<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-898
(LOGO) THE NARRAGANSETT ELECTRIC COMPANY
(Exact name of registrant as specified in charter)
Rhode Island 05-0187805
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
280 Melrose Street, Providence, R.I. 02901
(Address of principal executive offices)
Registrant's telephone number, including area code
(401-941-1400)
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 ( )
Common stock, par value $50 per share, authorized and
outstanding: 1,132,487 shares at September 30, 1994.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
<CAPTION>
Quarter Nine Months
------- -----------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $137,014 $136,174 $366,275 $367,850
-------- -------- -------- --------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate84,859 89,381 228,436 237,380
Other operation 19,126 17,659 52,454 53,639
Maintenance 3,112 2,608 9,339 9,430
Depreciation 6,650 4,652 19,980 13,727
Taxes, other than federal income taxes 8,975 9,198 27,414 27,452
Federal income taxes 3,355 2,915 4,594 4,304
-------- -------- -------- --------
Total operating expenses 126,077 126,413 342,217 345,932
-------- -------- -------- --------
Operating income 10,937 9,761 24,058 21,918
Other income:
Allowance for equity funds used
during construction 343 139 961 294
Other income (expense) - net (194) 23 (1,246) (1,017)
-------- -------- -------- --------
Operating and other income 11,086 9,923 23,773 21,195
-------- -------- -------- --------
Interest:
Interest on long-term debt 3,675 3,261 10,489 9,454
Other interest 685 387 1,913 1,364
Allowance for borrowed funds used during
construction - credit (504) (160) (1,160) (351)
-------- -------- -------- --------
Total interest 3,856 3,488 11,242 10,467
-------- -------- -------- --------
Net income $ 7,230 $ 6,435 $ 12,531 $ 10,728
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period$ 84,755 $ 74,326 $ 81,659 $ 74,207
Net income 7,230 6,435 12,531 10,728
Dividends declared on cumulative
preferred stock (535) (619) (1,607) (1,396)
Dividends declared on common stock (1,132) (566) (2,265) (3,963)
Premium on redemption of preferred stock (361) (361)
-------- -------- -------- --------
Retained earnings at end of period $ 90,318 $ 79,215 $ 90,318 $ 79,215
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
</TABLE>
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Twelve Months Ended September 30
(Unaudited)
<CAPTION>
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $481,453 $484,787
-------- --------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 301,952 310,343
Other operation 72,537 71,214
Maintenance 12,088 12,294
Depreciation 23,898 18,906
Taxes, other than federal income taxes 35,808 35,955
Federal income taxes 4,465 5,968
-------- --------
Total operating expenses 450,748 454,680
-------- --------
Operating income 30,705 30,107
Other income:
Allowance for equity funds used
during construction 1,210 303
Other income (expense) - net (863) (902)
-------- --------
Operating and other income 31,052 29,508
-------- --------
Interest:
Interest on long-term debt 13,751 12,728
Other interest 2,623 1,687
Allowance for borrowed funds used during
construction - credit (1,399) (469)
-------- --------
Total interest 14,975 13,946
-------- --------
Net income $ 16,077 $ 15,562
======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $ 79,215 $ 71,460
Net income 16,077 15,562
Dividends declared on cumulative
preferred stock (2,143) (1,784)
Dividends declared on common stock (2,831) (5,662)
Premium on redemption of preferred stock (361)
-------- --------
Retained earnings at end of period $ 90,318 $ 79,215
======== ========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
</TABLE>
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
September 30, December 31,
ASSETS 1994 1993
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $596,058 $534,569
Less accumulated provisions for depreciation 163,077 156,652
-------- --------
432,981 377,917
Construction work in progress 37,520 43,660
-------- --------
Net utility plant 470,501 421,577
-------- --------
Current assets:
Cash 328 838
Accounts receivable:
From sales of electric energy 50,549 55,795
Other (including $6,941,000 and $1,087,000 from affiliates) 22,462 11,701
Less reserves for doubtful accounts 4,377 3,800
-------- --------
68,634 63,696
Unbilled revenues 13,175
Fuel, materials and supplies, at average cost 6,331 4,572
Prepaid and other current assets 12,232 11,515
-------- --------
Total current assets 100,700 80,621
-------- --------
Deferred charges and other assets 55,381 53,709
-------- --------
$626,582 $555,907
======== ========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $50 per share,
authorized and outstanding 1,132,487 shares $ 56,624 $ 56,624
Premiums on preferred stocks 170 170
Other paid-in capital 45,000 45,000
Retained earnings 90,318 81,659
-------- --------
Total common equity 192,112 183,453
Cumulative preferred stock 36,500 36,500
Long-term debt 178,893 155,972
-------- --------
Total capitalization 407,505 375,925
-------- --------
Current liabilities:
Short-term debt (including $23,625,000 and $19,725,000
to affiliates) 33,625 19,725
Accounts payable (including $48,903,000 and $43,468,000
to affiliates) 55,708 51,005
Accrued liabilities:
Taxes 1,979 1,712
Interest 3,134 4,921
Other accrued expenses 29,520 11,798
Customer deposits 5,524 5,622
Dividends payable 1,668 1,102
-------- --------
Total current liabilities 131,158 95,885
-------- --------
Deferred federal income taxes 67,013 63,494
Unamortized investment tax credits 8,645 9,026
Other reserves and deferred credits 12,261 11,577
-------- --------
$626,582 $555,907
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Cash Flows
Nine Months Ended September 30
(Unaudited)
<CAPTION>
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 12,531 $ 10,728
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 19,980 13,727
Deferred federal income taxes and investment
tax credit - net 1,198 1,562
Allowance for funds used during construction (2,121) (645)
Amortization of unbilled revenues 4,105
Early retirement program 2,705
Decrease (increase) in accounts receivable,
net, and unbilled revenues (18,113) (7,863)
Decrease (increase) in fuel, materials, and supplies (1,759) 606
Increase (decrease) in accounts payable 4,703 3,145
Increase (decrease) in other current liabilities 11,999 (1,367)
Other, net 998 (2,455)
-------- --------
Net cash provided by operating activities $ 33,521 $ 20,143
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(66,725) $(45,398)
Other investing activities (900)
-------- --------
Net cash used in investing activities $(67,625) $(45,398)
-------- --------
Financing Activities:
Dividends paid on common stock $ (1,699) $ (5,095)
Dividends paid on preferred stock (1,607) (1,233)
Preferred stock - issues 20,000
Preferred stock - retirements (10,000)
Premium on redemption of preferred stock (361)
Long-term debt - issues 23,000 27,500
Long-term debt - retirements (14,900)
Premium on reacquisition of long-term debt (652)
Changes in short-term debt 13,900 10,700
-------- --------
Net cash provided by financing activities $ 33,594 $ 25,959
-------- --------
Net increase (decrease) in cash and cash equivalents $ (510) $ 704
Cash and cash equivalents at beginning of period 838 830
-------- --------
Cash and cash equivalents at end of period $ 328 $ 1,534
======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 12,286 $ 11,122
-------- --------
Federal income taxes paid $ 703 $ 2,934
-------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Note A
- ------
A 1986 Rhode Island Supreme Court decision held that the Rhode
Island Public Utilities Commission's (RIPUC) rate-making powers
include the authority to order refunds of amounts earned in excess
of an allowed return. As a result, the RIPUC monitors the
Company's earnings on a continuous basis.
Note B - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System (NEES) subsidiaries currently have in place an
environmental audit program intended to enhance compliance with
existing federal, state, and local requirements regarding the
handling of potentially hazardous products and by-products.
Federal and state environmental agencies have contacted the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. The Company has been named as a
potentially responsible party (PRP) by either the U.S.
Environmental Protection Agency or the Massachusetts Department of
Environmental Protection at two sites (one of which is located in
Massachusetts) at which hazardous waste is alleged to have been
disposed. The Company is also aware of other sites for which it
may be held responsible for remediating and it is likely that, in
the future, the Company will become involved in additional
proceedings demanding contribution for the cost of remediating
additional hazardous waste sites.
Gas was manufactured from coal in Rhode Island in the past.
The Company is aware of five sites on which gas was manufactured or
manufactured gas was stored that were owned either by the Company
<PAGE>
Note B - Hazardous Waste - Continued
- ------------------------
or by its predecessor companies. It is not known to what extent
the Company would be held liable for hazardous wastes, if any, left
at these manufactured gas locations.
There are significant uncertainties as to the potential costs
to investigate and, when necessary, remediate any given hazardous
waste site. Factors such as the evolving nature of remediation
technology and regulatory requirements and the particular
characteristics of each site, including, for example, the size of
the site, the nature and amount of waste disposed at the site, and
the surrounding geography and land use, make precise estimates
difficult. A preliminary review by a consultant hired by the NEES
companies of the potential cost of investigating and, if necessary,
remediating Rhode Island manufactured gas sites resulted in costs
per site ranging from less than $1 million to $8 million. An
informal survey of other utilities conducted on behalf of NEES and
its subsidiaries indicated costs in a similar range.
There are also significant uncertainties as to the portion, if
any, of the investigation and remediation costs of any particular
hazardous waste site that may ultimately be borne by the Company.
The Company believes that hazardous waste liabilities for all
sites of which it is aware will not be material (10 percent of
common equity) to its financial position. Where appropriate, the
Company intends to seek recovery from its insurers and from other
PRPs, but it is uncertain whether, and to what extent, such efforts
will be successful.
Note C
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the financial statements in the Company's 1993 Annual
Report.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Earnings
- --------
Net income for the third quarter and first nine months of 1994
increased by $1 million and $2 million, respectively, as compared
to the same periods last year. The increase in earnings for the
quarter reflects increased kilowatthour (KWH) sales billed to
ultimate customers and the commencement of recognition of revenue
for electricity delivered but not yet billed (unbilled revenue)
pursuant to a rate agreement (see Rate Activity section). The
increase in KWH sales reflects weather conditions and an improving
economy.
Earnings in the first nine months of 1993 included a one-time
charge of $3 million after tax ($5 million before tax) associated
with an early retirement offer and special severance program.
Excluding the effect of this 1993 charge, earnings for the first
nine months of 1994 decreased by $1 million as compared to the
corresponding periods last year. This decrease is primarily due to
increases in other operation expenses, partially offset by the net
increase in third quarter earnings.
Rate Activity
- -------------
In July 1994, the Rhode Island Public Utilities Commission
(RIPUC) approved a rate agreement between the Company and the Rhode
<PAGE>
Island Division of Public Utilities and Carriers that provides for
a 5 percent base rate discount, excluding fuel costs, for the
Company's large commercial and industrial customers who sign an
agreement to give a five year notice to the Company before they
purchase power from another supplier or generate any additional
power themselves. The notice provision may be reduced from five to
three years under certain conditions. The amount of the discount,
if all eligible customers sign agreements, is approximately $4
million per year. Customers representing approximately 63 percent
of all eligible revenues have signed agreements. The agreement
also provides for the Company to recognize unbilled revenues for
accounting purposes. Unbilled revenues at December 31, 1993 of
approximately $14 million are being amortized to income over a
twenty-one month period beginning April 1994 through December 1995.
In addition, the Company now recognizes seasonal fluctuations in
unbilled revenues on a quarterly basis. The Company began
recording the effects of this rate agreement in the third quarter
of 1994.
Effective March 1993, the RIPUC approved a new purchased power
cost adjustment mechanism for the recovery of all of the Company's
purchased power costs, excluding fuel and oil conservation
adjustment charges which continue to be recovered through separate
adjustment mechanisms. Under the new mechanism any over or under-
collections of purchased power expense will ultimately be passed on
<PAGE>
to customers including the effects of peak-demand billing
fluctuations. The Company accrues the effects of this new
mechanism on its books on a current basis. In August 1994, the
RIPUC gave notice that it intends to open a proceeding to consider
the effect of fuel adjustment clauses on utility incentives to
reduce costs.
Effective January 1993, the RIPUC approved a $1.5 million
increase in rates for the Company, representing the first step of
a three year phase-in of the Company's recovery of costs associated
with postretirement benefits other than pensions (PBOPs). A second
$1.5 million increase took effect January 1994 and the third and
final step increase is anticipated to go into effect in January
1995.
A 1986 Rhode Island Supreme Court decision held that the
RIPUC's rate-making powers include the authority to order refunds
of amounts earned in excess of an allowed return. As a result, the
RIPUC monitors the Company's earnings on a continuous basis.
Demand-Side Management Programs
- -------------------------------
The Company files its conservation and load management
program, also referred to in the industry as demand-side management
(DSM) program, regularly with the RIPUC and has received approval
to recover in rates estimated DSM expenditures on a current basis.
The rates provide for reconciling estimated expenditures to actual
<PAGE>
DSM expenditures, with interest. Expenditures subject to the
reconciliation mechanism were $5.6 million in the first nine months
of 1994 and $12 million for the full year 1993. Since 1990, the
Company has been allowed to earn incentives based on the results of
its DSM program. Before incentives are recorded, the Company must
be able to demonstrate to the RIPUC the electricity savings
produced by its DSM program. The Company recorded $0.5 million of
before-tax incentives in 1993. No incentives were recorded during
the first nine months of 1994. The Company has received orders
from the RIPUC that will give it the opportunity to continue to
earn incentives based on 1994 DSM program results.
<PAGE>
Operating Revenue
- -----------------
Operating revenue for the nine months ended September 30, 1994
decreased by $2 million from the corresponding period in 1993. The
following table summarizes the changes in operating revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1994 vs 1993 1994 vs 1993
------------- ------------
(In Millions)
Fuel recovery $(2) $(4)
DSM recovery - (2)
Service extension discounts (1) (1)
Unbilled revenues recognized
under rate agreement 4 4
Seasonal fluctuation in
accrued unbilled revenue (1) (1)
Sales increase and other 1 2
--- ---
$ 1 $(2)
=== ===
KWH sales billed to ultimate customers in the third quarter
and first nine months of 1994 increased by 1.8 and 1.2 percent,
respectively, as compared to the corresponding prior periods. This
increase in KWH sales is primarily due to weather conditions and an
improving economy, partially offset by a loss of sales attributable
to the May 1994 plant closing of one of the Company's largest
customers. Revenues from this customer, excluding fuel and
<PAGE>
purchased power costs, were approximately $1.4 million on an annual
basis. In spite of the loss of a large customer, KWH sales are
expected to increase approximately 1 percent over 1993. In
addition, there was one less billing day due to meter reading
schedules in the first nine months of 1994 compared to 1993.
General rate changes reflect rate discounts recorded in the
third quarter to large commercial and industrial customers
retroactive to May 15, 1994, in connection with the Company's
recently implemented rate agreement.
For a discussion of unbilled revenues see the Rate Activity
section.
<PAGE>
Operating Expenses
- ------------------
The following table summarizes the changes in total operating
expenses discussed below:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1994 vs 1993 1994 vs 1993
------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $(2) $(4)
Integrated facilities
credits from NEP (2) (6)
Purchases and demand charges
from NEP - 1
Other operation and maintenance:
DSM - (2)
Other 2 1
Depreciation 2 6
--- ---
$ - $(4)
=== ===
The entire output of the Company's generating capacity has in
the past, and continues to be made available to New England Power
Company (NEP). The Company receives a credit on its purchased
power bill from NEP for its fuel costs and other generation and
transmission costs. The change in the above table reflects
increased credits for dismantlement costs being incurred on the
Company's previously retired South Street generating facility.
<PAGE>
The increase in other operation and maintenance expense in the
third quarter and first nine months of 1994 is primarily due to
increased computer system development costs, increased retiree
benefit costs, increased workers' compensation claims, and general
increases in other areas. The increase for the nine month period
was partially offset by a one-time charge of $5 million recorded in
the first quarter of 1993 associated with an early retirement offer
and special severance program implemented in 1993.
The increase in depreciation expense in the third quarter and
first nine months of 1994 reflects increased charges for
dismantlement costs for the previously retired South Street
generating station.
Allowance For Funds Used During Construction (AFDC)
- ---------------------------------------------------
AFDC increased for the third quarter and first nine months of
1994 due to increased construction work in progress, principally
associated with the repowering of the Manchester Street Station
(see Repowering of Manchester Street Station section).
Hazardous Waste
- ---------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
<PAGE>
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System (NEES) subsidiaries currently have in place an
environmental audit program intended to enhance compliance with
existing federal, state, and local requirements regarding the
handling of potentially hazardous products and by-products.
Federal and state environmental agencies have contacted the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. The Company has been named as a
potentially responsible party (PRP) by either the U.S.
Environmental Protection Agency (EPA) or the Massachusetts
Department of Environmental Protection at two sites (one of which
is located in Massachusetts) at which hazardous waste is alleged to
have been disposed. The Company is also aware of other sites for
<PAGE>
which it may be held responsible for remediating and it is likely
that, in the future, the Company will become involved in additional
proceedings demanding contribution for the cost of remediating
additional hazardous waste sites.
Gas was manufactured from coal in Rhode Island in the past.
The Company is aware of five sites on which gas was manufactured or
manufactured gas was stored that were owned either by the Company
or by its predecessor companies. It is not known to what extent
the Company would be held liable for hazardous wastes, if any, left
at these manufactured gas locations.
There are significant uncertainties as to the potential costs
to investigate and, when necessary, remediate any given hazardous
waste site. Factors such as the evolving nature of remediation
technology and regulatory requirements and the particular
characteristics of each site, including, for example, the size of
the site, the nature and amount of waste disposed at the site, and
the surrounding geography and land use, make precise estimates
difficult. A preliminary review by a consultant hired by the NEES
companies of the potential cost of investigating and, if necessary,
remediating Rhode Island manufactured gas sites resulted in costs
per site ranging from less than $1 million to $8 million. An
informal survey of other utilities conducted on behalf of NEES and
its subsidiaries indicated costs in a similar range.
<PAGE>
There are also significant uncertainties as to the portion, if
any, of the investigation and remediation costs of any particular
hazardous waste site that may ultimately be borne by the Company.
The Company believes that hazardous waste liabilities for all
sites of which it is aware will not be material (10 percent of
common equity) to its financial position. Where appropriate, the
Company intends to seek recovery from its insurers and from other
PRPs, but it is uncertain whether, and to what extent, such efforts
will be successful.
Electric and Magnetic Fields (EMF)
- ---------------------------------
In recent years, concerns have been raised about whether EMF,
which occur near transmission and distribution lines as well as
near household wiring and appliances, cause or contribute to
adverse health effects. Numerous studies on the effects of these
fields, some of them sponsored by electric utilities (including
NEES companies), have been conducted and are continuing. Some of
the studies have suggested associations between certain EMF and
various types of cancer, while other studies have not substantiated
such associations. In February 1993, the EPA called for
significant additional research on EMF. In July 1994, a study by
a University of Southern California professor suggested an
association between EMF and Alzheimer's disease. It is impossible
to predict the ultimate impact on the Company and the electric
<PAGE>
utility industry if further investigations were to demonstrate that
the present electricity delivery system is contributing to
increased risk of cancer or other health problems.
Many utilities, including the NEES companies, have been
contacted by customers regarding a potential relationship between
EMF and adverse health effects. To date, no court in the United
States has ruled that EMF from electrical facilities cause adverse
health effects and no utility has been found liable for personal
injuries alleged to have been caused by EMF. In any event, the
NEES companies believe that they have adequate insurance coverage.
Several state courts have recognized a cause of action for
damage to property values in transmission line condemnation cases
based on the fear that power lines cause cancer. It is difficult
to predict what impact there would be on the Company if this cause
of action is recognized in Rhode Island and in contexts other than
condemnation cases.
A lawsuit concerning the proposed expansion of a transmission
line was filed on April 28, 1994 against the Company, NEES, and New
England Power Service Company (NEPSCo), in the Superior Court of
Rhode Island by certain residents of property which borders
existing transmission lines in East Greenwich, Rhode Island. The
plaintiffs alleged that fear of health risks from exposure to high
voltage power lines had devalued their property and ask for
unspecified damages. All claims in this case relating to damages
<PAGE>
from existing lines were dismissed with prejudice. The Company has
been informed that another resident is contemplating a similar
suit. The Company recently received approval from the Rhode Island
Energy Facility Siting Board to construct a new line and relocate
an existing line on the existing right of way.
Bills had been introduced in the Rhode Island legislature to
require that transmission lines be placed underground. In July
1993, two bills passed by the legislature restricting the
construction of overhead transmission lines were vetoed by the
governor. A similar bill was introduced in 1994 and was rejected
by the legislature.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to increasing
competitive pressures, stemming from a combination of trends,
including increasing electric rates, improved technologies, and new
regulations and legislation intended to foster competition. To
date, this competition has been most prominent in the bulk power
market in which non-utility generating sources have noticeably
increased their market share. This change indirectly affects the
Company as it purchases all of its energy requirements from NEP.
Electric utilities are also facing increased competition in the
retail market. Currently, retail competition comes primarily from
alternative fuel suppliers (including natural gas companies) for
<PAGE>
heating and cooling, customer-owned generation to displace
purchases from electric utilities, and direct competition among
electric utilities to attract major new manufacturing facilities to
their service territories. Some state regulatory agencies, other
entities, and individuals have developed proposals under which
electric utilities and non-utility generators may sell electricity
to retail customers of other electric utilities without regard to
franchised service territories. For example, the California Public
Utilities Commission recently announced a proposal that would give
certain large retail customers, by the year 1996, and all other
retail customers, by the year 2002, the option of selecting their
electricity provider. Power purchased from another provider would
still be delivered over the local utility's transmission network
which, under the proposal, would be subject to broader access.
Other states (including several New England states), federal
agencies regulating the NEES companies, and state and federal
legislative bodies have considered or are in the process of
considering options to foster increased competition.
The NEES companies are responding to current and anticipated
competitive pressures in a variety of other ways, including cost
control and a corporate reorganization into separate retail and
wholesale business units. The retail business unit's response to
competition includes the development of comprehensive value-added
services customized to customers' needs and the offering of
<PAGE>
economic development rates to encourage businesses to locate in the
Company's service territory. In addition, pursuant to its recent
rate agreement approved by the RIPUC, the Company is offering a
discount from base rates in return for a contract requiring the
customer to provide five years written notice before purchasing
electricity from others or generating any additional electricity
for the customer's own use (the notice provision may be reduced
from five to three years under certain conditions). The discount
is available to customers with average monthly peak demands over
200 kilowatts. Customers representing approximately 63 percent of
all eligible revenues have signed agreements.
Since a large part of the Company's costs represent the cost
of power purchased from NEP, its competitive position is affected
by NEP's ability to control costs. NEP is controlling costs and
positioning itself for increased competition through such means as
terminating certain purchased power and gas pipeline contracts,
shutdowns of uneconomic generating stations, and rapid amortization
of certain plant assets.
Observers of the electric utility business have recommended
various (and sometimes conflicting) strategies for electric
utilities to deal with these competitive pressures. These
suggestions include business combinations with other companies,
restructurings involving separation or sales of portions of the
retail and/or wholesale businesses, and diversification into
<PAGE>
unrelated businesses. For example, the NEES companies have
proposed one possible framework for increasing customer choice of
suppliers and achieving environmental goals, while preserving
shareholder value. This increase in customer choice could decrease
the value of generation related assets and purchased power
contracts. However, the replacement value of transmission assets
likely far exceeds their historic cost. The NEES companies have
suggested that utilities should have the ability to offset this
decrease in the value of generation related assets by realizing the
higher value of transmission assets. As one part of this possible
framework, the NEES companies have stated that, in order to
accomplish this realization, they would be willing to consider
selling their transmission system at replacement cost to entities
not in the generation business. This sale would facilitate the
transition to a fully competitive generating market. As part of
their routine long-term planning process, the NEES companies may,
from time to time, be engaged in analysis, either internally or
with third parties, of these and other strategies.
The Federal Energy Regulatory Commission (FERC) ruled in 1992,
in a proceeding not involving NEES subsidiaries, that a utility may
recover from a wholesale requirements customer, any legitimate,
prudent, and verifiable costs that the utility had incurred based
on a reasonable expectation that it would continue to sell
requirements service to the customer. The FERC has referred to
<PAGE>
such costs as "stranded costs". On appeal, the United States Court
of Appeals for the District of Columbia Circuit has questioned
whether allowing utilities to recover stranded costs is anti-
competitive and the Court remanded the case back to the FERC for
further proceedings and development of the competitive issues. In
a separate development, the FERC issued a notice of proposed rule-
making on the recovery of investment costs stranded as a result of
increased competition.
Electric utility rates are generally based on a utility's
costs. Therefore, electric utilities are subject to certain
accounting standards that are not applicable to other business
enterprises in general. These accounting rules require regulated
entities, in appropriate circumstances, to establish regulatory
assets and liabilities, which defer the income statement impact of
certain costs that are expected to be recovered in future rates.
The effects of competition could ultimately cause the operations of
the Company, or a portion thereof, to cease meeting the criteria
for application of these accounting rules. While the Company does
not expect to cease meeting these criteria in the near future, if
this were to occur, accounting standards of enterprises in general
would apply and immediate recognition of any previously deferred
costs would be necessary in the year in which these criteria were
no longer applicable. In addition, if, because of competition,
utilities are unable to recover all of their costs in rates, it may
be necessary to write off those costs that are not recoverable.
<PAGE>
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $67 million in the
first nine months of 1994, including $28 million related to the
Manchester Street Station Repowering Project. The funds necessary
for utility plant expenditures were primarily provided by net cash
from operating activities, after the payment of dividends and the
proceeds of long-term and short-term debt issues.
The Company issued $23 million of bonds during the first nine
months of 1994, bearing interest rates ranging from 6.91 to 8.16
percent. In addition, the Company issued $10 million of long-term
debt in November 1994 at an interest rate of 8.33 percent and plans
to issue an additional $7 million of long-term debt by the end of
1994 or early 1995.
At September 30, 1994, the Company had $34 million of short-
term debt outstanding of which $24 million was to affiliates. The
Company currently has lines of credit with banks totaling $41
million. Outstanding borrowings under these lines of credit at
September 30, 1994 were $10 million.
For the twelve-month period ending September 30, 1994, the
ratio of earnings to fixed charges was 2.24.
<PAGE>
Repowering of Manchester Street Station
- ---------------------------------------
The Company's major construction project is the repowering of
Manchester Street Station, a 140 megawatt electric generating
station in Providence, Rhode Island which is jointly owned by the
Company (10 percent) and NEP (90 percent). Repowering will more
than triple the power generation capacity of Manchester Street
Station and substantially increase the plant's thermal efficiency.
The total cost for the generating station, scheduled for completion
in late 1995, is estimated to be approximately $525 million,
including AFDC. In addition, related transmission work was
estimated to cost $75 million. At September 30, 1994, a total of
$310 million, including AFDC, had been spent on the project
including the related transmission work ($63 million by the
Company). The transmission facilities were in service at September
30, 1994, although all costs related to such work had not yet been
incurred. Substantial commitments have been made relative to
future planned expenditures for this project.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning dismissal of a lawsuit filed against
the Company on October 28, 1994, by residents of property which
borders the Company's existing transmission lines in East
Greenwich, Rhode Island, discussed in Part I of this report in
Management's Discussion and Analysis of Financial Condition and
Results of Operations is incorporated herein by reference and made
a part hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing the following revised exhibit for
incorporation by reference into its registration statements on Form
S-3, Commission File Nos. 33-49455 and 33-50015:
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-Q for
the quarter ended September 30, 1994 to be signed on its behalf by
the undersigned thereunto duly authorized.
THE NARRAGANSETT ELECTRIC COMPANY
s/ Howard W. McDowell
Howard W. McDowell
Controller, Authorized Officer, and
Principal Accounting Officer
Date: November 10, 1994
Exhibit Index
<PAGE>
Exhibit Index
-------------
Exhibit Description Page
- ------- ----------- ----
12 Statement re computation of Filed herewith
ratios
27 Financial Data Schedule Filed herewith
Exhibit 12
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Computation of Ratio of Earnings to Fixed Charges
(SEC Coverage)
(Unaudited)
<CAPTION>
12 Months
Ended
September 30, 1994 Years Ended December 31,
Actual -------------------------------------------------------------
(Unaudited) 1993 1992 1991 1990 1989
-------------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income $16,077 $14,274 $21,052 $16,820 $17,599 $10,582
- ----------
Add income taxes and fixed charges
- ----------------------------------
Current federal income taxes 2,251 2,183 4,608 1,558 7,624 4,690
Deferred federal income taxes 2,416 2,199 4,560 5,528 351 (2,509)
Investment tax credits - net (508) (508) (507) (500) (504) (536)
Interest on long-term debt 13,751 12,715 13,290 12,581 11,016 11,016
Interest on short-term debt and other 2,623 2,074 1,277 2,500 2,968 2,117
------- ------- ------- ------- ------- -------
Net earnings available for fixed charges $36,610 $32,937 $44,280 $38,487 $39,054 $25,360
------- ------- ------- ------- ------- -------
Fixed charges:
Interest on long-term debt $13,751 $12,715 $13,290 $12,581 $11,016 $11,016
Interest on short-term debt and other 2,623 2,074 1,277 2,500 2,968 2,117
------- ------- ------- ------- ------- -------
Total fixed charges $16,374 $14,789 $14,567 $15,081 $13,984 $13,133
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 2.24 2.23 3.04 2.55 2.79 1.93
- ----------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1993 DEC-31-1994 DEC-31-1993
<PERIOD-END> SEP-30-1994 SEP-30-1993 SEP-30-1994 SEP-30-1993
<PERIOD-TYPE> 9-MOS 9-MOS QTR-3 QTR-3
<BOOK-VALUE> PER-BOOK PER-BOOK PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 470,501 0 0 0
<OTHER-PROPERTY-AND-INVEST> 0 0 0 0
<TOTAL-CURRENT-ASSETS> 100,700 0 0 0
<TOTAL-DEFERRED-CHARGES> 55,381 <F1> 0 0 0
<OTHER-ASSETS> 0 0 0 0
<TOTAL-ASSETS> 626,582 0 0 0
<COMMON> 56,624 0 0 0
<CAPITAL-SURPLUS-PAID-IN> 45,170 0 0 0
<RETAINED-EARNINGS> 90,318 0 0 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 192,112 0 0 0
0 0 0 0
36,500 0 0 0
<LONG-TERM-DEBT-NET> 178,893 0 0 0
<SHORT-TERM-NOTES> 33,625 <F2> 0 0 0
<LONG-TERM-NOTES-PAYABLE> 0 0 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 0 0 0 0
0 0 0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0 0 0
<LEASES-CURRENT> 0 0 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 185,452 0 0 0
<TOT-CAPITALIZATION-AND-LIAB> 626,582 0 0 0
<GROSS-OPERATING-REVENUE> 366,275 367,850 137,014 136,174
<INCOME-TAX-EXPENSE> 4,594 4,304 3,355 2,915
<OTHER-OPERATING-EXPENSES> 337,623 341,628 122,722 123,498
<TOTAL-OPERATING-EXPENSES> 342,217 345,932 126,077 126,413
<OPERATING-INCOME-LOSS> 24,058 21,918 10,937 9,761
<OTHER-INCOME-NET> (285) (723) 149 162
<INCOME-BEFORE-INTEREST-EXPEN> 23,773 21,195 11,086 9,923
<TOTAL-INTEREST-EXPENSE> 11,242 10,467 3,856 3,488
<NET-INCOME> 12,531 10,728 7,230 6,435
1,607 1,396 535 619
<EARNINGS-AVAILABLE-FOR-COMM> 10,924 9,332 6,695 5,816
<COMMON-STOCK-DIVIDENDS> 2,265 3,963 1,132 566
<TOTAL-INTEREST-ON-BONDS> 10,489 9,454 3,675 3,261
<CASH-FLOW-OPERATIONS> 33,521 20,143 4,375 9,077
<EPS-PRIMARY> 0 <F3> 0 <F3> 0 <F3> 0 <F3>
<EPS-DILUTED> 0 <F3> 0 <F3> 0 <F3> 0 <F3>
<FN>
<F1> Total deferred charges includes other assets.
<F2> Short-term notes includes notes payable to banks and short-term debt to affiliates.
<F3> Per share data is not relevant because the Company's common stock is wholly owned by New England Electric System.
</FN>
