 4.13,7 1-2301 Board of Directors of Boston Edison Form 10-K company taken August 5, 1991 re for the 9 3/8% debentures due August 15, 2021 year ended December 31, 1991 4.1.4 Revolving Credit Agreement dated 4.1.24 1-2301 February 12, 1993 Form 10-K for the year ended December 31, 1992 4.1.4.1 First Amendment'to Revolving Credit 4.1.10 1-2301 Agreement dated May 19, 1995 Form 10-K for the year ended
- _ December 31, 1995 4.1.4.2 Second Amendment to Revolving Credit 4.1.4.2 1-2301 Agreement dated July 1, 1997 Form 10-K for the j year ended December.31, 1997
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4.1.5 Votes of the Pricing Committee of the 4.1.25 1 2301 Board of Directors of Boston Edison Form 10-K Company taken September 10, 1992 re for the 8 1/4% debentures due September 15, 2022 year ended December 31, 1992 74
_s e !
Exhibit SEC Docket 4.1.6 Votes of the Pricing Committee of the 4.1.26 1-2301 Board of Directors of Bosten Edison Form 10-K Company taken January 27, 1993 re for the 6.80% debentures due February 1, 2000 year ended December 31, 1992 4.1.7 Votes of the Pricing Committee of the 4.1.27 1-2301 Board of Directors of Boston Edison Form 10-K Company taken March 5,1993 re for the 6.80% debentures due March 15, 2003, year ended 7.80% debentures due March 15, 2023 December 31, 1992 4.1.8 Votes of the Pricing Committee of the 44 28 1-2301 Board of Directors of Boston Edison Form 10-K company taken August 18, 1993 re for the "'
6.05% debentures due August 15, 2000 year ended December 31, 1993 4.1.9 Votes of the Pricing Committee of the 4.1.9 1-2301 Board of Directors of Boston Edison Form 10-K Company taken May 10, 1995 re for the 7.80% debentures due May 15, 2010 year ended December 31, 1995 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.
e Exhibit SEC Docket Exhibit 10 Material Contracts Incorporated herein by reference:
10.1 Key Executive Benefit Plan 10.3.1 1-2301 Standard Form of Agreement, May 7 Form 10-K 1986, with modifications for the year ended December 31, 1991 75
4 i 7 Exhibit SEC. Docket 10.2 Executive Annual Incentive 10.5 2301-Compensation ~ Plan. Form 10-K for the year ended December 31, J 1988 1 10.2.1 Supplemental Executive Retirement 10.1 1-2301.
Plan Form 10-Q for the quarter ended June 30, 1997 10.2.2 1997 Stock Incentive Plan 10.2 1-2301
, ,g Form 10-Q for the quarter ended June 30, 1997 10.3 Boston Edison Company Deferred 10.11 1-2301 Fee Plan dated January 14, 1993 Jo.au 10-X for the year ended December 31, 1992 10.4 Deferred compensation Trust 10.10 1-2301 between Boston Edison Company Form 10-K and State Street Bank and for the Trust Company dated year ended February 2, 1993 ~~
Decenber'31, 1992
~
10.4.1' Amendment No. 1 to Deferred 10.' f.1 1-2301 Compensation Trust dated Form 10-K March 31, 1994 for the
, year ended December 31, 1994 10.5 Boston Edison Company Deferred 10.9 1-2301 Compensation Plan, Amendment and Form 10-K Restatement dated January 31, 1995 for the year ended December 31, 1994 76
r s*'?
Exhibit SEC Docket 10.6 Employment Agreement applicable to 10.10 1-2301 Ronald A. ' Ledgett dated .'vril 30, 1987 Form 10-K for the year ended December 31,
_ 1994 10.7 Change in Control Agreement applicable 10.2 1-2301 to Thomas J. May dated July 8, 1996 Form 10-Q for the quarter ended June 30, 1996 10.8' Form of Change in Control Agreement 10.3 1-2301 applicable to Ronald A. Ledgett, -! Form 10-Q L. Carl Gustin, Douglas S. Horan, for the James J. Judge and certain other quarter ended officers dated July'8, 1996 June 30, 1996 10.9 Boston Edison Company Restructuring 10.12 1-2301 Settlement Agreement dated July 1997 Form 10-K for the year ended December 31, 1997 10.10 Boston Edison Company and Sithe 10.1 1-2301 Energies, Inc. Furchase and Sale Form 10-Q and Transition Agreements dated for the December 10,'1997 . quarter ended .,
March 31, 1998 2_
Filed herewith:
10.11 Boston Edison Company Directors' Deferred Fee Plan Restatement !
effective October 1, 1998 i
1 10.12 Boston Edison Company and Entergy Nuclear Generation Company Purchase and Sale Agreement dated November 18, 1998 Exhibit 21 Subsidiaries of the Registrant i 21.1 Boston Edison Company (incorporated in Massachusetts), a wholly owned subsidiary of BEC Energy
. 77
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2%
Exhibit SEC Docket ,
21.2 Boston Energy Technology Group, Inc.
(incorporated in Massachusetts),
a wholly owned subsidiary of BEC Energy 21.3 Harbor Electric Energy Company. -~
(incorporated in Massachusetts),
a wholly owned subsidiary of Boston Edison Company Exhibit 23 Consent of Independent Accountants Filed herewith:
23.1 Consent of Independent Accountants 3 to incorporate by reference their opinion. included with this Form 10-K/A in the Form S-3 Registration Statement filed by BEC Energy on July 2, 1998 (File No. 33-59693);
Form S-8 Registration Statements filed by BEC Energy on June 17, 1998 (File Nos. 33-58457, 33-59662 and 33-59682) and June 29, 1998 (File No. 333-30975-99)
Exhibit 27 Financial Data Schedule Filed herewith:
27.1 Schedule UT Exhibit 99 Additional Exhibits' O, Incorporated herein by reference:
99.1 Settlement Agreement between Boston 28.1 1-2301 Edison Company and Commonwealth Form 8-K Electric Company, Montaup Electric dated company and the Municipal December 21, Light Department of the Town of 1989 Reading, Massachusetts, dated January 5, 1990 v.
99.2 Settlement Agreement Between Boston 28.2 1-2301 Edison Company and City of Holyoke Form 10-Q Gas and Electric Department et. al., for the dated April 26, 1990 quarter ended March 31, 1990 78
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Exhibit SEC Docket 99.3 Information required by SEC Form 1-2301 11-K for certain employee benefit Form 10-K/A plans for the years ended Amendments to December 31, 1997, 1996 and 1995 Form 10-K for the years ended
_ December 31, 1997, 1996 and 1995 dated June 25,1998, June 26, 1997 and June 27, 1996, respectively O
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i SIGNATURES Pursuant to the' requirements of Section 13.or 15(d) 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.
.BEC ENERGY i
By: /s/ Robert J. Weafer, Jr.
Robert J. Weafer, Jr.
Vice President-Finance, Controller
.l'[ _
.and Chief Accounting Officer t ,9 Date: May 12, 1999 i
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N 80 kr i i -- : - - - I- -- - -' -
{L es e
n i Report of Independent Accountants l To the Shareholders and Trustees of-BEC Energy:
In our opinion, the accompanying consolidated financial statements listed in Item 14(a) of this Form 10-K/A present fairly, in all material respects, the consolidated financial position of BEC Energy and its subsidraries at December 31, 1998 and 1997 and the consolidated results of their operations j and their cash flows.for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of BEC's management; our L responsibility is to express an opinion on these financial statements based on l
our audits . We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of naterial udsstatement. An audit _4ncludes examining, on a test basis, evidence supporting.the amounts and disclo'sures in the financial statements, assessing the accounting principles used and significant estimates l made by management, and evaluating the'overall financial statement presentation. We believe that our audits provide a reasonable basis for the l opinion expressed above.
i PricewaterhouseCoopers LLP Boston,-Massachusetts'
-January 28, 1999 CL
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