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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14768
NSTAR
(Exact name of registrant as specified in its charter)
Massachusetts 04-3466300
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
800 Boylston Street, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-424-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
Common Shares, Par Value $1 per share 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 filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K 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 Form 10-K or any amendment
to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).
YES [ X ] NO [ ]
The aggregate market value of the 53,032,546 shares of voting
stock of the registrant held by non-affiliates of the registrant,
computed as the average of the high and low market prices of the
common shares as reported on the New York Stock Exchange
consolidated transaction reporting system for NSTAR Common Shares
as of the last business day of the registrant's most recently
completed second fiscal quarter: $2,353,319,229.
Indicate the number of shares outstanding of each for the
registrant's classes of common stock, as of the latest
practicable date.
Class Outstanding at March 27, 2003
Common Shares, $1 par value 53,032,546 Shares
Documents Incorporated by Reference Part in Form 10-K
Portions of the Registrant's Definitive Parts I, II and III
Proxy Statement Dated March 27, 2003
(pages as specified herein)
List of exhibits begins on page 95 of this report.
NSTAR
Form 10-K Annual Report - December 31, 2002
Page
Part I
Item 1. Business 2
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 4A. Executive Officers of the Registrant 12
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Selected Consolidated Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About 50
Market Risk
Item 8. Financial Statements and Supplementary Financial 51
Information
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 93
Part III
Item 10. Trustees and Executive Officers of the Registrant 93
Item 11. Executive Compensation 93
Item 12. Security Ownership of Certain Beneficial Owners and 93
Management
Item 13. Certain Relationships and Related Transactions 94
Part IV
Item 14. Controls and Procedures 94
Item 15. Exhibits, Financial Statement Schedules and Reports 95
on Form 8-K
___________________________________
Signatures 102
Certification Statements 104
Part I
Item 1. Business
NSTAR makes available on its website at www.nstaronline.com
("Financial info, SEC filings"), its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (SEC). NSTAR
provides this service free of charge.
(a) General Development of Business
NSTAR is an energy delivery company focusing its activities in
the transmission and distribution of energy. NSTAR serves
approximately 1.4 million customers in Massachusetts, including
approximately 1.1 million electric customers in 81 communities
and 0.3 million gas customers in 51 communities. NSTAR is a
public utility holding company generally exempt from the
provisions of the Public Utility Holding Company Act of 1935.
NSTAR's retail utility subsidiaries are Boston Edison Company
(Boston Edison), Commonwealth Electric Company (ComElectric),
Cambridge Electric Light Company (Cambridge Electric) and NSTAR
Gas Company (NSTAR Gas). Its wholesale electric subsidiary is
Canal Electric Company (Canal). NSTAR's three retail electric
companies operate under the brand name "NSTAR Electric."
Reference in this report to "NSTAR" shall mean the registrant
NSTAR or one or more of its subsidiaries as the context requires.
Reference in this report to "NSTAR Electric" shall mean each of
Boston Edison, ComElectric and Cambridge Electric. NSTAR's non-
utility, unregulated operations include district energy
operations (Advanced Energy Systems, Inc. and NSTAR Steam
Corporation), telecommunications operations - NSTAR
Communications, Inc. (NSTAR Com) and a liquefied natural gas
service company (Hopkinton LNG Corp.). Utility operations
accounted for approximately 96% of revenues in 2002, 2001 and
2000.
NSTAR was created in 1999 through the merger of BEC Energy (BEC)
and Commonwealth Energy System (COM/Energy). An integral part of
the merger that created NSTAR was the rate plan of the retail
utility subsidiaries of BEC and COM/Energy that was approved by
the Massachusetts Department of Telecommunications and Energy
(MDTE) in an order issued on July 27, 1999. Significant elements
of the rate plan include a four-year distribution rate freeze
through August 2003, recovery of the acquisition premium
(goodwill) over 40 years and recovery of transaction and
integration costs (costs to achieve) over 10 years. Refer to the
"Retail Electric Rates" section in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for more information.
In 1998, Boston Edison completed the sale of all of its fossil
generating assets and in 1999 sold its Pilgrim Nuclear Generating
Station. COM/Energy sold substantially all of its fossil
generating assets in 1998 and Canal sold its 3.52% ownership
interest in the Seabrook Nuclear Power Station in November 2002.
Refer to the "Generating Assets Divestiture" section in Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information.
(b) Financial Information about Industry Segments
NSTAR's principal operating segments are the electric and natural
gas utilities that provide energy delivery services in 107 cities
and towns in Massachusetts and its unregulated operations. Refer
to Note L of the Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Financial Information"
for specific financial information related to NSTAR's electric
utility, gas utility and unregulated operating segments.
(c) Narrative Description of Business
Principal Products and Services
NSTAR Electric
NSTAR Electric's operating revenues and energy sales percentages
by customer class for the years 2002, 2001 and 2000 consisted of
the following:
Revenues ($) Energy Sales (kWh)
Retail: 2002 2001 2000 2002 2001 2000
Commercial 52% 51% 49% 56% 55% 55%
Residential 37% 33% 33% 29% 28% 28%
Industrial and other 8% 9% 10% 10% 11% 11%
Wholesale and contract 3% 7% 8% 5% 6% 6%
NSTAR Electric currently supplies electricity at retail to an
area of 1,702 square miles. The territory served includes the
City of Boston and 80 surrounding cities and towns including
Cambridge, New Bedford and Plymouth and the geographic area
comprising Cape Cod and Martha's Vineyard. The population of
this area is approximately 2.3 million. In 2002, NSTAR Electric
served approximately 1.1 million customers.
Retail Electric Rates
Unbundled delivery rates are established by the MDTE and are
composed of a customer charge (to collect metering and billing
costs), a distribution charge (to collect the costs of delivering
electricity), a transition charge (to collect costs for
previously held investments in generating plants and current
costs related to above market power contracts), a transmission
charge (to collect the cost of moving the electricity over high
voltage lines from a generating plant), an energy conservation
charge (to collect costs for demand-side management programs) and
a renewable energy charge (to collect the cost to support the
development and promotion of renewable energy projects).
Electric distribution companies in Massachusetts are required to
obtain and resell power to retail customers through either
standard offer service or default service for those who choose
not to buy energy from a competitive energy supplier. Standard
offer service will be available to eligible customers through
February 2005 at prices approved by the MDTE, set at levels so as
to guarantee mandatory overall rate reductions provided by the
Massachusetts Electric Restructuring Act of 1997 (Restructuring
Act). New retail customers in the NSTAR Electric service
territories and other customers who are no longer eligible for
standard offer service and have not chosen to receive service
from a competitive supplier are provided default service. The
price of default service is intended to reflect the average
competitive market price for power. As of December 31, 2002 and
2001, customers of NSTAR Electric had approximately 27% and 16%,
respectively, of their load requirements provided by competitive
suppliers.
Sources and Availability of Electric Power Supply
NSTAR Electric expects to continue to make periodic market
solicitations for default service and standard offer power supply
consistent with provisions of the Restructuring Act and MDTE
orders. NSTAR Electric has existing long-term power purchase
agreements that are expected to supply approximately 80%-85% of
its standard offer service obligation for 2003. NSTAR Electric
has contracted with a third party supplier to provide 100% of its
standard offer supply obligation through December 31, 2003. In
connection with this arrangement, NSTAR Electric has assigned its
long-term power purchase agreements to this supplier through
December 31, 2003. NSTAR Electric is recovering its payments to
suppliers through MDTE approved rates billed to customers. NSTAR
Electric's existing portfolio of long-term power purchase
contracts supplied the majority of its standard offer (including
wholesale) energy requirements in 2002. Also during 2002, NSTAR
Electric entered into an agreement whereby all of its energy
supply resource entitlements were transferred to an independent
energy supplier, following which NSTAR Electric repurchased its
energy resource needs from this independent energy supplier for
NSTAR Electric's ultimate sale to standard offer customers.
NSTAR Electric has entered into a short-term power purchase
agreement to meet its entire default service supply obligation
for the period January 1, 2003 through June 30, 2003 and for 50%
of its obligation for the second-half of 2003. A Request for
Proposals will be issued in the second quarter of 2003 for the
remainder of the obligation. NSTAR Electric entered into
agreements ranging in length from five to twelve-months effective
January 1, 2002 through December 31, 2002 with suppliers to
provide full default service energy and ancillary service
requirements at contract rates approved by the MDTE.
NSTAR's electric load reached an all-time level peak demand of
4,501 megawatts (MW) on August 14, 2002 and surpassed the 2001
peak load by 1.1%.
Independent System Operator - New England (ISO-NE)
Prior to March 1, 2003, ISO-NE dispatched generating units based
on the lowest operating costs of available generation and
transmission. Under this structure, generators were required to
provide ISO-NE with market prices at which they sell short-term
energy supply. For each participant actively involved in the
power market, the imbalance in energy provided by a participant
and the energy consumed by such participant in each hour is
settled at a single real-time clearing hourly price for such
power. Pursuant to orders issued by the Federal Energy
Regulatory Commission (FERC) in September and December of 2002,
these markets have been further restructured into Standard Market
Design (SMD), which began on March 1, 2003. SMD provides an
additional market in which wholesale power costs can be hedged a
day in advance through binding financial commitments. Also,
under SMD, wholesale power clearing prices vary by location, with
prices increasing in areas where less efficient resources close
to the load are dispatched to meet the load requirements due to
the fact that the more efficient resources cannot be imported as
a result of transmission limitations. As part of the movement to
SMD, load-serving entities, like NSTAR, will be granted proceeds
from the auction of "financial transmission rights" that is
conducted by ISO-NE. Holders of these rights are essentially
entitled to the positive differences in the prices between the
locations specified for such rights and are subject to additional
costs for negative differences. NSTAR can either use these
proceeds to mitigate costs to customers directly or transfer them
to the suppliers of its energy resource needs to reduce the cost
to customers. Therefore, the impact of the change to SMD on
NSTAR's costs to meet its standard offer service and default
service obligations are mitigated somewhat.
NSTAR Gas
NSTAR Gas' operating revenues and energy sales percentages by
customer class for the years 2002, 2001 and 2000, consisted of
the following:
Revenues ($) Energy Sales (therms)
Gas Sales and 2002 2001 2000 2002 2001 2000
Transportation:
Residential 64% 58% 59% 42% 43% 41%
Commercial 21% 27% 24% 34% 34% 32%
Industrial and other 9% 10% 11% 19% 18% 17%
Off-System and contract sales 6% 5% 6% 5% 5% 10%
NSTAR Gas distributes natural gas to approximately 0.3 million
customers in 51 communities in central and eastern Massachusetts
covering 1,067 square miles and having an aggregate population of
1,176,000. Twenty-five of these communities are also served with
electricity by NSTAR Electric. Some of the larger communities
served by NSTAR Gas include Cambridge, Somerville, New Bedford,
Plymouth, Worcester, Framingham, Dedham and the Hyde Park area of
Boston.
Natural Gas Industry Restructuring and Rates
Effective November 1, 2000, the MDTE approved regulations that
expand the choice of gas supplier to all customers of local gas
distribution companies (LDCs) such as NSTAR Gas. The regulations
established a five-year transition period and a three-year review
of market conditions to determine whether the capacity market has
become sufficiently competitive to warrant removal or
modification of the LDC's service obligation with respect to
planning and procurement. To meet the requirements of the
restructuring regulations, NSTAR Gas has modified its billing,
customer and gas supply systems to accommodate full retail
choice. The MDTE previously had approved the compliance process
submitted by NSTAR Gas and other LDCs that implement the
unbundling of retail gas services to all customers. Among the
important provisions are: setting the LDC as the default service
provider, certification of competitive suppliers/marketers,
extension of the MDTE's consumer protection rules to residential
customers taking competitive service, requirement for LDCs to
provide suppliers/marketers with customer usage data, and
requirement for suppliers/marketers to disclose service terms to
potential customers. The MDTE has also ruled on requiring the
mandatory assignment of the LDC's upstream pipeline and storage
capacity and downstream peaking capacity to customers who elect a
competitive gas supply. This eliminates potential stranded cost
exposure for the LDCs.
NSTAR Gas generates revenues primarily through the sale and/or
transportation of natural gas. Gas sales and transportation
services are divided into two categories: firm, whereby NSTAR Gas
must supply gas and/or transportation services to customers on
demand; and interruptible, whereby NSTAR Gas may, generally
during colder months, temporarily discontinue service to high
volume commercial and industrial customers. Sales and
transportation of gas to interruptible customers do not
materially affect NSTAR Gas' operating income because
substantially the entire margin on such service is returned to
its firm customers as cost reductions.
In addition to delivery service rates, NSTAR Gas' tariffs include
a seasonal Cost of Gas Adjustment Clause (CGAC) and a Local
Distribution Adjustment Clause (LDAC). The CGAC provides for the
recovery of all gas supply costs from firm sales customers or
default service customers. The LDAC provides for the recovery of
certain costs applicable to both sales and transportation
customers. The CGAC is filed semi-annually for approval by the
MDTE. The LDAC is filed annually for approval. In addition,
NSTAR Gas is required to file interim changes to its CGAC factor
when the actual costs of gas supply vary from projections by more
than 5%.
Gas Supply
NSTAR Gas maintains a flexible resource portfolio consisting of
gas supply contracts, transportation contracts on interstate
pipelines, market area storage and peaking services. In order to
control costs and to efficiently manage the gas supply needs of
its customers, NSTAR Gas optimizes its supply mix to ensure
maximum resource utilization.
NSTAR Gas purchases transportation, storage and balancing
services from Tennessee Gas Pipeline Company and Algonquin Gas
Transmission Company, as well as other upstream pipelines that
bring gas from major producing regions in the U.S., Gulf of
Mexico and Canada to the final delivery points in the NSTAR Gas
service area. NSTAR Gas purchases all of its gas supplies from
third-party vendors, primarily under firm contracts with terms of
less than one year. The vendors vary from small independent
marketers to major gas and oil producers. Based on its firm
pipeline transportation capacity entitlements, NSTAR Gas
contracts for up to 140,309 Million British thermal units (MMBtu)
per day of domestic production. In addition, NSTAR Gas has an
agreement for up to 4,500 MMBtu per day of Canadian supplies.
In addition to the firm transportation and gas supplies mentioned
above, NSTAR Gas utilizes contracts for underground storage and
liquefied natural gas (LNG) facilities to meet its winter peaking
demands. The LNG facilities, described below, are located within
NSTAR Gas' distribution system and are used to liquefy and store
pipeline gas during the warmer months for use during the heating
season. The underground storage contracts are a combination of
existing and new agreements that are the result of FERC Order 636
service unbundling. During the summer injection season, excess
pipeline capacity is used to deliver and store gas in market area
storage facilities, located in the New York and Pennsylvania
region. Stored gas is withdrawn during the winter season to
supplement pipeline supplies in order to meet firm heating
demand. NSTAR Gas has firm storage capacity entitlements of over
7.5 billion cubic feet (Bcf).
A portion of the storage of gas supply for NSTAR Gas during the
winter heating season is provided by Hopkinton LNG Corp.
(Hopkinton), a wholly-owned unregulated subsidiary of NSTAR. The
facility in Hopkinton, Massachusetts consists of a liquefaction
and vaporization plant and three above ground cryogenic storage
tanks having an aggregate capacity of 3 Bcf of natural gas.
In addition, Hopkinton owns a satellite vaporization plant and
two above-ground cryogenic storage tanks located in Acushnet,
Massachusetts with an aggregate capacity of 0.5 Bcf of natural
gas that are filled with LNG trucked from Hopkinton or purchased
from third parties.
Based upon information presently available regarding projected
growth in demand and estimates of availability of future supplies
of pipeline gas, NSTAR Gas believes that its present sources of
gas supply are adequate to meet existing load and allow for
future growth in sales.
Franchises
Through their charters, which are unlimited in time, NSTAR
Electric and NSTAR Gas have the right to engage in the business
of distributing and selling electricity and natural gas and have
powers incidental thereto and are entitled to all the rights and
privileges of and subject to the duties imposed upon electric and
natural gas companies under Massachusetts laws. The locations in
public ways for electric transmission and distribution lines or
gas distribution pipelines are obtained from municipal and other
state authorities which, in granting these locations, act as
agents for the state. In some cases the actions of these
authorities are subject to appeal to the MDTE. The rights to
these locations are not limited in time and are subject to the
action of these authorities and the legislature. No other entity
shall provide distribution service within NSTAR's territory
without the written consent of NSTAR Electric and/or NSTAR Gas.
This consent must be filed with the MDTE and the municipality so
affected.
Unregulated Operations
NSTAR's unregulated operations segment engages in businesses that
include district energy operations, telecommunications and
liquefied natural gas service. District energy operations are
principally provided through its Advanced Energy Systems, Inc.
(AES) facility that generates chilled water, steam and
electricity for use by hospitals and teaching facilities located
in Boston's Longwood Medical Area. AES is expanding its Medical
Area Total Energy Plant (MATEP) facility in 2003 to provide
additional capacity. NSTAR Steam also supplies steam customers
in Cambridge and Boston. Telecommunications services are
provided through NSTAR Com, which installs, owns, operates and
maintains a wholesale transport network for other
telecommunications service providers in the metropolitan Boston
area to deliver voice, video, data and internet services to
customers. Liquefied natural gas service is provided by
Hopkinton LNG Corp. In 2000, NSTAR's subsidiary Northwind Boston
LLC (Northwind) notified its chilled water customers of its
decision to exit the business and that service ceased effective
September 30, 2002, in accordance with its contractual
obligations.
RCN Joint Venture and Investment Conversion
NSTAR Com participated in a telecommunications venture with RCN
Telecom Services, Inc. of Massachusetts, a subsidiary of RCN
Corporation (RCN), prior to the conversion of its equity interest
into common shares of RCN, as further discussed below. NSTAR Com
accounted for its investment in the joint venture using the
equity method of accounting. As part of the Joint Venture
Agreement, NSTAR Com had the option to exchange portions of its
joint venture interest for common shares of RCN at specified
periods. As of December 31, 2002, NSTAR Com no longer
participates in the joint venture but holds 11.6 million common
shares of RCN. The investment in these common shares is
accounted for as marketable securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). Under SFAS 115, NSTAR has classified its
investment in RCN securities as available for sale.
NSTAR Com recognized impairments of its investment in RCN in the
first quarter of 2001 and in the second and fourth quarters of
2002. For a further discussion, refer to the "Investments -
Available for Sale Securities" section in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Regulation
NSTAR Electric, NSTAR Gas, and Boston Edison's wholly owned
regulated subsidiary, Harbor Electric Energy Company, operate
primarily under the authority of the MDTE, whose jurisdiction
includes supervision over retail rates for distribution of
electricity, natural gas and financing and investing activities.
In addition, the FERC has jurisdiction over various phases of
NSTAR Electric and NSTAR Gas utility businesses, including rates
for electricity and natural gas sold at wholesale, facilities
used for the transmission or sale of that energy, certain
issuances of short-term debt and regulation of the accounting.
NSTAR is a holding company exempt from the provisions of the
Public Utility Holding Company Act of 1935, as amended, except
Section 9(c)(2) relating to SEC approval of certain acquisitions
of securities of public utility or public utility holding
companies.
Capital Expenditures and Financings
The most recent estimates of capital expenditures and long-term
debt maturities requirements for the years 2003 through 2007 are
as follows:
2003 2004 2005 2006 2007
(in thousands)
Capital expenditures $286,000 $250,000 $202,000 $178,000 $180,000
Long-term debt $212,746 $ 78,659 $177,562 $ 98,024 $ 83,218
Management continuously reviews its capital expenditure and
financing programs. These programs and, therefore, the estimates
included in this Form 10-K are subject to revision due to changes
in regulatory requirements, operating requirements, environmental
standards, availability and cost of capital, interest rates and
other assumptions.
Plant expenditures in 2002 were $368.1 million and consisted
primarily of additions to NSTAR's distribution and transmission
systems. The majority of these expenditures were for system
reliability and performance improvements, customer service
enhancements and capacity expansion to meet long-range growth in
the NSTAR service territory.
Refer to the "Liquidity and Capital Resources" section of Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information regarding capital
resources to fund NSTAR's construction programs.
Seasonal Nature of Business
NSTAR Electric kilowatt-hour sales and revenues are typically
higher in the winter and summer than in the spring and fall as
sales tend to vary with weather conditions. NSTAR Gas' sales are
positively impacted by colder weather because a substantial
portion of its customer base uses natural gas for space heating
purposes. Refer to the "Selected Consolidated Quarterly
Financial Data" section in Item 6, "Selected Consolidated
Financial Data" for specific financial information by quarter for
2002 and 2001.
Competitive Conditions
The electric and natural gas industries have continued to change
in response to legislative, regulatory and marketplace demands
for improved customer service at lower prices. These pressures
have resulted in an increasing trend in the industry to seek
competitive advantages and other benefits through business
combinations. NSTAR was created to operate in this marketplace
by combining the resources of its utility subsidiaries activities
in the transmission and distribution of energy.
Environmental Matters
NSTAR's 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 costs by
substantial amounts. Noncompliance with certain standards can,
in some cases, also result in the imposition of monetary civil
penalties. Refer to the "Contingencies - Environmental Matters"
section in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for more
information.
Management believes that its facilities are in substantial
compliance with currently applicable statutory and regulatory
environmental requirements.
Number of Employees
As of December 31, 2002, NSTAR had approximately 3,300 employees,
including approximately 2,400, or 73% of whom are represented by
three collective bargaining units covered by separate contracts.
Local 369 of the Utility Workers Union of America, AFL-CIO,
represents approximately 2,075 employees with a five-year
contract that expires on May 15, 2005.
A collective bargaining unit contract representing approximately
260 employees expired on March 31, 2002. On March 24, 2002,
Local 12004, United Steelworkers of America, AFL-CIO-CLC,
ratified a new four-year contract that expires on March 31, 2006.
Approximately 70 employees of Advanced Energy Systems' MATEP
subsidiary are represented by Local 877, the International Union
of Operating Engineers, AFL-CIO, through a labor agreement that
expires on September 30, 2006.
Management believes it has satisfactory relations with its
employees.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
None of NSTAR's subsidiaries have any foreign operations or
export sales.
Item 2. Properties
NSTAR Electric properties include an integrated system of
distribution lines and substations, an office building and other
structures such as garages and service centers that are located
primarily in eastern Massachusetts.
At December 31, 2002, the NSTAR Electric primary and secondary
transmission and distribution system consisted of approximately
20,300 circuit miles of overhead lines, approximately 8,500
circuit miles of underground lines, 266 substation facilities and
approximately 1,121,000 active customer meters.
NSTAR Electric's high-tension transmission lines are generally
located on land either owned or subject to perpetual and
exclusive easements in its favor. Its low-tension distribution
lines are located principally on public property under permission
granted by municipal and other state authorities.
NSTAR, through its Canal subsidiary, sold its 3.52% ownership
interest (40.5 MW of capacity) in the Seabrook Nuclear Generating
Station on November 1, 2002.
NSTAR Gas' principal natural gas properties consist of
distribution mains, services and meters necessary to maintain
reliable service to customers. At December 31, 2002, the gas
system included approximately 2,900 miles of gas distribution
lines, approximately 176,300 services and approximately 270,700
customer meters together with the necessary measuring and
regulating equipment. In addition, NSTAR (through Hopkinton LNG
Corp.) owns a liquefaction and vaporization plant, a satellite
vaporization plant and above ground cryogenic storage tanks
having an aggregate storage capacity equivalent to 3.5 Bcf of
natural gas. NSTAR Gas owns an office and service building in
Southborough, Massachusetts, three district office buildings and
several natural gas receiving and take stations.
In 2002, NSTAR purchased a 370,000 square foot office building
(the Summit) sited on 33 acres in the Boston suburb of Westwood,
Massachusetts. This site is centrally located in NSTAR's service
area and houses central administrative offices including customer
care, finance, human resources, sales, engineering, and
information technology.
District energy operations primarily consist of the MATEP
facility located in the Longwood Medical Area of Boston. MATEP
provides steam, chilled water and electricity to over 9 million
square feet of medical and teaching facilities. NSTAR Steam's
distribution system consists primarily of approximately 3.5 miles
of high pressure steam lines to customers in Cambridge and
Boston.
Item 3. Legal Proceedings
Merger Rate Plan Appeal
On December 16, 2002, the Massachusetts Supreme Judicial Court
(SJC) affirmed the MDTE's 1999 decision to allow for the merger
of BEC and COM/Energy as originally structured. The SJC decision
finalized the resolution of all issues relating to this appeal
and did not have any impact on NSTAR's 2002 or prior periods'
consolidated financial position, cash flows or results of
operations. The 1999 MDTE order approving the rate plan
associated with the merger of BEC and COM/Energy, was appealed to
the SJC by the Massachusetts Attorney General (AG) and a separate
group that consisted of The Energy Consortium (TEC) and Harvard
University (Harvard). TEC and Harvard alleged that, in approving
the rate plan and merger proposal, the MDTE committed errors of
law in the following areas: (1) in adopting a public interest
standard, the MDTE applied the wrong standard of review, and
failed to investigate the propriety of rates and to determine
that the resulting rates of Boston Edison, Cambridge Electric,
ComElectric and NSTAR Gas were just and reasonable; (2) that in
permitting Cambridge Electric and ComElectric to adjust their
rates by $49.8 million to reflect demand-side management costs,
the MDTE failed to determine whether such an adjustment was
warranted in light of other cost decreases; (3) that the MDTE's
approval results in an arbitrary and unjustified sharing of
benefits and costs between ratepayers and shareholders; and (4)
that the MDTE's approval of the rate plan guarantees shareholders
recovery of future costs without any future demonstration of
customer savings. The AG made similar arguments in each of these
areas and added that, in allowing recovery of the acquisition
premium, the MDTE improperly deviated from a cost basis in
setting approved rates and the ratemaking policies in other
jurisdictions.
Other Legal Matters
In the normal course of its business, NSTAR and its subsidiaries
are involved in certain legal matters, including civil lawsuits.
Management is unable to fully determine a range of reasonably
possible court-ordered damages, settlement amounts, and related
litigation costs ("legal liabilities") that would be in excess of
amounts accrued. Based on the information currently available,
NSTAR does not believe that it is probable that any such
additional legal liability will have a material impact on its
consolidated financial position. However, it is reasonably
possible that additional legal liabilities that may result from
changes in estimates could have a material impact on its results
of operations for a reporting period.
Item 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 2002.
Item 4A. Executive Officers of Registrant
Identification of Executive Officers
Age at
December 31,
Name of Officer Position and Business Experience 2002
Thomas J. May Chairman, President (since 2002), 55
Chief Executive Officer and a
Trustee (since 1999); formerly
Chairman, President and Chief
Executive Officer and a Trustee
(1998-1999), BEC Energy, and
Chairman, President and Chief
Executive Officer and a Director
(1995-1999), Boston Edison
Company; Director, FleetBoston
Financial; Liberty Mutual Holding
Company Inc.; New England Business
Services, Inc. and RCN
Corporation.
Douglas S. Horan Senior Vice President - Strategy, 53
Law and Policy, Secretary and
General Counsel (since 2000);
formerly Senior Vice President -
Strategy, Law and Policy (1999-
2000); Senior Vice President -
Strategy and Law and General
Counsel, BEC Energy (1998-1999)
and Boston Edison Company (1995-
1999).
James J. Judge Senior Vice President, Treasurer 46
and Chief Financial Officer (since
2000); formerly Senior Vice
President and Chief Financial
Officer (1999-2000); Senior Vice
President - Corporate Services and
Treasurer, BEC Energy (1998-1999);
Senior Vice President - Corporate
Services and Treasurer, Boston
Edison Company (1995-1999).
Timothy R. Manning Senior Vice President - Human 51
Resources (since 2002); formerly
Vice President Human Resources
(2001); Director of Employee and
Labor Relations (1999-2001);
Director of Human Resources,
Boston Edison Company (1998-1999).
Age at
December 31,
Name of Officer Position and Business Experience 2002
Joseph R. Nolan, Jr. Senior Vice President - Customer 39
Care and Corporate Relations
(since 2002); formerly Senior Vice
President - Corporate Relations
(2000-2002); Vice President of
Government Affairs (1999-2000);
Director of Regulatory Relations,
BEC Energy (1998-1999); Manager of
Legislative Affairs, Boston Edison
Company (1994-1998).
Werner J. Schweiger Senior Vice President - Operations 43
(since 2002); formerly Vice
President, Office of Electric
Operations/Transmission and
Distribution Management, Keyspan
Energy Corporation (1997-2002).
Eugene J. Zimon Senior Vice President - 54
Information Technology (since
2001); formerly Vice President,
Business Development for
Utilities, Oracle Corporation
(2000-2001); Vice President,
Information Services, Boston Gas
Company (1996-2000).
Robert J. Weafer, Jr. Vice President, Controller and 55
Chief Accounting Officer (since
1999); formerly Vice President,
Controller and Chief Accounting
Officer, BEC Energy (1998-1999)
and Boston Edison Company (1991-
1998).
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
(a) Market Information
NSTAR's common shares are listed on the New York and Boston Stock
Exchanges. NSTAR's closing market price at December 31, 2002
was $44.39 per share.
The high and low market values per common share as reported by
the New York Stock Exchange composite transaction reporting
system for each of the quarters in 2002 and 2001 were as follows:
2002 2001
High Low High Low
First quarter $46.00 $42.30 $42.69 $33.94
Second quarter $48.20 $43.66 $43.85 $36.78
Third quarter $45.17 $34.00 $45.05 $39.50
Fourth quarter $44.70 $36.90 $45.24 $40.10
(b) Holders
As of December 31, 2002, there were 28,262 holders of NSTAR
common shares.
(c) Dividends
Dividends declared per common share for each of the quarters in
2002 and 2001 were as follows:
2002 2001
First quarter $0.53 $0.515
Second quarter $0.53 $0.515
Third quarter $0.53 $0.515
Fourth quarter $0.54 $0.53
Item 6. Selected Consolidated Financial Data
The following table summarizes five years of selected
consolidated financial data.
(in thousands, except per share data)
2002 2001 2000 1999(c) 1998(d)
Operating revenues $2,719,067 $3,191,836 $2,692,762 $1,851,427 $1,622,515
Net income (a) $ 163,667 $ 3,201 $ 180,962 $ 146,463 $ 141,046
Earnings (loss) per share
of common stock:
Basic (a) $ 3.05 $ (0.05) $ 3.19 $ 2.77 $ 2.76
Diluted (a) $ 3.03 $ (0.05) $ 3.18 $ 2.76 $ 2.75
Total assets $6,123,275 $5,328,191 $5,547,715 $5,466,143 $3,204,036
Long-term debt (b) $1,645,465 $1,377,899 $1,440,431 $ 986,843 $ 955,563
Transition property
securitization (b) $ 445,890 $ 513,904 $ 584,130 $ 646,559 $ -
Redeemable preferred
stock of subsidiary (b) $ 43,000 $ 43,000 $ 43,000 $ 92,279 $ 92,040
Cash dividends declared
per common share $ 2.13 $ 2.075 $ 2.015 $ 1.955 $ 1.895
(a) 2002 and 2001 include non-cash, after-tax charges oF $17.7 million
and $173.9 million, or $0.33 per share and $3.28 per share,
respectively, related to NSTAR's investment in RCN Corporation.
(b) Excludes the current portion of long-term debt and preferred stock.
(c) Due to the application of the purchase method of accounting, the
results for 1999 reflect eight months of BEC Energy and four months
of NSTAR.
(d) Results for 1998 reflect only BEC Energy.
Selected Consolidated Quarterly Financial Data (Unaudited)
(in thousands, except earnings per share)
Earnings
(Loss) Earnings
Net Available (Loss)
Income for Common Per Basic
Operating Operating (Loss) Shareholders Common Share
Revenues Income (a) (a) (a)
2002
First quarter $722,865 $ 76,715 $ 34,794 $ 34,304 $ 0.65
Second quarter $600,446 $ 69,061 $ 5,690 $ 5,200 $ 0.10
Third quarter $701,001 $117,141 $ 73,717 $ 73,227 $ 1.38
Fourth quarter $694,755 $ 74,680 $ 49,466 $ 48,976 $ 0.92
2001
First quarter $864,822 $ 89,268 $(132,256) $(133,746) $ (2.52)
Second quarter $732,273 $ 81,677 $ 37,710 $ 36,220 $ 0.68
Third quarter $890,748 $114,983 $ 68,636 $ 67,146 $ 1.27
Fourth quarter $703,993 $ 64,833 $ 29,111 $ 27,954 $ 0.52
(a) The second quarter of 2002 includes a non-cash, after-tax impairment
charge of $27.6 million, or $0.52 per share, related to NSTAR's
investment in RCN Corporation common stock.
The fourth quarter of 2002 includes a net gain of $9.9 million,
or $0.19 per share, that reflects the recognition of tax benefits
of $19.6 million, or $0.37 per share, related to NSTAR's investment
in RCN Corporation offset, in part, by an additional non-cash,
after-tax impairment charge of $9.7 million, or $0.18 per share,
associated with the RCN investment.
The first quarter of 2001 includes a non-cash, after-tax
charge of $173.9 million, or $3.28 per share, related to the
RCN investment.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A)
Overview
NSTAR is an energy delivery company focusing its activities in
the transmission and distribution of energy. NSTAR serves
approximately 1.4 million customers in Massachusetts, including
approximately 1.1 million electric customers in 81 communities
and 0.3 million gas customers in 51 communities. NSTAR is a
public utility holding company generally exempt from the
provisions of the Public Utility Holding Company Act of 1935.
NSTAR's retail utility subsidiaries are Boston Edison Company
(Boston Edison), Commonwealth Electric Company (ComElectric),
Cambridge Electric Light Company (Cambridge Electric) and NSTAR
Gas Company (NSTAR Gas). Its wholesale electric subsidiary is
Canal Electric Company (Canal). NSTAR's three retail electric
companies operate under the brand name "NSTAR Electric."
Reference in this report to "NSTAR" shall mean the registrant
NSTAR or one or more of its subsidiaries as the context requires.
Reference in this report to "NSTAR Electric" shall mean each of
Boston Edison, ComElectric and Cambridge Electric. NSTAR's non-
utility, unregulated operations include district energy
operations (Advanced Energy Systems, Inc. and NSTAR Steam
Corporation), telecommunications operations - NSTAR
Communications, Inc. (NSTAR Com) and a liquefied natural gas
service company (Hopkinton LNG Corp.). Utility operations
accounted for approximately 96% of revenues in 2002, 2001 and
2000.
Cautionary Statement
This MD&A contains certain forward-looking statements such as
forecasts and projections of expected future performance or
statements of management's plans and objectives. These forward-
looking statements may also be contained in other filings with
the SEC, in press releases and oral statements. You can identify
these statements by the fact that they do not relate strictly to
historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning in
connection with any discussion of future operating or financial
performance. These statements are based on the current
expectations, estimates or projections of management and are not
guarantees of future performance. Some or all of these forward-
looking statements may not turn out to be what NSTAR expected.
Actual results could potentially differ materially from these
statements. Therefore, no assurance can be given that the
outcomes stated in such forward-looking statements and estimates
will be achieved.
The impact of continued cost control procedures on operating
results could differ from current expectations. NSTAR's revenues
from its electric and gas sales are sensitive to weather, the
economy and other variable conditions. Accordingly, NSTAR's sales
in any given period reflect, in addition to other factors, the
impact of weather, with colder winter temperatures generally
resulting in increased gas sales and warmer summer temperatures
generally resulting in increased electric sales. NSTAR
anticipates that these sensitivities to seasonal and other
weather conditions will continue to impact its sales forecasts in
future periods. The effects of changes in weather, economic
conditions, tax rates, interest rates, technology, and prices and
availability of operating supplies could materially affect the
projected operating results.
NSTAR's forward-looking information is based in large measure on
prevailing governmental policies and regulatory actions,
including those of the MDTE and the FERC, with respect to allowed
rates of return, rate structure, continued recovery of regulatory
assets, financings, purchased power and cost of gas recovery,
acquisition and disposition of assets, operation and construction
of facilities, changes in tax laws and policies and changes in
and compliance with environmental and safety laws and policies.
The impacts of various environmental, legal, and regulatory
matters could differ from current expectations. 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 the specific cleanup technology could affect the estimated
cleanup liabilities. The impacts of changes in available
information and circumstances regarding legal issues could affect
any estimated litigation costs.
NSTAR undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future
events, or otherwise. You are advised, however, to consult all
further disclosures NSTAR makes in its filings to the SEC. Also
note that NSTAR provided in the above paragraphs a cautionary
discussion of risks and other uncertainties relative to its
business. These are factors that could cause its actual results
to differ materially from expected and historical performance.
Other factors in addition to those listed here could also
adversely affect NSTAR. This report also describes material
contingencies and critical accounting policies and estimates
in this section and in the accompanying Notes to Consolidated
Financial Statements, and NSTAR encourages a review of these
Notes.
Critical Accounting Policies and Estimates
NSTAR's discussion and analysis of its financial condition,
results of operations and cash flows are based upon the
accompanying Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation
of these Consolidated Financial Statements required management to
make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the date of
the Consolidated Financial Statements. Actual results may differ
from these estimates under different assumptions or conditions.
Critical accounting policies and estimates are defined as those
that are reflective of significant judgment and uncertainties,
and potentially may result in materially different outcomes under
different assumptions and conditions. NSTAR believes that its
accounting policies and estimates that are most critical to the
reported results of operations, cash flows and financial position
are described below.
a. Revenue Recognition
Utility revenues are based on authorized rates approved by the
MDTE and FERC. Estimates of transmission, distribution and
transition revenues for electricity and natural gas delivered to
customers but not yet billed are accrued at the end of each
accounting period. The determination of unbilled revenues
requires management to estimate the volume and pricing of
electricity and gas delivered to customers prior to actual meter
readings.
Revenues related to the sale, transmission and distribution of
energy are generally recorded when service is rendered or energy
is delivered to customers. However, the determination of the
energy sales to individual customers is based on the reading of
their meters that are read on a systematic basis throughout the
month. Meters which are not read during a given month are
estimated and trued-up in a future period. At the end of each
month, amounts of energy delivered to customers since the date of
the last billing date are estimated and the corresponding
unbilled revenue is estimated. This unbilled electric revenue is
estimated each month based on daily generation volumes (territory
load), line losses and applicable customer rates. Unbilled
natural gas revenues are estimated based on estimated purchased
gas volumes and tariffed rates in effect. Accrued unbilled
revenues recorded in the accompanying Consolidated Balance Sheets
as of December 31, 2002 and 2001 were $47 million and $51
million, respectively.
NSTAR's non-utility revenues are recognized when services are
rendered or when the energy is delivered. Revenues are based,
for the most part, on long-term contractual rates.
b. Regulatory Accounting
NSTAR follows accounting policies prescribed by GAAP, the FERC
and the MDTE. As a rate-regulated company, NSTAR is subject to
the Financial Accounting Standards Board, Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). The application of
SFAS 71 results in differences in the timing of recognition of
certain revenues and expenses from that of other businesses and
industries. NSTAR's energy delivery business remains subject to
rate-regulation and continues to meet the criteria for
application of SFAS 71. This ratemaking process results in the
recording of regulatory assets based on the probability of
current and future cash inflows. Regulatory assets represent
incurred costs that have been deferred because they are probable
of future recovery in customer rates. As of December 31, 2002
and 2001, NSTAR has recorded regulatory assets of $2 billion
and $1 billion, respectively. This increase is primarily the
result of the recognition of certain purchased power costs.
NSTAR continuously reviews these assets to assess their ultimate
recoverability within the approved regulatory guidelines. NSTAR
expects to fully recover these regulatory assets in its rates.
If future recovery of costs ceases to be probable, NSTAR would be
required to charge these assets to current earnings. However,
impairment risk associated with these assets relates to
potentially adverse legislative, judicial or regulatory actions
in the future. Regulatory assets related to the generation
business are recovered through the transition charge.
c. Derivative Instruments - Power Contracts
Typically, the electric power industry contracts to buy and sell
electricity under option contracts, which allow the buyer some
flexibility in determining when to take electricity and in what
quantity to match fluctuating demand. These contracts would
normally meet the definition of a derivative requiring mark-to-
market accounting. However, because electricity cannot be stored
and an entity is obligated to maintain sufficient capacity to
meet the electricity needs of its customer base, an option
contract for the purchase of electricity typically qualifies for
the normal purchases and sales exception described in SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities" and Derivative Implementation Group (DIG) Issue No.
C15, "Scope Exceptions: Normal Purchases and Normal Sales
Exception for Option-Type Contracts and Forward Contracts in
Electricity."
NSTAR Electric has long-term purchased power agreements that are
used primarily to meet its standard offer obligation. The
majority of these agreements are above-market but are not
reflected on the accompanying Consolidated Balance Sheets as they
qualify for the normal purchases and sales exception. However,
in Issue C15, the DIG concluded that contracts with a pricing
mechanism that are subject to future adjustment based on a
generic index that is not specifically related to the contracted
service commodity generally would not qualify for the normal
purchases and sales exception. NSTAR has six purchased power
contracts that contain components with pricing mechanisms that
are based on a pricing index, such as the GNP or CPI. Although
these factors are only applied to certain ancillary pricing
components of these agreements, as required by the interpretation
of DIG Issue C15, NSTAR began recording these contracts at fair
value on its Consolidated Balance Sheets during 2002. This
action resulted in the recognition of a liability for the fair
value of the above-market portion of these contracts at December
31, 2002 of approximately $701 million and is reflected as a
component of Deferred credits - Power contracts on the
accompanying Consolidated Balance Sheets.
These contracts are valued using a discounted cash flow model and
a 10% discount rate. The market value assumption used was
provided by a third party who determines such pricing for the New
England power market. Had management used an alternative
assumption, the value of these contracts at December 31, 2002
would have changed significantly. A one percent increase or
decrease to the discount rate would change the above market value
by approximately $27 million from what is presently recorded.
NSTAR Electric recovers all of its electricity supply costs,
including the above-market costs. The recovery of its above-
market costs occurs through 2016 for Boston Edison, through 2023
for ComElectric and through 2011 for Cambridge Electric. These
recovery periods coincide with the contractual terms of these
purchased power agreements. Therefore, in addition to the
liability recorded, NSTAR also recorded a corresponding
regulatory asset representing the future recovery of these actual
costs.
d. Pension and Other Postretirement Benefits
NSTAR's pension and other postretirement benefits costs are
dependent upon several factors and assumptions, such as employee
demographics, the level of cash contributions made to the plans,
earnings on the plans' assets, the discount rate, the expected
long-term rate of return on the plans' assets and health care
cost trends.
In accordance with SFAS No. 87, "Employers' Accounting for
Pensions" (SFAS 87) and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106), changes
in pension and postretirement benefit obligations other than
pensions (PBOP) associated with these factors may not be
immediately recognized as pension and PBOP costs in the
statements of income, but generally are recognized in future
years over the remaining average service period of the plans'
participants.
There were no changes to NSTAR's pension plan benefits in 2002,
2001 and 2000 that had a significant impact on recorded pension
costs. As further described in Note G to the accompanying
Consolidated Financial Statements, NSTAR has revised the discount
rate in 2002 as compared to 2001 and 2000. In addition, NSTAR
revised the expected long-term rate of return on its pension and
PBOP plan assets for 2003 to 8.4% and 8%, respectively, reduced
from 9.4% and 9% in 2002, respectively. These changes will have
a significant impact on reported pension costs in future years in
accordance with the cost recognition approach of SFAS 87
described above. This impact will be mitigated, to an extent,
through NSTAR's regulatory accounting treatment of pension and
PBOP costs. (See further discussion of regulatory accounting
treatment below). In determining pension obligation and cost
amounts, these assumptions may change from period to period, and
such changes could result in material changes to recorded pension
and PBOP costs and funding requirements.
NSTAR's Pension Plan (the Plan) assets, which partially consist
of equity investments, have been affected by significant declines
in the equity markets in the past three years. Fluctuations in
equity market returns may result in increased or decreased
pension costs in future periods. These conditions impacted the
funded status of the Plan at December 31, 2002, and therefore,
will also impact pension costs for 2003.
The following chart reflects the projected benefit obligation and
cost sensitivities associated with a change in certain actuarial
assumptions by the indicated percentage. Each sensitivity below
reflects an evaluation of the change based solely on a change in
that assumption.
(in thousands) Impact on
Projected
Benefit Impact on 2002 Cost
Actuarial Assumption Change in Assumption Obligation (Increase)/Decrease
Pension:
Increase in discount rate 50 basis points $ (48,693) $ (3,220)
Decrease in discount rate 50 basis points $ 52,580 $ 3,410
Increase in expected long-term
rate of return on plan assets 50 basis points NA $ 3,935
Decrease in expected long-term
rate of return on plan assets 50 basis points NA $ (3,935)
Other Postretirement Benefits:
Increase in discount rate 50 basis points $ (37,289) $ (2,235)
Decrease in discount rate 50 basis points $ 41,695 $ 2,723
Increase in expected long-term
rate of return on plan assets 50 basis points NA $ 1,164
Decrease in expected long-term
rate of return on plan assets 50 basis points NA $ (1,164)
NA-not applicable
NSTAR's discount rate is based on rates of high quality corporate
bonds as published by nationally recognized rating agencies.
In determining the expected long-term rate of return on plan
assets, NSTAR considers past performance and economic forecasts
for the types of investments held by the Plan. In 2003, NSTAR
reduced the expected long-term rate of return on plan assets from
9.4% to 8.4% as a result of the prevailing outlook for equity
market returns. Reported pension costs will increase in 2003 and
future years as a result of this changed assumption. However, as
a result of the MDTE Accounting Order (Accounting Order)
discussed below, this increase will not have a material impact on
NSTAR's results of operations.
The unfavorable market conditions have impacted the value of Plan
assets. As a result of the negative investment performance, the
Plan's accumulated benefit obligation (ABO) exceeded Plan assets
at December 31, 2002. The ABO represents the present value of
benefits earned without considering future salary increases.
Since the fair value of its Plan assets is less than the ABO,
NSTAR is required to record this difference as an additional
minimum pension liability on the accompanying Consolidated
Balance Sheets.
Under SFAS 87, NSTAR is also required to eliminate its prepaid
pension balance. The additional minimum pension liability
adjustment is equal to the sum of the minimum pension liability
and the prepaid pension that would be recorded, net of taxes, as
a non-cash charge to Other Comprehensive Income (OCI) on the
accompanying Consolidated Statements of Comprehensive Income.
The fair value of Plan assets and the ABO are measured at each
year-end balance sheet date. The minimum liability will be
adjusted each year to reflect this measurement. At such time
that the Plan assets exceed the ABO, the minimum liability would
be reversed.
In November 2002, NSTAR filed a request with the MDTE seeking an
accounting ruling to mitigate the impact of the non-cash charge
to OCI in 2002 and the increases in expected pension and PBOP
costs in 2003. On December 20, 2002, the MDTE approved the
Accounting Order. Based on this Accounting Order and an opinion
from legal counsel regarding the probability of recovery of these
costs in the future, NSTAR recorded a regulatory asset in lieu of
taking a charge to OCI at December 31, 2002. In addition, the
Accounting Order permits NSTAR to defer, as a regulatory asset or
liability, the difference between the level of pension and PBOP
expenses that are included in rates and the amounts that are
required to be recorded under SFAS 87 and SFAS 106 beginning in
2003.
The regulatory asset of $426 million, recorded as a result of
this Accounting Order, consists of the prepaid pension asset
($257 million) related to the qualified pension plan and the
minimum liability ($169 million) incurred at December 31, 2002.
The regulatory asset is shown separately in Deferred debits on
the accompanying Consolidated Balance Sheets.
NSTAR's utility subsidiaries anticipate filing with the MDTE,
during 2003, a specific mechanism designed to address pension and
PBOP costs. It is NSTAR's goal to eliminate the volatility of
these costs.
The Plan currently meets the minimum funding requirements of the
Employee Retirement Income Security Act of 1974. While not
required to make contributions to the Plan, NSTAR anticipates
increasing the level of its cash contributions to the Plan in
2003 to mitigate the projected adverse impact. Such cash
contributions may be material to its consolidated cash flows from
operations. NSTAR believes it has adequate access to capital
resources to support these contributions.
e. Investments - Available for Sale Securities
NSTAR classifies its investments in marketable securities as
available for sale. As of December 31, 2002, these investments
include 11.6 million common shares of RCN Corporation (RCN) and
represent approximately 10.6% of RCN's outstanding common shares.
As of December 31, 2001, these investments included 4.1 million
common shares of RCN, 148,400 common shares of John Hancock
Financial Services, Inc. (John Hancock), and 141,300 common
shares of MetLife, Inc. (MetLife). During 2002, NSTAR sold all
of its common shares in John Hancock and MetLife for a gain of
$4.9 million. This gain is recorded as part of Other Income, net
in the accompanying Consolidated Statements of Income.
In accordance with its accounting policies, NSTAR continuously
evaluates the carrying value of its investment in RCN common
shares to assess whether any decline in the market value below
its carrying value is deemed to be "other-than-temporary."
Consistent with the performance of the telecommunications sector
as a whole, the market value of RCN's common shares decreased
significantly during the later part of 2000 and continued to
decrease through 2002. As a result, in 2001 and 2002, management
determined that this decline in market value was "other-than-
temporary" in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
NSTAR recognized non-cash, after-tax impairment charges in 2002
and 2001 on its investment in RCN common shares of $17.7 million
and $173.9 million, respectively. These charges are reported on
the accompanying Consolidated Statements of Income as "Write-down
of RCN Investment, net."
The total carrying value of the 11.6 million RCN common shares is
included in Other investments on the accompanying Consolidated
Balance Sheets at its estimated fair value of approximately $6.1
million at December 31, 2002. The fair value of the 11.6 million
shares held may increase or decrease as a result of changes in
the market value of RCN common shares. As of December 31, 2002
and 2001, the market value per share of RCN was $0.53 and $2.93,
respectively. The unrealized gain or loss associated with these
shares will fluctuate due to the changes in fair value of these
securities during each period and is reflected, net of associated
income taxes, as a component of Other comprehensive income, net
on the accompanying Consolidated Statements of Comprehensive
Income. The cumulative increase or decrease in fair value of
these shares including the impact of the write-down adjustments
of these shares are included in Accumulated other comprehensive
income on the accompanying Consolidated Balance Sheets.
f. Decommissioning Cost Estimates
The accounting for decommissioning costs of nuclear power plants
involves significant estimates related to costs to be incurred
many years in the future. Changes in these estimates will not
affect NSTAR's results of operations or cash flows because these
costs will be collected from customers through NSTAR's transition
charge filings with the MDTE.
While NSTAR no longer directly owns any nuclear power plants,
NSTAR Electric collectively owns, through its equity investments,
14% of Connecticut Yankee Atomic Power Company (CYAPC), 14% of
Yankee Atomic Electric Company (YAEC), and 4% of Maine Yankee
Atomic Power Company, (the "Yankee Companies"). Periodically,
NSTAR obtains estimates from the management of the Yankee
Companies on the cost of decommissioning the Connecticut Yankee
nuclear unit (CY), the Yankee Atomic nuclear unit (YA), and the
Maine Yankee nuclear unit (MY). These nuclear units are
completely shut down and are currently conducting decommissioning
activities.
Based on estimates from the Yankee Companies' management as of
December 31, 2002, the total remaining cost for decommissioning
each nuclear unit is approximately as follows: $248 million for
CY, $225 million for YA and $166 million for MY. Of these
amounts, NSTAR Electric is obligated to pay $34.7 million towards
the decommissioning of CY, $31.5 million toward YA, and $6.6
million toward MY. These estimates are recorded in the
accompanying Consolidated Balance Sheets as Power contract
liabilities with a correspond- ing regulatory asset. These
estimates may be revised from time to time based on information
available to the Yankee Companies regarding future costs.
NSTAR expects the Yankee Companies to seek recovery of these
costs and any additional increases to these costs in rate
applications with the FERC, with any resulting adjustments being
charged to their respective sponsors, including NSTAR Electric.
NSTAR Electric would recover its share of any allowed increases
from customers through the transition charge.
g. Asset Impairment Assessment
NSTAR evaluates its assets for impairment whenever indicators of
impairment exist, but at least annually. Accounting standards
require that if the sum of the undiscounted expected future cash
flows from a company's asset is less than the carrying value of
the asset, an asset impairment must be recognized in the
financial statements. The amount of impairment recognized is
calculated by subtracting the fair value of the asset from the
carrying value of the asset.
As discussed in the accompanying Notes to Consolidated Financial
Statements, NSTAR has three operating segments, one of which is
its unregulated operations that includes the telecommunications
operations. Based on the current market performance of the
telecommunications sector, NSTAR has reviewed and assessed for
impairment, in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," its unregulated
telecommunications assets. NSTAR's judgments used in its
assessment include, but are not limited to, future anticipated
revenue streams and future operating costs. NSTAR has
determined, based on its probability assessment, that the total
of the undiscounted expected future cash flows exceeded the
carrying value of its unregulated telecommunications assets;
therefore, no impairment loss was recognized as of December 31,
2002. Although management believes that its estimates of future
revenues and expenses are reasonable, it cannot assure the
precision of such estimates. Should a further and continued
deterioration of this business sector occur, NSTAR may be
required to write-down its carrying value of these assets.
In estimating future sales and operating costs of
telecommunications services, NSTAR uses internal forecasts.
NSTAR develops these forecasts based on recent sales activity for
these services in conjunction with anticipated economic patterns
and planned and scheduled customer commitments for services.
For each assumption used in the analysis, NSTAR applied a
probability factor to each of the future cash flow scenarios.
The probability factors used were determined based on
management's experience in the telecommunications sector and the
likelihood of a change in the economic environment.
New Accounting Standards
See Note A, "New Accounting Standards," to the accompanying
Consolidated Financial Statements.
Generating Assets Divestiture
a. Seabrook Nuclear Power Station
On November 1, 2002, FPL Group, Inc. purchased 88% of the
majority ownership interest in the Seabrook Nuclear Power
Station, including Canal's 3.52% ownership interest, for $799.4
million, net of closing adjustments. FPL Group assumed
responsibility for the ultimate decommissioning of the facility
and received the Seabrook decommissioning funds of approximately
$226.9 million at the closing. Canal's portion of the sale
proceeds amounted to $31.9 million, of which $3.5 million was
paid into the decommissioning trust as a final top-off and $1.3
million was used for other transaction costs. The net proceeds
of $27.1 million were less than Canal's remaining investment in
Seabrook. The difference of approximately $16.7 million will be
included as a component of Cambridge Electric's and ComElectric's
transition cost recovery and is expected to be collected from
ComElectric's and Cambridge Electric's customers in 2003 through
the transition charge. As part of this sale, all purchased power
agreements were terminated. The Seabrook sale did not have an
impact on NSTAR's current results of operations. The future
impact of the sale will not have a material effect on results of
operations, cash flow or financial position.
b. Blackstone Station
On August 1, 2002, Cambridge Electric reached a tentative
agreement to sell Blackstone Station to Harvard University
(Harvard) for $14.6 million that will be used to reduce Cambridge
Electric's transition charge. At the same time, NSTAR Steam
signed an agreement with Harvard to sell its Blackstone steam
assets and contracts to Harvard for $3 million. The sale is
subject to the approval of the MDTE. A filing with the MDTE for
regulatory approval for this transaction was made on November 21,
2002. Under terms of this agreement, NSTAR Steam will continue
to manage the day-to-day operations of the steam plant on this
site for one year after the sale. Cambridge Electric is
divesting its electric generating assets consistent with the
provisions of the Massachusetts Electric Restructuring Act of
1997 (Restructuring Act). Cambridge Electric divested the
majority of its non-nuclear generating facilities in 1998. NSTAR
anticipates completing the Blackstone Station sale in the second
quarter of 2003.
Rate and Regulatory Proceedings
a. Distribution Rate Proceedings
On February 14, 2003, NSTAR notified the MDTE that it is in the
process of reviewing the 2002 test-year cost of service for its
utility subsidiaries in order to determine whether to request a
general base rate increase. This assessment coincides with the
expiration of NSTAR's four-year rate freeze presently in effect
as part of the Merger Rate Plan that created NSTAR. If NSTAR
decides not to seek a general base rate increase, NSTAR will
request a specific rate recovery mechanism relating to pension
and PBOP costs in conjunction with the MDTE Accounting Order
dated December 20, 2002. Management intends to finalize its
decision on the appropriate regulatory proceedings during the
second quarter of 2003.
b. Merger Rate Plan
An integral part of the merger of BEC and COM/Energy that created
NSTAR was the rate plan of the retail utility subsidiaries that
was approved by the MDTE on July 27, 1999 and affirmed by the SJC
in December 2002 as further discussed below. Significant
elements of the rate plan included a four-year distribution rate
freeze, recovery of the acquisition premium (goodwill) over 40
years and recovery of transaction and integration costs (costs to
achieve) over 10 years. Refer to the "Retail Electric Rates"
section of this MD&A for more information on retail rates and
cost recovery.
On December 16, 2002, the SJC affirmed the MDTE's 1999 decision
to allow for the merger of BEC and COM/Energy as originally
structured. The SJC's decision finalized the resolution of all
issues relating to the appeal, as described below. This decision
did not have an impact on NSTAR's 2002 or prior periods'
consolidated financial position, cash flows or results of
operations. The 1999 MDTE order, which approved the rate plan
associated with the merger, was appealed to the SJC by the
Massachusetts Attorney General (AG) and a separate group that
consisted of The Energy Consortium (TEC) and Harvard University
(Harvard). The AG, TEC and Harvard alleged that, in approving
the rate plan and merger proposal, the MDTE committed errors of
law in the following areas: (1) in adopting a public interest
standard, the MDTE applied the wrong standard of review, and
failed to investigate the propriety of rates and to determine
that the resulting rates of Boston Edison, Cambridge Electric,
ComElectric and NSTAR Gas were just and reasonable; (2) that in
permitting Cambridge Electric and ComElectric to adjust their
rates by $49.8 million to reflect demand-side management costs,
the MDTE failed to determine whether such an adjustment was
warranted in light of other cost decreases; (3) that the MDTE's
approval results in an arbitrary and unjustified sharing of
benefits and costs between ratepayers and shareholders; and (4)
that the MDTE's approval of the rate plan guarantees shareholders
recovery of future costs without any future demonstration of
customer savings. The AG's brief included similar arguments in
each of these areas and added that, in allowing recovery of the
acquisition premium, the MDTE improperly deviated from a cost
basis in setting approved rates and the ratemaking policies in
other jurisdictions.
c. Goodwill and Costs to Achieve
The merger that created NSTAR was accounted for using the
purchase method of accounting. In accordance with the MDTE's
approval of a four-year rate plan, the premium (Goodwill)
associated with the acquisition was approximately $490 million,
while the original estimate of transaction and integration costs
to achieve the merger was $111 million. The merger premium is
reflected on the accompanying Consolidated Balance Sheets as
Goodwill. This premium will continue to be amortized over 40
years and amounts to approximately $12.2 million annually, while
the costs to achieve (CTA) are being amortized over 10 years.
CTA are the costs incurred to execute the merger including the
employee costs for a voluntary severance program, costs of
financial advisers, legal costs, and other transaction and
systems integration costs. CTA is being amortized at an annual
rate of $11.1 million based on the original rate plan. NSTAR
will reconcile the actual CTA costs incurred with the original
estimate in a future rate proceeding. This reconciliation will
include a final accounting of the deductibility for income tax
purposes of each component of CTA. The total CTA is
approximately $143 million. This increase from the original
estimate is partially mitigated by the fact that the portion of
CTA that is not deductible for income tax purposes is
approximately $20 million lower than the original estimate.
NSTAR anticipates that these incremental costs are probable of
recovery in future rates. The CTA and Goodwill amounts were
filed and approved as part of the rate plan.
d. Service Quality Index
On October 29, 2001, and as subsequently updated, NSTAR Electric
and NSTAR Gas filed proposed service quality plans for each
company with the MDTE. The service quality plans established
performance benchmarks effective January 1, 2002 for certain
identified measures of service quality relating to customer
service and billing performance, customer satisfaction, and
reliability and safety performance. The companies are required
to report annually concerning their performance as to each
measure and are subject to maximum penalties of up to two percent
of transmission and distribution revenues should performance fail
to meet the applicable benchmarks. Concurrently, NSTAR Electric
and NSTAR Gas filed with the MDTE a report of their performance
on the identified service quality measures for the two twelve-
month periods ended August 31, 2000 and 2001. This report
included a calculation of penalties in accordance with MDTE
guidelines. On March 22, 2002, following hearings on the matter,
the MDTE issued an order imposing a service quality penalty of
approximately $3.25 million on NSTAR Electric that was refunded
to customers as a credit to their bills during the month of May
2002. This refund had no material effect on NSTAR's consolidated
financial position, cash flows or results of operations in 2002.
For the four-month period ended December 31, 2001, the MDTE
determined that NSTAR's performance relative to service quality
measures did not warrant a penalty assessment.
On February 28, 2003, NSTAR Electric and NSTAR Gas filed their
2002 Service Quality Reports with the MDTE that reflected
significant improvements in reliability and performance and
indicate that no penalty will be assessed for this period. NSTAR
accounts for its service quality penalties pursuant to SFAS No.
5, "Accounting for Contingencies." Accordingly, these penalties
are monitored on a monthly basis to determine NSTAR's contingent
liability, and if NSTAR determines it is probable that a
liability has been incurred and is estimable, NSTAR would then
accrue an appropriate liability. Annually, each NSTAR utility
subsidiary makes a service quality performance filing with the
MDTE. Any settlement or rate order that would result in a
different liability (or credit) level from what has been accrued
would be adjusted in the period an agreement is reached with the
MDTE.
e. Retail Electric Rates
The Restructuring Act requires electric distribution companies to
obtain and resell power to retail customers through either
standard offer service or default service for those who choose
not to buy energy from a competitive energy supplier. Standard
offer service will be available to eligible customers through
February 2005 at prices approved by the MDTE, set at levels so as
to guarantee mandatory overall rate reductions provided by the
Restructuring Act. New retail customers in the NSTAR Electric
service territories and other customers who are no longer
eligible for standard offer service and have not chosen to
receive service from a competitive supplier are provided default
service. The price of default service is intended to reflect the
average competitive market price for power. As of December 31,
2002 and 2001, customers of NSTAR Electric had approximately 27%
and 16%, respectively, of their load requirements provided by
competitive suppliers.
In December 2002, NSTAR Electric filed proposed transition rate
adjustments for 2003, including a preliminary reconciliation of
transition, transmission, standard offer and default service
costs and revenues through 2002. The MDTE subsequently approved
tariffs for each retail electric subsidiary effective January 1,
2003. The filings were updated in February 2003 to include final
costs and revenues for 2002.
On November 14, 2002, Boston Edison and the AG received approval
of a Settlement Agreement from the MDTE resolving issues in
Boston Edison's reconciliation of costs and revenues for the year
2001. Among other issues, the Settlement Agreement includes an
adjustment relating to the reconciliation of costs relating to
securitization and efforts to mitigate costs incurred in relation
to a purchased power agreement with Hydro Quebec. As a result of
this Settlement Agreement with the AG, Boston Edison recognized
approximately $11.4 million in additional transition charge
revenues in 2002. This benefit was significantly offset by
several other regulatory true-up adjustments.
In December 2001, NSTAR Electric filed proposed transition rate
adjustments for 2002, including a preliminary reconciliation of
costs and revenues through 2001. The MDTE subsequently approved
tariffs for each retail electric subsidiary effective January 1,
2002. The filings were updated in February 2002 to include final
costs for 2001. The MDTE approved the reconciliation of costs
and revenues for Boston Edison through 2000 in its approval on
November 16, 2001 of a Settlement Agreement between Boston Edison
and the AG resolving all outstanding issues in Boston Edison's
prior reconciliation filings. As a part of this settlement,
Boston Edison agreed to reduce the costs sought to be collected
through the transition charge by approximately $2.9 million as
compared to the amounts that were originally sought. This
settlement did not have a material adverse effect on NSTAR's
consolidated financial position, results of operations or cash
flows.
On June 1, 2001, the MDTE issued its final orders on the
reconciliation of ComElectric and Cambridge Electric's
transition, standard offer service, default service and
transmission costs and revenues for 1998. ComElectric and
Cambridge Electric reached a settlement with the AG regarding the
1999 and 2000 reconciliation proceedings. Under this settlement,
the companies' future recovery of transition costs would be
reduced by approximately $7.8 million. This settlement was
approved by the MDTE on June 5, 2002 and did not have a material
adverse effect on NSTAR's 2002 consolidated financial position,
cash flows or results of operations.
During 2000, NSTAR Electric's accumulated costs to provide
default and standard offer service were in excess of the revenues
it was allowed to bill customers by approximately $242.7 million.
On January 1 and July 1, 2001, NSTAR Electric was permitted by
the MDTE to increase its rates to customers for standard offer
and default service to collect this shortfall. Furthermore, when
combined with the reduction in energy supply costs experienced in
2001 and through the first half of 2002, rates were reduced on
January 1, 2002, April 1, 2002, July 1, 2002 and January 1, 2003.
As a result, NSTAR reflected a regulatory asset of approximately
$45.4 million and $30.4 million at December 31, 2001 and 2002,
respectively, that are reflected as components of Regulatory
assets - other on the accompanying Consolidated Balance Sheets.
In December 2000, the MDTE approved a standard offer fuel index
of 1.321 cents per kilowatt-hour (kWh) that was added to each
NSTAR Electric company's standard offer service rates for the
first half of 2001. In June 2001, the MDTE approved an
additional increase of 1.23 cents per kWh effective July 1, 2001
based on a fuel adjustment formula contained in its standard
offer tariffs to reflect the prices of natural gas and oil. In
December 2001, the MDTE approved a decrease in this fuel index of
1.125 cents to 1.426 cents per kWh for the first quarter of 2002
due to a decrease in the cost of fuel. Effective April 1, 2002,
each NSTAR Electric company's fuel index was set to zero. The
MDTE has ruled that these fuel index adjustments are excluded
from the 15% rate reduction requirement under the Restructuring
Act.
f. Standard Market Design
Effective March 1, 2003, the wholesale electric energy market in
the Northeast has been restructured into what is known as
"Standard Market Design" (SMD) in conjunction with FERC orders
issued in September and December of 2002. SMD provides an
additional market in which wholesale power costs can be hedged a
day in advance through binding financial commitments. Also,
under SMD, wholesale power clearing prices vary by location, with
prices increasing in areas where less efficient resources close
to the load are dispatched to meet the load requirements due to
the fact that the more efficient resources cannot be imported as
a result of transmission limitations. SMD is not expected to
have an impact on NSTAR's results of operations because of the
recovery mechanism for wholesale energy costs approved by the
MDTE.
g. Natural Gas Industry Restructuring and Rates
NSTAR Gas generates revenues primarily through the sale and/or
transportation of natural gas. Gas sales and transportation
services are divided into two categories: firm, whereby NSTAR Gas
must supply gas and/or transportation services to customers on
demand; and interruptible, whereby NSTAR Gas may, generally
during colder months, temporarily discontinue service to high
volume commercial and industrial customers. Sales and
transportation of gas to interruptible customers do not
materially affect NSTAR Gas' operating income because
substantially the entire margin on such service is returned to
its firm customers as rate reductions.
In addition to delivery service rates, NSTAR Gas' tariffs include
a seasonal Cost of Gas Adjustment Clause (CGAC) and a Local
Distribution Adjustment Clause (LDAC). The CGAC provides for the
recovery of all gas supply costs from firm sales customers or
default service customers. The LDAC provides for the recovery of
certain costs applicable to both sales and transportation
customers. The CGAC is filed semi-annually for approval by the
MDTE. The LDAC is filed annually for approval. In addition,
NSTAR Gas is required to file interim changes to its CGAC factor
when the actual costs of gas supply vary from projections by more
than 5%.
Due to significant declines in wholesale natural gas prices,
NSTAR Gas received six consecutive approvals from the MDTE
effective March 1, 2001 through October 31, 2002 to reduce the
CGAC factor and pass those savings on to customers. In October
2002, due to the increase in wholesale natural gas prices, NSTAR
Gas was allowed by the MDTE to increase the CGAC factor for the
period from November 1, 2002 through January 1, 2003 to recover
the higher costs of gas.
In both 2002 and 2001, the CGAC was revised on four occasions to
reflect the changes in the cost of gas caused by varying market
conditions. In 2002, the CGAC ranged from $0.3828 per therm to
$0.6139 while the range for 2001 was $0.5261 per therm to
$1.1123.
Other Legal Matters
In the normal course of its business, NSTAR and its subsidiaries
are involved in certain legal matters, including civil lawsuits.
Management is unable to fully determine a range of reasonably
possible court-ordered damages, settlement amounts, and related
litigation costs ("legal liabilities") that would be in excess of
amounts accrued. Based on the information currently available,
NSTAR does not believe that it is probable that any such
additional legal liability will have a material impact on its
consolidated financial position. However, it is reasonably
possible that additional legal liabilities that may result from
changes in estimates could have a material impact on its results
of operations for a reporting period.
Income Tax Issues
a. Tax Valuation Allowance
SFAS 109 prohibits the recognition of all or a portion of
deferred income tax benefits if it is more likely than not that
the deferred tax asset will not be realized. NSTAR had
determined that it was more likely than not that a current or
future income tax benefit would not be realized relating to the
write-downs of its RCN investment that were recorded in the
second and fourth quarters of 2002 and previously in the first
quarter of 2001. These write-downs resulted from the significant
declines in the market value of the telecommunications sector,
including RCN. As a result of this uncertainty, NSTAR recorded a
$77.6 million tax valuation allowance on the entire tax benefit
associated with these write-downs. During 2002, as a result of
previously unanticipated capital gain transactions, NSTAR
recognized $3.9 million of this tax benefit.
Additionally, based on the Internal Revenue Service (IRS) review
of NSTAR's 1999 and 2000 federal income tax returns, NSTAR
determined that it was more likely than not that it would
ultimately recognize the tax benefits relating to the incremental
operating losses from the joint venture. The returns are
currently being audited by the IRS as part of their normal review
of NSTAR's consolidated federal income tax returns. The tax
valuation allowance included reserves relating to the tax
treatment of these losses through June 19, 2002. Each of the tax
returns filed for 1999 through 2001 claimed operating losses.
The return to be filed for 2002 will also claim the remaining
portion of these operating losses. The issues involving the
operating loss deductions recorded on the tax returns for the
years 2001 and 2002 are substantially similar to those that had
concerned NSTAR regarding the tax treatment of that item on the
1999 and 2000 returns. Based on the IRS examining agent's
current review, no adjustment for the years under audit is
proposed. A determination of this issue was arrived at in the
fourth quarter of 2002 and, as a result, NSTAR applied the
treatment of these operating losses for all years on a consistent
basis, allowing a reduction to its valuation allowance of
approximately $19.7 million as a net credit to income tax expense
included as a component of the write-down.
NSTAR has and will continue to research potential transactions
that improve the operational efficiencies of NSTAR while
maximizing the utilization of these potential tax benefits.
Should NSTAR be successful in its tax and operational planning to
allow a portion of the remaining tax benefit to be ultimately
realized, NSTAR will reflect a credit to its income tax expense.
Future earnings could be positively impacted by the outcome of
this strategy. The maximum potential positive future earnings
impact is currently estimated at $53 million. Management is
currently unable to determine when, whether, or the extent to
which NSTAR will be able to recognize this potential benefit.
b. Tax Gain on Generating Assets
The cost of transitioning to retail open access was mitigated, in
part, by the sale of Commonwealth Energy System's (COM/Energy)
(now a wholly owned subsidiary of NSTAR) non-nuclear generating
assets. COM/Energy completed the sale of substantially all of
its non-nuclear generating assets in 1998. Proceeds from the
sale of these assets amounted to approximately $453.9 million, or
6.1 times their book value of approximately $74.2 million. The
proceeds from the sale, net of book value, transaction costs and
certain other adjustments amounted to $358.6 million and are
required to be used for the benefit of COM/Energy customers under
MDTE rate setting policies. In this instance, the amount was
used to reduce transition costs of Cambridge Electric and
ComElectric related to electric industry restructuring.
COM/Energy determined that this transaction was not a taxable
event because it did not provide an economic benefit to its
shareholders. The amount, if not for this treatment, that would
otherwise have been paid in taxes is approximately $136 million.
Should COM/Energy ultimately lose this issue, tax deductions
resulting in tax savings of approximately $136 million would be
realized by COM/Energy over a period of years. During the second
quarter of 2002, NSTAR was notified that the IRS intended to file
a Request for Technical Advice with the IRS National Office with
regard to COM/Energy's tax treatment of this item. As of
December 31, 2002, the Request for Technical Advice had not yet
been filed.
The IRS is in the process of completing its audit of COM/Energy's
tax returns for the years 1997, 1998 and 1999. The audit will
not be closed at the examination level until the issue described
above has been resolved either by the IRS closing the audit with
no adjustment for the item or by providing COM/Energy with a tax
deficiency notice. Should COM/Energy be issued a deficiency
notice it must then decide to either contest the notice (at IRS
Appellate or in a court of law) or concede the issue. It is
expected that once the Request for Technical Advice is filed, a
National Office decision would be made within two months. Should
NSTAR's position be challenged, it is probable that NSTAR will
make a tax payment of approximately $60 million in order to stop
the accrual of interest on the potential remaining tax deficiency
for all years involved through 2002. NSTAR intends to vigorously
defend its position, which is supported by an opinion from an
independent tax advisor, relative to this transaction and
anticipates pursuing a refund of any amounts paid plus interest.
In addition, NSTAR would pursue regulatory rate recovery for the
interest on tax deficiencies should any amounts ultimately be
incurred as a result of this transaction. The MDTE has provided
written acknowledgements to NSTAR indicating: (1) its
understanding of the issue; and (2) COM/Energy's ability to seek
recovery of costs relating to the tax deficiency that may be
incurred. NSTAR believes that recovery from customers is
probable in view of the MDTE's position and its understanding of
the monetary benefits to be realized by COM/Energy's customers
should it be successful in defending its position. However, if
NSTAR is unsuccessful with the IRS and unsuccessful in getting
favorable regulatory treatment, it is possible that it could have
an adverse impact on NSTAR's results of operations, cash flows
and financial position.
Results of Operations
The following section of MD&A compares the results of operations
for each of the three fiscal years ended December 31, 2002, 2001
and 2000 and should be read in conjunction with the accompanying
Consolidated Financial Statements and the accompanying Notes to
Consolidated Financial Statements included elsewhere in this
report.
2002 compared to 2001
NSTAR's energy delivery businesses continue to be subject to
traditional utility accounting and ratemaking principles since
NSTAR earns a regulated equity return on its investments in those
businesses.
Earnings (loss) per common share were as follows:
Years Ended December 31,
2002 2001 % Change
Basic -
After RCN charge $3.05 $(0.05) NM
Before RCN charge $3.38 $ 3.23 4.6
Diluted -
After RCN charge $3.03 $(0.05) NM
Before RCN charge $3.37 $ 3.22 4.7
NM-not meaningful
Management believes that earnings before the RCN charge is a
meaningful measure of earnings and is reflective of its internal
earnings assessment and controls. In addition, it is also more
representative of NSTAR's prior and future performance.
Earnings were $161.7 million, or $3.05 and $3.03 per basic and
diluted common share, respectively, for 2002. Earnings for 2002
were $179.4 million, or $3.38 and $3.37 per basic and diluted
common share, respectively, before total non-cash, after-tax
charges of $17.7 million, or $0.33 per basic share, related to
NSTAR's investment in RCN Corporation (RCN) that is further
discussed below. For 2001, NSTAR reported a loss of $2.4 million
or $0.05 per basic and diluted common share. Results for 2001
were $171.5 million, or $3.23 per basic and $3.22 per diluted
common share, before a non-cash, after-tax charge of $173.9
million, or $3.28 per basic share, related to NSTAR's investment
in RCN.
Absent the RCN charges in both years, 2002 earnings increased by
$7.9 million ($0.15 per share), or 4.6%, primarily due to
increased kWh and firm gas sales and transportation and favorable
adjustments related to regulatory orders, lower preferred
dividend requirements and interest savings offset by higher
operations and maintenance expenses. Operations and maintenance
reflects higher pension and other postretirement benefits
expenses and increased maintenance on the electric system in
connection with the System Improvement Program. Cash flows from
operations increased by over $261 million due to the higher level
of earnings, improved accounts receivable collections, lower
regulatory cost deferrals, and income tax payments. Other
positive factors during the current year included lower bad debt
expense of $4.5 million and a $3.9 million deferred tax benefit
resulting from an adjustment to NSTAR's tax valuation allowance.
NSTAR's return on equity was 12.6% despite the downturn in the
current economic environment. NSTAR and subsidiaries maintained
their credit ratings with all rating agencies. In addition,
NSTAR increased its common dividend rate by $0.04 or 1.9% per
share to $2.16 on an annual basis.
Capital spending in 2002 significantly exceeded the prior year's
level due to an increase in the allocation of critical capital
resources to improve electric system reliability and customer
service. As an indication of this progress, key electric and gas
operating performance results were greatly improved in 2002 over
those of 2001. Electric customer outage hours were reduced by
35% and the length of those outages was reduced by 27%. These
dramatic improvements were accomplished during record-breaking
summer heat and an unprecedented demand for electricity. Also
contributing to this increase was additional capital spending
related to NSTAR's non-regulated subsidiaries, primarily Advanced
Energy Systems' generation expansion project.
On June 19, 2002, NSTAR received an additional 7.5 million shares
from the third and final exchange of its investment in the RCN
joint venture pursuant to an amended Joint Venture Agreement.
The market value of RCN common shares continued to decline during
2002 and did not close above NSTAR's previously adjusted carrying
value of $3.75 per share since November 27, 2001. As a result,
NSTAR recognized impairment charges totaling $37.3 million,
reducing the carrying value of its 11.6 million RCN shares to
$0.53 per share as of December 31, 2002. These charges were
offset by the recognition of $19.6 million in tax benefits
relating to joint venture operating losses. Combined, the
impairment charges and tax benefits amounted to $17.7 million, or
$0.33 per share in 2002. Similarly, in 2001, due to a
significant decrease in the market value of RCN common shares,
NSTAR recorded a non-cash, after-tax charge of $173.9 million.
Management determined that these declines in market value were
"other-than-temporary" in accordance with SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Operating revenues
Operating revenues for 2002 decreased 15% from 2001 as follows:
(in thousands)
Retail electric revenues $ (375,130)
Wholesale electric revenues (22,702)
Gas sales revenues (65,203)
Other revenues (9,734)
Decrease in operating revenues $ (472,769)
==========
The decrease in operating revenues was significantly impacted by
the decline in standard offer and default service rates charged
to customers beginning in January 2002 that reflected lower
purchased power and gas costs.
Retail electric revenues were $2,122.3 million in 2002 compared
to $2,497.5 million in 2001, a decrease of $375.2 million, or
15%. The change in retail revenues includes the significantly
lower cost of purchased energy supply (discussed below) that
contributed to the lower rates implemented in January, April and
July 2002 for standard offer and default services. Components of
the total decrease in retail revenues includes lower revenues
attributable to standard offer and default services of $263.8
million and $163.9 million, respectively, lower revenue related
to demand-side management and renewable energy programs of $8.4
million due to the reconciliation of program costs, an increase
in incentive adjustments and the timing of program expenditures.
Transition revenues increased by $36.1 million due to higher
rates for transition cost recovery offset by an $8 million
decline in mitigation incentive revenues that are allowed for
successfully lowering transition charges. Mitigation incentive
revenues will continue to decrease over the transition period
extending over time from 2009 through 2026. Transmission
revenues increased by $30.8 million primarily as a result of rate
increases and the absence in 2002 of a $6.7 million reduction in
2001 revenues that reflected an MDTE-approved transmission
reconciliation filing. The change in NSTAR's retail revenues
related to standard offer, default services and demand-side
management and renewable energy are reconciled to the costs
incurred.
The 1.2% increase in retail kWh sales in 2002 reflects, by
customer sectors, an improvement of 2% in residential and 1.8% in
commercial offset somewhat by the continued sales decline of 5.5%
in the industrial sector. The overall increase in sales is
attributable to the warmer summer period, as compared to the
prior year. 2002 was the tenth warmest year in 132 years.
However, the economic downturn continues to have an negative
impact on sales as indicated by the high Boston office vacancy
rate. Business spending continues to be depressed as firms
appear reluctant to commit to increased employment and expansion
of office space. The unemployment rate in Boston was
approximately 4.4% through December 2002 as compared to
approximately 3% in the same period last year. NSTAR Electric's
sales to residential and commercial customers were approximately
29% and 56%, respectively, of its total retail sales mix for 2002
and provided 37% and 52% of total revenues, respectively.
Industrial sales declined due primarily to a slowdown in economic
conditions that led to reduced production or facility closings.
The industrial and other retail sales sector comprises
approximately 10% of NSTAR's energy sales and 8% of distribution
revenue.
NSTAR forecasts its electric and gas sales based on normal
weather conditions. Actual results may differ from those
projected due to actual weather conditions above or below these
normal weather levels. Due to a challenging economic environment
ahead, unit sales of electricity in 2003 are expected to grow at
approximately 1%.
Weather conditions greatly impact the change in electric sales
and, to a greater extent, gas sales and revenues in NSTAR's
service area. The first quarter of 2002 was significantly warmer
than the same period in 2001, followed by slightly below normal
temperatures for the second quarter, above-normal temperatures in
the third quarter and colder than prior year and normal
conditions in the fourth quarter of 2002. Below is comparative
information on heating and cooling degree-days for 2002 and 2001
and the number of degree-days in a "normal" year as represented
by a 30-year average. A "degree-day" is a unit measuring how
much the outdoor mean temperature falls below (for heating) or
rises above (for cooling) a base of 65 degrees. Each degree
below or above the base, is measured in one degree day.
Normal
30-Year
2002 2001 Average
Heating degree-days 5,658 5,644 5,942
Percentage change from prior year -% (8.3)%
Percentage change from 30-year average (4.8)% (5.1)%
Cooling degree-days 972 822 777
Percentage change from prior year 18.2% 39.8%
Percentage change from 30-year average 25.1% 5.8%
The heating degree-days experienced during 2002 were virtually
the same level with heating degree-days in 2001. However, in the
first quarter of 2002, heating degree-days totaled 2,522, a
decline of 16% from the prior year of 3,007 and 15% below a
normal level of 2,975. Heating degree-days for the fourth
quarter were 2,172, an increase of 28% as compared to 2001 and 8%
greater than normal. The warmer than normal conditions in early
2002 significantly impacted earnings for gas operations due to
the relatively short winter period when there is potential
heating demand.
The higher cooling degree-days experienced during 2002 positively
impacted electric distribution revenues. The above normal
cooling degree-days impacted air conditioning usage of our
customers and resulted in higher electric distribution revenues
than would otherwise have been recorded during a more moderate
summer period.
Wholesale electric revenues were $64.2 million in 2002 compared
to $86.9 million in 2001, a decrease of $22.7 million, or 26%.
This decrease in wholesale revenues reflects the expiration of
two municipal power supply contracts on May 31, 2002, and another
municipal contract on October 31, 2002, and a decline in rates
due to the lower cost of purchased power. After October 31,
2005, NSTAR will no longer have contracts for the supply of
wholesale power. Amounts collected from wholesale customers are
credited to retail customers through the transition charge.
Therefore, the expiration of these contracts has no impact on
results of operations. In 2003, wholesale electric sales are
forecasted to decrease due to the expiration of contracts with
several municipalities.
Gas sales revenues were $323.2 million in 2002 compared to $388.4
million in 2001, a decrease of $65.2 million, or 17%. The
decrease in revenues is primarily attributable to a 26% decline
in the cost of gas from suppliers compared to the same period
last year, slightly offset by a 0.6% increase in firm unit sales.
Other revenues were $209.4 million in 2002 compared to $219.1
million in 2001, a decrease of $9.7 million, or 4%. This
decrease primarily reflects lower revenues from non-utility
operations due to lower steam sales that reflect warmer weather
during the early part of 2002, lower billing rates, and the loss
of a large customer, partially offset by higher chilled water
revenues due to the warmer summer period and higher demand rates.
Operating expenses
Purchased power costs were $1,260.7 million in 2002 compared to
$1,673.5 million in 2001, a decrease of $412.8 million, or 25%.
The decrease in expense reflects a decline in prices of natural
gas and oil and a 22% decrease in wholesale sales due to the
expiration of three municipal power supply contracts. Partially
offsetting the impact of these decreases was a 1.2% increase in
retail electric sales and an increase in transmission costs.
Included in 2002 and 2001 was $31.3 million and $215.9 million,
respectively, that related to the recognition of previously
deferred standard offer and default service supply costs
resulting from the current period collection of previously
deferred costs. NSTAR adjusts its electric rates to collect the
costs related to energy supply from customers on a reconciling
basis. Due to the rate adjustment mechanism, a change in the
amount of energy supply expense does not have an impact on
earnings. NSTAR Electric satisfied most of its standard offer
service through existing long-term power purchase agreements that
were assigned to an independent party, and entered into shorter-
term agreements for the remaining requirement.
The cost of gas sold, representing NSTAR Gas' supply expense, was
$176.5 million in 2002 compared to $239.5 million in 2001, a
decrease of $63 million, or 26%, reflecting the lower cost of gas
supply and the significant reduction in sales due to milder
weather conditions in the first quarter of 2002. These expenses
are also reconciled to the current level of revenues collected.
Operations and maintenance expense was $431.7 million in 2002
compared to $417.1 million in 2001, an increase of $14.6 million,
or 4%. This increase primarily reflects incremental expenditures
incurred relating to improvements to NSTAR's electric delivery
system that were substantially completed as of September 30,
2002, an increase of approximately $17.7 million and $5.6 million
in pension-related and postretirement benefits expense (net of
amounts capitalized), respectively, resulting primarily from a
downturn in the equity market rates and a $2.3 million loss
incurred that related to an insurance settlement adjustment. The
increase in pension costs and other postretirement benefit costs
are anticipated to continue through 2003, as a result of the
declines in the equity markets over the past three years. These
factors were somewhat offset by the absence of $3.7 million in
storm costs incurred in the first quarter of 2001 and a decline
in bad debt expense of $4.5 million. In 2003, despite a
projected $11 million increase in pension and PBOP expense, total
operations and maintenance expense is expected to remain flat.
Depreciation and amortization expense was $239.2 million in 2002
compared to $231 million in 2001, an increase of $8.2 million, or
4%. This increase was primarily due to increases in capital
spending during 2002 in connection with system reliability
improvements as well as the accelerated amortization of
regulatory assets associated with the Seabrook sale of
approximately $7.3 million. This increase was offset by the
absence of depreciation on NSTAR's district energy facility,
Northwind in 2002. In 2001 Northwind's assets were written down
by $5 million.
Demand side management (DSM) and renewable energy programs
expense was $69 million in 2002 compared to $70.1 million in
2001, a decrease of $1.1 million, or 2%, primarily due to a
reduction of DSM programs which is consistent with the collection
of conservation and renewable energy revenues. These costs are
in accordance with program guidelines established by the MDTE and
are collected from customers on a fully reconciling basis. In
addition, NSTAR earns revenue incentive amounts in return for
increased customer participation. In 2002 and 2001, these
incentives amounted to approximately $3 million.
Property and other taxes were $97.2 million in 2002 compared to
$96.5 million in 2001, an increase of $0.7 million, or 1%. This
increase was due to higher tax rates and assessments,
particularly for the City of Boston of $2.2 million offset by
lower payments in lieu of taxes to the Town of Plymouth under
NSTAR's agreement with the town.
Income taxes from operations were $107.1 million in 2002 compared
to $113.4 million in 2001, a decrease of $6.3 million, or 6%.
The decrease in income tax expense is primarily the result of tax
benefits relating to certain customer refunds, which reduced
income tax expense by approximately $4 million. In addition,
this decrease also reflects the tax benefit of deducting NSTAR's
common dividends paid to the NSTAR Savings Plan. These items
resulted in a decrease in the effective tax rate for 2002 to
37.3% from 40.2% for 2001.
Other income, net
Other income was $22.4 million in 2002 compared to $6.9 million
in 2001, an increase in income of $15.5 million. The increase
was due primarily to $7.3 million in accelerated amortization of
ITC resulting from the sale of Seabrook, deferred tax valuation
allowance adjustments of $3.9 million, a $3.2 million net
increase in interest income primarily related to a reversal of a
previously established interest reserve and the absence in 2002
of $1.1 million related to system development costs. Other
income in 2002 also reflects $1.2 million related to transaction
fees.
Other deductions, net
Other deductions were $2 million in both 2002 and in 2001.
Deductions in 2002 reflect the absence of a $5 million accrual
for shutdown costs recorded in 2001 for the Northwind district
energy facility as compared to $2 million in 2002 for an
additional charge for expected equipment removal costs and a $0.6
million decline in expense for the minority interest related to
this facility. Other deductions also include increased
charitable contributions of $0.9 million, offset by $1.5 million
in lower miscellaneous deductions, including applicable income
tax benefits for total other deductions.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $152.6 million in 2002 compared to $158.4
million in 2001, a decrease of $5.8 million, or 4%. The decrease
in interest expense reflects the retirement of $24.3 million in
Boston Edison's 9.375% Debentures in August 2001, Boston Edison's
early redemption of 8.25% Debentures of $60 million in September
2002, NSTAR Gas' 8.99% Series I Bonds of $3.5 million in December
2001, Cambridge Electric's 7.75% Series D Notes of $2.1 million
in June 2002 and ComElectric's 9.3% $30 million Term Loan in
January 2002, additional sinking fund payments and