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, 1997
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, 1997.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
THE NARRAGANSETT ELECTRIC COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
Quarter Nine Months
------- -----------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
Operating revenue $141,980 $140,481 $393,340 $384,236
-------- -------- -------- --------
Operating expenses:
Fuel for generation and purchased electric
energy, (principally from New England
Power Company, an affiliate) 85,460 83,693 234,904 226,161
Other operation 17,648 18,577 52,951 53,836
Maintenance 3,375 3,062 9,122 10,016
Depreciation 5,891 7,350 17,594 21,707
Taxes, other than federal income taxes 10,409 10,395 29,882 30,448
Federal income taxes 4,959 3,985 11,427 8,118
-------- -------- -------- --------
Total operating expenses 127,742 127,062 355,880 350,286
-------- -------- -------- --------
Operating income 14,238 13,419 37,460 33,950
Other income:
Other income (expense), net 110 (143) (1,073) (1,377)
-------- -------- -------- --------
Operating and other income 14,348 13,276 36,387 32,573
-------- -------- -------- --------
Interest:
Interest on long-term debt 3,806 4,303 12,301 12,899
Other interest 686 785 1,510 2,299
Allowance for borrowed funds used during
construction - credit (6) 19 (64) (201)
-------- -------- -------- --------
Total interest 4,486 5,107 13,747 14,997
-------- -------- -------- --------
Net income $ 9,862 $ 8,169 $ 22,640 $ 17,576
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $122,624 $111,183 $119,978 $108,227
Net income 9,862 8,169 22,640 17,576
Dividends declared on cumulative
preferred stock (535) (536) (1,607) (1,608)
Dividends declared on common stock (2,265) (1,416) (11,325) (6,795)
-------- -------- -------- --------
Retained earnings at end of period $129,686 $117,400 $129,686 $117,400
======== ======== ======== ========
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)
1997 1996
---- ----
(In Thousands)
Operating revenue $512,689 $502,686
-------- --------
Operating expenses:
Fuel for generation and purchased electric energy,
(principally from New England Power Company,
an affiliate) 305,803 293,277
Other operation 70,740 72,085
Maintenance 12,115 13,500
Depreciation 23,786 30,178
Taxes, other than federal income taxes 37,964 39,145
Federal income taxes 15,260 10,771
-------- --------
Total operating expenses 465,668 458,956
-------- --------
Operating income 47,021 43,730
Other income:
Allowance for equity funds used
during construction (147)
Other income (expense), net (428) (1,009)
-------- --------
Operating and other income 46,593 42,574
-------- --------
Interest:
Interest on long-term debt 16,607 17,214
Other interest 2,094 3,277
Allowance for borrowed funds used during
construction - credit (126) (640)
-------- --------
Total interest 18,575 19,851
-------- --------
Net income $ 28,018 $ 22,723
======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $117,400 $104,182
Net income 28,018 22,723
Dividends declared on cumulative preferred stock (2,142) (2,144)
Dividends declared on common stock (13,590) (7,361)
-------- --------
Retained earnings at end of period $129,686 $117,400
======== ========
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 1997 1996
------ ---- ----
(In Thousands)
Utility plant, at original cost $757,298 $742,481
Less accumulated provisions for depreciation 195,178 187,690
-------- --------
562,120 554,791
Construction work in progress 4,621 5,392
-------- --------
Net utility plant 566,741 560,183
-------- --------
Current assets:
Cash 2,006 1,727
Accounts receivable:
From sales of electric energy 51,227 54,426
Other (including $1,431,000 and $1,253,000
from affiliates) 2,422 3,415
Less reserves for doubtful accounts 5,535 5,149
-------- --------
48,114 52,692
Unbilled revenues 15,938 15,300
Fuel, materials and supplies, at average cost 4,117 4,300
Prepaid and other current assets 22,224 15,919
-------- --------
Total current assets 92,399 89,938
-------- --------
Deferred charges and other assets 54,574 56,881
-------- --------
$713,714 $707,002
======== ========
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 129,686 119,978
Unrealized gain on securities, net 95
-------- --------
Total common equity 266,575 256,772
Cumulative preferred stock 36,500 36,500
Long-term debt 176,575 178,517
-------- --------
Total capitalization 479,650 471,789
-------- --------
Current liabilities:
Long-term debt due in one year 5,000 32,500
Short-term debt (including $4,725,000 and $5,300,000
to affiliates) 31,400 19,025
Accounts payable (including $53,953,000 and $40,425,000
to affiliates) 59,056 45,221
Accrued liabilities:
Taxes 4,914 3,877
Interest 2,936 5,677
Other accrued expenses 16,084 11,949
Customer deposits 5,893 5,638
Dividends payable 2,801 2,801
-------- --------
Total current liabilities 128,084 126,688
-------- --------
Deferred federal income taxes 83,061 81,880
Unamortized investment tax credits 7,146 7,517
Other reserves and deferred credits 15,773 19,128
-------- --------
$713,714 $707,002
======== ========
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)
1997 1996
---- ----
(In Thousands)
Operating Activities:
Net income $ 22,640 $ 17,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,594 21,707
Deferred federal income taxes and investment
tax credit, net 209 2,409
Allowance for funds used during construction (64) (201)
Decrease (increase) in accounts receivable, net
and unbilled revenues 3,940 1,631
Decrease (increase) in fuel, materials, and supplies 183 1,180
Decrease (increase) in prepaid and other current assets (6,305) (6,706)
Increase (decrease) in accounts payable 13,835 11,992
Increase (decrease) in other current liabilities 2,686 (3,298)
Other, net 137 834
-------- --------
Net cash provided by operating activities $ 54,855 $ 47,124
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(24,248) $(42,114)
Other investing activities (271) (98)
-------- --------
Net cash used in investing activities $(24,519) $(42,212)
-------- --------
Financing Activities:
Dividends paid on common stock $(11,325) $ (5,946)
Dividends paid on preferred stock (1,607) (1,608)
Long-term debt - issues 3,000 2,000
Long-term debt - retirements (32,500) (2,000)
Changes in short-term debt 12,375 2,250
Premium on reacquisition of long-term debt (260)
-------- --------
Net cash used in financing activities $(30,057) $ (5,564)
-------- --------
Net increase (decrease) in cash and cash equivalents $ 279 $ (652)
Cash and cash equivalents at beginning of period 1,727 1,999
-------- --------
Cash and cash equivalents at end of period $ 2,006 $ 1,347
======== ========
The accompanying notes are an integral part of these 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.
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) is a wholly-owned distribution subsidiary of New England
Electric System (NEES). NEES subsidiaries have an internal
environmental audit program and an external waste disposal vendor
audit and qualification program intended to enhance compliance with
federal, state, and local requirements regarding the handling of
potentially hazardous products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for
three sites (two of which are located in Massachusetts) at which
hazardous waste is alleged to have been disposed. The Company is
currently aware of other sites, and may in the future become aware
of additional sites, that it may be held responsible for
remediating.
Gas was manufactured from coal in Rhode Island in the past. The
Company is aware of five sites on which gas was manufactured or
manufactured gas was stored that were owned either by the Company
or by its predecessor companies. It is not known to what extent
the Company would be held liable for hazardous wastes, if any, left
at these manufactured gas locations.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. A
preliminary review by a consultant hired by the 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 is seeking or intends to seek recovery
from other insurers and from other PRPs, but it is uncertain
Note A Hazardous Waste - Continued
- ----------------------
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.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which became effective in 1997. These new
rules do not have a material effect on the Company's financial
position or results of operations.
Note B
- ------
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 1996 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 (the Company) (a wholly-owned
distribution subsidiary of New England Electric System (NEES))
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 1996 Annual Report on Form 10-K.
Earnings
- --------
Net income for the third quarter and first nine months of 1997
increased $2 million and $5 million, respectively, from the
corresponding periods in 1996. These increases primarily reflect
an $11 million increase in base distribution rates that became
effective on January 1, 1997.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island and New Hampshire, see "Industry
Restructuring" in the Company's Form 10-K for 1996.
Industry Restructuring Update
As previously reported, the Rhode Island statute and related
settlement covering customer choice and electric utility
restructuring provide for full recovery of the costs of generating
assets and oil and gas related assets (including regulatory assets)
not recoverable through the divestiture of New England Power
Company's (NEP) (a wholly-owned generation and transmission
subsidiary of NEES) and the Company's generating business. A Rhode
Island settlement reached in May 1997 among the Company, NEP, the
Rhode Island Public Utilities Commission (RIPUC) and the Rhode
Island Division of Public Utilities and Carriers to implement the
stranded cost recovery provisions of the Utility Restructuring Act
of 1996 is pending before the Federal Energy Regulatory Commission
(FERC). In July 1997, a FERC Administrative Law Judge certified
the proposed settlement to the full FERC commission. FERC action
is expected later in 1997.
In July 1997, the Governor of Rhode Island signed into law
bills further implementing utility restructuring in Rhode Island.
The Securitization Act establishes a framework at the RIPUC for
customers obligations to pay stranded cost charges. The 1997
Amendments to the Utility Restructuring Act modify the law so that
utilities will not have to transfer their transmission assets to
another company and make other technical amendments.
On August 5, 1997, the Company and NEP (collectively, the
"Sellers") reached an agreement to sell their nonnuclear generating
business to USGen New England, Inc. (USGen), an indirect wholly-
owned subsidiary of PG&E Corporation. The Sellers' nonnuclear
generating business includes three fossil-fuel generating stations
and 15 hydroelectric generating stations, totaling approximately
4,000 megawatts (MW) of capacity, with a book value $1.1 billion.
USGen will pay the Sellers $1.59 billion in cash, of which $225
million will be contingent upon retail customers being able to
choose their electric supplier. Specifically, if customers
representing 89 percent of kilowatt-hour (kWh) sales of investor
owned utilities in Massachusetts or 50 percent of kWh sales in New
England have the ability to choose their electric supplier by
January 1, 1999, the Sellers will be entitled to the full
contingent amount. If such retail choice milestone is met after
January 1, 1999, the contingent portion of the purchase price
declines ratably by $75 million over the year 1999, and $50 million
per year thereafter until the milestone is met. Payment of the
contingent portion can be deferred for up to two years if retail
choice is not the result of legislation. The Company will receive
proceeds equal to net book value (approximately $41 million) of its
10 percent interest in the Manchester Street station.
USGen will also reimburse the NEES companies for $85 million of
costs associated with early retirement and special severance
programs for employees affected by industry restructuring. USGen
will purchase NEP's entitlement in approximately 1,100 MW of power
procured under long-term contracts. NEP will make a monthly fixed
contribution toward the above-market cost of the purchased power of
between $12.5 million and $14.2 million per month from closing
through January 2008. These amounts are recoverable under the
terms of the Rhode Island settlement. USGen will be responsible
for the balance of the costs under the purchased power contracts.
USGen will assume responsibility for environmental conditions
at the Sellers' generating stations. USGen will also assume NEP's
obligations under long-term fuel and fuel transportation contracts
and certain existing collective bargaining agreements.
The sale is subject to approval by various state and federal
regulatory agencies. The timing of such approval is uncertain;
however, approval is unlikely before the spring of 1998. Closing
is contingent upon all regulatory approvals being obtained by
February 1999.
Under Rhode Island's Utility Restructuring Act of 1996, the
proceeds from the sale will be used to offset the stranded costs
which the Company recovers from customers. The Company estimates
that, upon completion of the sale, prices for its customers would
decrease on average by approximately 15 percent below today's
prices.
Workforce Reduction
The NEES companies expect to implement substantial workforce
reductions during 1998 as a result of industry restructuring and
the sale of the generating business. The NEES companies have
reached an agreement with all three of their unions regarding
benefits and other assistance including early retirement and
severance programs, to union employees that are affected by these
events. The NEES companies have also announced similar early
retirement and severance programs for management employees. The
costs of such programs are expected to be substantially recovered
from the proceeds of the sale of the generating business.
Risk Factors
This Form 10-Q contains statements that may be considered
forward looking statements as defined under the securities laws.
Actual results may differ materially. As disclosed in the
Company's Form 10-K for the year ended 1996, there are several risk
factors which could affect actual results. While the NEES
companies believe that the sale agreement with USGen and other
developments constitute substantial progress in resolving the
uncertainty regarding the impact from industry restructuring,
significant risks remain. These include, but are not limited to:
(i) the potential that ultimately the Rhode Island settlement will
not be implemented in the manner anticipated by NEES, and (ii) the
possibility of state or federal legislation that would increase the
risks above those contained in the settlement and statute. The
major risk factors affecting the Company relate to the possibility
of adverse regulatory or judicial decisions or legislation which
limit the level of revenues the Company is allowed to charge for
its services or affect the costs the Company incurs.
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. 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 certain costs expected to be
recovered in future rates. At December 31, 1996, the Company had
approximately $44 million in net regulatory assets in compliance
with FAS 71. The Company believes that the continuing rate-making
policies and practices of the RIPUC and the terms of the Rhode
Island statute will enable the Company to recover both its specific
costs of providing ongoing distribution services and stranded costs
billed to it by NEP. The Company believes that these factors will
allow it to continue to apply FAS 71. However, despite the
progress made to date, it is possible that the final restructuring
plans ultimately ordered by regulatory bodies would not reflect
full recovery of stranded costs, including a fair return on those
costs as they are being recovered. In addition, it is possible
that future methods of setting performance-based distribution rates
may not be considered cost-based as required by FAS 71. In the
event that future circumstances should cause the application of FAS
71 to be discontinued, a noncash write-off of previously
established regulatory assets would be required.
Year 2000 Computer Issues
- -------------------------
In the next two years, most large companies will face a
potentially serious information systems (computer) problem because
most software application and operational programs written in the
past will not properly recognize calendar dates beginning in the
year 2000. This could force computers to either shut down or lead
to incorrect calculations. The NEES companies began the process of
identifying the changes required to their computer programs and
hardware during 1996. The necessary modifications to the NEES
companies' centralized financial, customer, and operational
information systems are expected to be completed by the end of
1998. The NEES companies believe they will incur approximately $20
million of costs associated with making the necessary modifications
identified to date to the centralized systems. Substantially all
of these costs are expected to be incurred prior to December 31,
1998. Noncentralized systems are currently being reviewed for Year
2000 problems. The NEES companies are unable to predict the costs
to be incurred for correction of such noncentralized systems, but
expect the scope and schedule for such work to be less complex than
for its centralized information systems.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1997 vs 1996 1997 vs 1996
------------- ------------
(In Millions)
Deliveries to ultimate customers $ 1 $ -
Purchased Power Cost Adjustment
mechanism (PPCA) (2) (2)
Rate changes 2 8
Fuel recovery 1 5
Demand Side Management (DSM) (1) (2)
--- ---
$ 1 $ 9
=== ===
The Company's rates contain a fuel clause and a PPCA
provision. These mechanisms are designed to allow the Company to
pass on to its customers charges in purchased energy costs.
The increase in revenues due to rate changes reflects an $11
million increase in base rates, approved by the RIPUC, effective
January 1, 1997 in accordance with the Utility Restructuring Act of
1996.
The increase in fuel recovery revenues is due to increased
replacement power fuel purchases by NEP due to reduced generation
by partially owned nuclear units. These costs are passed on to the
Company through NEP's fuel clause. The Company, in turn, passes
these costs on to its customers.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1997 vs 1996 1997 vs 1996
------------- ------------
(In Millions)
Fuel for generation and
purchased electric energy:
Fuel $ 1 $ 5
Integrated facilities
credit from NEP 2 5
Purchases and demand charges
and other (1) (1)
Other operation and maintenance:
DSM (1) (2)
Depreciation (1) (4)
Taxes 1 3
--- ---
$ 1 $ 6
=== ===
For a discussion of fuel costs, see the "Operating Revenue"
section.
The decrease in depreciation and the decrease in the integrated
facilities credits from NEP both reflect reduced dismantlement
costs associated with the retired South Street generation plant.
This decrease in depreciation expense was partially offset by new
plant expenditures.
Utility Plant Expenditures and Financings
- -----------------------------------------
Cash expenditures for utility plant totaled $24 million in the
first nine months of 1997. The funds necessary for utility plant
expenditures were provided by net cash from operating activities,
after the payment of dividends. For the first nine months of 1997,
the Company issued $3 million of long-term debt. On October 3,
1997, the Company issued $7 million of long-term debt.
On November 7, 1997, NEES commenced cash tender offers for any
and all outstanding shares of the Company's preferred stock, which
totals approximately $36 million. Concurrently with the offer, the
Company's Board of Directors is soliciting proxies for use at a
special meeting of preferred shareholders. The special meeting is
being held to consider amendments to the Company's Preferred Stock
Provisions which would remove a limitation on the ability of the
Company to issue unsecured debt without approval of preferred
shareholders. The offer expires on December 12, 1997.
At September 30, 1997, the Company had $31 million of short-
term debt outstanding of which $27 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, 1997.
For the twelve-month period ending September 30, 1997, the ratio
of earnings to fixed charges was 3.26.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning restructuring dockets before the Federal
Energy Regulatory Commission and other regulatory approvals sought
for the sale of the Company's generation business, discussed in
Part I of this report in Management's Discussion and Analysis of
Financial Conditions and Results of Operations, is incorporated
herein by reference and made a part hereof.
Item 4. Submission of Matters to a Vote of Security-Holders
- -------------------------------------------------------------
On September 19, 1997, a Special Meeting of Stockholders was
held. The number of directors of the Company was increased from
nine to eleven by unanimous vote of the 1,132,487 shares having
general voting rights represented at the meeting.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibit 2. The Company is filing as an exhibit a copy of the
Asset Purchase Agreement by and among New England Power Company and
the Company and USGen New England, Inc. (formerly USGen Acquisition
Corporation) dated as of August 5, 1997. (Incorporated by
reference to Exhibit 2 to New England Electric System's Form 10-Q
for the period ended September 30, 1997, File No. 1-3446).
The Company is filing the following revised exhibit for
incorporation by reference into its registration statement on Form
S-3, Commission file No. 33-61131.
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
The Company filed reports on Form 8-K dated July 3, 1997 and
August 6, 1997, each 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, 1997 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 13, 1997