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, 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 June 30, 1994.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
Operating revenue $103,800 $107,529 $229,261 $231,676
-------- -------- -------- --------
Operating expenses:
Fuel for generation 57 58 163 107
Purchased electric energy, principally from
New England Power Company, an affiliate65,370 71,757 143,577 147,999
Other operation 17,298 15,539 33,165 35,873
Maintenance 2,828 3,195 6,227 6,822
Depreciation 8,655 4,652 13,330 9,075
Taxes, other than federal income taxes 8,530 8,568 18,439 18,254
Federal income taxes (1,652) (177) 1,239 1,389
-------- -------- -------- --------
Total operating expenses 101,086 103,592 216,140 219,519
-------- -------- -------- --------
Operating income 2,714 3,937 13,121 12,157
Other income:
Allowance for equity funds used
during construction 340 89 618 155
Other income (expense) - net (265) (136) (1,052) (1,040)
-------- -------- -------- --------
Operating and other income 2,789 3,890 12,687 11,272
-------- -------- -------- --------
Interest:
Interest on long-term debt 3,489 3,087 6,814 6,193
Other interest 674 415 1,228 977
Allowance for borrowed funds used during
construction - credit (361) (105) (656) (191)
-------- -------- -------- --------
Total interest 3,802 3,397 7,386 6,979
-------- -------- -------- --------
Net income (loss) $ (1,013) $ 493 $ 5,301 $ 4,293
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period$ 86,871 $ 75,354 $ 81,659 $ 74,207
Net income (loss) (1,013) 493 5,301 4,293
Dividends declared on cumulative
preferred stock (536) (389) (1,072) (777)
Dividends declared on common stock (567) (1,132) (1,133) (3,397)
-------- -------- -------- --------
Retained earnings at end of period $ 84,755 $ 74,326 $ 84,755 $ 74,326
======== ======== ======== ========
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.
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Twelve Months Ended June 30
(Unaudited)
1994 1993
---- ----
(In Thousands)
Operating revenue $480,613 $474,298
-------- --------
Operating expenses:
Fuel for generation 245 195
Purchased electric energy, principally from
New England Power Company, an affiliate 306,474 301,328
Other operation 70,825 69,423
Maintenance 11,584 11,691
Depreciation 21,900 17,270
Taxes, other than federal income taxes 36,031 35,130
Federal income taxes 4,025 7,016
-------- --------
Total operating expenses 451,084 442,053
-------- --------
Operating income 29,529 32,245
Other income:
Allowance for equity funds used
during construction 1,005 166
Other income (expense) - net (646) (921)
-------- --------
Operating and other income 29,888 31,490
-------- --------
Interest:
Interest on long-term debt 13,336 12,897
Other interest 2,325 1,537
Allowance for borrowed funds used during
construction - credit (1,054) (372)
-------- --------
Total interest 14,607 14,062
-------- --------
Net income $ 15,281 $ 17,428
======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $ 74,326 $ 64,396
Net income 15,281 17,428
Dividends declared on cumulative
preferred stock (2,226) (1,553)
Dividends declared on common stock (2,265) (5,945)
Premium on redemption of preferred stock (361)
-------- --------
Retained earnings at end of period $ 84,755 $ 74,326
======== ========
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.
THE NARRAGANSETT ELECTRIC COMPANY
Balance Sheets
(Unaudited)
June 30, December 31,
ASSETS 1994 1993
------ ---- ----
(In Thousands)
Utility plant, at original cost $547,063 $534,569
Less accumulated provisions for depreciation 162,929 156,652
-------- --------
384,134 377,917
Construction work in progress 65,417 43,660
-------- --------
Net utility plant 449,551 421,577
-------- --------
Current assets:
Cash 1,425 838
Accounts receivable:
From sales of electric energy 49,288 55,795
Other (including $5,368,000 and $1,087,000 from affiliates)12,74911,701
Less reserves for doubtful accounts 4,165 3,800
-------- --------
57,872 63,696
Fuel, materials and supplies, at average cost 7,181 4,572
Prepaid and other current assets 10,060 11,515
-------- --------
Total current assets 76,538 80,621
-------- --------
Deferred charges and other assets 53,784 53,709
-------- --------
$579,873 $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 84,755 81,659
-------- --------
Total common equity 186,549 183,453
Cumulative preferred stock 36,500 36,500
Long-term debt 173,905 155,972
-------- --------
Total capitalization 396,954 375,925
-------- --------
Current liabilities:
Short-term debt to affiliates 15,450 19,725
Accounts payable (including $45,663,000 and $43,468,000
to affiliates) 52,909 51,005
Accrued liabilities:
Taxes 2,250 1,712
Interest 5,211 4,921
Other accrued expenses 16,963 11,798
Customer deposits 5,514 5,622
Dividends payable 1,102 1,102
-------- --------
Total current liabilities 99,399 95,885
-------- --------
Deferred federal income taxes 62,662 63,494
Unamortized investment tax credits 8,772 9,026
Other reserves and deferred credits 12,086 11,577
-------- --------
$579,873 $555,907
======== ========
The accompanying notes are an integral part of these financial statements.
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
1994 1993
---- ----
(In Thousands)
Operating Activities:
Net income $ 5,301 $ 4,293
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 13,330 9,075
Deferred federal income taxes and
investment tax credit - net (2,599) (539)
Allowance for funds used during construction (1,274) (346)
Early retirement program (814)
Decrease (increase) in accounts receivable 5,824 (1,671)
Decrease (increase) in fuel, materials, and supplies(2,609) 571
Increase (decrease) in accounts payable 1,904 (2,839)
Increase (decrease) in other current liabilities 5,885 5,208
Other, net 3,384 (1,872)
-------- --------
Net cash provided by operating activities $ 29,146 $ 11,066
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(40,079) $(26,451)
-------- --------
Net cash used in investing activities $(40,079) $(26,451)
-------- --------
Financing Activities:
Dividends paid on common stock $ (1,133) $ (3,963)
Dividends paid on preferred stock (1,072) (777)
Long-term debt - issues 18,000 22,500
Long-term debt - retirements (12,100)
Premium on reacquisition of long-term debt (78)
Changes in short-term debt (4,275) 9,750
-------- --------
Net cash provided by financing activities $ 11,520 $ 15,332
-------- --------
Net increase in cash and cash equivalents $ 587 $ (53)
Cash and cash equivalents at beginning of period 838 830
-------- --------
Cash and cash equivalents at end of period $ 1,425 $ 777
======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 6,603 $ 6,340
-------- --------
Federal income taxes paid $ 700 $ 5,528
-------- --------
The accompanying notes are an integral part of these financial statements.
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
- ------
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. In addition, 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
Note B - 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.
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Earnings
- --------
Net income for the first six months of 1994 increased by $1
million as compared to the same period last year. Earnings in the
first six 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 second quarter and
first six months of 1994 decreased by $2 million as compared to the
corresponding periods last year. These decreases are primarily due
to increases in operation expenses.
Rate Activity
- -------------
In July 1994, the Rhode Island Public Utilities Commission
(RIPUC) approved a rate agreement between the Company and the Rhode
Island Division of Public Utilities and Carriers that provides for
a 5 percent base rate discount, excluding fuel costs, retroactive
to May 15, 1994, 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 proposed discount, if all eligible customers sign
agreements, is estimated at $4 million per year. The agreement
also provides for the Company to begin recognizing unbilled
revenues for accounting purposes. Unbilled revenues at December
31, 1993, of approximately $14 million will be amortized to income
over the twenty-one month period beginning April 1994 through
December 1995. No unbilled revenues have been recorded in the
financial statements through June 1994. The Company will begin
recording the effects of this rate agreement in the third quarter
of this year.
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
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 addition, 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.
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
DSM expenditures, with interest. Expenditures subject to the
reconciliation mechanism were $3.0 million in the first six 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 six 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.
Operating Revenue
- -----------------
Operating revenue for the second quarter and six months ended
June 30, 1994 decreased by $4 million and $2 million, respectively,
from the corresponding periods in 1993.
The following table summarizes the changes in operating revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1994 vs 1993 1994 vs 1993
-------------- ------------
(In Millions)
Fuel recovery $(2) $(1)
DSM recovery (1) (2)
General rate changes - 1
Sales increase and other (1) -
--- ---
$(4) $(2)
=== ===
Kilowatthour (KWH) sales increased by 1 percent in the first
six months of 1994 as compared to the corresponding prior period.
This increase in KWH sales is primarily due to colder than normal
weather conditions in the first quarter as compared to the same
period last year and an improving economy partially offset by the
reduction of one billing day due to meter reading schedules. In
May 1994, one of the Company's largest customers closed its
facility. Revenues from this customer, excluding fuel and
purchased power costs, were approximately $1.4 million on an annual
basis. Excluding the effects of losing this customer, KWH sales
are expected to increase less than 1 percent as compared to 1993.
General rate changes include the effect of rate increases for
the recovery of PBOPs (see Rate Activity section).
Operating Expenses
- ------------------
The following table summarizes the changes in total operating
expenses discussed below:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1994 vs 1993 1994 vs 1993
------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $(2) $(1)
Integrated facilities
credits from NEP (4) (4)
Purchases and demand charges
from NEP - 1
Other operation and maintenance:
DSM (1) (2)
Other 2 (1)
Depreciation 4 4
Taxes, primarily income taxes (1) -
--- ---
$(2) $(3)
=== ===
The entire output of the Company's portion of the Manchester
Street Generating Station is 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 associated with this plant. The change in the
above table reflects increased credits for dismantlement costs
being incurred on the Company's previously retired South Street
generating facility.
The decrease in other operation and maintenance expense in the
first six months of 1994 is primarily due to the recording in the
first quarter of 1993 of a one-time charge of $5 million associated
with an early retirement offer and special severance program
implemented in 1993. This decrease was partially offset by
increased computer system development costs, increased fringe
benefit costs, including PBOPs, and general increases in other
areas.
The increase in depreciation expense in the second quarter and
first six months of 1994 reflects increased charges for
dismantlement costs for the previously retired South Street
generating station.
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 (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. In addition, 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
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.
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
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.
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. The plaintiffs are residents of property which
borders existing transmission lines in East Greenwich, Rhode
Island. The Company has a proposal before the Rhode Island Energy
Facilities Siting Board (EFSB) to upgrade one of the lines and
relocate the lines on the existing right of way. The plaintiffs
allege that fear of health risks from exposure to high voltage
power lines has devalued their property and ask for unspecified
damages. The plaintiffs have also asked for an injunction to halt
the proposed changes to the transmission lines and an order to
remove the existing power lines. After preliminary review of the
complaint, the Company, NEES, and NEPSCo do not expect that the
plaintiffs will prevail. The EFSB has recently concluded hearings
on the Company's proposal to upgrade and relocate the transmission
lines and a decision is expected shortly.
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.
Recently, 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 (principally natural gas
companies) for 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. In the future, the
potential exists for electric utilities and non-utility generators
to 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, 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 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 value-added services for customers and
the offering of economic development rates to encourage businesses
to locate in the Company's service territory. Pursuant to its
recent rate agreement approved by the RIPUC, the Company will begin
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 discount will be
available to customers with average monthly peak demands over 200
kilowatts.
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 contracts, shutdowns of
uneconomic generating stations, and rapid amortization of certain
plant assets.
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
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.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $40 million in the
first six months of 1994, including $17 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 debt issues.
The Company issued $18 million of bonds during the first six
months of 1994, bearing interest rates ranging from 6.91 to 8.08
percent. In August 1994, an additional $5 million of new long-term
debt was issued at an interest rate of 8.16 percent. The Company
plans to issue an additional $17 million of long-term debt by the
end of 1994.
At June 30, 1994, the Company had $15 million of short-term
debt outstanding to affiliates. The Company currently has lines
of credit with banks totaling $41 million. There were no
borrowings under these lines of credit at June 30, 1994.
For the twelve-month period ending June 30, 1994, the ratio of
earnings to fixed charges was 2.21.
Repowering of Manchester Street Station
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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 allowance for funds used during construction (AFDC). In
addition, related transmission work, which is principally the
responsibility of the Company, is estimated to cost approximately
$75 million and is scheduled for completion in late 1994. At June
30, 1994, $263 million, including AFDC, had been incurred on the
project ($52 million by the Company). Substantial commitments have
been made relative to future planned expenditures for this project.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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Information concerning the approval by the Rhode Island Public
Utilities Commission of a rate agreement filed by the Company,
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
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The Company filed reports on Form 8-K dated April 28, 1994,
April 29, 1994, and May 16, 1994, each containing Item 5 - Other
Events.
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
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, 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: August 10, 1994