<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 June 30, 1999
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 June 30, 1999.
<PAGE> PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
<CAPTION>
Quarter Six Months
-------- ----------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $102,479 $117,295 $228,607 $237,271
-------- -------- -------- --------
Operating expenses:
Fuel for generation and purchased electric
energy:
Contract termination charges from
New England Power Company, an affiliate 13,965 32,743
49,612 66,598
Other New England Power Company 3,213 27,919 6,284
55,437
Other 34,753 114 72,279 212
Other operation 18,054 26,427 35,953 46,127
Maintenance 3,035 3,055 5,854 5,951
Depreciation 5,622 5,962 11,245 11,923
Taxes, other than federal income taxes 8,959 10,143
19,379 20,402
Federal income taxes 3,491 2,167 6,025 7,051
-------- -------- -------- --------
Total operating expenses 91,092 108,530 206,631
213,701
-------- -------- -------- --------
Operating income 11,387 8,765 21,976 23,570
Other income:
Other income (expense), net (259) 255 (1,328) (734)
-------- -------- -------- --------
Operating and other income 11,128 9,020 20,648
22,836
-------- -------- -------- --------
Interest:
Interest on long-term debt 3,591 3,780 7,217 7,611
Other interest 740 933 1,617 1,551
Allowance for borrowed funds used during
construction - credit (11) (28) (26) (60)
-------- -------- -------- --------
Total interest 4,320 4,685 8,808 9,102
-------- -------- -------- --------
Net income $ 6,808 $ 4,335 $ 11,840 $ 13,734
======== ======== ======== ========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 91,418 $109,897 $
86,465 $129,567
Net income 6,808 4,335 11,840 13,734
Dividends declared on cumulative
preferred stock (94) (189) (188) (379)
Dividends declared on common stock - (8,493) - (37,372)
Premium on redemption of preferred stock - - 15 -
-------- -------- -------- --------
Retained earnings at end of period $ 98,132 $105,550 $ 98,132
$105,550
======== ======== ======== ========
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 June 30
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $466,990 $505,949
-------- --------
Operating expenses:
Fuel for generation and purchased electric
energy:
Contract termination charges from New England
Power Company, an affiliate 100,770 66,598
Other New England Power Company 23,622 215,358
Other 121,643 277
Other operation 85,618 85,199
Maintenance 11,900 12,651
Depreciation 22,081 23,177
Taxes, other than federal income taxes 37,892 40,295
Federal income taxes 15,151 14,830
-------- --------
Total operating expenses 418,677 458,385
-------- --------
Operating income 48,313 47,564
Other income:
Other income (expense), net 207 (301)
-------- --------
Operating and other income 48,520 47,263
-------- --------
Interest:
Interest on long-term debt 14,531 15,295
Other interest 3,681 3,202
Allowance for borrowed funds used during
construction - credit (51) (122)
-------- --------
Total interest 18,161 18,375
-------- --------
Net income $ 30,359 $ 28,888
======== ========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $105,550 $122,624
Net income 30,359 28,888
Dividends declared on cumulative preferred stock (376) (1,262)
Dividends declared on common stock (36,240) (43,034)
Premium on redemption of preferred stock (1,161) (1,666)
-------- --------
Retained earnings at end of period $ 98,132 $105,550
======== ========
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>
June 30, December 31,
ASSETS 1999 1998
- ------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $742,522 $732,077
Less accumulated provisions for depreciation 218,411 209,155
-------- --------
524,111 522,922
Construction work in progress 1,548 2,566
-------- --------
Net utility plant 525,659 525,488
-------- --------
Current assets:
Cash 1,841 2,957
Accounts receivable:
From electric energy services 42,465 53,727
Other (including $10,938,000 and $4,444,000
from affiliates) 12,007 5,575
Less reserves for doubtful accounts 4,625 4,240
-------- --------
49,847 55,062
Unbilled revenues 18,719 20,752
Fuel, materials and supplies, at average cost 3,629 3,494
Prepaid and other current assets 9,814 739
-------- --------
Total current assets 83,850 83,004
-------- --------
Deferred charges and other assets 54,137 55,628
-------- --------
$663,646 $664,120
======== ========
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 81 81
Other paid-in capital 105,713 105,713
Retained earnings 98,132 86,465
Unrealized gain on securities, net 263 237
-------- --------
Total common equity 260,813 249,120
Cumulative preferred stock, par value $50 per share 7,238 7,238
Long-term debt 168,743 168,702
-------- --------
Total capitalization 436,794 425,060
-------- --------
Current liabilities:
Long-term debt due in one year 5,000 8,000
Short-term debt 36,000 26,675
Accounts payable (including $14,120,000 and
$1,929,000 to affiliates) 40,399 28,260
Accrued liabilities:
Taxes 2,897 10,031
Interest 4,477 4,553
Other accrued expenses 14,025 34,734
Customer deposits 5,522 6,116
Dividends payable 94 4,058
-------- --------
Total current liabilities 108,414 122,427
-------- --------
Deferred federal income taxes 87,843 81,045
Unamortized investment tax credits 6,291 6,533
Other reserves and deferred credits 24,304 29,055
-------- --------
$663,646 $664,120
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 11,840 $ 13,734
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 11,245 11,923
Deferred federal income taxes and
investment tax credits, net 6,378 3,672
Allowance for funds used during construction (26) (60)
Decrease (increase) in accounts receivable, net
and unbilled revenue 7,248 755
Decrease (increase) in fuel, materials, and supplies (135)
(439)
Decrease (increase) in prepaid and other current assets
(9,075) 1,753
Increase (decrease) in accounts payable 12,139 (418)
Increase (decrease) in other current liabilities (28,513)
(7,202)
Other, net (2,827) 683
-------- --------
Net cash provided by operating activities $ 8,274
$ 24,401
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(11,423) $(10,013)
Other investing activities (140) -
-------- --------
Net cash used in investing activities $(11,563)
$(10,013)
-------- --------
Financing Activities:
Capital contributions from parent $ - $ 180
Dividends paid on common stock (3,964) (32,276)
Dividends paid on preferred stock (188) (379)
Long-term debt - retirements (3,000) (5,000)
Changes in short-term debt 9,325 22,650
Preferred stock - retirements - (26)
-------- --------
Net cash provided by (used in)
financing activities $ 2,173 $(14,851)
-------- --------
Net decrease in cash and cash equivalents $ (1,116) $ (463)
Cash and cash equivalents at beginning of period 2,957 3,122
-------- --------
Cash and cash equivalents at end of period $ 1,841 $ 2,659
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>THE NARRAGANSETT ELECTRIC COMPANY
Notes to Unaudited Financial Statements
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. A number of states, including
Massachusetts, have enacted similar laws.
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 several 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 waste liabilities for all sites of which it is aware are not
material to its financial position.
<PAGE>Note B
- ------
In the opinion of the Company, these financial 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 1998 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
1998 Annual Report on Form 10-K.
Merger Agreements
- -----------------
For a full discussion of New England Electric Systems' (NEES) merger
agreements with The National Grid Group plc (National Grid) and Eastern
Utilities Associates (EUA), see the Merger Agreements sections of the
Company's Form 10-K for 1998 and the Company's 1998 Annual Report.
Update of Merger Agreements with National Grid and EUA
On April 22, 1999, shareholders of National Grid approved the proposed
merger with 99 percent of those voting approving the merger. On May 3, 1999,
NEES received the approval of more than the required majority of outstanding
shares for the merger with 75 percent of outstanding shares voting in favor of
the merger. Of those shares voted, in excess of 94 percent voted in favor of
the merger.
The NEES/National Grid merger has received approval or clearance from the
Federal Trade Commission (FTC), the Committee on Foreign Investment in the
United States, the Federal Energy Regulatory Commission (FERC), the Vermont
Public Service Board (VPSB), and the Connecticut Department of Public Utility
Control (CDPUC). In addition, the New Hampshire Public Utilities Commission
approved the proposed merger in an oral order on August 9, 1999, with a
written order expected in several weeks.
NEES and National Grid have also filed for merger approval with the
Securities and Exchange Commission (SEC), under the Public Utility Holding
Company Act of 1935 (1935 Act). In connection with the SEC application, the
Massachusetts Department of Telecommunications and Energy (MDTE) certified to
the SEC that the merger would not interfere with the MDTE's authority or
ability to protect customers of NEES' Massachusetts distribution subsidiaries.
NEES and National Grid have requested a similar certification from state
regulators in Rhode Island. In addition, NEES and National Grid have also
filed for merger approval with the Nuclear Regulatory Commission (NRC) to
transfer ownership licenses for its minority ownership interests in regional
nuclear plants. On July 20, 1999, three subsidiaries of Northeast Utilities
filed a request for hearing with the NRC with respect to financial
qualifications and raising issues of foreign ownership. NEES and National
Grid responded, in a July 27, 1999 filing, opposing the request and asserting
that the application should be granted as a matter of law and there is no need
for a hearing. It is not known when the NRC will respond to the request or
how it will rule.
<PAGE> The NEES/National Grid merger is expected to be completed
by early 2000.
The NEES acquisition of EUA has also received clearance from the FTC.
NEES and EUA have made appropriate filings with the FERC, SEC, under the 1935
Act, NRC, MDTE, VPSB, and the Rhode Island Public Utilities Commission
(RIPUC). In addition, the acquisition of EUA requires approval by the CDPUC.
On May 17, 1999, EUA shareholders approved the acquisition of EUA by NEES.
The acquisition of EUA is expected to be completed by early 2000.
Impact of Mergers on Distribution Rates
- ---------------------------------------
In May 1999, the Company, along with Blackstone Valley Electric Company
(Blackstone Valley) and Newport Electric Corporation (Newport Electric),
wholly owned subsidiaries of EUA, filed a rate consolidation plan with the
RIPUC, reflecting the acquisition of EUA by NEES and the merger of Blackstone
Valley and Newport Electric into the Company. In the filing, the companies
proposed that effective within 120 days after the closing of the NEES
acquisition of EUA or on April 1, 2000, whichever is later, most distribution
rates for customers of Blackstone Valley and Newport Electric would be reduced
by approximately $5 million per year. The filing calls for a distribution
rate freeze for all three companies for up to four years.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in Rhode
Island, the NEES companies' divestiture of its nonnuclear generating business,
stranded cost recovery, and the impact of restructuring on the distribution
business, see the "Industry Restructuring", and "Impact of Restructuring on
Distribution Business" sections of the Company's Form 10-K for 1998 and the
Company's 1998 Annual Report.
Regulatory Asset Recovery
- -------------------------
Historically, electric utility rates have been based on a utility's
costs. As a result, electric utilities are subject to certain accounting
standards that are not applicable to other business enterprises in general.
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation (FAS 71), requires regulated entities, in
appropriate circumstances, to establish regulatory assets, and thereby defer
the income statement impact of these charges because they are expected to be
included in future customer charges. At June 30, 1999, the Company had net
regulatory assets of approximately $34 million.
Under existing ratemaking practices and provisions of industry
restructuring settlement agreements approved by state and federal regulators,
the Company has the ability to recover through rates its specific costs of
providing ongoing distribution services and stranded costs billed to it by New
England Power Company (NEP). To
<PAGE>date, the Company believes these factors allow it to continue
to apply FAS 71.
Currently, there is much regulatory and other movement toward
establishing performance-based rates. It is possible that the adoption of
performance-based rates, future regulatory rules, or other circumstances could
cause the application of FAS 71 to be discontinued. Absent the circumstances
described in the next paragraph, this discontinuation would result in a
noncash write-off of previously established regulatory assets. In addition,
reserves for depreciation may also have to be increased to comply with
unregulated accounting practices.
In May 1999, the Company filed a rate plan which, if approved, may cause
the application of FAS 71 to be discontinued upon consummation of the
NEES/National Grid merger. Because the discontinuation of FAS 71 would be
coincident with the completion of the NEES/National Grid merger, the NEES
companies believe the appropriate accounting treatment would be that the
regulatory assets would not be written off but instead reclassified to either
an intangible asset account or a goodwill account.
Year 2000 Readiness Disclosure
- ------------------------------
Over the course of this year, most companies will face a potentially
serious information systems (computer) problem because many software
applications and operational programs written in the past may not properly
recognize calendar dates associated with the year 2000 (Y2K). This could cause
computers to either shut down or lead to incorrect calculations.
During 1996, the NEES companies began the process of identifying the
changes required to their computer software and hardware to mitigate Y2K
issues. The NEES companies established a Y2K Project team to manage these
issues, which has consisted of as many as 70 full-time equivalent staff at
some points in time, primarily external consultants being overseen by an
internal Y2K management team. To facilitate the Y2K Project, NEES entered
into contracts with Keane, Inc. and IBM to provide personnel support to the
Y2K Project. Through June 30, 1999, the NEES companies have spent
approximately $18 million with these vendors, which is included in the cost
figures disclosed below. The Y2K Project team reports project progress to a
Y2K Executive Oversight Committee each month. The team also makes regular
reports to NEES' Board of Directors and its Audit Committee. The NEES
companies separated their Y2K Project into four parts as shown below.
<PAGE><TABLE>
<CAPTION>
Substantial Contingency Testing,
Completion Documentation,
of Critical and Clean
Category Specific Example Systems Management
- -------- ---------------- ----------- -------------------
<S> <C> <C> <C>
Mainframe/Midrange Accounting/Customer Completed Throughout 1999
systems service integrated
systems
Desktop systems Personal computers/ Completed Throughout 1999
Department software/
Networks
Operational/ Dispatching systems/ Completed Throughout 1999
Embedded Transmission and
systems Distribution systems/
Telephone systems
External issues Electronic Data Completed Throughout 1999
Interchange/Vendor
communications
</TABLE>
The NEES companies used a three-phase approach in coordinating their Y2K
Project for system-related issues: (I) Assessment and Inventory, (II) Pilot
Testing, and (III) Renovation, Conversion, or Replacement of Application and
Operating Software Packages and Testing. Phase I, which was an initial
assessment of all systems and devices for potential Y2K defects, was completed
in mid-1997. These assessments included, but were not limited to, the review
of program code for mainframe and midrange systems, analysis of personal
computer hardware and network equipment for desktop systems, reaching
consensus with key "data exchange" partners regarding the approach and
execution of plans to address Y2K-
related issues, and coordination with other New England Power Pool (NEPOOL)
member utilities related to operational systems, such as transmission
systems. Phase II, which consisted of renovation pilots for a cross-section
of systems in order to facilitate the establishment of templates for Phase III
work, was completed in late 1997. Phase III, which was completed on June 30,
1999, required the renovation, conversion, or replacement of the remaining
applications and operating software packages.
Critical systems include major operational and informational systems such
as the NEES companies' financial-related and customer information systems.
These mission critical systems were first addressed at an individual component
level, and then, upon satisfactory completion of that testing, reviewed at an
integrated level, during which the Y2K Project team tested for Y2K problems
which could be caused by various system interfaces. Additionally, contingency
plans are being implemented for mission critical systems, as described below.
The overall Y2K Project was designed such that Y2K-related work performed
by external consultants was reviewed by NEES employees, and vice-versa. The
Y2K Project team management periodically benchmarked its progress against the
recommended progress schedule
<PAGE>documented by the North American Electric Reliability
Council (NERC), and has met all recommended schedules, including the issuance
of its Year 2000 Readiness Letter to NERC on June 30, 1999.
The NEES companies also implemented a formalized communication process
with third parties to give and receive information related to their progress
in remediating their own Y2K issues, and to communicate the NEES companies'
progress in addressing the Y2K issue. These third parties include major
customers, suppliers, and significant businesses with which the NEES companies
have data links (such as banks). The NEES companies have identified standard
offer generation service providers, telecommunications companies, and the
Independent System Operator-New England (ISO New England) as critical to
business operations. The NEES companies have been in contact with all of
these parties regarding the progress of their Y2K remediation efforts, and
will continue to monitor their ongoing remediation efforts through continued
communications. The NEES companies cannot predict the outcome of other
companies' remediation efforts. Therefore, contingency plans are being
implemented, as described below.
The NEES companies believe total costs associated with making the
necessary modifications to all centralized and noncentralized systems will be
approximately $28 million. These costs include the replacement of
approximately one thousand desktop computers. In addition, the NEES companies
are spending $7 million related to the replacement of the human resources and
payroll system, in part due to the Y2K issue. As of June 30, 1999, total
Y2K-related costs of approximately $33 million have been incurred, of which
approximately $6 million have been capitalized. The NEES companies
continually review their cost estimates based upon the overall Y2K Project
status, and update these estimates as warranted.
The NEES companies have developed and are implementing Y2K contingency
plans to allow for critical information and operating systems to function from
January 1, 2000, forward. These plans are intended to address both internal
risks as well as potential external risks related to suppliers and customers.
Part of the contingency plan implementation for accounting and desktop systems
will include taking extensive data back-ups prior to year-end closing. For
operational systems, the NEES companies have in place an overall disaster
recovery program, which already includes periodic disaster simulation training
(for outages due to severe weather, for instance). As part of the Y2K
contingency plan implementation, the NEES companies are reviewing their
disaster recovery plans and modifying them for Y2K-specific issues, such as a
potential loss of telecommunication services. The NEES companies expect to
hold contingency plan drills during the third quarter of 1999.
Interregional and regional contingency plans are being finalized to
address emergency scenarios due to the interconnection of utility systems
throughout the United States. At a regional level, the NEES companies are
participating and cooperating with NEPOOL and ISO New England. Overall
regional activities, including those of NEPOOL and ISO New England, are being
coordinated by the Northeast Power Coordinating Council, whose activities are
being
<PAGE>incorporated into the interregional coordinating effort by
NERC. Drills of these interregional and regional contingency plans are
expected to be held in September 1999.
The NEES companies believe that their mission critical systems used to
deliver electricity are ready for date changes associated with Y2K, in
accordance with the criteria specified by NERC. Recognizing that neither the
NEES companies nor any other organization can make guarantees about something
as complex as Y2K, the NEES companies also have developed and are implementing
the contingency plans described above (including contingency plans in the
event of temporary disruptions of electric service) to address potential
problems caused by Y2K. In the event that a short-term disruption in service
occurs, NEES does not expect that such a disruption would have a material
impact on its financial position or results of operation.
Earnings
- --------
Net income increased $2 million during the second quarter of 1999
compared with the corresponding period in 1998 due primarily to the
implementation of a fully reconciling transmission cost rate mechanism in the
first quarter of 1999, increased kilowatthour (kWh) deliveries, reduced
operations and maintenance expense, and reduced property tax expense. These
increases were partially offset by loss of income associated with the
Company's former 10 percent ownership of the Manchester Street generating
station (Manchester Street) as a result of the sale of NEES' nonnuclear
generating business on September 1, 1998.
Net income for the first six months of 1999 decreased $2 million compared
with the same period in 1998 due to the impact of the loss of income on
Manchester Street exceeding the impact of increased kWh deliveries.
Operating Revenue
- -----------------
Operating revenue decreased $15 million and $9 million in the second
quarter and first six months of 1999, respectively, compared with the
corresponding periods in 1998, reflecting a transition access charge rate
reduction effective January 1, 1999. These decreases were partially offset by
increased standard offer revenues, the recovery of increased demand-side
management spending (DSM), and the implementation of a fully reconciling
transmission cost true-up mechanism in the first quarter of 1999. In
addition, kWh deliveries increased 6.2 percent and 3.8 percent, respectively,
as a result of significantly warmer weather in June 1999 and the effect of a
strong economy. For the year-to-date period, revenues were also favorably
affected by a refund made in January 1998 of past overrecoveries of
postretirement benefits other than pension (PBOP) costs.
<PAGE>Operating Expenses
- ------------------
Operating expenses for the second quarter and first six months of 1999
decreased $17 million and $7 million, respectively, compared with the
corresponding periods in 1998. The decrease in both periods is primarily due
to reduced transition access charge billings from NEP, decreased operation and
maintenance expenses, and reduced property taxes. These decreases were
partially offset by reduced reimbursements associated with the Company's
former 10 percent ownership of Manchester Street.
Fuel and purchased electric energy costs decreased by $9 million in the
second quarter but increased by $6 million for the year-to-
date period. Access charge billings from NEP decreased by $19 million and $17
million, respectively, in the quarter and year-to-
date period. Reimbursement credits from NEP in connection with the Company's
ownership of transmission facilities and former ownership of generation
facilities decreased by $10 million and $20 million, respectively, in the
quarter and year-to-date period. However, $6 million and $12 million,
respectively, of this reduction represents a reclassification of the
transmission portion of such credits from purchased power expense to operation
and maintenance expense in the second quarter of 1999. Lastly, standard offer
purchased power costs increased in the second quarter by approximately $2
million due to increased sales.
Operation and maintenance expenses decreased for the second quarter and
first six months of 1999 by $8 million and $10 million, respectively. These
decreases were primarily due to the reclassification of $6 million and $12
million, respectively, of reimbursement credits from NEP described in the
previous paragraph. In addition, the decrease is also attributable to an
accounting write-off in the second quarter of 1998 of approximately $2 million
of certain previously capitalized plant items. Partially offsetting these
decreases for the year-to-date period were increased transmission wheeling
costs, increased DSM spending, and the impact of a refund in the first
quarter of 1998 of past overrecoveries of PBOP costs.
The decrease in property tax expense for the second quarter and first six
months of 1999 is due primarily to the Company's sale of Manchester Street.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $11 million for the first six
months of 1999. The funds necessary for utility plant expenditures during the
period were provided by net cash from operating activities, after the payment
of dividends, plus increased short-term debt.
In the first six months of 1999, the Company retired $3 million of
mortgage bonds.
<PAGE> At June 30, 1999, the Company had $36 million of short-term debt
outstanding representing borrowings from affiliates. The Company's ability to
issue short-term debt is limited by the need to obtain regulatory approval
from the SEC, under the 1935 Act. Approval has been granted for up to $100
million. As of June 30, 1999, the Company had lines of credit with banks
totaling $41 million. There were no borrowings under these lines of credit at
June 30, 1999.
For the twelve-month period ending June 30, 1999, the ratio of earnings
to fixed charges was 3.53.
<PAGE>PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
Information concerning a rate consolidation plan filed by the Company
with the Rhode Island Public Utilities Commission on May 20, 1999, 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 statement on Form S-3, Commission File No.
33-61131.
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 June
30, 1999 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: August 13, 1999
<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
June 30, 1999 Years Ended December 31,
Actual
- -------------------------------------------------------------
(Unaudited) 1998 1997 1996 1995 1994
-------------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income $30,359 $32,253 $27,932 $22,954 $23,910
$14,589
- ----------
Add income taxes and fixed charges
- ----------------------------------
Current federal income taxes 15,622 19,312 14,185
6,918 7,212 1,020
Deferred federal income taxes 492 (2,212) 79 4,675
3,512 3,930
Investment tax credits - net (487) (489) (495) (498)
(503) (508)
Interest on long-term debt 14,531 14,925 16,179
17,205 16,627 14,334
Interest on short-term debt and other 3,681 3,615 2,475
2,883 3,663 2,897
------- ------- ------- -------
- ------- -------
Net earnings available for fixed charges $64,198 $67,404
$60,355 $54,137 $54,421 $36,262
------- ------- ------- -------
- ------- -------
Fixed charges:
Interest on long-term debt $14,531 $14,925 $16,179
$17,205 $16,627 $14,334
Interest on short-term debt and other 3,681 3,615 2,475
2,883 3,663 2,897
------- ------- ------- -------
- ------- -------
Total fixed charges $18,212 $18,540
$18,654 $20,088 $20,290 $17,231
======= ======= ======= =======
======= =======
Ratio of earnings to fixed charges 3.53 3.64 3.24 2.69
2.68 2.10
- ----------------------------------
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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-31-1999
<PERIOD-END> JUN-30-1999
<PERIOD-TYPE> 6MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 525,659
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 83,850
<TOTAL-DEFERRED-CHARGES> 54,137 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 663,646
<COMMON> 56,624
<CAPITAL-SURPLUS-PAID-IN> 105,794
<RETAINED-EARNINGS> 98,132
<TOTAL-COMMON-STOCKHOLDERS-EQ> 260,813 <F3>
0
7,238
<LONG-TERM-DEBT-NET> 168,743
<SHORT-TERM-NOTES> 36,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 5,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 185,852
<TOT-CAPITALIZATION-AND-LIAB> 663,646
<GROSS-OPERATING-REVENUE> 228,607
<INCOME-TAX-EXPENSE> 6,025
<OTHER-OPERATING-EXPENSES> 200,606
<TOTAL-OPERATING-EXPENSES> 206,631
<OPERATING-INCOME-LOSS> 21,976
<OTHER-INCOME-NET> (1,328)
<INCOME-BEFORE-INTEREST-EXPEN> 20,648
<TOTAL-INTEREST-EXPENSE> 8,808
<NET-INCOME> 11,840
188
<EARNINGS-AVAILABLE-FOR-COMM> 11,652
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 7,217
<CASH-FLOW-OPERATIONS> 8,274
<EPS-BASIC> 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>
