<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 March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7471
(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
(401-784-7000)
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 March 31, 1998.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Periods Ended March 31
(Unaudited)
<CAPTION>
Three Months Twelve Months
------------ -------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $119,976 $131,466 $508,548 $507,766
-------- -------- -------- --------
Operating expenses:
Fuel for generation and purchased electric
energy (principally from New England
Power Company, an affiliate) 61,471 77,173 293,728 300,544
Other operation 19,700 17,826 76,249 72,348
Maintenance 2,896 2,715 12,628 11,737
Depreciation 5,961 6,104 22,814 26,866
Taxes, other than federal income taxes 10,259 10,268 39,357 38,717
Federal income taxes 4,884 3,977 15,154 12,926
-------- -------- -------- --------
Total operating expenses 105,171 118,063 459,930 463,138
-------- -------- -------- --------
Operating income 14,805 13,403 48,618 44,628
Other income:
Other income (expense) - net (989) (1,056) (683) (679)
-------- -------- -------- --------
Operating and other income 13,816 12,347 47,935 43,949
-------- -------- -------- --------
Interest:
Interest on long-term debt 3,831 4,305 15,705 17,218
Other interest 618 393 2,700 2,592
Allowance for borrowed funds used during
construction - credit (32) (44) (108) (218)
-------- -------- -------- --------
Total interest 4,417 4,654 18,297 19,592
-------- -------- -------- --------
Net income $ 9,399 $ 7,693 $ 29,638 $ 24,357
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $129,567 $119,978 $123,738 $111,716
Net income 9,399 7,693 29,638 24,357
Dividends declared on cumulative
preferred stock (190) (536) (1,609) (2,143)
Dividends declared on common stock (28,879) (3,397) (40,204) (10,192)
Premium on redemption of preferred stock - - (1,666) -
-------- -------- -------- --------
Retained earnings at end of period $109,897 $123,738 $109,897 $123,738
======== ======== ======== ========
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>
March 31, December 31,
ASSETS 1998 1997
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $767,603 $760,923
Less accumulated provisions for depreciation 201,489 198,551
-------- --------
566,114 562,372
Construction work in progress 1,208 5,739
-------- --------
Net utility plant 567,322 568,111
-------- --------
Current assets:
Cash 2,931 3,122
Accounts receivable:
From sales of electric energy 51,169 54,109
Other (including $1,834,000 and $1,112,000 from affiliates) 4,094 2,571
Less reserves for doubtful accounts 4,755 4,707
-------- --------
50,508 51,973
Unbilled revenues 14,997 15,997
Fuel, materials, and supplies, at average cost 4,510 4,165
Prepaid and other current assets 13,421 14,202
-------- --------
Total current assets 86,367 89,459
-------- --------
Deferred charges and other assets 55,616 55,285
-------- --------
$709,305 $712,855
======== ========
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 36 36
Other paid-in capital 105,500 105,500
Retained earnings 109,897 129,567
Unrealized gain on securities, net 164 112
-------- --------
Total common equity 272,221 291,839
Cumulative preferred stock 12,774 12,800
Long-term debt 183,567 183,545
-------- --------
Total capitalization 468,562 488,184
-------- --------
Current liabilities:
Long-term debt due in one year - 5,000
Short-term debt (including $725,000 and $4,425,000
to affiliates) 12,425 16,350
Accounts payable (including $52,584,000 and $50,751,000
to affiliates) 57,106 56,048
Accrued liabilities:
Taxes 6,230 4,314
Interest 3,135 4,810
Other accrued expenses 16,243 21,519
Customer deposits 6,021 5,982
Dividends payable 29,068 3,587
-------- --------
Total current liabilities 130,228 117,610
-------- --------
Deferred federal income taxes 86,547 82,871
Unamortized investment tax credits 6,900 7,023
Other reserves and deferred credits 17,068 17,167
-------- --------
$709,305 $712,855
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Cash Flows
Quarters Ended March 31
(Unaudited)
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Operating activities:
Net income $ 9,399 $ 7,693
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,961 6,104
Deferred federal income taxes and investment tax credit, net 3,416 (996)
Allowance for funds used during construction (32) (44)
Decrease (increase) in accounts receivable, net
and unbilled revenue 2,465 2,197
Decrease (increase) in fuel, materials, and supplies (345) (123)
Decrease (increase) in prepaid and other current assets 781 (145)
Increase (decrease) in accounts payable 1,058 570
Increase (decrease) in other current liabilities (4,996) 8,770
Other, net (105) (2,327)
-------- --------
Net cash provided by operating activities $ 17,602 $ 21,699
-------- --------
Investing activities:
Plant expenditures, excluding allowance for
funds used during construction $ (5,175) $ (6,990)
Other investing activities (80) (127)
-------- --------
Net cash used in investing activities $ (5,255) $ (7,117)
-------- --------
Financing activities:
Dividends paid on common stock $ (3,397) $ (2,265)
Dividends paid on preferred stock (190) (536)
Long-term debt - retirements (5,000) -
Preferred stock - redemption (26) -
Changes in short-term debt (3,925) (12,250)
-------- --------
Net cash provided by (used in)
financing activities $(12,538) $(15,051)
-------- --------
Net increase (decrease) in cash and cash equivalents $ (191) $ (469)
Cash and cash equivalents at beginning of period 3,122 1,727
-------- --------
Cash and cash equivalents at end of period $ 2,931 $ 1,258
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Note A - 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.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The Narragansett Electric Company (the
Company) currently has in place an internal environmental audit
program and an external waste disposal vendor audit and
qualification program intended to enhance compliance with existing
federal, state, and local requirements regarding the handling of
potentially hazardous products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for
three sites (two of which are located in Massachusetts) at which
hazardous waste is alleged to have been disposed. The Company is
currently aware of other sites, and may in the future become aware
of additional sites, that it may be held responsible for
remediating.
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.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. 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. A
preliminary review by a consultant hired by the New England
Electric System (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 $11 million. An informal survey of other
utilities conducted on behalf of NEES and its subsidiaries
indicated costs in a similar range. The NEES companies have
recovered amounts from certain insurers, and, where appropriate,
the Company intends to seek recovery from other insurers and from
other PRPs, but it is uncertain whether, and to what extent, such
efforts will be successful. The Company believes that hazardous
<PAGE>
waste liabilities for all sites of which it is aware are not
material to its financial position.
Note B - Comprehensive Income
- -----------------------------
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income (FAS 130). The statement establishes standards for
reporting comprehensive income and its components. Comprehensive
income for the period is equal to net income plus "other
comprehensive income," which, for the Company, consists of the
change in unrealized holding gains on available-for-sale securities
during the period. Other comprehensive income was immaterial for
the Company for the quarters ended March 31, 1998 and 1997,
respectively.
Note C - New Accounting Standards
- ---------------------------------
In 1997, the Financial Accounting Standards Board (FASB)
released Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information
(FAS 131), which goes into effect in 1998. FAS 131 requires the
reporting in financial statements of certain new additional
information about operating segments of a business. Application of
FAS 131 is not required for interim reporting in the initial year
of application. The Company is currently evaluating the impact
that FAS 131 will have on its future reporting requirements.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits (FAS 132) which revises
disclosure requirements for pension and other postretirement
benefits. The Company is currently evaluating the effects of FAS
132 on its reporting requirements and will adopt FAS 132 in its
financial statements for the year ending December 31, 1998. The
adoption of FAS 132 will have no impact on the Company's operating
results, financial position, or cash flows.
Note D
- ------
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 1997 Annual
Report.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------------
This section contains management's assessment of The Narragansett
Electric Company's (the Company) financial condition and the
principal factors having an impact on the results of operations.
This discussion should be read in conjunction with the Company's
financial statements and footnotes and the 1997 Annual Report on
Form 10-K.
Earnings
- ----------
Net income for the first quarter of 1998 increased $1.7 million
from the corresponding period in 1997. Contributing to this
increase was a $7 million distribution rate increase that became
effective on January 1, 1998, as well as a reduction in operating
and maintenance expenses.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island, and New Hampshire, stranded cost
recovery, the New England Electric System (NEES) companies'
proposed divestiture of its nonnuclear generating business,
accounting implications of industry restructuring and divestiture,
workforce reductions, and impact of industry restructuring on the
distribution business, see the "Industry Restructuring" section in
the Company's Form 10-K for 1997 and the Company's 1997 Annual
Report.
Risk Factors
This report contains statements that may be considered forward
looking statements as defined under the securities laws. Actual
results may differ materially for the reasons discussed in the
Company's Form 10-K for 1997 and the Company's 1997 Annual Report.
While the Company believes that the Rhode Island Settlement and
the sale agreement with USGen New England, Inc. (USGen) and other
developments constitute substantial progress in reducing the
impacts associated with industry restructuring, significant risks
remain. These include, but are not limited to: (i) the potential
that ultimately the Rhode Island Settlement will not be implemented
in the manner anticipated by the Company, (ii) the possibility of
federal legislation that would increase the risk to shareholders
above those contained in the Rhode Island Settlement and statute,
and (iii) the failure to complete the sale of the nonnuclear
<PAGE>
generating business to USGen. The major risk factors affecting the
Company relate to the possibility of adverse regulatory or judicial
decisions or legislation which limit the level of revenues the
Company is allowed to charge for its services or affect the costs
the Company incurs.
Year 2000 Computer Issues
- -------------------------
For a full discussion of the Company's Year 2000 computer issues,
including a description of the modification process, timeline, and
estimated total costs, refer to the "Financial Review" section of
the Company's 1997 Annual Report, filed in conjunction with the
Company's Form 10-K for 1997.
Operating Revenue
- -----------------
The following table summarizes the changes in operating revenue:
Increase (Decrease) in Operating Revenue
First Quarter
-------------
1998 vs 1997
-------------
(In millions)
Industry restructuring-related rate changes:
Purchased power and transmission-related $(11)
Distribution-related 2
PBOP rate decrease (2)
----
$(11)
====
Historically, the Company purchased all of its electrical
requirements from New England Power Company (NEP), an affiliate of
the Company, under the provisions of an all-requirements contract.
In connection with an amendment to this contract, in January 1998
all of the Company's customers gained the right to choose their
power supplier. NEP continues to supply power to the Company, at
new lower rates, for customers who choose to continue to take power
from the Company. These new rates include the recovery by NEP of
its generation-related stranded costs. In connection with these
changes, the revenues that the Company is billing to its customers
related to NEP's costs, excluding transmission costs, are all
subject to true-up mechanisms based on NEP's actual billings.
Prior to January 1998, the Company had a purchased power cost
adjustment mechanism and a fuel clause mechanism, which allowed
NEP's billings to be passed on to customers.
<PAGE>
In accordance with the Rhode Island Restructuring Act of 1996,
a $7 million increase in distribution rates was implemented for the
Company, effective January 1, 1998. The Company also implemented
a rate decrease related to its lower level of postretirement
benefits other than pensions (PBOPs) expenses being incurred and
also made refunds in January 1998 of past overrecoveries of PBOP
costs, for which reserves had previously been established.
Operating Expenses
- ------------------
The following table summarizes the changes in operating expenses:
Increase (Decrease) in Operating Expenses
First Quarter
-------------
1998 vs 1997
-------------
(In millions)
Fuel, purchased power and
operation and maintenance:
Fuel, purchased power, generation
and transmission-related $(11)
Other (3)
Taxes 1
----
$(13)
====
As noted above, effective January 1, 1998, NEP's billings to the
Company were significantly changed in connection with the
restructuring of the electric utility industry in Rhode Island.
Not only were NEP's rates reduced, but the transmission portion of
NEP's costs are billed separately and are recorded in operation and
maintenance expense instead of as a component of purchased power
expense.
The decrease in other operation and maintenance expense is
primarily due to a reduction in the cost of PBOPs, for which
refunds and a rate decrease were put into effect in the first
quarter. The Company also experienced a reduction in bad-debt
related expenses.
<PAGE>
Utility Plant Expenditures and Financings
- -----------------------------------------
Plant expenditures for the first quarter of 1998 amounted to $5
million. The funds necessary for utility plant expenditures were
provided by net cash from operating activities, after the payment
of dividends.
In the first three months of 1998, the Company retired $5 million
of mortgage bonds and decreased its short-term debt outstanding by
$4 million.
At March 31, 1998, the Company had $12 million of short-term debt
outstanding which represents commercial paper borrowings. The
Company currently has lines of credit with banks totaling $31
million. There were no outstanding borrowings under these lines of
credit at March 31, 1998.
For the twelve-month period ending March 31, 1998, the ratio of
earnings to fixed charges was 3.41.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
- -------------------------------------------------------------
On March 11, 1998, a Special Meeting in lieu of Annual Meeting
of Stockholders was held. The following actions were taken by the
unanimous vote of the 1,132,487 shares having general voting rights
represented at the meeting:
The number of directors for the ensuing year was fixed at seven.
The following were elected as directors:
Richard W. Frost
Cheryl A. LaFleur
Robert L. McCabe
Lawrence J. Reilly
Michael F. Ryan
Richard P. Sergel
Ronald L. Thomas
Coopers & Lybrand L.L.P. was appointed as auditor for 1998.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing the following revised exhibit for
incorporation by reference into its registration statement on Form
S-3, Commission file No. 33-61131.
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
The Company filed reports on Form 8-K dated December 31, 1997
and February 25, 1998, each containing Item 5, Other Events.
<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 March 31, 1998 to be signed on its behalf by the
undersigned thereunto duly authorized.
THE NARRAGANSETT ELECTRIC COMPANY
s/John G. Cochrane
John G. Cochrane
Treasurer, Authorized Officer, and
Principal Financial Officer
Date: May 13, 1998
<PAGE>
Exhibit Index
-------------
Exhibit Description Page
- ------- ----------- ----
12 Statement re computation of Filed herewith
ratios
27 Financial Data Schedule Filed herewith
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Computation of Ratio of Earnings to Fixed Charges
(SEC Coverage)
(Unaudited)
<CAPTION>
12 Months
Ended
March 31, 1998 Years Ended December 31,
Actual -------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Net Income $29,638 $27,932 $22,954 $23,910 $14,589 $14,274
- ----------
Add income taxes and fixed charges
- ----------------------------------
Current federal income taxes 10,677 14,185 6,918 7,212 1,020 2,183
Deferred federal income taxes 4,496 79 4,675 3,512 3,930 2,199
Investment tax credits - net (493) (495) (498) (503) (508) (508)
Interest on long-term debt 15,705 16,179 17,205 16,627 14,334 12,715
Interest on short-term debt and other 2,700 2,475 2,883 3,663 2,897 2,074
------- ------- ------- ------- ------- -------
Net earnings available for fixed charges $62,723 $60,355 $54,137 $54,421 $36,262 $32,937
------- ------- ------- ------- ------- -------
Fixed charges:
Interest on long-term debt $15,705 $16,179 $17,205 $16,627 $14,334 $12,715
Interest on short-term debt and other 2,700 2,475 2,883 3,663 2,897 2,074
------- ------- ------- ------- ------- -------
Total fixed charges $18,405 $18,654 $20,088 $20,290 $17,231 $14,789
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 3.41 3.24 2.69 2.68 2.10 2.23
- ----------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED
EARNINGS AND CASH FLOWS OF THE NARRAGANSETT ELECTRIC COMPANY, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 567,322
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 86,367
<TOTAL-DEFERRED-CHARGES> 55,616 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 709,305
<COMMON> 56,624
<CAPITAL-SURPLUS-PAID-IN> 105,536
<RETAINED-EARNINGS> 109,897
<TOTAL-COMMON-STOCKHOLDERS-EQ> 272,221 <F3>
0
12,774
<LONG-TERM-DEBT-NET> 183,567
<SHORT-TERM-NOTES> 725
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 11,700
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 228,318
<TOT-CAPITALIZATION-AND-LIAB> 709,305
<GROSS-OPERATING-REVENUE> 119,976
<INCOME-TAX-EXPENSE> 4,884
<OTHER-OPERATING-EXPENSES> 100,287
<TOTAL-OPERATING-EXPENSES> 105,171
<OPERATING-INCOME-LOSS> 14,805
<OTHER-INCOME-NET> (989)
<INCOME-BEFORE-INTEREST-EXPEN> 13,816
<TOTAL-INTEREST-EXPENSE> 4,417
<NET-INCOME> 9,399
190
<EARNINGS-AVAILABLE-FOR-COMM> 9,209
<COMMON-STOCK-DIVIDENDS> 28,879
<TOTAL-INTEREST-ON-BONDS> 3,831
<CASH-FLOW-OPERATIONS> 17,602
<EPS-PRIMARY> 0 <F2>
<EPS-DILUTED> 0 <F2>
<FN>
<F1> Total deferred charges includes other assets.
<F2> Per share data is not relevant because the Company's common stock is
wholly-owned by New England Electric System.
<F3> Total common stockholders equity includes the unrealized gain on
securities.
</FN>
