SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 September 30, 1996.
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
- ----------------------------
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
Quarter Nine Months
------- -----------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Operating revenue $140,481 $139,217 $384,236 $380,663
-------- -------- -------- --------
Operating expenses:
Fuel for generation and purchased electric
energy, (principally from New England
Power Company, an affiliate) 83,693 83,022 226,161 227,536
Other operation 18,577 19,646 53,836 53,565
Maintenance 3,062 2,638 10,016 7,690
Depreciation 7,350 8,049 21,707 23,062
Taxes, other than federal income taxes 10,395 9,044 30,448 27,930
Federal income taxes 3,985 4,119 8,118 8,235
-------- -------- -------- --------
Total operating expenses 127,062 126,518 350,286 348,018
-------- -------- -------- --------
Operating income 13,419 12,699 33,950 32,645
Other income:
Allowance for equity funds used
during construction (175) 253
Other income (expense), net (143) (94) (1,377) (560)
-------- -------- -------- --------
Operating and other income 13,276 12,430 32,573 32,338
-------- -------- -------- --------
Interest:
Interest on long-term debt 4,303 4,242 12,899 12,312
Other interest 785 1,023 2,299 2,685
Allowance for borrowed funds used during
construction - credit 19 (774) (201) (1,422)
-------- -------- -------- --------
Total interest 5,107 4,491 14,997 13,575
-------- -------- -------- --------
Net income $ 8,169 $ 7,939 $ 17,576 $ 18,763
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $111,183 $ 97,345 $108,227 $ 91,556
Net income 8,169 7,939 17,576 18,763
Dividends declared on cumulative
preferred stock (536) (535) (1,608) (1,607)
Dividends declared on common stock (1,416) (567) (6,795) (4,530)
-------- -------- -------- --------
Retained earnings at end of period $117,400 $104,182 $117,400 $104,182
======== ======== ======== ========
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 September 30
(Unaudited)
1996 1995
---- ----
(In Thousands)
Operating revenue $502,686 $496,057
-------- --------
Operating expenses:
Fuel for generation and purchased electric energy,
(principally from New England Power Company,
an affiliate) 293,277 299,783
Other operation 72,085 74,188
Maintenance 13,500 10,632
Depreciation 30,178 27,895
Taxes, other than federal income taxes 39,145 36,334
Federal income taxes 10,771 8,524
-------- --------
Total operating expenses 458,956 457,356
-------- --------
Operating income 43,730 38,701
Other income:
Allowance for equity funds used
during construction (147) 320
Other income (expense), net (1,009) (170)
-------- --------
Operating and other income 42,574 38,851
-------- --------
Interest:
Interest on long-term debt 17,214 16,157
Other interest 3,277 3,669
Allowance for borrowed funds used during
construction - credit (640) (1,796)
-------- --------
Total interest 19,851 18,030
-------- --------
Net income $ 22,723 $ 20,821
======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $104,182 $ 90,318
Net income 22,723 20,821
Dividends declared on cumulative
preferred stock (2,144) (2,143)
Dividends declared on common stock (7,361) (4,814)
-------- --------
Retained earnings at end of period $117,400 $104,182
======== ========
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)
September 30, December 31,
ASSETS 1996 1995
------ ---- ----
(In Thousands)
Utility plant, at original cost $729,903 $699,906
Less accumulated provisions for depreciation 182,498 173,391
-------- --------
547,405 526,515
Construction work in progress 8,446 8,733
-------- --------
Net utility plant 555,851 535,248
-------- --------
Current assets:
Cash 1,347 1,999
Accounts receivable:
From sales of electric energy 55,731 59,760
Other (including $6,199,000 and $1,464,000 13,607 9,330
from affiliates)
Less reserves for doubtful accounts 6,095 5,516
-------- --------
63,243 63,574
Unbilled revenues 15,200 16,500
Fuel, materials and supplies, at average cost 5,065 6,245
Prepaid and other current assets 22,593 15,887
-------- --------
Total current assets 107,448 104,205
-------- --------
Deferred charges and other assets 60,685 60,168
-------- --------
$723,984 $699,621
======== ========
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 80,000 80,000
Retained earnings 117,400 108,227
-------- --------
Total common equity 254,194 245,021
Cumulative preferred stock 36,500 36,500
Long-term debt 178,488 210,892
-------- --------
Total capitalization 469,182 492,413
-------- --------
Current liabilities:
Long-term debt due in one year 32,500
Short-term debt (including $7,250,000 and $1,000,000
to affiliates) 24,925 22,675
Accounts payable (including $52,431,000 and $38,510,000
to affiliates) 58,239 46,247
Accrued liabilities:
Taxes 4,240 6,380
Interest 3,457 5,847
Other accrued expenses 20,900 19,558
Customer deposits 5,581 5,691
Dividends payable 1,951 1,102
-------- --------
Total current liabilities 151,793 107,500
-------- --------
Deferred federal income taxes 79,875 76,017
Unamortized investment tax credits 7,642 8,016
Other reserves and deferred credits 15,492 15,675
-------- --------
$723,984 $699,621
======== ========
The accompanying notes are an integral part of these financial statements.
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Cash Flows
Nine Months Ended September 30
(Unaudited)
1996 1995
---- ----
(In Thousands)
Operating Activities:
Net income $ 17,576 $ 18,763
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 21,707 23,062
Deferred federal income taxes and investment
tax credit, net 2,409 4,635
Allowance for funds used during construction (201) (1,675)
Amortization of unbilled revenues (6,156)
Decrease (increase) in accounts receivable, net
and unbilled revenues 1,631 (5,339)
Decrease (increase) in fuel, materials, and supplies 1,180 (641)
Decrease (increase) in prepaid and other current assets (6,706) (1,922)
Increase (decrease) in accounts payable 11,992 (5,042)
Increase (decrease) in other current liabilities (3,298) 1,452
Other, net 834 6,632
-------- --------
Net cash provided by operating activities $ 47,124 $ 33,769
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(42,114) $(53,461)
Other investing activities (98)
-------- --------
Net cash used in investing activities $(42,212) $(53,461)
-------- --------
Financing Activities:
Capital contributions from parent $ 10,000
Dividends paid on common stock $ (5,946) (4,247)
Dividends paid on preferred stock (1,608) (1,607)
Long-term debt - issues 2,000 15,000
Long-term debt - retirements (2,000)
Changes in short-term debt 2,250 1,250
Premium on reacquisition of long-term debt (260)
-------- --------
Net cash provided by (used in) financing activities$ (5,564) $ 20,396
-------- --------
Net increase (decrease) in cash and cash equivalents $ (652) $ 704
Cash and cash equivalents at beginning of period 1,999 713
-------- --------
Cash and cash equivalents at end of period $ 1,347 $ 1,417
======== ========
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 regular basis.
Note B - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. New England Electric System (NEES)
subsidiaries currently have 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 U.S. 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
Note B - Hazardous Waste - Continued
- ------------------------
waste site that may ultimately be borne by the Company. 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 $11 million. An informal
survey of other utilities conducted on behalf of NEES and its
subsidiaries indicated costs in a similar range. 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. The Company believes that
hazardous waste liabilities for all sites of which it is aware are
not material to its financial position.
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 1995 Annual
Report.
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 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 1995 Annual Report on
Form 10-K. This section contains forward-looking statements as
defined under the securities laws. Actual results could differ
materially from those projected. This section, particularly under
"Competitive Conditions - Risk Factors", lists some of the reasons
why results could differ materially from those projected.
Earnings
- --------
Net income for the third quarter of 1996 was relatively
unchanged from the corresponding period in 1995, but earnings for
the first nine months of 1996 decreased $1.2 million. This
decrease reflects (i) the completion of the recognition of $14
million of unbilled revenues over a 21-month period that ended in
December 1995, (ii) increased distribution system-related
expenses, (iii) increased taxes, other than income taxes, and (iv)
decreased allowance for funds used during construction. Partially
offsetting these decreases to income for the nine-month period are
a base rate increase and a 0.7 percent increase in kilowatt-hour
(kWh) sales reflecting an improving regional economy. KWh sales to
ultimate customers for the third quarter decreased 1.6 percent
reflecting a cooler summer in 1996.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to rapidly
increasing competitive pressures, stemming from a combination of
trends, including the presence of surplus generating capacity, a
disparity in electric rates among regions of the country,
improvements in generation efficiency, increasing demand for
customer choice, and new regulations and legislation intended to
foster competition. See the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
In states across the country, including Rhode Island, there
have been an increasing number of proposals to allow retail
customers to choose their electricity supplier, with incumbent
utilities required to deliver that electricity over their
transmission and distribution systems (also known as "retail
wheeling"). In these competitive circumstances, utilities across
the country that operate generation plants, such as New England
Power Company (NEP), the Company's affiliated wholesale power
supplier, face the risk that market prices may not be sufficient
to recover the costs of the commitments incurred to supply
customers under a regulated industry structure. The amount by
which costs exceed market prices is commonly referred to as
"stranded costs".
Rhode Island Legislation
On August 7, 1996, the Governor of Rhode Island signed into
law legislation that will restructure the electric utility industry
in Rhode Island. Rhode Island is the first state to pass
comprehensive legislation providing retail customers with access to
alternative suppliers and providing utilities with recovery of
their stranded investments. The NEES companies supported this
legislation which affects NEP and the Company.
The legislation allows all customers of electric utilities to
choose their power supplier under a phased-in approach, while
transmission and distribution rates will remain regulated. This
phase-in will begin on July 1, 1997 for customers representing
approximately 10 percent of the Company's load, followed by another
10 percent on January 1, 1998, and the balance of customers on July
1, 1998. All Rhode Island customers would have choice of supplier
beginning January 1, 1998 if retail access is available to 40
percent or more of the kWh sales in New England by that date.
Rhode Island customers will likely receive substantial savings in
a competitive market, which will therefore result in revenue losses
for the Company.
Under the new law, NEP's wholesale contract with the Company
will be terminated. In return, the cost of NEP's past generation
commitments to serve the Company's customers (estimated at
approximately $1 billion) will be recovered through a transition
access charge on retail distribution rates. Those commitments
consist of (i) generating plant commitments, (ii) regulatory
assets, (iii) the above-market component of purchased power
contracts, and (iv) the operating cost of nuclear plants which
cannot be mitigated by shutting down the plants, including nuclear
decommissioning.
Sunk costs associated with generating plants and regulatory
assets would be recovered over a period of 12 years. The above-
market component of purchased power contracts and nuclear
decommissioning costs would be recovered as incurred over the life
of those obligations, a period expected to extend beyond 12 years.
The transition access charge would be reduced to reflect the net
proceeds from the sale of the NEES companies' generating assets.
The initial transition access charge, before the application of
those proceeds, would be set at 2.8 cents per kWh through December
31, 2000, and is expected to decline thereafter.
The legislation requires the Company to file by January 1,
1997 a plan with the Rhode Island Public Utilities Commission
(RIPUC) to transfer its generating and transmission assets at book
value to affiliated companies. A settlement agreement pending
approval before the Massachusetts Department of Public Utilities
would require the full divestiture of the NEES companies'
generating business to a nonaffiliated entity.
The legislation also establishes performance-based rates for
distribution utilities, such as the Company. Under the
legislation, the Company will be entitled to increase its
distribution rates by approximately $10 million in 1997 and another
$10 million in 1998. In addition, in 1996 and 1997, the Company's
return on equity from distribution operations will be subject to a
floor of 6 percent and a ceiling of 11 percent. Earnings over the
ceiling will be shared equally between customers and shareholders
up to an absolute cap on return on equity from distribution
operations of 12.5 percent. To the extent that earnings fall below
the floor, the Company will be authorized to surcharge customers
for the shortfall.
Implementation of various aspects of the Rhode Island
legislation is subject to RIPUC and Federal Energy Regulatory
Commission (FERC) approval. Additional governmental approvals
would be required for divestiture of the generating business.
FERC Order
In April 1996, the FERC issued Order No. 888 addressing open
access transmission and required those utilities that own
transmission facilities to file open access tariffs to make
available transmission service to affiliates and nonaffiliates at
fair non-discriminatory rates. Order No. 888 also stated that
public utilities will be allowed to seek recovery of legitimate and
verifiable stranded costs from departing customers as a result of
wholesale competition. The FERC indicated that it will provide for
the recovery of retail stranded costs only if state regulators lack
the legal authority to address those costs at the time retail
wheeling is required. The FERC also stated that it would permit
stranded cost recovery under wholesale requirements contracts, such
as the contracts between NEP and its retail affiliates.
Accounting Implications
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. 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 liabilities, and
thereby defer the income statement impact of certain costs that are
expected to be recovered in future rates. The Company believes
that, if approved by regulators, the Rhode Island legislation would
meet the criteria for continued application of FAS 71. As a
result, no write-off of existing regulatory assets is expected.
Risk factors
For a discussion of risk factors in the event that the Rhode
Island legislation is not implemented see "Risk Factors" in the
Company's Form 10-Q for the quarter ended June 30, 1996.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- -----------
1996 vs 1995 1996 vs 1995
------------- ------------
(In Millions)
Sales to ultimate customers $(3) $ 2
Rate changes 3 9
Fuel recovery 2 -
Unbilled revenues recognized
under rate agreement (2) (6)
Rate adjustment mechanisms (1) (3)
Demand side management (DSM) 1 1
Other 1 1
--- ---
$ 1 $ 4
=== ===
For a discussion of sales to ultimate customers, see the
"Earnings" section.
The increase in revenues due to rate changes reflects a $12
million increase in base rates, approved by the RIPUC and effective
December 1, 1995.
The decrease in unbilled revenues recognized under rate
agreement reflects the completion of the recognition of $14 million
in unbilled revenues over a 21 month period that ended December 31,
1995 in accordance with the Company's 1994 rate agreement.
The Company's rates contain a fuel clause and various rate
adjustment mechanisms. These mechanisms are designed to allow the
Company to true-up the recovery of purchased energy costs from NEP.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1996 vs 1995 1996 vs 1995
------------- ------------
(In Millions)
Fuel for generation and
purchased electric energy
Fuel $ 2 $ -
Other (1) (1)
Other operation and maintenance
DSM 1 1
Other (2) 1
Depreciation (1) (1)
Taxes, other than income taxes 1 2
--- ---
$ - $ 2
=== ===
The decrease in other operation and maintenance expense in the
third quarter reflects a decrease in uncollectible accounts expense
and fringe benefit costs. The increase in the nine-month period
reflects increased distribution system-related expenses.
The decrease in depreciation reflects reduced dismantlement
costs associated with the retired South Street generation plant.
This decrease was partially offset by increased depreciation on the
Manchester Street repowering project which went into service in the
second half of 1995 and new plant expenditures.
The increase in taxes, other than income taxes in 1996 is due
to increased property taxes, including taxes on the Manchester
Street Station.
Utility Plant Expenditures and Financings
- -----------------------------------------
Cash expenditures for utility plant totaled $42 million in the
first nine months of 1996. The funds necessary for utility plant
expenditures were primarily provided by net cash from operating
activities, after the payment of dividends, and short-term debt
issuances.
During the first nine months of 1996 the Company refinanced $2
million of long-term debt at an interest rate of 7.24 percent. The
Company plans to issue an additional $10 million of long-term debt
later in 1996.
At September 30, 1996, the Company had $25 million of short-
term debt outstanding of which $18 million represents commercial
paper borrowings. The Company currently has lines of credit with
banks totaling $41 million. There were no outstanding borrowings
under these lines of credit at September 30, 1996.
Under the Rhode Island legislation mentioned above, the
Company must transfer its generating and transmission assets at net
book value less deferred tax reserves to affiliated companies. Net
book value before deduction of deferred tax reserves is
approximately $45 million for generating assets and $105 million
for transmission assets. The proceeds from these transfers will be
used to reduce short-term debt, fund capital expenditures, retire
outstanding first mortgage bonds, or for other general corporate
purposes.
For the twelve-month period ending September 30, 1996, the
ratio of earnings to fixed charges was 2.60.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing the following revised exhibit for
incorporation by reference into its registration statements on Form
S-3, Commission file Nos. 33-49455, 33-50015, and 33-61131.
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
The Company filed a report on Form 8-K dated October 1, 1996,
containing Item 5, Other Events.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-Q for
the quarter ended September 30, 1996 to be signed on its behalf by
the undersigned thereunto duly authorized.
THE NARRAGANSETT ELECTRIC COMPANY
s/Howard W. McDowell
Howard W. McDowell
Controller, Authorized Officer, and
Principal Accounting Officer
Date: November 8, 1996