<PAGE>
EXHIBIT 99.3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Providence Energy Corporation:
We have audited, in accordance with generally accepted auditing
standards, the
consolidated financial statements included in Providence Energy
Corporation's
annual report to shareholders incorporated by reference in this Form
10-K, and
have issued our report thereon dated November 2, 1999. Our audit was
made for
the purpose of forming an opinion on those statements taken as a
whole. The
schedule listed in the accompanying index to the financial
statements is the
responsibility of the Company's management and is presented for
purposes of
complying with the Securities and Exchange Commission's rules and is
not part of
the basic financial statements. This schedule has been subjected to
the auditing
procedures applied in the audit of the basic financial statements
and, in our
opinion, fairly states, in all material respects, the financial data
required to
be set forth therein, in relation to the basic financial statements
taken as a
whole.
Arthur Andersen LLP
Boston, Massachusetts
November 2, 1999 (except for the information discussed in Note 2, as
to which
the date is November 16, 1999)
Consolidated Balance Sheets
September 30
(thousands of dollars)
1999 1998
----------------------------------------------------------------------------
Assets
Current assets:
Cash and temporary cash investments (notes 1 and 9)
$ 2,804 $ 2,006
Accounts receivable, less allowance of
$2,883 in 1999 and $2,720 in 1998 (notes 1 and 4)
13,684 14,067
Unbilled revenues (note 1)
2,821 1,665
Inventories, at average cost-
Fuel oil and underground gas storage
558 656
Materials and supplies
1,283 1,433
Prepaid and refundable taxes (note 3)
4,215 5,355
Prepayments
2,214 1,853
--------- ----------
27,579 27,035
--------- ----------
Gas plant, at original cost (notes 1, 5, 8, and 10)
345,671 $ 324,502
Less accumulated depreciation and
plant acquisition adjustments (notes 1 and 10)
127,481 125,976
--------- ----------
218,190 198,526
--------- ----------
Other assets:
Other property, net
2,628 2,692
Investments (notes 12 and 14)
11,186 2,169
Deferred environmental costs (notes 8 and 10)
9,719 3,969
Deferred charges and other assets (notes 1, 4, 5, and 7)
28,731 18,997
--------- ----------
52,264 27,827
--------- ----------
Total assets
$ 298,033 $ 253,388
========= ==========
Capitalization and Liabilities
Capitalization (see accompanying statement)
$ 187,628 $ 173,232
--------- ----------
Current liabilities:
Notes payable (notes 6 and 9)
38,250 20,079
Current portion of long-term debt (note 5)
3,515 3,233
Accounts payable (notes 7 and 9)
12,199 9,310
Accrued compensation
1,634 1,337
Accrued environmental costs (notes 8 and 10)
6,145 -
Accrued interest
1,647 1,496
Accrued taxes
3,557 2,714
Accrued vacation
1,807 1,706
Accrued workers compensation
595 530
Customer deposits
2,973 3,034
Deferred revenue (note 10)
315 -
Energy conservation liablility
1,261 742
Other
2,776 3,373
--------- ----------
76,674 47,554
--------- ----------
Deferred credits, reserves, and other liabilities:
Accumulated deferred Federal income taxes (note 3)
24,151 22,292
Unamortized investment tax credits (note 3)
2,059 2,217
Accrued environmental costs (notes 8 and 10)
- 1,750
Accrued pension (note 7)
6,982 5,812
Other
539 531
--------- ----------
33,731 32,602
--------- ----------
Commitments and contingencies (notes 8 and 10)
--------- ----------
Total capitalization and liabilities
$ 298,033 $ 253,388
========= ==========
The accompanying notes are an integral part of these consolidated
financial
statements.
Consolidated Statements of Income
For the Years Ended September 30
(thousands, except per share amounts)
1999 1998 1997
---------------------------------------------------------------------------
Energy revenues
$ 225,029 $ 222,112 $ 220,420
Cost of energy
119,043 122,991 124,376
--------- --------- ---------
Operating margin
105,986 99,121 96,044
--------- --------- ---------
Operating expenses:
Operation and maintenance
53,047 51,993 48,768
Depreciation and amortization
17,496 14,485 12,874
Taxes:
State gross earnings
5,673 5,618 6,045
Local property and other
8,880 8,363 7,687
--------- --------- ---------
Total operating expenses
85,096 80,459 75,374
--------- --------- ---------
Operating income
20,890 18,662 20,670
--------- --------- ---------
Other income (loss) (note 1)
1,123 57 (219)
--------- --------- ---------
Interest expense:
Long-term debt
6,827 6,391 6,042
Other
2,262 1,998 1,786
Interest capitalized
(389) (256) (225)
--------- --------- ---------
8,700 8,133 7,603
--------- --------- ---------
Income before Federal income taxes
13,313 10,586 12,848
Provision for Federal income taxes (note 3)
4,540 3,657 4,391
--------- --------- ---------
Income before preferred dividends of subsidiary
8,773 6,929 8,457
Preferred dividends of subsidiary (note 5)
348 487 626
--------- --------- ---------
Net income
$ 8,425 $ 6,442 $ 7,831
========= ========= =========
Earnings per common share - basic
$ 1.40 $ 1.09 $ 1.35
========= ========= =========
Earnings per common share - diluted
$ 1.40 $ 1.09 $ 1.35
========= ========= =========
Weighted average common shares outstanding (note 13):
Basic
6,015.7 5,919.7 5,790.1
========= ========= =========
Diluted
6,034.1 5,929.7 5,794.3
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial
statements.
Consolidated Statements of Cash Flows
For the Years Ended September 30
(thousands of dollars)
1999 1998 1997
----------------------------------------------------------------------------
Cash provided by -
Operating Activities:
Income before preferred dividends of subsidiary
$ 8,773 $ 6,929 $ 8,457
Items not requiring cash:
Depreciation and amortization
17,496 14,485 12,874
Changes as a result of regulatory action
(2,357) 1,500 -
Gain on sale of financial instruments (note 1)
(355) - -
Deferred Federal income taxes
888 1,131 703
Loss on sale of real estate
- 37 -
Amortization of investment tax credits
(158) (158) (158)
Changes in assets and liabilities which provided (used)
cash:
Accounts receivable
549 21,504 (187)
Unbilled revenues
(1,156) 1,018 (326)
Deferred gas costs
- 78 6,041
Inventories
302 (169) (2,222)
Prepaid and refundable taxes
1,731 (1,646) 14
Prepayments
(361) (800) 501
Accounts payable
1,529 (3,495) (617)
Accrued compensation
297 (607) 323
Accrued interest
151 298 (80)
Accrued taxes
1,107 202 526
Accrued vacation, accrued workers compensation,
customer deposits, and other
(354) 1,105 (631)
Accrued pension
1,170 (928) 1,070
Deferred charges and other
(2,388) 3,638 1,149
-------- -------- --------
Net cash provided by operating activities
26,864 44,122 27,437
-------- -------- --------
Investment Activities:
Expenditures for property, plant, and equipment, net
(39,542) (31,150) (20,425)
Expenditures for business acquisitions, net of cash
acquired (note 15)
275 (2,744) -
Investment in joint venture (note 14)
(9,071) (2,000) -
Proceeds from sale of real estate
- 698 -
Proceeds from (cash paid for) financial instruments (note 12)
403 (104) -
-------- -------- --------
Net cash used in investing activities
(47,935) (35,300) (20,425)
-------- -------- --------
Financing Activities:
Issuance of common stock
23 - 44
Proceeds from exercise of stock options
14 115 34
Issuance of mortgage bonds (note 5)
15,000 15,000 -
Repurchase of mortgage bonds
- (6,363) -
Premium payment on bonds
- (1,392) -
Redemption of preferred stock
(1,600) (1,600) (1,600)
Issuance of long-term debt
- - 1,345
Payments on long-term debt
(4,132) (3,799) (2,164)
Increase (decrease) in notes payable
18,171 (4,462) 405
Cash dividends on preferred shares (note 5)
(348) (487) (626)
Cash dividends on common shares
(5,259) (4,891) (4,811)
-------- -------- --------
Net cash provided (used) by financing activities
21,869 (7,879) (7,373)
-------- -------- --------
Increase (decrease) in cash and temporary cash investments
798 943 (361)
Cash and temporary cash investments at beginning of year
2,006 1,063 1,424
-------- -------- --------
Cash and temporary cash investments at the end of year
$ 2,804 $ 2,006 $ 1,063
======== ======== ========
Consolidated Statements of Cash Flows
For the Years Ended September 30 (continued)
(thousands of dollars) 1999
1998 1997
----------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for-
Interest (net of amount capitalized) $ 8,283
$ 7,606 $ 7,476
Income taxes (net of refunds) $ 2,821
$ 3,750 $ 2,036
Schedule of non-cash investing activities:
Capital lease obligations for equipment $ 131
$ - $ 437
Other long-term debt for equipment $ -
$ - $ 1,983
Stock issuance for business acquisition $ 1,548
$ - $ -
The accompanying notes are an integral part of these consolidated
financial
statements.
Consolidated Statements of Capitalization
September 30
(thousands of dollars)
1999 1998
----------------------------------------------------------------------------
Common stockholders' investment (notes 5, 7, and 11):
Common stock, $1 Par
Authorized - 20,000 shares
Outstanding - 6,102 shares in 1999 and 5,969 shares in
1998 $ 6,102 $ 5,969
Amount paid in excess of par
61,966 59,198
Retained earnings
25,000 23,067
---------- ----------
93,068 88,234
Accumulated other comprehensive earnings:
Unrealized gain on financial instruments (notes 12 and 17)
39 43
---------- ----------
Total common equity
93,107 88,277
---------- ----------
Cumulative preferred stock of subsidiary (notes 5 and 9):
Redeemable 8.7% Series, $100 Par
Authorized - 80 shares
Outstanding - 32 shares as of 1999 and 48 shares as of 1998
3,200 4,800
---------- ----------
Long-term debt (notes 5, 8, and 9):
First Mortgage Bonds, secured by property
Series M, 10.25%, due July 31, 2008
1,819 2,728
Series N, 9.63%, due May 30, 2020
10,000 10,000
Series O, 8.46%, due September 30, 2022
12,500 12,500
Series P, 8.09%, due September 30, 2022
12,500 12,500
Series Q, 5.62%, due November 30, 2003
8,000 9,600
Series R, 7.50%, due December 15, 2025
15,000 15,000
Series S, 6.82%, due April 1, 2018
15,000 15,000
Series T, 6.50%, due February 1, 2029
15,000 -
Other long-term debt
4,461 4,890
Capital leases
556 1,170
---------- ----------
94,836 83,388
Less-current portion
3,515 3,233
---------- ----------
Long-term debt, net
91,321 80,155
---------- ----------
Total capitalization
$ 187,628 $ 173,232
========== ==========
The accompanying notes are an integral part of these consolidated
financial
statements.
Consolidated Statements of Changes in Common Stockholders' Equity
For the Three Years Ended September 30
Shares
Amount Paid Other
Issued and Outstanding
In Excess Retained Comprehensive
(thousands of dollars) Number Amount
of Par Earnings Income (Loss)
---------------------------------------------------------------------------
Balance, September 30, 1996 5,748 $ 5,748
$55,404 $21,413 $ -
Add (deduct):
Net income - -
- 7,831 -
Dividends ($1.08 per share) - -
- (6,242) -
Dividend reinvestment, cash
stock purchase plan, and employee
benefit plans 82 82
1,392 - -
Exercise of stock options 2 2
32 - -
Accrual for stock compensation
plan - -
(110) - -
Amortization of deferred
compensation for stock
compensation plans - -
109 - -
---------- ------------
------------ ---------- --------------
Balance, September 30, 1997 5,832 5,832
56,827 23,002 -
Add (deduct):
Net income - -
- 6,442 -
Dividends ($1.08 per share) - -
- (6,377) -
Dividend reinvestment, cash
stock purchase plan, and employee
benefit plans 76 76
1,410 - -
Exercise of stock options 7 7
108 - -
Accrual for stock compensation
plan - -
(266) - -
Amortization of deferred
compensation for stock
compensation plans - -
163 - -
Unrealized gain on
financial instruments - -
- - 43
Shares issued for acquisition 54 54
956 - -
---------- ------------
------------ ---------- --------------
Balance, September 30, 1998 5,969 5,969
59,198 23,067 43
Add (deduct):
Net income - -
- 8,425 -
Dividends ($1.08 per share) - -
- (6,492) -
Dividend reinvestment, cash
stock purchase plan, and employee
benefit plans 63 63
1,170 - -
Exercise of stock options 1 1
13 - -
Accrual for stock compensation
plan - -
(98) - -
Amortization of deferred
compensation for stock
compensation plans - -
181 - -
Unrealized (loss) on
financial instruments - -
- - (4)
Shares issued for acquisition 68 68
1,480 - -
Shares issued for employee stock
purchase plan 1 1
22 - -
---------- ------------
------------ ---------- --------------
Balance, September 30, 1999 6,102 $ 6,102
$61,966 $25,000 $ 39
========== ============
============ ========== ==============
The accompanying notes are an integral part of these consolidated
financial
statements.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Providence
Energy Corporation and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
The Company will account for its investment in the Capital Center
Energy
Company, LLC joint venture under the equity method of accounting at the
conclusion of the construction period (also see Note 14).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
Generally
Accepted Accounting Principles requires management to make estimates
and
assumptions that affect the reported amounts of assets and
liabilities and
disclosure of contingent assets and liabilities at the date of the
financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Regulation
ProvGas is subject to regulation by the RIPUC. North Attleboro
Gas is
subject to regulation by the MDTE. The accounting policies of
ProvGas and North
Attleboro Gas conform to GAAP as applied in the case of regulated
public
utilities and are in accordance with the regulators' accounting
requirements and
rate-making practices.
Energy Revenues
Energy revenues are generated principally from natural gas and oil
activities. The natural gas distribution companies record accrued
natural gas
distribution revenues based on estimates of gas volumes delivered
but not billed
at the end of an accounting period in order to match revenues with
related
costs. Also included in energy revenues are revenues earned from energy
management services, including energy project development fees.
Hedging
The Company's non-regulated operation uses financial
instruments to manage
market risks and to reduce exposure to fluctuations in the market
prices of home
heating oil, diesel, heavy oil, and natural gas. The Company's
policy is not to
hold or issue financial instruments for trading purposes but to
utilize such
instruments to hedge the impact of market price fluctuations.
These financial instruments qualify for hedge accounting. Hedge
accounting is
used in non-trading activities when there is a high degree of
correlation
between price movements in the instrument and the item designated as
being
hedged. Under hedge accounting, financial instruments with third
parties are
carried at market value with related unrealized gains and losses
recorded as
adjustments to equity in the Consolidated Statements of
Capitalization. Realized
gains and losses are recognized in the Consolidated Statements of
Income when
the hedge transaction occurs.
Lease Accounting
Previously, the Company leased water heaters and other
appliances to
customers under finance leases. These leases are recorded on the
accompanying
Consolidated Balance Sheets at the gross investment in the leases
less unearned
income. Unearned income is recognized in such a manner as to
produce a constant
periodic rate of return on the net investment in the finance leases.
Gas Plant
Gas plant is stated at the original cost of construction. In
accordance
with the uniform system of accounts prescribed by the RIPUC, the
difference
between the original cost of gas plant acquired and the cost to
ProvGas is
recorded as a Plant Acquisition Adjustment and is being amortized
over periods
ranging from 1 to 24 years.
The Company also capitalizes the costs of all technology
investments with
the exception of system maintenance costs, which are expensed unless
deferral is
approved by regulators.
Impairment Of Long-lived Assets
SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for
Long-Lived Assets to be Disposed of" established accounting
standards for the
impairment of long-lived assets. SFAS No. 121 also required that
regulatory
assets which are no longer probable of recovery through future
revenues be
charged to earnings. SFAS No. 121 has not impacted the Company's
financial
position or results of operations for the years presented.
Depreciation
For ProvGas and North Attleboro Gas, depreciation is provided
on the
straight-line basis at rates approved by the RIPUC and the MDTE
which are
designed to amortize the cost of depreciable plant over its
estimated useful
life. The composite depreciation rate expressed as a percentage of
the average
depreciable gas plant in service was approximately 3.85 percent for
1999, 1998,
and 1997.
For the non-regulated operation, depreciation is provided on
the straight-
line basis at rates which are designed to amortize asset costs over
their useful
lives.
The Company retires property units for its regulated operation
by charging
original cost, cost of removal, including environmental
investigation and
remediation costs, and salvage value to accumulated depreciation.
Due to the
magnitude of environmental investigation and remediation costs,
these amounts
have been separately stated in the accompanying Consolidated Balance
Sheets.
Gains and losses on the disposition of assets for the
non-regulated
operation are reported in earnings in the period realized.
Gas Charge Clauses
In May 1996, the RIPUC approved a Rate Design Settlement
Agreement. The
Agreement included changes to ProvGas' gas cost recovery mechanism.
Specifically, the Agreement replaced the previous CGA with the GCC
effective
June 2, 1996. In addition to the commodity and related pipeline
transportation
costs historically included in the CGA, the GCC provided for the
recovery of:
(1) inventory financing costs; (2) working capital associated with
gas supply
purchases; (3) bad debt expenses associated with the gas revenue
portion of
customer bills; and (4) a substantial portion of liquefied natural
gas operating
and maintenance expenses, all of which were previously recovered in
base rates.
Similar to the former CGA, the GCC provided for reconciliation of
total gas
costs billed with the actual cost of gas incurred. Any excess or
deficiency in
amounts billed as compared to costs incurred was deferred and either
refunded
to, or recovered from, customers over a subsequent period. As a
result of the
Price Stabilization Plan Settlement Agreement described in Note 10,
the GCC has
been suspended for the period from October 1, 1997 through September
30, 2000.
Any excess or deficiency in amounts billed as compared to costs
incurred will be
retained or borne by ProvGas during this period.
Allowance For Funds Used During Construction
ProvGas and North Attleboro capitalize interest and an
allowance for equity
funds in accordance with established policies of the RIPUC and MDTE.
The rates
used are based on the actual cost of debt and the allowed equity
return.
Interest capitalized is shown as a reduction of interest expense and
the equity
allowance is included in other income (loss) in the accompanying
Consolidated
Statements of Income.
Deferred Charges and Other Assets
The Company defers and amortizes certain costs in a manner
consistent with
authorized or probable rate-making treatment.
Deferred financing costs are amortized over the life of the
related
security while the remaining deferred regulatory charges and other
assets are
amortized over a recovery period specified by the respective regulatory
commissions.
Deferred Charges and Other Assets include the following:
(thousands of dollars) 1999 1998
------------------------------------------------
Year 2000 costs $ 7,315 $ 2,518
Pension costs 7,177 6,401
Goodwill, net 4,624 2,839
Unamortized debt expense 3,888 3,204
Exogenous recovery (note 10) 2,450 -
Other deferred charges 3,277 4,035
------- -------
Total $28,731 $18,997
======= =======
Temporary Cash Investments
Temporary cash investments are short-term, highly liquid
investments with
original maturities to the Company of not more than 90 days.
Stock-based Compensation
Compensation expense associated with awards of stock or options to
employees is measured using the intrinsic value method of Accounting
Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(see Note 11).
Intangibles
All intangible assets are amortized on a straight-line basis
over their
estimated useful lives. The goodwill and customer list amortization
periods
associated with the recent oil acquisitions are 20 years and 10 years,
respectively.
Reclassifications
Certain prior year amounts have been reclassified for consistent
presentation with the current year.
2. Subsequent Event - Merger
On November 15, 1999, the Company and Southern Union announced
that their
Boards of Directors unanimously approved a definitive merger agreement.
ProvEnergy will serve as Southern Union's headquarters for its New
England
operations. The agreement calls for Southern Union to merge with
the Company in
a transaction valued at approximately $400 million, including
assumption of
debt. Under the terms of the agreement, the Company's shareholders
will receive
$42.50 per share of Company stock in cash.
Upon completion of the merger, Southern Union will serve
approximately 1.5
million gas, electric, oil, and propane customers in Rhode Island,
Massachusetts, Pennsylvania, Texas, Missouri, Florida, Connecticut,
and Mexico.
The Company will operate as an autonomous division of Southern
Union with
the headquarters remaining in Rhode Island, and pursuant to terms of
the merger
agreement, there will be no material changes in the immediate future
to the
operations of the Company. Southern Union will honor all of the
Company's union
contracts and no layoffs are anticipated as a result of the
transaction. The
Company's Chairman and Chief Executive Officer, James H. Dodge, will
also become
a member of Southern Union's Board of Directors.
The transaction may require certain legal approvals, including
the approval
of the holders of a majority of the outstanding Company shares, the
Division,
the RIPUC, the MDTE, the SEC, and FERC, as well as regulators in Texas,
Missouri, Pennsylvania, and Florida, where Southern Union currently has
operations.
3. Federal Income Taxes
The Company records income taxes in accordance with the
Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which
requires deferred taxes to be provided for all temporary differences.
The following is a summary of the provision for Federal income
taxes for the
three years ended September 30:
(thousands of dollars) 1999 1998 1997
--------------------------------------------------------------------
Current $3,652 $2,526 $3,688
Deferred 888 1,131 703
------ ------ ------
Total Federal income tax
provision $4,540 $3,657 $4,391
====== ====== ======
The effective Federal income tax rates and the reasons for their
differences from the statutory Federal income tax rates are as
follows:
1999 1998 1997
--------------------------------------------------------------------
Statutory Federal income
tax rates 34.0% 34.0% 34.0%
Reversing temporary differences (.8) (.1) (.3)
Amortization of
investment tax credits (.4) (.5) (.4)
Non-deductible goodwill .6 .3 -
Other .7 .8 .9
------ ------ ------
Effective Federal income
tax rates 34.1% 34.5% 34.2%
====== ====== ======
The Company's deferred tax assets and liabilities for each of
the two years
in the period ended September 30 are the result of the following
temporary
differences:
(thousands of dollars) 1999 1998
--------------------------------------------------------------------
Long-term deferred taxes
------------------------
Tax assets
Unamortized ITC $ 719 $ 773
Other 222 413
Tax liabilities
Property related (22,575) (22,730)
Pension costs (125) (237)
Deferred charges (2,392) (511)
-------- --------
Net deferred tax liability included
in accompanying Consolidated Balance Sheets $(24,151) $(22,292)
======== ========
Prepaid taxes
-------------
Tax assets
Accounts receivable reserves $ 1,288 $ 970
Property tax reserves 61 (136)
Other 1,358 927
Tax liabilities
Employee severance 56 56
Other (139) (109)
-------- --------
Net prepaid taxes 2,624 1,708
Prepaid gross earnings tax
and other 1,591 3,647
-------- --------
Net prepaid and refundable taxes
included in accompanying
Consolidated Balance Sheets $ 4,215 $ 5,355
======== ========
Investment tax credits are amortized through credits to other
income
(loss), over the estimated lives of related property.
4. Lease Receivables
Previously, the Company financed the installation of water
heaters and
other appliances for its customers under one to three-year finance
agreements.
Additionally, the Company leased water heaters and appliances to
customers under
10-year sales-type leases.
Future minimum lease payments to be received are:
(thousands of dollars)
-------------------------------------------------
2000 $ 389
2001 295
-------
684
Amount representing interest (99)
-------
Amount representing principal $ 585
=======
5. Capitalization
A. First Mortgage Bonds
In April 1998, ProvGas issued $15 million of Series S First
Mortgage Bonds.
These First Mortgage Bonds bear interest at the rate of 6.82 percent
and mature
in April 2018. The net proceeds provided by this indebtedness were
used to
finance capital expenditures and pay down short-term debt.
In September 1998, ProvGas repurchased $6.4 million of Series M
First
Mortgage Bonds. The cost of repurchase was comprised of $6.4 million in
principal and $1.4 million in premium. The premium will be amortized
over 30
years, which is the life of the Series T First Mortgage Bonds, which
ProvGas
issued in February 1999. ProvGas has received an order from the
Division which
permits the amortization of the bond premium over the life of this
new debt.
ProvGas issued $15 million in Series T First Mortgage Bonds on
February 8,
1999. These First Mortgage Bonds bear interest at the rate of 6.5
percent and
mature in February 2029. The proceeds were used to reduce
borrowings under
lines of credit as well as for general corporate purposes.
ProvGas' First Mortgage Bonds are secured by a lien on
substantially all of
the tangible and real property.
As of September 30, 1999, the annual sinking fund requirements and
maturities of long-term debt are as follows:
(thousands of dollars)
------------------------
2000 $ 2,509
2001 2,509
2002 1,601
2003 1,600
2004 and thereafter 81,600
--------
$ 89,819
========
The Company's ability to pay dividends is largely dependent on the
continuing operations of ProvGas. Approximately $20 million of
ProvGas' retained
earnings is available for dividends under the most restrictive terms
of ProvGas'
First Mortgage Bond Indenture.
B. Other Long-term Debt
During 1997, the Company financed equipment purchases of
approximately
$3,328,000 through the issuance of long-term notes to IBM Credit
Corporation.
The notes have five-year terms and interest rates ranging from 4.9
to 7.5
percent. As of September 30, 1999, the maturities of these
long-term notes over
the next five years are $663,000 in 2000, $704,000 in 2001, $480,000
in 2002,
$69,000 in 2003, and $78,000 in 2004 and thereafter.
The remainder of the other long-term debt consists primarily of
an amount
due to a former owner of an acquired company.
C. Redeemable Preferred Stock
ProvGas' preferred stock, which consists of 80,000 shares of
$100 par
value, has an 8.7 percent cumulative annual dividend rate payable on
a quarterly
basis, and has no voting power or privileges. The stock is subject
to a
cumulative annual sinking fund requirement of 16,000 shares per year
at par
($1,600,000) plus accrued or unpaid dividends which commenced in
February 1997.
Accordingly, 16,000 shares were redeemed by ProvGas at par value in
February
1999 and 1998. Under the agreement, in addition to the sinking fund
redemptions
required, the Company has the option to redeem the final 16,000
shares of
preferred stock on March 1, 2000.
6. Notes Payable
The Company meets seasonal cash requirements and finances capital
expenditures on an interim basis through short-term bank borrowings.
As of
September 30, 1999, the Company had lines of credit totaling
$74,000,000 with
borrowings outstanding of $38,250,000. The Company pays a fee for
its lines of
credit rather than maintaining compensating balances. The weighted
average
short-term interest rate for borrowings outstanding at the end of
the year was
5.52 percent in 1999, 5.86 percent in 1998, and 5.79 percent in 1997.
7. Employee Benefits
A. Retirement Plans
The Company has two pension plans providing retirement benefits
for most of
its employees. The benefits under the plans are based on years of
service and
the employee's final average compensation. It is the Company's
policy to fund at
least the minimum required contribution.
The following table sets forth the funding status of the
pension plans and
amounts recognized in the Company's Consolidated Balance Sheets at
September 30,
1999 and 1998:
(thousands of dollars) 1999 1998
-----------------------------------------------------------------------
Accumulated benefit obligation,
including vested benefit obligation
of $(47,881) as of September 30,
1999 and $(46,175) as of
September 30, 1998 $ (57,017) $
(54,986)
========= ========
Projected benefit obligation for
service rendered to date $ (72,366) $
(71,540)
Plan assets at fair value (primarily
listed stocks, corporate bonds, and
U.S. bonds) 83,137 74,862
--------- ----------
Excess of plan assets over
projected benefit obligation 10,771 3,322
Unrecognized (gain) (19,749) (9,872)
Unrecognized prior service cost 4,056 2,559
Unrecognized net transition asset
being recognized over 15 years
from October 1, 1985 (136) (272)
------- --------
Net accrued pension cost included
in accrued pension and accounts payable
at September 30, 1999 and 1998 $(5,058) $ (4,263)
======= ========
Net pension cost for fiscal years 1999, 1998, and 1997 included the
following
components:
(thousands of dollars) 1999 1998 1997
--------------------------------------------------------------------------------
Service cost $ 2,285 $ 1,989 $ 1,824
Interest cost on benefit obligations 4,993 4,904 4,583
Actual return on plan assets (11,605) (1,338) (16,458)
Net amortization and deferral 5,123 (6,515) 10,526
-------- ------- --------
Net periodic pension cost 796 (960) 475
Adjustments due to regulatory
action (796) 960 (475)
-------- ------- --------
Net periodic pension cost recognized
in earnings $ - $ - $ -
======== ======= ========
In 1999, the discount rate and rate of increase in future
compensation
levels used in determining the projected benefit obligation were
7.25 percent
and 5 percent, respectively. The expected long-term rate of return
on assets was
9 percent in 1999.
In 1998, the discount rate and rate of increase in future
compensation
levels used in determining the projected benefit obligation were
6.75 percent
and 5 percent, respectively. In 1997, the discount rate and rate of
increase in
future compensation levels used in determining the projected benefit
obligation
were 8 percent and 6 percent, respectively. The expected long-term
rate of
return on assets was 9 percent in 1998 and 1997.
ProvGas recovers pension costs in rates when such costs are
funded.
Therefore, the amount by which funding differs from pension expense,
determined
in accordance with GAAP, is deferred and recorded as a regulatory
asset or
liability.
B. Post-retirement Benefits Other Than Pensions
ProvGas currently offers retirees who have attained age 55 and
worked five
years for ProvGas, healthcare and life insurance benefits during
retirement.
These benefits are similar to the benefits offered to active employees.
Although retirees are not required to make contributions for
healthcare and life
insurance benefits currently, future contributions may be required
if the cost
of healthcare and life insurance benefits during retirement exceed
certain
limits.
Since 1993, post-retirement benefit costs for active employees
are recorded
by ProvGas on an accrual basis, ratably over their service periods.
Benefits of
$10,526,000 earned prior to 1993 have been deferred as an unrecognized
transition obligation, which ProvGas is amortizing over a 20-year
period.
ProvGas funds its post-retirement benefit obligation by
contributions to a
VEBA Trust. Total contributions of $1,177,000 in 1999, $1,308,000 in
1998, and
$1,372,000 in 1997 were made to the VEBA Trust.
ProvGas recovers its post-retirement benefit obligation in
rates to the
extent allowed by the RIPUC. The RIPUC generally allows such costs
to be
recovered if amounts are funded into tax-favored investment funds,
such as the
VEBA Trust. Accordingly, ProvGas fully recovered its 1999, 1998,
and 1997 post-
retirement obligations because such obligations were funded through
the VEBA
Trust. In addition, in September 1996, the RIPUC approved a ratable
recovery of
the cumulative unrecovered difference of $1,041,000 during 1997,
1998, and 1999.
Of the total post-retirement benefit obligations, $1,523,000,
$1,654,000, and
$1,718,000, were included in rates during 1999, 1998, and 1997,
respectively.
The healthcare and life insurance benefits' costs and accumulated
post-
retirement benefit obligation for 1999, 1998, and 1997 are
calculated by
ProvGas' actuaries using assumptions and estimates which include:
1999 1998 1997
---------------------------------------------------------------------
Healthcare cost annual growth rate 7.55% 9.0% 10.2%
Healthcare cost annual growth rate - long-term 4.75 6.0 6.0
Expected long-term rate of return (union) 8.5 8.5 8.5
Expected long-term rate of return (non-union) 5.5 5.5 5.5
Discount rate 7.25 6.75 8.0
The healthcare cost annual growth rate significantly impacts
the estimated
benefit obligation and annual expense. For example, in 1999, a one
percent
increase in the above rates would increase the obligation by
$745,000 and the
annual expense by $77,000. Decreasing the assumed health care cost
annual
growth rate by one percent would decrease the obligation by $596,000
and the
annual expense by $62,000.
The obligations and assets for the healthcare and life insurance
benefits at
September 30, 1999 and 1998 are as follows:
(thousands of dollars) 1999 1998
-------------------------------------------------------------
Accumulated post-retirement benefit
obligation as of the end of the
prior fiscal year $(12,886) $(11,748)
Service cost (273) (243)
Interest cost (848) (945)
Actuarial loss/(gain) and
assumption change 872 (660)
Expected benefits paid 724 710
-------- --------
Accumulated post-retirement benefit
obligation as of the end
of the fiscal year (12,411) (12,886)
-------- --------
Fair value of plan assets as of
the beginning of the year 5,684 4,704
Return on plan assets 627 377
Employer contributions 1,177 1,308
Expenses paid (13) (18)
Benefits paid (590) (687)
-------- --------
Fair value of plan assets
as of the end of the year 6,885 5,684
-------- --------
Unfunded post-retirement benefit
obligation (5,526) (7,202)
Unrecognized transition obligation 7,368 7,895
Unrecognized net (gain) or loss (1,842) (693)
-------- --------
Prepaid post-retirement
benefit obligation included
in the accompanying Consolidated
Balance Sheets $ - $ -
======== ========
ProvGas' actuarially determined healthcare and life insurance
benefits'
costs for 1999, 1998, and 1997 include the following:
(thousands of dollars) 1999 1998 1997
-----------------------------------------------------------
Service cost $ 273 $ 243 $ 228
Interest cost 849 945 896
Actual return on plan assets (471) (406) (278)
Amortization and deferral 526 526 526
------ ------ ------
Total annual plan costs $1,177 $1,308 $1,372
====== ====== ======
C. Supplemental Retirement Plans
The Company provides certain supplemental retirement plans for key
employees. The projected benefit obligation is approximately
$2,111,000 which is
being accrued over the service period of these key employees. The
supplemental
retirement plans are unfunded. ProvGas accrued and expensed
$407,000, $61,000,
and $612,000, related to these benefits in 1999, 1998, and 1997,
respectively.
D. Performance and Equity Incentive Plan
The Providence Energy Corporation Performance and Equity
Incentive Plan
provides that up to 225,000 shares of common stock, as well as cash
awards, can
be granted to key employees, including employees of ProvGas, at no
cost to the
employees. Key employees who receive common shares are entitled to
receive
dividends, but full beneficial ownership vests on the fifth
anniversary of the
date of the grant provided the participant is still employed by the
Company.
Vesting may be accelerated under certain circumstances, including a
change in
control. This plan also provides for cash compensation to key
employees.
The executive compensation incentive awards totaled
approximately $715,000
for 1999, $459,000 for 1998, and $439,000 for 1997. Amounts paid in
cash are
charged to expense when earned. However, amounts paid in restricted
stock are
deferred and amortized to expense over the five-year vesting period.
Of the $715,000 1999 award, $483,000 will be paid in cash
during 2000. Of
the $459,000 1998 award, $310,000 was paid in cash during 1999. Of
the $439,000
1997 award, $297,000 was paid in cash during 1998. Grant shares
totaling 7,566,
7,230, and 5,989, were purchased by the Company and reissued to key
employees
during 1999, 1998, and 1997, respectively.
E. Restricted Stock Incentive Plan
The Restricted Stock Incentive Plan, which was discontinued in
1998,
provided that up to 60,000 shares of common stock may be granted to
employees of
the Company with at least three months of service, who were not
officers or
covered by a collective bargaining agreement, at no cost to the
employee. All
participants were entitled to receive dividends; however, full
beneficial
ownership vests on the third anniversary of the date of the grant
provided that
the participant is still employed by the Company. Vesting may be
accelerated
under certain circumstances.
The purchase of 4,230 shares for the Restricted Stock Incentive
Plan for
the 1997 award occurred in 1998 at a cost of approximately $90,000.
All amounts
awarded under the Restricted Stock Incentive Plan are deferred and
amortized to
expense over a three-year period.
F. 1998 Performance Share Plan
Effective October 1, 1998, the Board of Directors adopted a
Performance
Share Plan to encourage executives' interest in longer-term
performance by
keying incentive payouts to the total return performance of the
Company's common
stock in relation to that of other companies in the Edward Jones &
Company gas
distribution group of approximately 30 companies and to the change
in the
Company's stock price over three-year performance periods. The
number of shares
earned will range from 50 percent to 150 percent of awarded shares,
if based on
the relative total shareholder return method, and 50 percent to 100
percent, if
based on the increase in the Company's stock price during the
three-year period.
These levels were developed to bring total compensation levels at
the Company
more in line with survey data for the relevant labor market. No
shares will be
earned unless shareholders have earned a minimum annual return over
the three-
year period equal to the total annual return for 30-year Treasury
notes during
such period. Upon the occurrence of a change in control, unless
otherwise
prohibited, the opportunities under all outstanding awards shall be
deemed to
have been fully earned for the entire performance period as of the
effective
date of the change in control. Dividends will not be paid on the
shares until
they are earned. Awards will be paid half in cash and half in stock.
During
1999, 38,000 shares were granted under this plan.
8. Commitments and Contingencies
A. Legal Proceedings
The Company is involved in legal and administrative proceedings
in the
normal course of business, including certain proceedings involving
material
amounts in which claims have been or may be made. However,
management believes,
after review of insurance coverage and consultation with legal
counsel, that the
ultimate resolution of the legal proceedings to which it is or can
at the
present time be reasonably expected to be a party, will not have a
materially
adverse effect on the Company's results of operations or financial
condition.
B. Capital Leases
ProvGas has a capital lease with Algonquin for storage space in
a LNG tank.
The capital lease arrangement also provides that Algonquin lease
from ProvGas,
for a corresponding term at an annual amount of $150,000, the land
on which the
tank is situated. ProvGas also leases certain information systems
and other
equipment under capital leases.
Property under Capital Leases:
-----------------------------
(thousands of dollars) 1999 1998
------------------------------------------------------------
Gas Plant $ 6,116 $ 6,116
Computer and other equipment 568 1,988
Accumulated depreciation (6,067) (6,937)
------- -------
$ 617 $ 1,167
======= =======
Commitments for Capital Leases are:
-----------------------------------
*LNG Computer
(thousands of dollars) Storage Equipment Total
--------------------------------------------------------------------
2000 $ 136 $ 144 $ 280
2001 136 144 280
2002 - 69 69
2003 - 34 34
2004 - 2 2
------- ------- -------
$ 272 $ 393 $ 665
------- ------- -------
Amount representing interest (109)
-------
Amount representing principal $ 556
=======
* This capital lease will be terminated once the terms of the
contract with
Algonquin, which is described below, are met.
C. Operating Leases
The Company also leases facilities and equipment under
operating leases
with total future payments as of September 30, 1999 as follows:
(thousands of dollars)
----------------------
2000 $ 205
2001 145
2002 61
-----
$ 411
=====
D. Gas Supply
As part of the Price Stabilization Plan Settlement Agreement
described in
Note 10, ProvGas entered into a full requirements gas supply
contract with DETM,
a joint venture of Duke Energy Corporation and Mobil Corporation,
for a term of
three years commencing October 1, 1997. Under the contract, DETM
guarantees to
meet ProvGas' supply requirements; however, ProvGas must purchase
all of its gas
supply exclusively from DETM. In addition, under the contract, ProvGas
transferred responsibility for its pipeline capacity resources, storage
contracts, and LNG capacity to DETM. As a result, ProvGas' gas
inventories of
approximately $18 million at September 30, 1997 were sold at book
value to DETM
on October 1, 1997.
In addition to providing supply for firm customers at a fixed
price, DETM
will provide gas at market prices to cover ProvGas' non-firm sales
customers'
needs and to make up the supply imbalances of transportation
customers. DETM
will also provide various other services to ProvGas' transportation
service
customers including enhanced balancing, standby, and the storage and
peaking
services available under ProvGas' approved FT-2 storage service
effective
December 1, 1997. DETM will receive the supply-related revenues from
these
services in exchange for providing the supply management inherent in
these
services.
Included in the DETM contract are a number of other important
features.
ProvGas has retained the right to continue to make gas supply
portfolio changes
to reduce supply costs. To the extent ProvGas makes such changes,
ProvGas must
keep DETM whole for the value lost over the remainder of the
contract period.
The outsourcing of day-to-day supply management relieves ProvGas of
the need to
perform certain upstream supply management functions. This will
make it
possible for ProvGas to take on the additional supply management
workload
required by the further unbundling of firm sales customers without
major
staffing additions.
ProvGas has entered into an agreement replacing its existing
service
contract with Algonquin, a subsidiary of Duke Energy Corporation.
Algonquin is
the owner and operator of a LNG tank located in Providence, Rhode
Island.
ProvGas relies upon this service to provide gas supply into its
distribution
system during the winter period. The service provided for in the
agreement,
subject to the successful completion of
construction, is expected to begin in the first quarter of fiscal
2000. Under
the terms of the agreement, Algonquin replaced and expanded the
vaporization
capability at the tank. ProvGas will receive approximately $2.6
million from
Algonquin. Of the $2.6 million, approximately $.9 million represents
reimbursement received by ProvGas in 1999 for costs incurred related
to the
project including labor, engineering, and legal expenses. The
remaining portion
of the payment, or approximately $1.7 million, will be paid to DETM
under
ProvGas' contract with DETM as reimbursement for the additional
costs that DETM
will incur when the Algonquin storage capacity is released to DETM
as provided
for in the gas supply contract described above. This payment is
expected 60 days
after the in-service date of the project.
In June 1999, the FERC issued an order in Docket Number
CP99-113 approving
Algonquin's project described above. In that order FERC also
approved the new
10-year contract between Algonquin and ProvGas for service from the
tank. Also
approved was ProvGas' parallel filing, PR99-8, requesting regulatory
authorization to charge Algonquin for transportation of gas
vaporized for other
Algonquin customers and transported by ProvGas to the Algonquin
pipeline on
behalf of those customers.
As a result of FERC Order 636 and other related orders, pipeline
transportation companies have incurred significant costs,
collectively known as
transition costs. The majority of these costs will be reimbursed by the
pipeline's customers, including ProvGas. ProvGas estimates its
transition costs
to be approximately $21.7 million, of which $16.2 million has been
included in
the GCC and collected from customers through September 30, 1997. As
part of the
above supply contract, DETM assumed liability for these transition
costs during
the contract's three-year term. At the end of the three-year term of
the
contract, the Company will assume any remaining liability, which is
not expected
to be material.
E. Environmental Matters
Federal, state, and local laws and regulations establishing
standards and
requirements for the protection of the environment have increased in
number and
in scope within recent years. The Company cannot predict the future
impact of
such standards and requirements, which are subject to change and can
take effect
retroactively. The Company continues to monitor the status of these
laws and
regulations. Such monitoring involves the review of past activities
and current
operations, and may include expending funds to investigate or clean
up certain
sites. To the best of its knowledge, subject to the following, the
Company
believes it is in substantial compliance with such laws and
regulations.
At September 30, 1999, the Company was aware of five sites at
which future
costs may be incurred.
Plympton Sites (2)
------------------
The Company has been designated as a PRP under the Comprehensive
Environmental Response Compensation and Liability Act of 1980 at two
sites in
Plympton, Massachusetts on which waste material is alleged to have been
deposited by disposal contractors employed in the past either
directly or
indirectly by the Company and other PRPs. With respect to one of the
Plympton
sites, the Company has joined with other PRPs in entering into an
Administrative
Consent Order with the Massachusetts Department of Environmental
Protection. The
costs to be borne by the Company, in connection with both Plympton
sites, are
not anticipated to be material to the financial condition of the
Company.
Providence Site
---------------
During 1995, the Company began a study at its primary gas
distribution
facility located in Providence, Rhode Island. This site formerly
contained a
manufactured gas plant operated by the Company. As of September 30,
1999,
approximately $3.0 million had been spent primarily on studies and the
formulation of remediation work plans at this site. In accordance
with state
laws, such a study is monitored by the DEM. The purpose of this
study was to
determine the extent of environmental contamination at the site. The
Company has
completed the study which indicated that remediation will be
required for two-
thirds of the property. The remediation began in June 1999 and is
anticipated to
be completed during the next fiscal year. During this remediation
period, the
remaining one-third of the property will also be investigated and
remediated if
necessary.
The Company has compiled a preliminary range of costs, based on
removal and
off-site disposal of contaminated soil, ranging from $7.0 million to
in excess
of $9.0 million. However, because of the uncertainties associated with
environmental assessment and remediation activities, the future cost of
remediation could be higher than the range noted. Based on the
proposals for
remediation work, the Company has a net accrual of $6.1 million at
September 30,
1999 for anticipated future remediation costs at this site.
Westerly Site
-------------
Tests conducted following the discovery of an abandoned
underground oil
storage tank at the Company's Westerly, Rhode Island operations
center in 1996
confirmed the existence of coal tar waste at this site. As a result,
the Company
completed a site characterization test. Based on the findings of
that test, the
Company concluded that remediation would be required. As of
September 30, 1999,
the Company had removed an underground oil storage tank and regulators
containing mercury disposed of on the site, as well as some localized
contamination. The costs associated with the site characterization
test and
partial removal of soil contaminants were shared equally with the
former owner
of the property. The Company is currently engaged in negotiations to
transfer
the property back to the previous owner, who would continue to
remediate the
site. The purchase and sale agreement is anticipated to be signed
during fiscal
2000, at which time the previous owner will assume responsibility
for removal of
coal tar waste on the site. The Company remains responsible for
cleanup of any
mercury released into adjacent water. Contamination from scrapped
meters and
regulators, which was discovered in 1997, was reported to the DEM
and the Rhode
Island Department of Health and the Company has completed the necessary
remediation. Costs incurred by the Company to remediate this site were
approximately $.1 million.
Allens Avenue Site
------------------
In November 1998, the Company received a letter of
responsibility from DEM
relating to possible contamination on previously-owned property on
Allens Avenue
in Providence. The current operator of the property has been
similarly notified.
Both parties have been designated as PRPs. A work plan has been
created and
approved by DEM. An investigation has begun in order to determine
the extent of
the problem and the Company's responsibility. The Company has
entered into a
cost sharing agreement with the current operator of the property,
under which
the Company will be held responsible for approximately 20 percent of
the costs
related to the investigation. Total estimated costs of testing at
this site are
anticipated to be approximately $.2 million. Until the results of the
investigation are known, the Company cannot offer any conclusions as
to its
responsibility.
General
-------
In prior rate cases filed with the RIPUC, ProvGas requested that
environmental investigation and remediation costs be recovered by
inclusion in
its depreciation factors consistent with the rate recovery treatment
for all
types of cost of removal. Due to the magnitude of ProvGas'
environmental
investigation and remediation expenditures, ProvGas sought current
recovery for
these amounts. As a result, in accordance with the Price
Stabilization Plan
Settlement Agreement described in Note 10, effective October 1,
1997, all
environmental investigation and remediation costs incurred through
September 30,
1997, as well as all costs incurred during the three-year term of
the Plan, will
be amortized over a 10-year period, in accordance with the levels
authorized in
Energize RI. Additionally, it is ProvGas' practice to consult with
the RIPUC on
a periodic basis when, in management's opinion, significant amounts
might be
expended for environmental-related costs. As of September 30, 1999,
ProvGas has
incurred environmental assessment and remediation costs of $4.7
million and has
a net accrual of $6.1 million for future costs.
Management has begun discussions with other parties who may
assist ProvGas
in paying the costs associated with the remediation of the above sites.
Management believes that its program for managing environmental
issues, combined
with rate recovery and financial contributions from others, will
likely avoid
any material adverse effect on its results of operations or its
financial
condition as a result of the ultimate resolution of the above sites.
F. Purchase Commitments
At September 30, 1999 and 1998, the non-regulated operation had
forward
purchase commitments for its supply needs with market values of
approximately
$13.8 million and $15.2 million, respectively. These contracts were
acquired at
costs of approximately $12.2 million and $15.6 million,
respectively, and have
maturities of less than one year. All financial instruments held by
the Company
currently qualify as hedges due to either anticipated sales
contracts or firm
sales commitments.
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value
disclosures for the following financial instruments:
Cash, Cash Equivalents, Accounts Payable, and Short-term Debt
-------------------------------------------------------------
The carrying amount approximates fair value due to the
short-term maturity
of these instruments.
Financial Instruments for Hedging
---------------------------------
The fair value of financial instruments for hedging are the
same as the
carrying amount on the balance sheet as these instruments were
marked to market
at September 30, 1999 and 1998.
Long-term Debt and Preferred Stock
----------------------------------
The fair value of long-term debt and preferred stock is
estimated based on
currently quoted market prices for similar types of issues.
The carrying amounts and estimated fair values of the Company's
financial
instruments at September 30 are as follows:
1999 1998
--------------------
------------------
Carrying Fair Carrying
Fair
(thousands of dollars) Amount Value Amount
Value
-----------------------------------------------------
------------------
Cash and cash equivalents $ 2,804 $ 2,804 $ 2,006 $
2,006
Financial instruments
for hedging 114 114 169
169
Accounts payable 12,199 12,199 9,310
9,310
Short-term debt 38,250 38,250 20,079
20,079
Long-term debt 94,836 90,099 83,388
96,024
Preferred stock 3,200 3,223 4,800
5,040
The difference between the carrying amount and the fair value
of ProvGas'
preferred stock and 1998 long-term debt, if they were settled at
amounts
reflected above, would likely be recovered in ProvGas' rates over a
prescribed
amortization period. Accordingly, any settlement should not result
in a
material impact on ProvGas' financial position or results of
operations.
10. Rate Changes
A. Price Stabilization Plan Settlement Agreement
In August 1997, the RIPUC approved Energize RI among ProvGas,
the Division,
the Energy Council of Rhode Island, and the George Wiley Center.
Effective
October 1, 1997 through September 30, 2000, Energize RI provides
firm customers
with a price decrease of approximately 4.0 percent in addition to a
three-year
price freeze. Under Energize RI, the GCC mechanism has been
suspended for the
entire term. Also, in connection with the Plan, ProvGas wrote off
approximately
$1.5 million of previously deferred gas costs in October 1997.
Energize RI also
provides for ProvGas to make significant capital investments to
improve its
distribution system and support economic development. Specific capital
improvement projects funded under Energize RI are estimated to total
approximately $26 million over its three-year term. In addition,
under Energize
RI, ProvGas provides funding for the Low-Income Assistance Program
at an annual
level of $1.0 million, the Demand Side Management Rebate Program at
an annual
level of $.5 million and the Low-Income Weatherization Program at an
annual
level of $.2 million. Energize RI also continues the process of
unbundling by
allowing ProvGas to provide unbundled service offerings for up to 10
percent per
year of firm deliveries.
As part of Energize RI, ProvGas has reclassified and is amortizing
approximately $4.0 million of prior environmental costs. These
costs and all
environmental costs incurred during the term of the Plan will be
amortized over
a 10-year period, in accordance with the levels authorized Energize RI.
Under Energize RI, ProvGas may earn up to 10.9 percent, but not
less than
7.0 percent, annually on its average common equity, which is capped
at $81.0
million, $86.2 million, and $92.0 million in fiscal 1998, 1999, and
2000,
respectively. In the event that ProvGas earns in excess of 10.9
percent or less
than 7.0 percent, ProvGas will defer revenues or costs through a
deferred
revenue account over the term of the Plan. Any balance in the
deferred revenue
account at the end of the Plan will be refunded to or recovered from
customers
in a manner to be determined by all parties to the Plan and approved
by the
RIPUC.
As part of Energize RI, ProvGas is permitted to file annually
with the
Division for the recovery of exogenous changes which may occur
during the three-
year term of the Plan. Exogenous changes are defined as "...significant
increases or decreases in ProvGas' costs or revenues which are
beyond ProvGas'
reasonable control." Any disputes between ProvGas and the Division
regarding
either the nature or quantification of the exogenous changes are to
be resolved
by the RIPUC. The impact of any such exogenous changes will be
debited or
credited to a regulatory asset or liability account throughout the
term of
Energize RI and will be recovered or refunded at the expiration of
the Plan
through a method to be determined.
In fiscal 1998, ProvGas did not earn its allowed rate of return
primarily
as a result of the extremely warm winter weather and the loss of
non-firm
margin. ProvGas believed the causes of these two events were beyond its
reasonable control and thus deemed them to be exogenous changes. In
March 1999,
ProvGas reached an agreement with the Division, which allowed it to
recover
$2.45 million in revenue losses attributable to exogenous changes
experienced by
ProvGas in fiscal 1998. The RIPUC reviewed the exogenous changes
agreement to
ensure consistency with the terms of Energize RI and affirmed the
agreement at
its May 28, 1999 open meeting.
During fiscal 1999, ProvGas recognized into revenue $2.45
million for the
exogenous changes recovery, and at year-end has deferred
approximately $.5
million of revenue under the provisions of the earnings cap of
Energize RI.
ProvGas intends to file for recovery of exogenous changes
experienced in
1999 which resulted from factors similar to 1998. Absent further
exogenous
recovery and/or other factors such as colder than normal weather,
ProvGas'
ability to earn a 10.9 percent return on average common equity in
the final year
of Energize RI is substantially impaired.
B. North Attleboro Gas Rate Increase
In October 1991, the MDTE released its settlement order in
regards to a
rate request which included a qualified phase-in plan.
The rate settlement required North Attleboro Gas to classify
$545,000 of
gas plant as plant held for future use. This plant is eligible to be
included in
future rates since North Attleboro Gas has met certain growth
requirements which
were required by the year 2000. North Attleboro Gas capitalized
AFUDC and other
costs of approximately $18,000 in 1998, and $37,000 in 1997 that
related
primarily to the gas plant not yet phased into North Attleboro Gas'
rates under
the plan. North Attleboro Gas amortized $76,000 in 1999, $214,000 in
1998, and
$214,000 in 1997, of amounts previously deferred.
11. Stock Rights and Options
Currently, one common stock purchase right is attached to each
outstanding
share of common stock. Each right entitles the holder to purchase
one share of
common stock at a price of $70 per share, subject to adjustment. In
the event
that certain transactions as defined in the common stock purchase
rights
agreement occur, each common stock purchase right will become
exercisable for
that number of shares of common stock of the acquiring company (or
of the
Company in certain circumstances) which at the time of the
transaction has a
market value of two times the exercise price. These rights expire on
August 17,
2008 and may be redeemed by a vote of the Directors at a redemption
price of
$.01 per common stock purchase right. Due to the antidilutive
characteristics of
these rights, there is no assumed impact on earnings per share.
The Company offered two stock option plans for officers,
directors, and key
employees which covered 250,000 shares of the Company's common
stock. Options
under the plans were granted at an exercise price equal to fair
market value at
the date of grant. The options expire 10 years from the date of
grant and in the
case of options granted to the directors, the options become
exercisable after
the first anniversary of the date of such grant.
Pursuant to the provisions of the plans, each plan terminated
on November
3, 1998 which was 10 years from the effective date of the plan. Any
options
outstanding under either of the plans shall remain in effect
according to the
plans' terms and conditions.
In connection with the purchase of the oil distribution
companies, the
Company issued an option to purchase 100,000 shares of its common
stock to a
former owner of an acquired company in 1998.
Stock option data are summarized as follows for the years ended
September
30, 1999, 1998, and 1997:
Weighted
Number
Average
of Shares
Exercise Price
----------------------------------------------------------------------------
Outstanding, September 30, 1996 62,238
$16.77
Granted 9,319
17.50
Exercised (2,130)
16.11
Expired (10,009)
17.71
--------
------
Outstanding, September 30, 1997 59,418
16.75
Granted 100,000
23.00
Exercised (6,852)
16.79
Expired -
-
--------
------
Outstanding, September 30, 1998 152,566
20.85
Granted -
-
Exercised (706)
19.00
Expired (1,206)
16.95
--------
------
Outstanding, September 30, 1999 150,654
$20.62
========
======
The following table sets forth information regarding options
outstanding at
September 30, 1999:
Number of Options 150,654
Range of Exercise Prices $ 13.875 - $23
Number Currently Exercisable 150,654
Weighted Average Exercise Price $ 20.62
Weighted Average Remaining Life 4.89 years
Weighted Average Exercise Price for
Currently Exercisable $ 20.62
At September 30, 1998 and 1997, 152,566 and 50,927 were currently
exercisable, respectively.
As described in Note 1, the Company uses the intrinsic method
to measure
compensation expense associated with grants of stock options or
awards to
employees. Had the Company used the fair value method to measure
compensation,
reported net income would have been $6,396,000 in 1998 and
$7,822,000 in 1997.
Earnings per share for fiscal year 1998 would have been $1.08.
Earnings per
share for fiscal 1997 remain unchanged. Earnings per share for
fiscal 1999
remain unchanged as there were no options granted during the year.
For purposes of determining the above disclosure required by
Statement of
Financial Accounting Standards No. 123, the fair value of options on
their grant
date was measured using the Black-Scholes option pricing model. Key
assumptions
used to apply this pricing model were as follows:
1998 1997
----- -----
Risk-free interest rate 5.01% 5.43%
Expected life of option grants (years) 4.0 7.0
Expected volatility of underlying stock 15% 15%
The pro-forma presentation only includes the effects of grants
made
subsequent to October 1, 1996. The estimated fair value of option
grants made
during 1998 and 1997 was $.70 and $1.41, respectively, per option.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions
and are fully transferable. In addition, option valuation models
require the
input of highly subjective assumptions including the expected stock
price
volatility. Because the Company's employee stock options have
characteristics
significantly different from those of traded options, and because
changes in the
subjective input assumptions can materially affect the fair value
estimate, in
management's opinion, the existing models do not necessarily provide
a reliable
single measure of the fair value of its employee stock options.
In January 1997, the shareholders of the Company adopted the
Non-Employee
Director Stock Plan, which provides that up to 50,000 shares of
common stock may
be granted to non-employee directors. The shares are granted, at no
cost to the
director, on the first day of each fiscal year based on each director's
aggregate fees earned in the
prior fiscal year. All participants are entitled to vote the grant
shares and
receive dividends on the grant shares, however, full beneficial
ownership vests
on the third anniversary of the grant date provided the participant
is still a
director of the Company. Vesting may be accelerated under certain
circumstances.
The Company issued 1,963 and 2,131 shares under the Non-Employee
Director Stock
Plan in 1999 and 1998, respectively.
12. Hedging
The Company's strategy is to use financial instruments for
hedging purposes
to manage the impact of market fluctuations on contractual
commitments. The
Company's non-regulated operation uses financial instruments to
manage market
risks and to reduce its exposure to fluctuations in the market
prices of home
heating oil, diesel, kerosene, and natural gas.
The futures and option contracts, had net unrealized gains of
approximately
$40,000, which have been deferred on the accompanying Consolidated
Balance
Sheets at both September 30, 1999 and 1998.
At September 30, 1999 and 1998, the estimated fair market value
of the
forward contracts totaled approximately $13.8 million and $15.2
million and were
acquired at costs of approximately $12.2 million and $15.6 million.
The fair
market value of these forward contracts is based on quoted market
prices and the
contracts have maturities of less than one year.
13. Earnings per Share
During 1998, the Company adopted the provisions of SFAS No. 128
"Earnings
Per Share". Under the provisions of SFAS No. 128, basic earnings per
share
replaces primary earnings per share and the dilutive effect of stock
options are
excluded from the calculation. Fully diluted earnings per share are
replaced by
diluted earnings per share and include the dilutive effect of stock
options and
warrants, using the treasury stock method. All prior period earnings
per share
data have been restated to conform to the requirements of SFAS No. 128.
A reconciliation of the weighted average number of shares
outstanding used
in the computation of basic and diluted earnings per share for the
three years
ended September 30, is as follows:
1999 1998 1997
--------- --------- ---------
Weighted average
shares 6,015,691 5,919,699 5,790,087
Effect of dilutive stock
options 18,443 9,963 4,260
--------- --------- ---------
Weighted average
shares diluted 6,034,134 5,929,662 5,794,347
========= ========= =========
The net income used in the calculation for basic and diluted
earnings per
share agrees with the net income appearing in the accompanying
Consolidated
Financial Statements.
14. Investments
In July 1998, the Company and ERI Services, Inc. agreed to form
CCEC. The
joint venture is owned 50 percent by the Company's subsidiary,
ProvEnergy Power
Company, LLC and 50 percent by ERI Services' subsidiary, ERI
Providence, LLC.
CCEC's wholly-owned subsidiary DownCity Energy Company, LLC, was
selected as the
exclusive electric, heat, air conditioning, and related service
provider for the
next 30 years for most of the Providence Place Mall, which opened in
August
1999. The Company had invested, primarily as bridge financing, $11.1
million of
its total projected investment of $15 million at September 30, 1999.
The Company
anticipates obtaining permanent financing for the Mall during the
first quarter
of fiscal 2000, after which the Company projects its equity
investment in the
mall to approximate $3.0 million.
15. Acquisitions
In July 1999, the Company acquired Keenan Oil Services, Inc. of
Warwick,
Rhode Island, which serves approximately 2,700 full-service residential
customers. In November 1997, the Company acquired all of the
outstanding stock
of the Super Service Companies as well as all the assets of the Mohawk
Companies. These acquisitions in
conjunction with the purchase of three small oil companies' customer
lists in
1998 serve as a valuable market entry as a full service heating oil
company.
The amounts related to the purchases of these companies are not
material to
the financial position of the Company. These acquisitions have been
accounted
for as purchases and, accordingly, operating results of these
businesses
subsequent to the date of acquisition have been consolidated in the
financial
statements of the Company. Pro-forma results of operations, which
include the
operating results of these acquisitions, are not materially
different than the
operating results presented.
On October 1, 1999, the Company acquired the customer list of
one small oil
company servicing approximately 600 customers in Northern Rhode Island.
The Company continues to assess the energy market for potential
acquisitions to fulfill its vision.
16. Operating Segments
The Company's operations are classified into two principal
reportable
segments: Regulated Operations and Non-regulated Operations.
The Regulated Operations consists primarily of natural gas
sales and
distribution to residential, commercial, and industrial customers.
The Non-
regulated Operations consists of heating oil, motor oil, and gas
commodity sales
to residential, commercial, and industrial customers and other
energy management
projects, which include project development fees.
The accounting policies used to develop segment information
correspond to
those described in Note 1, "Significant Accounting Policies". The
Company
evaluates performance based on net income.
(thousands of dollars) 1999 1998
1997
-----------------------------------------------------------------------------
Energy Revenues
---------------
Regulated operation $ 183,373 $ 189,034 $
215,258
Non-regulated operation 41,656 33,078
5,162
----------- ----------
----------
Total $ 225,029 $ 222,112 $
220,420
=========== ==========
==========
Interest Expense
----------------
Regulated operation $ 7,660 $ 7,600 $
7,570
Non-regulated operation 441 400
23
----------- ----------
----------
Total reportable segments 8,101 8,000
7,593
Parent company 599 133
10
----------- ----------
----------
Total $ 8,700 $ 8,133 $
7,603
=========== ==========
==========
Depreciation and amortization
-----------------------------
Regulated operation $ 16,925 $ 13,962 $
12,869
Non-regulated operation 571 523
5
----------- ----------
----------
Total $ 17,496 $ 14,485 $
12,874
=========== ==========
==========
Income tax expense
------------------
Regulated operation $ 5,083 $ 4,655 $
4,785
Non-regulated operation (373) (966)
(161)
----------- ----------
----------
Total reportable segments 4,710 3,689
4,624
Parent company (170) (32)
(233)
----------- ----------
----------
Total $ 4,540 $ 3,657 $
4,391
=========== ==========
==========
Net income (loss)
-----------------
Regulated operation $ 9,837 $ 8,566 $
8,546
Non-regulated operation (986) (1,692)
(313)
----------- ----------
----------
Total reportable segments 8,851 6,874
8,233
Parent company (426) (432)
(402)
----------- ----------
----------
Total $ 8,425 $ 6,442 $
7,831
=========== ==========
==========
Total assets
------------
Regulated operation $ 271,115 $ 238,493 $
251,759
Non-regulated operation 13,870 11,593
1,360
----------- ----------
----------
Total reportable segments 284,985 250,086
253,119
Parent company 13,048 3,302
2,391
----------- ----------
----------
Total $ 298,033 $ 253,388 $
255,510
=========== ==========
==========
Capital expenditures
--------------------
Regulated operation $ 39,501 $ 30,783 $
20,335
Non-regulated operation 41 367
90
----------- ----------
----------
Total $ 39,542 $ 31,150 $
20,425
=========== ==========
==========
Significant non-cash items
-------------------------
Deferred Federal income taxes
and amortization of ITC
Regulated operation $ 725 $ 970 $
544
Non-regulated operation 4 2
-
----------- ----------
----------
Total reportable segments 729 972
544
Parent company 1 1
1
----------- ----------
----------
Total $ 730 $ 973 $
545
=========== ==========
==========
Stock issuance for business
acquisition
Non-regulated operation $ 1,548 $ - $
-
=========== ==========
==========
All segment amounts reported above correspond to items reported
in the
Company's consolidated financial statements and are consistent with the
presentation adopted in internal management reports.
Under total assets, the Parent company amount consists
primarily of the
Company's investment in the Mall.
17. Comprehensive Income
Effective October 1, 1998, the Company adopted the provisions
of SFAS No.
130, "Reporting Comprehensive Income", which requires that an
enterprise (a)
classify items of other comprehensive income by their nature in a
financial
statement and (b) display the accumulated balance of other
comprehensive income
separately from retained earnings and additional paid-in capital in
the equity
section of a statement of financial position.
A reconciliation of net income to other comprehensive income is
as follows:
(thousands of dollars) 1999 1998 1997
------------------------------------- ------ ------ ------
Net Income $8,425 $6,442 $7,831
Unrealized holding gain (loss) on
investments, net of tax (4) 43 -
------ ------ ------
Comprehensive Income $8,421 $6,485 $7,831
====== ====== ======
The following is a summary of the reclassification adjustments
and the
income tax effects for the components of other comprehensive income
(loss) for
the year ended September 30:
Unrealized Holding Reclassification
Gains on Adjustments for
Investments Gains
Other
Arising During Included in
Comprehensive
(thousands of dollars) the Period Net Income
Loss
---------------------------------------------------------------------------
1999
Pretax income $ 78 $
(84) $ (6)
Income tax expense 26
(28) (2)
-------- --------
-------
Net change $ 52 $
(56) $ (4)
======== ========
=======
18. New Accounting Pronouncements
Effective for fiscal year 1999, the Company adopted the
provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
SFAS No. 131 requires that a public business enterprise report
financial and
descriptive information about its reportable operating segments.
This statement
requires additional disclosure only and will not affect the
financial position
or results of operations of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative
Instruments and Hedging Activities". This Statement establishes
accounting and
reporting standards requiring that every derivative instrument
(including
certain derivative instruments embedded in other contracts) be
recorded on the
balance sheet as either an asset or liability measured at its fair
value. SFAS
No. 133 requires that changes in the derivative's fair value be
recognized
currently in earnings unless specific hedge accounting criteria are
met.
Special accounting for qualifying hedges allows a derivative's gains
and losses
to offset related results on the hedged item in the income statement
and
requires that a company must formally document, designate, and
assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective in the first fiscal quarter for the
Company's
fiscal year ending September 30, 2001. A company may also implement
the
Statement as of the beginning of any fiscal quarter after issuance
(that is,
fiscal quarters beginning June 16, 1998 and thereafter). SFAS No.
133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in
hybrid contracts
that were issued, acquired, or substantively modified after December
31, 1997
(and, at a company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS
No. 133 on
the financial statements and has not determined the timing of or
method of
adoption of SFAS No. 133.
In March 1998, the American Institute of Certified Public
Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or
Obtained for Internal Use". It applies to all non-governmental
entities and is
effective for the Company's financial statements for the fiscal year
ending
September 30, 2000. The provisions of this SOP should be applied to
internal-use
software costs incurred in fiscal years subsequent to December 15,
1998 for all
projects, including those projects in progress upon initial
application of the
SOP.
The SOP establishes accounting standards for the determination
of capital
or expense treatment of expenditures for computer software developed
or obtained
for internal use based upon the stage of development. The SOP
defines three
stages as (1) Preliminary Project, (2) Application Development, and
(3) Post-
Implementation/Operation. As a general rule, the Preliminary Project
and Post-
Implementation/Operation phase expenditures are expensed and
Application
Development expenditures are capitalized.
The Company will adopt the SOP in fiscal 2000 and does not
expect it to
have a material impact on the financial statements.
19. Unaudited Quarterly Financial Information
The following is unaudited quarterly financial information for
the two
years ended September 30, 1999 and 1998. Quarterly variations
between periods
are caused primarily by the seasonal nature of energy sales and the
availability
of energy products.
(thousands of dollars, except
per share amounts) Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30
---------------------------------------
Fiscal 1999
------------------------------------------------------------------
Energy revenues $64,585 $93,690 $38,714 $28,040
Operating income (loss) 8,105 17,976 658 (5,849)
Net income (loss) 3,967 10,373 (376) (5,539)
Net income (loss)
per share* .66 1.73 (.06) (.90)
FISCAL 1998
------------------------------------------------------------------
Energy revenues $67,942 $87,796 $39,968 $26,406
Operating income (loss) 8,620 16,611 (585) (5,984)
Net income (loss) 4,403 9,535 (1,843) (5,653)
Net income (loss)
per share* .75 1.61 (.31) (.95)
* Calculated on the basis of the weighted average shares
outstanding during the
quarter.
