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. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- THE NARRAGANSETT ELECTRIC COMPANY Statements of Income Periods Ended June 30 (Unaudited) Quarter Six Months -------- ---------- 1999 1998 1999 1998 ---- ---- ---- ---- (In Thousands) 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. THE NARRAGANSETT ELECTRIC COMPANY Statements of Income Twelve Months Ended June 30 (Unaudited) 1999 1998 ---- ---- (In Thousands) 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. THE NARRAGANSETT ELECTRIC COMPANY Balance Sheets (Unaudited) June 30, December 31, ASSETS 1999 1998 - ------ ---- ---- (In Thousands) 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. THE NARRAGANSETT ELECTRIC COMPANY Statements of Cash Flows Six Months Ended June 30 (Unaudited) 1999 1998 ---- ---- (In Thousands) 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. 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. 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. 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. 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 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. Substantial Contingency Testing, Completion Documentation, of Critical and Clean Category Specific Example Systems Management - -------- ---------------- ----------- ------------------- 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 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 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 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. 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. 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. 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. 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