FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1995
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-10032
PROVIDENCE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) (Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 401-272-9191
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
Common Stock, $1.00 Par Value AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by checkmark 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant, as of December 26, 1995: $95,338,069
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $1.00 Par Value: 5,691,825 shares outstanding at
December 26, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the fiscal year ended
September 30, 1995 are incorporated by reference into Part II.
TABLE OF CONTENTS
PART I PAGE
Item 1 - Business
General I-1
Operations of the Gas Companies I-1
Nonutility Operations I-8
Special Factors Affecting the Gas Industry I-9
Item 2 - Properties I-12
Item 3 - Legal Proceedings I-12
Item 4 - Submission of Matters to a Vote of Security Holders I-12
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholders' Matters II-1
Item 6 - Selected Financial Data II-1
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1
Item 8 - Financial Statements and Supplementary Data II-1
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-1
PART III
Item 10 - Directors and Executive Officers of the Registrant III-1
Item 11 - Executive Compensation III-4
Item 12 - Security Ownership of Certain Beneficial Owners
and Management III-5
Item 13 - Certain Relationships and Related Transactions III-5
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Experts Consent IV-6
Supplemental Schedule IV-7
Signatures IV-10
PART I
ITEM 1. BUSINESS
General
Providence Energy Corporation (the Registrant or the Company) was
organized in 1981 as a Rhode Island business corporation. The
Registrant's outstanding common shares are presently listed on the
American Stock Exchange. The Registrant is the parent of two wholly-owned
natural gas distribution utilities, The Providence Gas Company (ProvGas)
and North Attleboro Gas Company (North Attleboro Gas), together referred
to as the Gas Companies. The Registrant also conducts its nonutility
operations through a wholly-owned nonutility subsidiary, Newport America
Corporation (Newport America)-see nonutility operations.
ProvGas, Rhode Island's largest natural gas distributor, was founded
in 1847 and serves approximately 161,000 customers in Providence, Newport
and 23 other cities and towns in Rhode Island. North Attleboro Gas serves
over 3,000 customers in North Attleboro and Plainville, Massachusetts,
towns adjacent to the northeastern Rhode Island border. The total natural
gas service territory of the Gas Companies encompasses 410 square miles
and has a population of approximately 850,000.
The corporate offices of the Registrant are located at 100 Weybosset
Street, Providence, Rhode Island 02903 (Telephone 401-272-9191).
Operations of the Gas Companies
Customers. The Gas Companies had an average annual number of
customers of approximately 165,000 for the twelve months ended September
30, 1995, of which approximately 90% were residential and 10% were
commercial and industrial.
The net increase in the average annual number of customers during
fiscal 1995 over fiscal 1994 was approximately 2,300 or 1.4 percent. This
moderate increase was the result of new housing construction and
conversions from other energy sources offset by shut-offs for non-payments
and housing vacancies due to the stagnant economy.
Gas Service. The gas services provided by the Gas Companies can be
grouped into three categories -- firm, interruptible and transportation
service. Firm service is provided to those residential, commercial and
industrial customers that use natural gas throughout the year.
Interruptible service is provided to those commercial and industrial
customers that do not require assured gas service because they can utilize
an alternative fuel or otherwise operate without gas service.
Transportation service is a service where the Gas Companies transport to
certain large customers gas owned by those customers or by third parties
selling gas to those customers.
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The following table shows the distribution of gas to various customer
classes, and the total gas sold and transported by year since 1991:
1995 1994 1993 1992 1991
Firm 76.4% 81.9% 83.9% 73.9% 66.2%
Interruptible 17.6 15.8 14.7 23.1 19.5
Transportation 6.0 2.3 1.4 3.0 14.3
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Total Gas Sold and Transported
BCF(*) 28.1 28.7 27.1 29.1 29.0
===== ===== ===== ===== =====
(*) Gas sales are denominated in billions of cubic feet of natural gas,
(Bcf). Total gas sales include gas sold and transported by the Gas
Companies.
Firm Service. In recent years, the distribution of the Gas
Companies' firm sales has been approximately 60% to residential and 40% to
commercial and industrial customers. Firm sales represent the highest
percentage of operating margin and represent the core of the Gas
Companies' business.
Interruptible Service. Interruptible customers consist of two types:
seasonal customers that typically use gas only during the nonwinter months
and dual-fuel customers that contract for gas service on a year round
basis, but agree to service interruption during certain peak periods. By
retaining the right to interrupt service to the dual-fuel customers, the
Gas Companies can balance daily demand from firm customers with available
gas supply and pipeline capacity. Interruptible customers may interrupt
their gas service, as well, when it is more economical to utilize an
alternative fuel. Accordingly, the amount of the Gas Companies'
interruptible sales fluctuates depending upon the relative price of
natural gas to alternative fuels.
Interruptible sales produce substantially less margin to the Gas
Companies than firm sales due to the more competitive nature of
interruptible sales. Service rates charged to dual-fuel customers are
based on the price that the customer would otherwise pay for its
alternative fuel. Total margin, however, is generally not impacted by
nonfirm sales due to a margin-sharing mechanism - see Rates and Regulation
and Competition and Marketing.
Transportation Service. Margin from the transportation of gas
purchased by certain large customers from third parties is likely to
represent an increasing percentage of the Gas Companies' future total
margin due to the continuing regulatory developments affecting the natural
gas industry - see Special Factors Affecting the Natural Gas Industry. In
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general, these developments now allow customers to buy gas directly from
the producer-supplier rather than solely from the local gas distribution
company. Customer-owned gas is transported to the customer's premises
through a combination of the interstate pipelines and the Gas Companies'
distribution systems.
For a given quantity of gas, the Gas Companies' margin from
transportation service is considerably less than their margin from firm
sales, but is generally comparable to their margin from interruptible
sales, depending upon the price of alternative fuels. To the extent that
the Gas Companies' existing customers buy gas directly from
producer-suppliers, the Gas Companies' revenue will decrease although
nonfirm margin may not be impacted. Total margin is impacted by nonfirm
sales and transportation sales under a margin-sharing mechanism- see Rates
and Regulation. During fiscal 1995, the Registrant saw an increase in its
transportation sales as compared to last year by 1,025 million cubic feet
(MMcf) due to additional capacity available for transportation and
competitive third party pricing.
Gas Supply
During 1995, the Registrant purchased 93% of its gas supply in the
production area with transportation to market and storage provided by firm
pipeline contracts. Liquefied natural gas (LNG) provided 2% of supply.
The remaining 5% was purchased in the market area, generally on an
interruptible basis. The Registrant maintains contracts sufficient to
meet 100% of its firm winter demand using firm storage and firm pipeline
transportation.
When not using capacity for its own sales, the Registrant released
the capacity or used it to make off-system sales. In fiscal 1995, the
Registrant received $5.1 million in revenue from released capacity, a 148%
increase over the $2.1 million was received in fiscal 1994. The revenues
reduce the firm customer's gas cost, making the Registrant more
competitive.
In addition to managing its pipeline capacity, the Registrant has
focused its attention on restructuring its supply portfolio to closely
match its market requirements. A sophisticated planning model is used to
support all major supply decisions and to identify specific areas in the
supply and transportation portfolio where savings can be gained without
jeopardizing the obligation to serve firm customers. During fiscal 1995,
a number of supply contracts were put out for bid, renegotiated or
terminated. For example, the Registrant restructured one if its major
supply contracts from a 365 day supply contract to a 151 day winter-only
contract resulting in significant savings. Over the next several years,
the Registrant plans to restructure other contracts as their terms expire.
Although the Registrant has significantly increased its storage
capacities since the Federal Energy Regulatory Commission (FERC) Order 636
implementation, it continues to explore opportunities to add additional
storage to its portfolio as a replacement for higher cost supplies as
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contracts expire. New storage will enhance the Registrant's ability to
provide the flexibility needed to meet rapid shifts in temperature, manage
market swings and stay competitive in the post FERC Order 636 environment.
Rates and Regulation. ProvGas is subject to the regulatory
jurisdiction of the Rhode Island Public Utilities Commission (RIPUC) with
respect to rates and charges, standards of service, accounting and other
matters. North Attleboro Gas Company is subject to similar regulatory
jurisdiction by the Massachusetts Department of Public Utilities (MDPU).
The standards set by these regulatory bodies affect all aspects of the Gas
Companies' businesses, including their ability to market to new customers
and to meet competition from other fuel suppliers -- see Competition and
Marketing.
In July 1994, ProvGas filed an Integrated Resource Plan (IRP) with
the RIPUC. The purpose of the IRP is to optimize the utilization of
production transmission and distribution resources such that customers
receive high quality services at the lowest possible costs.
Subsequent to year-end, ProvGas filed a three-year Settlement
Agreement between itself and the Division of Public Utilities and Carriers
regarding the IRP. The Settlement Agreement provides for: (1) funding
associated with Demand Side Management programs, which are designed to
provide equipment rebates for specific load building programs; (2) funding
associated with a low income weatherization program, which is designed to
assist low income customers through the installation of conservation
measures; and (3) a performance-based ratemaking mechanism.
In addition, the Settlement Agreement contains a general agreement
that ProvGas' strategy and steps prepared in its supply plan are
reasonable. The status of the Settlement Agreement is currently pending.
In February 1995, ProvGas filed for rate relief requesting an
approximate 8 percent general rate increase. The major factors
contributing to the rate request were an increase in depreciation due to
capital spending, an increase in working capital needs, and an increase in
capital expenditures. On November 17, 1995, the RIPUC issued its decision
on the rate request made by ProvGas. In its decision, the RIPUC
authorized ProvGas to increase its rates to recover additional annual
revenues in the amount of $3,990,000. Subsequent to the issuance of the
rate decision, the RIPUC approved ProvGas' motion to reconsider a revenue
adjustment of $171,572. That approval increases the overall rate increase
to $4,161,572. Additionally, as a result of the order, ProvGas will
record several adjustments to its first quarter 1996 financial statements.
Specifically:
a) ProvGas will begin calculating property tax expense for rate purposes
based on the current year's expense plus an estimate of one year's
increase in expense. Previously, ProvGas was required to estimate two
year's increase in expense. As a result, ProvGas will reduce its
regulatory liability for one year's property tax expense resulting in a
one time gain of approximately $3,900,000 before tax.
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b) ProvGas will write-off and not recover the $1,600,000, before tax, of
restructuring costs previously deferred. (See Footnote 8 to the Notes to
the Consolidated Financial Statements contained in the Registrant's Annual
Report to Shareholders filed herewith as Exhibit 13.) The RIPUC had
previously allowed ProvGas recovery of similar costs, but determined that
the costs of the 1994 reorganization should not be recovered in rates.
c) ProvGas will write-off approximately $400,000, before tax, of
previously deferred rate case expenses. (See Footnote 1 to the Notes to
the Consolidated Financial Statements contained in the Registrant's Annual
Report to Shareholders filed herewith as Exhibit 13.)
d) ProvGas will write-off approximately $461,000, before tax, of
construction expenditures previously capitalized. These costs were
capitalized in accordance with generally accepted accounting principles
and were based on Federal Energy Regulatory Commission guidance on
accounting for such costs. The RIPUC agreed that such costs could be
capitalized beginning in 1996, but did not allow recovery of previously
capitalized costs.
The net effect of the above adjustments will be recorded in ProvGas' first
quarter financial statements, and based on management's current estimates
will not have a material impact.
The following table sets forth the results of ProvGas' applications
before the RIPUC for revenue increases since 1981.
Annualized Annualized Authorized
Date of Revenue Increase Date Rates Revenue Increase Return on
Application Requested Effective Allowed (*) Common Equity
5/17/90 $15,800,000 03/15/91 $9,176,000 12.8%
1/15/93 9,100,000 (**) 11/14/93 694,000 11.2
2/16/95 14,880,000 (***)12/17/95 4,161,572 (****) 10.9
(*) Although the RIPUC reviews and approves all changes in gas costs
billed to customers through the Cost of Gas Adjustment (CGA) clause, such
changes are not part of the general rate filings described above. See
Footnotes 1 and 9 in Notes to the Consolidated Financial Statements
contained in the Registrant's 1995 Annual Report to Shareholders filed
herewith as Exhibit 13.
(**) Rate increase requested on January 15, 1993 of $9.1 million was
recalculated to $6,970,000 on September 14, 1993 due to cost of service
adjustments reflecting cost savings.
(***) Rate increase requested on February 16, 1995 of $14.9 million was
revised to $13,222,000 on July 18, 1995 due to lower projected costs.
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(****) The allowed annualized revenue increase of $4,161,572 is comprised
of an initial award of $3,990,000 plus a revenue adjustment of $171,572
due to a reconsideration motion.
In May 1995, ProvGas filed a request for a new rate design with the
RIPUC. The new request continues the movement towards equalized rates of
return for each of the customer classes as well as allowing for the
unbundling of certain services to ProvGas' largest customers. The rate
design request is revenue neutral. A major focus of the rate design
request is to improve the economic development climate and prospects for
job creation in Rhode Island. This request in currently pending.
ProvGas' cost of gas adjustment (CGA) clause contains a provision
that enables the Company to retain margins associated with non-firm sales
and transportation. Specifically, non-firm margins above a threshold are
shared at the ratio of 66 2/3% to firm customers and 33 1/3% to ProvGas.
The non-firm margin threshold is calculated annually based on the average
of non-firm sales and transportation margins for the preceding three
years. For fiscal 1995, ProvGas retained non-firm sales and
transportation margins of approximately $200,000 based on realized margins
of $3.0 million and a threshold of $2.4 million.
In October 1995, North Attleboro Gas received approval of its fifth
and final rate increase under the qualified five year phase-in plan.
Under the terms of the agreement, a 32 percent increase was phased-in over
five years effective November 1, 1991. See Footnote 9 to the Notes to the
Consolidated Financial Statements contained in the Registrant's Annual
Report to Shareholders filed herewith as Exhibit 13.
Competition and Marketing. The Registrant experienced moderate
growth in both residential and commercial/industrial markets. In all, the
average annual number of customers rose 1.4 percent to 164,587.
About half the residential homes on or near the Registrant's
distribution lines use an alternate fuel for heating. In addition, there
are about 28,000 housing units in the service territory that heat with
high cost electricity, making them excellent potential conversion
customers. In 1995, residential heating conversions increased to 765
homes.
In 1996, the Registrant's core marketing efforts will focus on
building loyalty with existing customers by offering incentives to
encourage the addition of gas appliances and energy related services. The
Registrant will continue joint marketing with the local network of heating
contractors to promote heating conversions of customers on existing gas
mains.
The Registrant is working closely with the RIPUC to develop a new
rate structure that will allow the Registrant to more effectively compete
with alternate fuel providers. In addition, the Registrant has proposed
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to offer unbundled services designed to respond to the needs of its
largest customers, such that those customers would have the option to
purchase natural gas directly from suppliers and use the Registrant to
transport the gas. This proposal will foster a more competitive and
flexible gas market in Rhode Island. To remain competitive, the
Registrant must be able to offer commercial/industrial businesses value-
added services at competitive prices.
For example, in 1995, the Registrant negotiated and received RIPUC
approval for five special agreements that allowed the Registrant to offer
unbundled services to several large manufacturing companies. Without this
customized approach, these companies would have utilized other fuel and
delivery alternatives, resulting in an annualized loss of operating margin
of approximately $600,000.
Emerging markets are expected to provide significant long-term
opportunities for growth. The Registrant expects strong growth in natural
gas internal combustion engines. These engines--used in large-scale air
conditioning, industrial water pumps, and air compressors--are
significantly less expensive to operate than comparable electric motors.
The Registrant continues to be a leader in the promotion of natural
gas vehicles. The Registrant opened the first public fueling station in
New England and has 15 local companies and state agencies using the
station.
Natural gas fuel cell technology holds great promise for the future.
These fuel cells convert natural gas into electricity through an
electrochemical process, dramatically reducing emissions and noise
normally associated with power generating equipment. In 1995, the
Registrant helped the Newport Naval Education and Training Center become
the third military facility in the country to operate this new technology
and is now selling about 15 MMcf of natural gas annually to the center.
The Registrant believes this extraordinarily efficient technology will
become more common.
The Registrant is developing energy-related alliances and
partnerships outside of its traditional markets. In late 1995, the
Registrant formed a strategic alliance with Catex Vitol Gas Inc., a large,
Boston-based marketing and trading company with average natural gas sales
of 1.4 Bcf per day. This alliance, the first for both companies, will
provide coordinated management and marketing of natural gas services,
including retail and wholesale sales to commercial and industrial
customers throughout New England.
The Registrant helped The Providence Housing Authority convert to gas
fired hot water heaters by using the substantial annual savings from the
conversion to pay off loans the Registrant provided. In 1995, the
Registrant expanded this program in cooperation with the Federal
Department of Housing and Urban Development to include federally
subsidized housing in other areas of the state.
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Employees. As of September 30, 1995, the Gas Companies had 553 full-
time employees. Approximately 275 distribution and customer service
employees are covered by a collective bargaining agreement with Local
12431 of the United Steelworkers of America. Negotiations held subsequent
to year-end have resulted in a new five year agreement to become effective
in January 1996. The agreement may be opened by either party in year
three or four, with a sixty day prior notice. The agreement calls for a
general wage increase of 3.5 percent in 1996 and 3.25 percent each year
from 1997 to 2000.
Additionally, during 1995, a new bargaining unit, Local 12431 A of
the United Steelworkers of America, was established to represent 98 office
and clerical employees. Negotiations for a first labor agreement covering
these employees will commence in early 1996.
Gas Distribution Systems. The Gas Companies' distribution systems
consist of approximately 2,400 miles of gas mains ranging in size from 2
to 36 inches in diameter, approximately 140,000 services, (a service is a
pipe connecting a gas main with piping on a customer's premises), and
approximately 161,000 active gas meters together with related facilities
and equipment. The Gas Companies have regulating and metering facilities
at nine points of delivery from Algonquin and one point of delivery from
Tennessee, which the Gas Companies presently believe to be adequate for
receiving gas into their distribution systems.
Storage Facilities. The Registrant has contracts with a number of
interstate pipelines for rights to store natural gas in underground
storage facilities located on or near its systems. These contracts enable
the Registrant to store up to 2,652 MMcf, which is available for firm
delivery. Also, additional storage capabilities of 585 MMcf are available
on an interruptible basis.
The Registrant has an agreement with Algonquin for the storage of up
to the equivalent of 1,300 MMcf of vaporized LNG in a tank owned by
Algonquin and located on land leased to Algonquin by the Registrant. The
agreement expires in September 2001, but the Registrant has an option to
extend the agreement for an additional thirty years. The Registrant owns
and operates an LNG storage and vaporization facility which has the
capacity to store the equivalent of 200 MMcf of vaporized LNG.
Nonutility Operations. As described earlier, the Registrant conducts
its nonutility operations through a wholly-owned subsidiary, Newport
America. These operations total less than two percent of the Registrant's
consolidated assets and consolidated revenues.
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During fiscal 1995, Newport America had three wholly-owned
subsidiaries engaged in various nonutility businesses. Prudence
Corporation owns real estate for investment and rental purposes. S & M
Appliance Service Company, whose nonutility assets were sold in August
1992, was a wholesale distributor of gas heating and air conditioning
equipment with installation and service capabilities. Patience Realty
Corporation was involved in operating a timeshare and condominium complex
along the waterfront in Newport, Rhode Island (the Wellington Project).
Special Factors Affecting the Natural Gas Industry
General. The natural gas industry is subject to numerous legislative
and regulatory requirements, standards and restrictions that are subject
to change and that affect the Gas Companies to varying degrees.
Significant industry factors that have affected or may affect the Gas
Companies from time to time include: lack of assurance that rate
increases can be obtained from regulatory authorities in adequate amounts
on a timely basis; changes in the regulations governing the Gas Companies'
operations; reductions in the prices of oil and propane, which can make
those fuels less costly than natural gas in some markets; increases in the
price of natural gas; and competition with other gas suppliers for
industrial customers, including potential attempts to bypass the Gas
Companies' facilities.
FERC Regulations. In recent years FERC has been attempting to
increase competition with regard to the transportation and sale of natural
gas in interstate commerce. Beginning in late 1985, FERC began
promulgating orders that allow all industry participants access to
pipeline transportation on an open, nondiscriminatory basis to the extent
of available capacity.
Recent FERC orders are in furtherance of its policy to make gas
transportation and alternate supply sources more accessible to all
parties, including local distribution companies and their customers. Such
open access allows the Gas Companies to obtain its supply through a more
competitive national gas pipeline system, where and when capacity is
available.
FERC Order 636 and other related orders (the Orders) have significantly
changed the structure and types of services offered by pipeline
transportation companies. The most significant components of the
restructuring occurred in November 1993. In response to these changes,
the Registrant has negotiated new pipeline transportation and gas storage
contracts.
At the same time, a number of contracts with gas suppliers have been
negotiated to complement the transportation and storage contracts. The
portfolio of supply contracts is designed to be market responsive and is
diversified with respect to contract lengths, source location, and other
contract terms. On a periodic basis, the Registrant reviews all of its
contracts to ensure a diverse, secure, flexible and economical supply
portfolio is maintained.
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To meet the requirements of the Orders, the pipelines have incurred
significant costs, collectively known as transition costs. The majority
of these costs will be reimbursed by the pipelines' customers including
the Registrant. Based upon current information, the Registrant anticipates
its transition costs to net between $17 million and $19 million of which
$12.6 million has been included in the CGA and is currently being
collected from customers. The remaining minimum obligation of $4.4 million
has been recorded in the accompanying consolidated balance sheets of the
Registrant's 1995 Annual Report to Shareholders filed herewith as Exhibit
13 along with a regulatory asset anticipating future recovery through the
CGA.
The Registrant's ultimate liability may differ from the above
estimates based on FERC settlements with the Registrant's pipeline
transportation suppliers. FERC has approved settlements with three of its
pipelines, which account for the bulk of the Registrant's transition
costs. Negotiations are continuing on one additional pipeline, and based
on the information available, the Registrant believes that its current
range for transition costs is reasonable.
Environmental Regulations
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 Registrant cannot predict
the future impact of such standards and requirements, which are subject to
change and can take effect retroactively. The Registrant 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 Registrant believes
it is in substantial compliance with such laws and regulations.
At September 30, 1995, the Registrant was aware of three sites at which
future costs may be incurred.
The Registrant has been designated as a potentially responsible party
(PRP) under the Comprehensive Environmental Response Compensation and
Liability Act of 1980 at two sites at 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 Registrant and
other PRPs. With respect to one of the Plympton sites, the Registrant 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 Registrant, in connection with both Plympton sites, are
not anticipated to be material to the financial condition of the
Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence. In accordance with state
laws, such a voluntary study is monitored by the Rhode Island Department
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of Environmental Management. The purpose of this study is to determine
the extent of environmental contamination at the site, if any. The study
is continuing, and although results are not conclusive, preliminary
findings indicate that clean-up may be required. The level of clean-up is
likely to vary significantly depending upon the proposed future use of the
site. In fact, if the site remains in its present use, only minimal
clean-up may be required. As of September 30, 1995, the Registrant cannot
estimate the future cost of investigation and clean-up as a result of the
uncertainties discussed. As of September 30, 1995, approximately $590,000
had been spent on studies at this site.
In its rate case filed in February 1995, the Registrant 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. Accordingly, environmental
investigation costs of approximately $841,000 have been charged to the
accumulated depreciation reserve at September 30, 1995. Management
believes that this rate recovery mechanism is appropriate for recovery of
future costs. Should future developments warrant additional rate recovery
mechanisms, management will seek such recovery.
In addition to rate recovery, management has a program to ascertain the
possibility of recovery under prior insurance coverage. Also, management
has begun discussions with other parties who may assist the Registrant in
paying future costs at the above sites. Management believes that its
program for managing environmental issues combined with rate recovery,
possible insurance 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 three sites.
Other Standards. The Gas Companies are also subject to standards
prescribed by the Secretary of Transportation under the Natural Gas
Pipeline Safety Act of 1968 with respect to the design, installation,
testing, construction and maintenance of pipeline facilities. The
enforcement of these standards has been delegated to the RIPUC and MDPU
and management believes that the Gas Companies are in substantial
compliance with all present requirements imposed by these agencies.
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<PAGE>
ITEM 2. PROPERTIES
In addition to the Registrant's gas distribution system and storage
facilities, which constitute the principal properties of the Registrant,
the Registrant owns several buildings and other facilities in Newport,
Providence and Westerly which house its offices and provide floor space
for its distribution and maintenance facilities.
Substantially all the foregoing properties are mortgaged as collateral
for the outstanding First Mortgage bonds of ProvGas.
ITEM 3. LEGAL PROCEEDINGS
The Registrant 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 Registrant's
results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
HOLDERS' MATTERS
The Registrant's common stock is listed on the American Stock
Exchange and trades under the symbol "PVY". As of December 21,
1995, there were 6,338 holders of record of the Registrant's
outstanding common stock. For the balance of the information
called for by this item, reference is made to the materials
under 'Dividends' and 'Common stock information' in the
Registrant's Annual Report to Shareholders for the fiscal year
ended September 30, 1995, which is filed herewith under Part IV
as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
For the information called for by this item, reference is made
to page 18 of the Registrant's Annual Report to shareholders
(pages 21 through 28 of this Form 10-K) for the fiscal year
ended September 30, 1995, which is filed herewith under Part IV
as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Regarding the information that relates to this item, reference
is made to pages 14 through 17, of the Registrant's Annual
Report to Shareholders (pages 14 through 20 of this Form 10-K)
for the fiscal year ended September 30, 1995, which is filed
herewith under Part IV as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the information called for by this item, reference is made
to pages 19 through 31 of the Registrant's Annual Report to
Shareholders (pages 23 through 49 of this Form 10-K) for the
fiscal year ended September 30, 1995, which is filed herewith
under Part IV as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
II-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is furnished with respect to the executive
officers of the Registrant:
Year
Office
Name and Age Office First Held
James H. Dodge (55) Chairman, President and Chief
Executive Officer 1992
James DeMetro (47) Vice President Energy Services 1992
Gary S. Gillheeney (40) Vice President Financial
and Information Services,
Treasurer and Assistant
Secretary 1994
Alycia L. Goody (43) Vice President, General Counsel and
Corporate Secretary 1994
Patricia O. Keene (50) Vice President Customer Activities 1994
William D. Mullin (47) Vice President Corporate Relations 1994
Robert W. Owens (47) Vice President Operations
1994
Bruce G. Wilde (49) Vice President Human Resources
and Assistant Secretary 1994
Mr. Dodge was elected President and Chief Executive Officer of the
Registrant and ProvGas in August 1990 after the retirement of Louis R.
Hampton. Mr. Dodge subsequently became Chairman of the Board in
January 1992. Prior to his employment with the Registrant, he was
President and Chief Executive Officer of Vermont Gas Systems, Inc.
Vermont Gas Systems, Inc. is a regulated public utility which sells
natural gas to a portion of the population of the State of Vermont.
Mr. DeMetro was elected Vice President Energy Services of the
Registrant and ProvGas in March 1992. For more than five years prior
thereto, Mr. DeMetro served the Brooklyn Union Gas Company, a
regulated natural gas utility, in various management positions, most
recently as Manager, Rates and Regulations.
Mr. Gillheeney was elected Vice President Financial and Information
Services, Treasurer and Assistant Secretary of the Registrant and
ProvGas in January 1994. For more than five years prior thereto, Mr.
Gillheeney served ProvGas in various management positions, most
recently as Assistant Treasurer and Controller.
III-1
Ms. Goody was elected Vice President General Counsel and Corporate
Secretary of the Registrant and ProvGas in December 1994. For four
years prior thereto, Ms. Goody served the Registrant and ProvGas as
General Counsel and Corporate Secretary. For two more years prior to
that, Ms. Goody served ProvGas as Corporate Counsel.
Ms. Keene was elected Vice President Customers Activities of the
Registrant in December 1994. For more than five years prior thereto,
Ms. Keene served as General Manager for NYNEX in various capacities.
Mr. Mullin was elected Vice President Corporate Relations of the
Registrant and ProvGas in January 1994. For five years prior to his
current position with the Registrant and ProvGas, he served ProvGas in
various management positions, most recently as Vice President
Operations.
Mr. Owens was elected Vice President Operations of the Registrant
and ProvGas in January 1994. For more than five years prior thereto,
Mr. Owens served the Registrant and ProvGas in various management
positions, most recently as Vice President, Treasurer and Chief
Financial Officer.
Mr. Wilde was elected Vice President Human Resources and Assistant
Secretary of the Registrant and ProvGas in May 1994. For more than
five years prior thereto, Mr. Wilde served ProvGas in various
management positions, most recently as Assistant Vice President for
Personnel.
III-2
<PAGE>
DIRECTORS OF THE REGISTRANT
The following information is furnished with respect to the Directors
of the Registrant:
Name Director Since Expiration of Term
Gilbert R. Bodell, Jr. 1980 1995
James H. Dodge 1991 1997
John H. Howland 1993 1996
Douglas H. Johnson 1993 1996
Dorothy G. Kramer 1976 1997
Paul F. Levy 1995 1998
Romolo A. Marsella 1993 1996
M. Anne Szostak 1995 1998
Kenneth W. Washburn 1975 1997
W. Edward Wood 1995 1998
Gilbert R. Bodell, Jr. is Chairman and former President, Frontier
Manufacturing Company (textiles); former Vice President, Valley Lace
Company and Esten Dyeing and Finishing Company, Inc.
James H. Dodge has been Chairman since January 1992 and President and
Chief Executive Officer of the Registrant since August 1990; from 1984
through August 1990: President and Chief Executive Officer of Vermont
Gas Systems, Inc. (a regulated natural gas utility) and affiliated
companies.
John H. Howland is President and Chief Operating Officer, Original
Bradford Soap Works, Inc.
Douglas H. Johnson is Vice President and Managing Partner, Van
Leesten & Johnson, Inc. (business and urban planning consultants);
since October 1991; from 1980 to October 1991: President and Chief
Executive Officer, Peerless Precision, Inc. (aerospace manufacturing
company).
III-3
Dorothy G. Kramer is a retired Senior Vice President, Treasurer and
Corporate Secretary, Taco, Inc. (manufacturers of pumping, heat
transfer and hydronic control equipment).
Paul F. Levy is Adjunct Professor, Massachusetts Institute of
Technology. From 1992 to 1995, Visiting Lecturer; from 1987 to 1992:
Executive Director, Massachusetts Water Resources Authority (a public
authority).
Romolo A. Marsella is President, Marsella Development Corporation
(real estate development).
M. Anne Szostak is Senior Vice President, Fleet Financial Group;
Chairman of the Board, Fleet Bank, Maine. From 1991 to 1994:
President and Chief Executive Officer, Fleet Bank of Maine; and from
1988 to 1991: Vice President, Fleet Financial Group.
Kenneth W. Washburn is Chairman and President, Union Wadding Company
(manufacturers of non-woven textiles).
W. Edward Wood is President, BDS Management Group (management and
consulting services to a variety of private businesses); from November
1990 to May 1991: Chief of Staff to Governor-elect and Governor of
Rhode Island; from January to November 1990: Chief of Staff, Phoenix
Associates III (private investment group).
ITEM 11. EXECUTIVE COMPENSATION
For the information called for by this item, reference is made to
pages 5 to 10 of the Registrant's proxy statement filed December 19,
1995 with the Securities and Exchange Commission for the annual
meeting of shareholders to be held January 18, 1996.
III-4
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
For the information called for by this item, reference is
made to page 12 of the Registrant's proxy statement filed
December 19, 1995 with the Securities and Exchange Commission
for the annual meeting of shareholders to be held January 18,
1996.
Section 16 Compliance
For the information called for by this item, reference is
made to page 13 of the Registrant's proxy statement filed
December 19, 1995 with the Securities and Exchange Commission
for the annual meeting of shareholders to be held January 18,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information called for by this item, reference is
made to page 4 of the Registrant's proxy statement filed
December 19, 1995 with the Securities and Exchange Commission
for the annual meeting of shareholders to be held January 18,
1996.
III-5
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PROVIDENCE ENERGY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules
Consolidated Balance Sheets--September 30, 1995 and 1994
Consolidated Statements of Income for the years ended September 30,
1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended September 30,
1995, 1994 and 1993
Consolidated Statements of Capitalization--September 30, 1995
and 1994
Consolidated Statements of Changes in Common Stockholders' Investment for
the years ended September 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Consent of Independent Public Accountants
The financial statements and related notes listed above are incorporated
by reference to Providence Energy Corporation's Annual Report to Shareholders
(see pages 21 through 48 of this Form 10-K) for the year ended September 30,
1995, filed herewith as Exhibit 13.
II. Reserves for the years ended September 30, 1995, 1994 and 1993.
Schedules I to XIII not listed above are omitted as not applicable or not
required under Regulation S-X.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the latest quarter of the
Registrant's fiscal year ended September 30, 1995.
IV-1
<PAGE>
(c) Exhibits
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation, as amended (incorporated by reference
to Exhibit 4(e) to the Registration Statement of the Registrant on
Form S-2 (Registration No. 33-24125)).
3.2 Bylaws (incorporated by reference to Exhibit C to the Proxy
Statement/Prospectus forming a part of the Registrant's
Registration Statement on Form S-14 (Registration No. 2-69473), as
amended at the annual meetings of the shareholders held January
14, 1985 and January 14, 1991, the text of such amendments being
set forth in each case as Exhibit A to the proxy statement for
such annual meeting, heretofore filed with the Securities and
Exchange Commission and being incorporated herein by this
reference).
4.1 Indenture dated as of August 1, 1981 from The Providence Gas
Company to St. Louis Union Trust Company, Trustee, filed as
Exhibit 4.1 to Registration Statement of The Providence Gas
Company on Form S-1 (Registration No. 2-72726), incorporated
herein by this reference.
4.2 First Supplemental Indenture dated as of May 1, 1986 from The
Providence Gas Company to Centerre Trust Company of St. Louis,
Trustee (filed as Exhibit 4 (b) to the Registration Statement of
The Providence Gas Company on Form S-3 (Registration File No.
33-5023), incorporated herein by this reference).
4.2(a) Thirteenth Supplemental Indenture dated as of May 1, 1986 from The
Providence Gas Company to Rhode Island Hospital Trust National
Bank.
4.3 First Mortgage Indenture of The Providence Gas Company dated as of
January 1, 1922, as supplemented by First through Twelfth
Supplemental Indentures (incorporated by reference to Exhibit
10.10 to registration statement of The Providence Gas Company on
Form S-1 (Registration No. 2-72726)).
4.4 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures of The
Providence Gas Company dated as of August 1, 1988, June 1, 1990
and November 1, 1992, respectively (incorporated by reference to
Exhibit 4 to the report of the Registrant to the Securities and
Exchange Commission on Form 10-Q for the quarter ended March 31,
1993).
4.5 Seventeenth Supplemental Indenture of The Providence Gas Company
dated as of November 1, 1993. (Filed as Exhibit 4.5 to the report
of The Registrant in Form 10-K for the year ended September 30,
1993 incorporated herein by this reference.)
IV-2
4.6 Eighteenth Supplemental Indenture of The Providence Gas Company
dated as of December 1, 1995.
10.1 Material contracts filed as Exhibit 10 (a) through 10 (ff) to
Registrant Statement of the Registrant on Form S-2 (Registration
No. 33-24125), incorporated herein by this reference.
10.2 Management contract dated December 19, 1994 between James H.
Dodge, Chairman, President and Chief Executive Officer of The
Providence Gas Company, and the said Company. (Filed as Exhibit
10.2 to the report of the Registrant in Form 10-Q for the quarter
ended December 31, 1994, incorporated herein by this reference.)
10.3 1989 Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit A to the Registrant's proxy statement for the
annual meeting of shareholders held January 9, 1989, heretofore
filed with the Securities and Exchange Commission).
10.4 1989 Stock Option Plan (incorporated by reference to Exhibit B to
the Registrant's proxy statement for the annual meeting of
shareholders held January 9, 1989, heretofore filed with the
Securities and Exchange Commission).
10.5 Non-firm Margin Sharing Agreement. (Filed as Exhibit 10.5 to the
report of the Registrant in Form 10-K for the year ended September
30, 1992, incorporated herein by this reference.)
10.6 Management contract dated December 19, 1994 between James DeMetro,
Vice President Energy Services of The Providence Gas Company, and
the said Company. (Filed as Exhibit 10.6 to the report of the
Registrant in Form 10-Q for the quarter ended December 31, 1994,
incorporated herein by this reference.)
10.7 Management contract dated December 19, 1994 between Robert W.
Owens, Vice President Operations of The Providence Gas Company,
and the said Company. (Filed as Exhibit 10.7 to the report of the
Registrant in Form 10-Q for the quarter ended December 31, 1994,
incorporated herein by this reference.)
10.8 Management contract dated December 19, 1994 between Gary S.
Gillheeney, Vice President, Financial and Information Services,
Treasurer and Assistant Secretary of The Providence Gas Company,
and the said Company. (Filed as Exhibit 10.8 to the report of the
Registrant in Form 10-Q for the quarter ended December 31, 1994,
incorporated herein by this reference.)
10.9 Management contract dated December 19, 1994 between William D.
Mullin, Vice President, Corporate Relations of The Providence Gas
Company, and the said Company. (Filed as Exhibit 10.9 to the
report of the Registrant in Form 10-Q for the quarter ended
December 31, 1994, incorporated herein by this reference.)
IV-3
13 Portions of the Annual Report to shareholders for the fiscal year
ended September 30, 1995. (Pages 14 through 35.)
22 Subsidiaries of the Registrant.
IV-4
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 17, 1995.
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 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 17, 1995
IV-5
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Providence Energy Corporation:
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated November 17, 1995, included in this Form
10-K, into the Company's previously filed registration statements on Forms
S-3, Registration No. 33-62318; S-3 Registration No. 33-70086; S-3,
Registration No. 33-31768; S-8, Registration No. 33-31770; and S-8
Registration No. 33-43031. It should be noted that we have not audited any
financial statements of the Company subsequent to September 30, 1995, or
performed any audit procedures subsequent to the date of our report.
Arthur Andersen LLP
Boston, Massachusetts
December 26, 1995
IV-6
Supplemental Schedule
PROVIDENCE ENERGY CORPORATION Schedule II
RESERVES FOR THE YEARS ENDED
SEPTEMBER 30, 1995, SEPTEMBER 30, 1994 AND SEPTEMBER 30, 1993
(Thousands of Dollars)
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/94 to Operations Add (Deduct) Created 9/30/95
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,671 $3,169 $ -- $3,845 $1,995
Allowance for lease
receivables -
current 367 4 -- 34 337
other 80 -- -- -- 80
Total $ 3,118 $3,173 $ -- $ 3,879 $2,412
======= ====== ======= ======= ======
Allowance for lease
receivables -
long-term $ 951 $ -- $ (200) $ 100 $ 651
======= ====== ======= ======= ======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $15,506 $2,142 $ 827 $(259)(C)$18,734
Unamortized investment
tax credit 2,851 -- -- 160 2,691
Other-
Liability and
damage reserve 421 400 -- 487 334
Other 6,665 623 1,496(A) 2,701 6,083
Total other 7,086 1,023 1,496 3,188 6,417
Total deferred
credits and
reserves $25,443 $3,165 $ 2,323 $3,089 $27,842
======= ====== ======= ====== =======
IV-7
Schedule II (cont'd)
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/93 to Operations Add (Deduct) Created 9/30/94
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,026 $4,991 $ -- $4,346 $ 2,671
Allowance for lease
receivables -
current 390 11 -- 34 367
other 96 -- -- 16 80
Total $ 2,512 $5,002 $ -- $ 4,396 $ 3,118
======= ====== ======= ======= =======
Allowance for lease
receivables -
long-term $ 778 $ 316 $ -- $ 143 $ 951
======= ====== ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $14,018 $7,033 $ -- $ 5,545 $15,506
Unamortized investment
tax credit 3,010 -- -- 159 2,851
Other-
Liability and
damage reserve 296 145 -- 20 421
Other 5,188 1,232 2,785(B) 2,540 6,665
Total other 5,484 1,377 2,785 2,560 7,086
Total deferred
credits and
reserves $22,512 $8,410 $ 2,785 $ 8,264 $25,443
======= ====== ======= ======= =======
IV-7(a)
SCHEDULE II (cont'd)
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/92 to Operations Add (Deduct) Created 9/30/93
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,275 $3,980 $ -- $4,229 $ 2,026
Allowance for lease
receivables -
current 417 17 -- 44 390
other -- 96 -- -- 96
Total $ 2,692 $4,093 $ -- $ 4,273 $ 2,512
======= ====== ======= ======= =======
Allowance for lease
receivables -
long-term $ 760 $ 190 $ -- $ 172 $ 778
======= ====== ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $13,474 $ 544 $ -- $ -- $14,018
Unamortized investment
tax credit 3,167 -- -- 157 3,010
Other-
Liability and
damage reserve 146 150 -- -- 296
Other 4,822 1,129 1,636 (A) 2,399 5,188
Total other 4,968 1,279 1,636 2,399 5,484
Total deferred
credits and
reserves $21,609 $1,823 $ 1,636 $ 2,556 $22,512
======= ====== ======= ======= =======
(A) Includes advance payments on customers' service agreements and
adjustments to the regulatory pension liability.
(B) Principally a reserve for restructuring charges which was offset
by a deferred regulatory asset. Also reported are advance payments
on customer service agreements and adjustments to the regulatory
pension liability.
(C) Represents adjustments to the regulatory asset and liability for
FAS No. 109 activity.
IV-7(b)
Exhibit 22. SUBSIDIARIES OF THE REGISTRANT
The Providence Gas Company - Incorporated under the laws of Rhode Island.
Newport America Corporation - Incorporated under the laws of Rhode Island.
North Attleboro Gas Company - Incorporated under the laws of Massachusetts.
IV-8
<PAGE>
INCORPORATION BY REFERENCE INTO REGISTRATION STATEMENTS ON FORM S-8
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13,1990) under the Securities Act of 1933, the
Registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into Part II of Registrant's Registration Statements
on Form S-8 Nos. 33-31769, 33-31770 and 33-43031:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being registered, the Registrant will, unless
in the opinion of its counsel that matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act,
will be governed by the final adjudication of such issue.
IV-9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE ENERGY CORPORATION
By JAMES H. DODGE
James H. Dodge, Chairman,
President and CEO
Date December 26, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
JAMES H. DODGE Chairman, President and CEO 12-22-95
James H. Dodge (Principal Executive Officer)
GARY S. GILLHEENEY Vice President, Financial 12-22-95
Gary S. Gillheeney and Information Services,
Treasurer and Assistant Secretary
GILBERT R. BODELL, JR. Director 12-21-95
Gilbert R. Bodell, Jr.
JOHN H. HOWLAND Director 12-21-95
John H. Howland
DOUGLAS H. JOHNSON Director 12-19-95
Douglas H. Johnson
DOROTHY G. KRAMER Director 12-21-95
Dorothy G. Kramer
PAUL F. LEVY Director
Paul F. Levy 12-21-95
ROMOLO A. MARSELLA Director 12-21-95
Romolo A. Marsella
M. ANNE SZOSTAK Director
M. Anne Szostak 12-21-95
KENNETH W. WASHBURN Director 12-21-95
Kenneth W. Washburn
W. EDWARD WOOD Director
W. Edward Wood 12-19-95
IV-10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE ENERGY CORPORATION
By
James H. Dodge, Chairman,
President and CEO
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
Chairman, President and CEO
James H. Dodge (Principal Executive Officer)
Vice President, Financial
Gary S. Gillheeney and Information Services,
Treasurer and Assistant Secretary
Director
Gilbert R. Bodell, Jr.
Director
John H. Howland
Director
Douglas H. Johnson
Director
Dorothy G. Kramer
Director
Paul F. Levy
Director
Romolo A. Marsella
Director
M. Anne Szostak
Director
Kenneth W. Washburn
Director
W. Edward Wood
IV-10
EXHIBIT 13. PORTIONS OF ANNUAL REPORT OF REGISTRANT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
The Registrant's current operating revenues, operating margin and net
income have decreased over the comparable periods presented, as shown in the
table below:
(000's)
Percent
1995 1994 Change Change
Operating revenues $183,992 $222,778 $(38,786) (17.4)
Operating margin 83,048 87,674 (4,626) (5.3)
Net income 6,127 8,089 (1,962) (24.3)
RESULTS OF OPERATION - 1995 VS 1994
Operating Revenues and Operating Margin
The Registrant experienced the second warmest heating season
in 42 years with temperatures averaging 10.5 percent warmer-
than-normal. Overall, 1995 was 14.5 percent warmer than 1994,
thereby decreasing operating margin by almost $5 million.
As a result of the severe warmer-than-normal temperatures
experienced during 1995, residential sales, which provide the
Registrant with its greatest source of revenues, decreased 1.4
billion cubic feet (Bcf) or 10 percent from 1994. Offsetting
this decrease was a net increase in the average annual number
of customers during 1995 over 1994 of approximately 2,300 or
1.4 percent. The moderate increase was the result of new
housing construction and conversions from other energy sources
offset by shut-offs for non-payment and housing vacancies due
to the stagnant economy.
Non-firm sales volumes increased approximately 400 million
cubic feet (MMcf) or 9 percent. The increase in non-firm
sales of approximately 1,000 MMcf was offset by a decrease in
sales of gas for resale purposes of approximately 600 MMcf.
The increase in non-firm sales generated approximately
$200,000 in additional operating margin as a result of the
Registrant's non-firm margin sharing agreement. The decrease
in sales of gas for resale purposes did not have an impact on
the Registrant's operating margin because the Rhode Island
Public Utilities Commission (RIPUC) requires any margin earned
from the sale of gas for resale purposes be returned to firm
customers through the Cost of Gas Adjustment Clause (CGA).
PAGE-14
Continuing efforts to be customer focused and to meet customer
expectations resulted in the Registrant negotiating and
receiving regulatory approval for five special agreements that
allowed us to offer unbundled service to several large
manufacturing companies. Without these agreements, these
companies would have utilized other fuel and delivery
alternatives, resulting in an annualized loss of operating
margin of approximately $600,000.
Operating and Maintenance Expenses
Operating and maintenance expenses have decreased $1.9 million
or four percent over the last fiscal year. This decrease is
due to a lower uncollectible revenue provision resulting from
the decrease in operating revenue and a slight improvement in
the Registrant's collection of accounts receivable. The
remainder of the decrease is primarily attributable to a
reduction in labor and related expenses. The restructuring
initiative that occurred at the Registrant in June 1994 and
the impact of efficiency reviews as part of the continuous
improvement programs has also contributed to the reduction in
labor expenses. The Registrant continually reviews its
operating expenses in order to keep expenses as low as
possible. However, the Registrant's expenses can vary based
on weather and other factors. As a result, the four percent
decrease in expenses experienced in 1995 will not necessarily
reoccur in future years.
Taxes
Taxes have decreased $2.1 million or 12.5 percent during the
last year. This was mainly due to a reduction in Federal
income taxes as a result of lower pre-tax income and a
reduction in the state gross earnings tax as a result of lower
operating revenues due to warmer-than-normal weather.
Other Income
Other income increased by approximately $669,000 over 1994.
This was attributed to decreases in expenses related to our
customer equipment leasing program along with decreases in
promotional advertising.
Interest Expense
Interest expense increased approximately $1.1 million or 18.1
percent as compared to 1994. A significant increase in short-
term interest rates plus a slight increase in overall weighted
average short-term borrowings caused the increase in interest
expense.
PAGE-15
Future Outlook
In August 1995, the Registrant and Catex Vitol Gas Inc. formed
a strategic business alliance to jointly market natural gas
and other energy services. This agreement is the first such
business alliance for both companies. This alliance will
provide coordinated management and marketing of natural gas
services, including retail marketing and wholesale delivery to
industrial and commercial customers throughout New England.
Catex Vitol will contribute its experience in gas acquisition
and transportation and its expertise in financial energy
services. With this alliance, customers in Rhode Island and
throughout New England will have greater access to energy
products and services. The Registrant has proposed that the
net profit earned by the Registrant as a result of this
alliance be credited to the firm customer by inclusion in the
Registrant's cost of gas adjustment clause. The net profit is
not expected to have material impact on the Registrant's
margin.
The Registrant currently owns and operates North Attleboro Gas
Company (North Attleboro Gas), a small gas distribution
company with over 3,000 customers located in Massachusetts.
The Registrant is currently assessing the long-term strategic
fit of North Attleboro Gas. Our assessment of this operation
is part of our periodic evaluation of the strategic fit and
financial performance of all our major assets. The Registrant
is considering various options for North Attleboro Gas,
including a restructuring of operations, a request for a rate
increase or the possible sale of North Attleboro Gas to
another party. No decision has been made with respect to this
matter and any decision will not likely result in a material
change in the results of operations or the financial position
of the Registrant.
The Financial Accounting Standards Board (FASB) recently
released Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", which
will be effective for the Registrant in fiscal 1997. Based on
a preliminary review of this Statement, management does not
believe SFAS No. 121 will have an impact on the Registrant's
results of operations or financial position. The FASB has
also released Statement of Financial Accounting Standards No.
123 (SFAS No. 123), "Accounting for Stock-Based Compensation".
Although this Statement will increase footnote disclosures
regarding the Registrant's stock plans, management does not
believe SFAS No. 123 will have an impact on the Registrant's
results of operations or financial position.
PAGE-16
RESULTS OF OPERATIONS - 1994 VS 1993
Operating Revenues and Operating Margin
On October 14, 1993, the RIPUC approved the Registrant's
request to adopt a new rate design, including a declining
block rate structure, seasonal gas cost accounting and higher
customer charges, effective November 14, 1993. The declining
block rate structure allows the Registrant to recover more
fixed costs through rates immediately when a customer begins
using natural gas. Also, the new block rate structure will
help balance customer bills during the year and will help
protect the Registrant and its customers during periods of
extreme weather conditions in the winter months. This new
block rate structure should result in a stabilization of
earnings from year to year. In addition to the improved
stability in earnings, the new rates are designed to increase
annual operating margin by approximately $700,000. Other
components of the rate award included an allowed return on
equity of 11.2 percent. In 1994, for accounting and gas cost
recovery purposes, the Registrant recorded the embedded cost
of gas using seasonal gas cost factors of $4.26 per thousand
cubic feet (Mcf) during November 1993 through April 1994 and
$2.77 per Mcf during May 1994 through September 1994. The
ultimate effect of the seasonal gas cost accounting will be
that quarterly operating margin will decrease in the winter
months and increase in the summer months when compared to the
previous method. Assuming normal weather, annual earnings
should not be affected by this change.
Another significant attribute of the new rate design structure
as compared to the previous method is a higher customer
charge. The average monthly customer charge has been
increased to recognize that a portion of the Registrant's
costs are relatively fixed and should be recovered from
customers regardless of gas consumption. The Registrant's
volumetric charge has decreased in order to offset the
increased customer charge.
For the first time in 12 years, the Registrant experienced a
colder-than-normal heating season. During 1994, temperatures
averaged 4.7 percent colder-than-normal. In addition, 1994
weather was also 4.5 percent colder than 1993, thereby
increasing operating margin by approximately $700,000.
As a result of the colder temperatures experienced during
1994, residential sales, which provide the Company with its
greatest source of revenues, increased 339 MMcf or 2.5 percent
over 1993. Also affecting the increase was a net increase in
the average annual number of customers during 1994 over 1993
of approximately 2,100 or 1.3 percent. The moderate increase
PAGE-17
was the result of new housing construction and conversions
from other energy sources offset by shut-offs for non-payment
and housing vacancies due to the stagnant economy.
Non-firm sales volumes increased approximately 1,000 MMcf or
28 percent reflecting an increase in sales to other natural
gas utilities. Offsetting the above was a small decrease in
off-system cogeneration sales (approximately 300 MMcf) due to
the expiration of a short-term contract with a cogeneration
customer located outside the Registrant's service territory.
Both of these items, however, did not have a material impact
on the Registrant's operating margin or results of operations
because the RIPUC limits the amount of margin the Registrant
can retain. Any margin earned, which is greater than or less
than the RIPUC limits, is returned to or collected from
customers through the CGA.
Operating and Maintenance Expenses
Overall, other operation and maintenance expenses increased
approximately $2.4 million or 5.4 percent during 1994 as
compared to 1993. The increase was the result of a higher
uncollectible revenue provision, normal wage increases granted
due to negotiated union contract terms, employee merit raises
and expected one-time legal and related expenses associated
with compliance with Federal Energy Regulatory Commission
(FERC) Order 636. Additionally, the Registrant implemented a
new accounting standard for accounting for post-retirement
healthcare benefits which increased the annual expense by
$167,000. This increase was fully recovered in rates.
Furthermore, maintenance expenses increased, reflecting a
higher level of service and system repair work, caused
primarily by the colder-than-normal weather experienced during
the peak heating season.
Offsetting the above increases was a restructuring initiative
that occurred at the Registrant in June 1994. The intent of
the restructuring was to significantly improve the
Registrant's customer services, lower operating expenses and
increase operating efficiencies. The Registrant, during 1994,
realized approximately $200,000 in savings as a result of the
restructuring.
Taxes
Taxes increased approximately $850,000 or 5.3 percent during
1994. The increase in taxes, mainly Federal income and state
gross receipts, were the result of higher pretax income and
higher operating revenues, respectively. Offsetting the above
increase was a decrease in property taxes resulting from an
aggressive program over prior years to work with the local
cities and towns to reduce the assessment on which the
Registrant pays taxes.
PAGE-18
During 1994, the Registrant adopted Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes", which requires an asset and liability approach
to account for income taxes. There were significant
adjustments incorporated into the consolidated balance sheet.
However, there was no income statement impact as a result of
the adoption of SFAS No. 109. For a more detailed
explanation, see Footnote 2 to the Notes to the Consolidated
Financial Statements filed herewith as Exhibit 13.
Interest Expense
Interest expense for 1994 decreased approximately $400,000 or
6.1 percent as compared to 1993. A small increase in short-
term interest rates offset by a decline in weighted average
borrowings caused a decrease in short-term interest expense.
Long-term interest expense decreased as a result of the
refinancing of higher cost debt and sinking fund payments.
Liquidity and Capital Resources
During 1995, the Registrant experienced a $12.6 million
increase in its net cash provided by operations. Increases in
non-cash expenses, such as deferred taxes and depreciation,
and the collection of gas costs from the under-collection that
existed in 1994, provided the major reasons for the increase
in net cash provided by operations.
On October 3, 1991, the Massachusetts Department of Public
Utilities (MDPU) approved a settlement order reached between
the Massachusetts Attorney General's Office and North
Attleboro Gas Company. Due to the magnitude of the rate award
(32 percent), the MDPU ordered North Attleboro Gas to phase-in
the award over a five year period effective November 1, 1991.
As a result, North Attleboro phased-in an annual revenue
increase of $141,137 on November 1, 1994. The final revenue
increase of $94,445 was phased-in on November 1, 1995.
In December 1995, the Registrant issued $15 million of First
Mortgage Bonds bearing an interest rate of 7.5 percent. These
First Mortgage Bonds are designated as Series R and will
mature in December 2025. The net proceeds received were used
to paydown the Registrant's short-term debt. See Footnote 3 to
the Notes to the Consolidated Financial Statements filed
herewith as Exhibit 13.
The Registrant meets seasonal cash requirements and finances
its capital expenditures program on an interim basis through
short-term borrowings. As of September 30, 1995, the
Registrant had lines of credit totaling $66,000,000
($48,500,000 committed) with borrowings outstanding of
$22,337,000.
PAGE-19
The Registrant's ability to pay dividends is largely dependent
upon receipt of dividends from ProvGas. Approximately $14
million of ProvGas' retained earnings were available for
dividends at the end of fiscal 1995 under the most restrictive
terms of the Registrant's First Mortgage Bond indenture.
The Registrant continued to offer a Dividend Reinvestment and
Cash Stock Purchase Plan (the Plan) for its current
shareholders. During 1995, 40.6 percent of the Registrant's
shareholders participated in the Plan, with $1.3 million or
21.5 percent of declared dividends reinvested in new shares
rather than paid in cash.
Capital expenditures for 1995 of $19.6 million were stable
when compared to $19.8 million in 1994. Total anticipated
capital expenditures for the next three years are expected to
total between $50 million to $60 million.
In February 1995 ProvGas filed for rate relief requesting an
approximate eight percent general rate increase. In November
1995, the RIPUC authorized ProvGas to increase its rates to
recover additional annual revenues in the amount of
$3,990,000. Subsequent to the issuance of the rate decision,
the RIPUC approved the Registrant's motion to reconsider a
revenue adjustment of $171,572. That approval increases the
overall rate increase to $4,161,572. As part of this award,
ProvGas is allowed to earn a 10.9% return on common equity.
The major factors contributing to the rate request were an
increase in depreciation due to capital spending, an increase
in working capital needs and an increase in capital
expenditures. Please see Footnote 11 to the Notes to the
Consolidated Financial Statements filed herewith as Exhibit
13.
COMMON STOCK INFORMATION
Dividend Paid
Quarter Ended High Low Per Share
September 30, 1995 $16 3/8 $14 3/4 $.27
June 30, 1995 16 5/8 14 5/8 .27
March 31, 1995 17 1/2 14 3/4 .27
December 31, 1994 17 3/8 15 .27
September 30, 1994 17 1/2 15 1/8 .27
June 30, 1994 17 14 5/8 .27
March 31, 1994 19 1/8 16 3/8 .26
December 31, 1993 20 1/2 17 7/8 .26
PAGE-20
SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS
For the Years Ended September 30
(thousands, except per share amounts)
1995 1994 1993
Operating revenues $183,992 $222,778 $209,315
Cost of gas sold 100,944 135,104 126,314
Operating margin 83,048 87,674 83,001
Other operating expenses,
excluding taxes 54,838 55,838 52,921
Taxes, other than income 11,769 12,540 12,597
Federal income taxes 3,104 4,460 3,554
Total operating
expenses 69,711 72,838 69,072
Operating income 13,337 14,836 13,929
Nonutility operations and other:
Revenues - - -
Operating costs - - -
Other income 865 196 37
865 196 37
Income from continuing
operations before
interest expense 14,202 15,032 13,966
Interest expense 7,379 6,247 6,653
Income from continuing
operations after
interest expense 6,823 8,785 7,313
Preferred dividends of
subsidiary (696) (696) (696)
Net income 6,127 8,089 6,617
Common dividends 6,062 5,856 4,889
Earnings reinvested in
the corporation $ 65 $ 2,233 $ 1,728
======== ======== ========
Weighted average common
shares outstanding 5,624.2 5,534.1 4,761.8
======== ======== ========
Net income per
common share $ 1.09 $ 1.46 $ 1.39
======== ======== ========
Common dividends $ 1.08 $ 1.06 $ 1.02
======== ======== ========
PAGE - 21
OTHER FINANCIAL DATA
SEPTEMBER 30
1995 1994 1993
Total assets $227,127 $233,311 $224,550
Gas plant--at
original cost 257,264 239,830 221,769
Gas plant--net of
depreciation 169,792 159,012 149,272
Capitalization:
Common stockholders'
equity 78,524 77,156 73,368
Redeemable cumulative
preferred stock 8,000 8,000 8,000
Long-term debt 74,482 60,079 62,163
Shares of common stock
at year end 5,668 5,581 5,486
Book value per share $ 13.85 $ 13.82 $ 13.37
======== ======== ========
PAGE-22<PAGE>
FINANCIAL AND OPERATING STATISTICS
For the Years Ended September 30
1995 1994 1993
Operating Revenues (thousands of dollars):
Residential $106,387 $130,888 $120,997
Commercial/
Industrial 61,491 76,174 72,974
Total Firm 167,878 207,062 193,971
Interruptible 14,026 14,471 14,336
Transportation 804 287 54
Other 1,284 958 954
Total operating
revenues $183,992 $222,778 $209,315
======== ======== ========
Gas Sold and Transported (MMcf):
Residential 12,709 14,122 13,783
Commercial/
Industrial 8,772 9,360 8,926
Total Firm 21,481 23,482 22,709
Interruptible 4,950 4,547 3,985
Transportation 1,681 656 386
Total gas sold
and transported 28,112 28,685 27,080
Company use and
losses 919 1,182 1,187
Total sendout 29,031 29,867 28,267
======== ======== ========
PAGE - 23
1995 1994 1993
Gas Purchased, Produced and
Transported (MMcf):
Pipeline natural
gas-contract 16,591 22,880 18,044
Pipeline natural
gas-spot purchases 7,935 3,533 7,936
Pipeline natural
gas-transportation 1,681 656 386
Underground storage 2,270 1,697 879
Liquefied natural gas 554 1,101 1,022
Liquid propane and
synthetic natural
gas - - -
Total 29,031 29,867 28,267
======== ======== ========
Average Annual Number Of Customers:
Residential 147,935 145,793 143,771
Commercial/
Industrial 16,509 16,337 16,264
Total Firm 164,444 162,130 160,035
Interruptible &
transportation 143 141 123
Total 164,587 162,271 160,158
======== ======== ========
Total number of customers
at year-end 163,294 159,375 159,135
======== ======== ========
Residential Heating:
Average consumption per
customer (Mcf) 103 117 116
Average revenue per
customer $ 844 $ 1,068 $ 1,008
Average rate per
Mcf $ 8.19 $ 9.10 $ 8.68
Average annual number
of customers 116,826 114,461 112,497
Maximum daily sendout
(MMcf) 202 206 185
Calendar degree days 5,111 5,977 5,718
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet.
Normal calendar degree days for fiscal years 1995 and 1994 are 5,709;
1993, 1992 and 1991 are 5,811; and 1990 is 5,938.
PAGE - 24<PAGE>
SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS
For the Years Ended September 30
(thousands, except per share amounts)
1992 1991 1990
Operating revenues $190,341 $169,086 $156,906
Cost of gas sold 111,568 101,707 91,306
Operating margin 78,773 67,379 65,600
Other operating expenses,
excluding taxes 52,122 47,015 41,545
Taxes, other than
income 11,497 11,031 10,281
Federal income taxes 2,774 440 1,709
Total operating
expenses 66,393 58,486 53,535
Operating income 12,380 8,893 12,065
Nonutility operations and other:
Revenues 554 4,877 7,496
Operating costs 573 4,891 7,207
Other income 306 1,576 332
287 1,562 621
Income from continuing
operations before
interest expense 12,667 10,455 12,686
Interest expense 6,837 7,764 7,721
Income from continuing
operations after
interest expense 5,830 2,691 4,965
Preferred dividends of
subsidiary (696) (280) --
Net income 5,134 2,411 4,965
Common dividends 4,908 6,057 5,916
Earnings reinvested in
the corporation $ 226 $ (3,646) $ (951)
======== ======== =======
Weighted average common
shares outstanding 4,478.4 4,337.9 4,235.8
======== ======= =======
Net income per common
share $ 1.15 $ .56 $ 1.17
======== ======== =======
Common dividends $ 1.10 $ 1.40 $ 1.40
======== ======== =======
PAGE - 25
OTHER FINANCIAL DATA
SEPTEMBER 30
1992 1991 1990
Total assets $197,459 $189,422 $182,258
Gas plant--at
original cost 210,087 199,216 189,952
Gas plant--net of
depreciation 144,767 139,741 135,331
Capitalization:
Common stockholders'
equity 54,491 52,302 53,975
Redeemable cumulative
preferred stock 8,000 8,000 --
Long-term debt 60,958 42,885 49,148
Shares of common stock
at year end 4,534 4,408 4,278
Book value per share $12.02 $ 11.87 $12.62
====== ======== =======
PAGE - 26<PAGE>
FINANCIAL AND OPERATING STATISTICS
For the Years Ended September 30
1992 1991 1990
Operating Revenues (thousands of dollars):
Residential $104,658 $ 92,660 $ 105,418
Commercial/
Industrial 63,405 57,153 43,120
Total Firm 168,063 149,813 148,538
Interruptible 21,394 17,681 6,569
Transportation 74 735 833
Other 810 857 966
Total operating
revenues $190,341 $169,086 $156,906
======== ======== ========
Gas Sold and Transported (MMcf):
Residential 13,166 11,534 14,452
Commercial/
Industrial 8,363 7,637 6,188
Total Firm 21,529 19,171 20,640
Interruptible 6,717 5,659 2,084
Transportation 869 4,127 5,026
Total gas sold
and transported 29,115 28,957 27,750
Company use and
losses 1,264 1,445 985
Total sendout 30,379 30,402 28,735
======== ======== ========
Gas Purchased, Produced and
Transported (MMcf):
Pipeline natural
gas-contract 20,150 21,051 15,060
Pipeline natural
gas-spot purchases 7,374 3,210 5,848
Pipeline natural
gas-transportation 869 4,127 5,026
Underground storage 594 1,038 1,305
Liquefied natural
gas 1,329 975 1,488
Liquid propane and
synthetic natural
gas 63 1 8
Total 30,379 30,402 28,735
====== ====== ======
PAGE - 27
1992 1991 1990
Average Annual Number Of Customers:
Residential 143,114 143,207 139,718
Commercial/
Industrial 15,889 15,114 13,179
Total Firm 159,003 158,321 152,897
Interruptible &
transportation 115 79 65
Total 159,118 158,400 152,962
======== ======== ========
Total number of customers
at year-end 157,087 159,234 155,028
======== ======== ========
Residential Heating:
Average consumption per
customer (Mcf) 112 97 128
Average revenue per
customer $ 870 $ 766 $ 920
Average rate per
Mcf $ 7.80 $ 7.91 $ 7.21
Average annual number
of customers 111,176 110,997 106,984
Maximum daily sendout
(MMcf) 174 172 163
Calendar degree days 5,502 4,893 5,750
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet.
Normal calendar degree days for fiscal years 1995 and 1994 are 5,709; 1993, 1992
and 1991 are 5,811; and 1990 is 5,938.
PAGE - 28
<PAGE>
CONSOLIDATED BALANCE SHEETS
September 30
(thousands of dollars) 1995 1994
ASSETS
Gas plant, at original cost (notes 1,3,6 and 11) $257,264 $239,830
Less--Accumulated depreciation and
utility plant acquisition adjustments 87,363 80,733
169,901 159,097
Nonutility property, net 1,958 2,033
Current assets:
Cash and temporary cash
investments (notes 1 and 7) 1,278 1,145
Accounts receivable, less allowance of
$2,412 in 1995 and $3,118 in 1994 (notes 1 and 6)14,031 17,892
Unbilled revenues (note 1) 2,655 2,895
Deferred gas costs (notes 1 and 6) 1,193 15,819
Inventories, at average cost-
Liquefied natural gas, propane and under-
ground storage 10,116 11,255
Materials and supplies 1,540 1,679
Prepaid and refundable taxes (note 2) 5,933 4,030
Prepayments 1,366 1,499
38,112 56,214
Deferred charges and other assets
(notes 1, 5, 6, 8 and 11) 17,156 15,967
Total assets $227,127 $233,311
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statement) $161,006 $145,235
Current liabilities:
Notes payable (notes 4 and 7) 7,337 27,700
Current portion of long-term debt (note 3) 1,950 2,085
Accounts payable (notes 5 and 6) 14,102 18,324
Accrued taxes (note 11) 6,059 6,224
Accrued vacation 1,679 1,584
Customer deposits 3,981 3,580
Other 3,171 3,136
38,279 62,633
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 18,734 15,506
Unamortized investment tax credits (note 2) 2,691 2,851
Other (notes 5 and 8) 6,417 7,086
27,842 25,443
Commitments and contingencies (note 6) -- --
Total capitalization and liabilities $227,127 $233,311
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE - 29
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30
(thousands, except per share amounts) 1995 1994 1993
Operating revenues $183,992 $222,778 $209,315
Cost of gas sold 100,944 135,104 126,314
Operating margin 83,048 87,674 83,001
Operating expenses:
Operation and maintenance 44,368 46,223 43,848
Depreciation and amortization 10,470 9,615 9,073
Taxes--
State gross receipts 5,005 6,326 5,752
Local property and other (note 11) 6,764 6,214 6,845
Federal income (note 2) 3,104 4,460 3,554
Total operating expenses 69,711 72,838 69,072
Operating income 13,337 14,836 13,929
Other income, net (note 1) 865 196 37
Income before interest expense 14,202 15,032 13,966
Interest expense:
Long-term debt 5,086 4,987 5,172
Other 2,437 1,412 1,614
Interest capitalized (144) (152) (133)
7,379 6,247 6,653
Income after interest expense 6,823 8,785 7,313
Preferred dividends of subsidiary (note 3) (696) (696) (696)
Net income $ 6,127 $ 8,089 $ 6,617
======== ======== ========
Earnings per common share (note 12) $ 1.09 $ 1.46 $ 1.39
======== ======== ========
Weighted average common shares
outstanding (note 12) 5,624.2 5,534.1 4,761.8
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE - 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30
(thousands of dollars) 1995 1994 1993
Cash provided by -
Operating Activities:
Income after interest expense $ 6,823 $ 8,785 $ 7,313
Items not requiring cash:
Depreciation and amortization 10,529 9,759 9,301
Deferred Federal income taxes 2,142 1,235 544
Amortization of investment tax credits (160) (159) (157)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 3,861 (654) (2,491)
Unbilled revenues 240 (41) 510
Deferred gas costs 14,626 1,734 (9,853)
Inventories 1,278 310 (4,032)
Deferred capacity charges -- -- 1,343
Prepaid and refundable taxes (1,017) 2,407 337
Prepayments 133 (589) 305
Accounts payable (4,222) (934) 1,592
Accrued taxes (165) (71) 151
Refundable gas costs -- -- (1,795)
Accrued vacation, customer deposits
and other 563 237 632
Net cash provided by operations 34,631 22,019 3,700
Investment Activities:
Expenditures for property, plant
and equipment, net (19,597) (19,809) (13,882)
Deferred charges and other (2,002) (958) (1,239)
Total (21,599) (20,767) (15,121)
Financing Activities:
Issuance of common stock 1,303 1,555 17,149
Issuance of mortgage bonds -- 16,000 25,000
Payments on long-term debt (2,081) (465) (259)
Decrease in notes payable (5,363) (12,100) (24,610)
Cash dividends on preferred shares (696) (696) (696)
Cash dividends on common shares (6,062) (5,856) (4,889)
Total (12,899) (1,562) 11,695
Increase (decrease) in cash and cash equivalents 133 (310) 274
Cash and cash equivalents at beginning of year 1,145 1,455 1,181
Cash and cash equivalents at end of year $ 1,278 $ 1,145 $ 1,455
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during year for-
Interest (net of amount capitalized) $ 6,663 $ 6,091 $ 6,999
Income taxes (net of refunds) $ 1,388 $ 856 $ 2,307
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE - 31<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30
(thousands) 1995 1994
Common stockholders' investment (notes 3, 5 and 10):
Common stock, $1 Par, Authorized--20,000
shares, Outstanding--5,668 shares in 1995 and
5,581 shares in 1994 $ 5,668 $ 5,581
Amount paid in excess of par 54,258 53,042
Retained earnings 18,598 18,533
78,524 77,156
Cumulative preferred stock of subsidiary (notes 3 and 7):
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 80 shares as of 1995
and 1994 8,000 8,000
Long-term debt (notes 3, 6, and 7):
First Mortgage Bonds, secured by utility
property--
Series M, 10.25%, due July 31, 2008 10,000 10,000
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 14,400 16,000
Debt refinanced subsequent to year-end (note 3) 15,000 --
Capital Leases 2,032 1,164
76,432 62,164
Less-current portion 1,950 2,085
74,482 60,079
Total capitalization $161,006 $145,235
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE - 32<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN COMMON STOCKHOLDERS' INVESTMENT
For the Three Years Ended September 30
Amount
Shares Paid In
Issued and Outstanding Excess Retained
(thousands) Number Amount of Par Earnings
Balance, September 30, 1992 4,534 $ 4,534 $ 35,385 $ 14,572
Add (deduct):
Net income - - - 6,617
Cash dividends ($1.02 per share) - - - (4,889)
Common stock offering 850 850 14,493 -
Dividend reinvestment and cash
stock purchase plan 83 83 1,417 -
Employee benefit plans 13 13 202 -
Stock options 6 6 101 -
Preferred stock expenses - - (16) -
Balance, September 30, 1993 5,486 5,486 51,582 16,300
Add (deduct):
Net income - - - 8,089
Cash dividends ($1.06 per share) - - - (5,856)
Dividend reinvestment and cash
stock purchase plan 87 87 1,399 -
Employee benefit plans 8 8 132 -
Accrual for Executive Stock
Compensation Plan - - (71) -
Balance, September 30, 1994 5,581 5,581 53,042 18,533
Add (deduct):
Net income - - - 6,127
Cash dividends ($1.08 per share) - - - (6,062)
Dividend reinvestment and cash
stock purchase plan and
employee benefit plans 87 87 1,279 -
Accrual for Executive Stock
Compensation Plan - - (63) -
Balance, September 30, 1995 5,668 $ 5,668 $ 54,258 $ 18,598
======== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE - 33<PAGE>
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 (the
Registrant or the Company). Revenues from the natural gas distribution
business are reflected in the accompanying consolidated statements of income
to arrive at operating income. Revenues and expenses of nonutility
operations include sales of appliances as well as appliance rental and are
presented after operating income in the accompanying consolidated statements
of income. All significant intercompany transactions have been eliminated
in consolidation.
Regulation. The Providence Gas Company (ProvGas) is subject to regulation
by the Rhode Island Public Utilities Commission (RIPUC). The accounting
policies of ProvGas conform to generally accepted accounting principles as
applied in the case of regulated public utilities and are in accordance with
the regulators' accounting requirements and rate-making practices. North
Attleboro Gas Company (North Attleboro) is subject to regulation by the
Massachusetts Department of Public Utilities (MDPU).
Operating Revenues. Operating revenues consist principally of gas sales.
The gas companies record accrued utility revenues based on estimates of gas
volumes consumed and not billed at the end of an accounting period in order
to match revenues with related costs.
Lease Accounting. The Company leases water heaters and other appliances
to customers under finance leases. The Company recognizes the profits
associated with these leases when the sale is made, after providing reserves
for unearned income, doubtful accounts and warranty repairs.
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 Utility Plant Acquisition Adjustment and is
amortized over periods ranging from 1-24 years.
Depreciation. Depreciation is provided on the straight-line basis at
rates 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 3.75 percent
for all years presented.
The Company retires property units by charging original cost, cost of
removal; including environmental investigation and remediation costs; and
salvage value to accumulated depreciation.
Cost of Gas Adjustment. The Company has Cost of Gas Adjustment (CGA)
clauses which allow for the adjustment of rates charged to customers in
order to recover actual gas costs incurred, including demand and commodity
charges. The CGA provides for reconciliation of total gas costs billed with
PAGE - 34
the actual cost of gas recorded. Any excess or deficiency in amounts billed
as compared to costs is deferred and either refunded to, or recovered from,
the customers over a subsequent period.
Allowance for Funds used During Construction. The Company capitalizes
interest and an allowance for equity funds in accordance with established
policies of the RIPUC and MDPU. 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.
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 security while
the remaining deferred charges and other assets are amortized over a
recovery period specified by the respective Commissions.
Deferred charges include the following:
1995 1994
Cost of fuel assistance program $ 1,836 $ 1,885
Restructuring program (note 11) 1,600 1,600
Pension costs 6,361 5,890
Deferred costs related to
phase-in plan 601 649
Unamortized debt expense 2,217 2,422
Post-retirement benefits 1,041 708
Pipeline interconnection costs 625 921
Deferred rate case expense (note 11) 853 473
Other deferred charges 2,022 1,419
Total $ 17,156 $ 15,967
======== ========
Temporary Cash Investments. Temporary cash investments are short-term,
highly liquid investments with a maturity to the Company of not more than 90
days.
Reclassifications. Certain prior amounts have been reclassified for
consistent presentation with the current year.
2. FEDERAL INCOME TAXES
In 1994, the Registrant adopted Statement of Financial Accounting Standards
No. 109, (SFAS No. 109), "Accounting for Income Taxes", which requires an
asset and a liability approach to accounting for income taxes. Under the
provisions of SFAS No. 109, deferred taxes are provided for all temporary
differences.
PAGE - 35
When implementing SFAS No. 109, the Registrant reduced deferred taxes that
were previously provided at higher rates than the current 34% tax rate.
Additional deferred taxes and prepaid taxes were also provided for certain
temporary differences previously not provided. These adjustments to
deferred taxes will be returned to or collected from ratepayers in the
future. Accordingly, the Registrant has recorded regulatory assets and
liabilities corresponding to the tax adjustments. The implementation of SFAS
No. 109 has had no impact on the Registrant's results of operations or cash
flows.
The following is a summary of the provision for Federal income taxes for the
three years in the period ended September 30:
(thousands of dollars) 1995 1994 1993
Current $ 1,300 $ 3,211 $ 2,487
Deferred 2,142 1,235 1,113
Total Federal income tax
provision $ 3,442 $ 4,446 $ 3,600
======= ======= =======
Income tax is charged
(credited) to the following:
Charged to operating
expenses $ 3,104 $ 4,460 $ 3,554
Included in other income, net 338 (14) 46
Total Federal income tax
provision $ 3,442 $ 4,446 $ 3,600
======= ======= =======
The effective Federal income tax rates and the reasons for their differences
from the statutory Federal income tax rates are as follows:
1995 1994 1993
Statutory Federal income tax
rates 34.0% 34.0% 34.0%
Effect of change of
statutory rate to
35% - .3 -
Reversing temporary differences (.1) (.4) (.7)
Impact of equity allowance-
AFUDC - - (.2)
Amortization of investment
tax credits (.6) (.4) (.5)
Other .3 .1 .3
Effective Federal income
tax rate 33.6% 33.6% 32.9%
==== ==== ====
PAGE - 36
The Registrant's deferred tax assets and liabilities for each of the
two years in the period ended as of September 30 are the result of the
following temporary differences:
(thousands of dollars)
Long-term deferred taxes
1995 1994
Tax assets
Unamortized ITC $ 934 $ 989
Other 420 785
Tax liabilities
Property related (17,992) (15,553)
Pension costs (614) (659)
Deferred charges (1,482) (1,068)
Net deferred tax liability included in
accompanying consolidated balance
sheets $(18,734) $(15,506)
======== ========
Prepaid taxes
Tax assets
Accounts receivable reserves $ 814 $ 913
Property tax reserves 1,108 985
Alternative minimum tax -- 138
Other 1,194 1,275
Tax liabilities
Employee severance (541) (409)
Other (121) (86)
Net prepaid taxes 2,454 2,816
Prepaid gross receipts tax and other 3,479 1,214
Net prepaid and refundable taxes included
in accompanying consolidated balance
sheets $ 5,933 $ 4,030
======== ========
During 1994, the Registrant received permission from the Internal
Revenue Service to change its tax year to a fiscal year ended September 30.
Previously, the Registrant was a calendar year tax payer.
Investment tax credits are amortized through credits to other income
over the estimated lives of related property.
3. CAPITALIZATION
A. Long-term Debt
In December 1995, the Registrant issued $15 million of First Mortgage Bonds.
These First Mortgage Bonds are designated as Series R (7.5%) and will mature
in December 2025. The net proceeds provided by this indebtedness were used
to paydown the Registrant's short-term debt. The accompanying consolidated
balance sheets, statements of capitalization and related disclosures have
been prepared to reflect the issuance of this debt and the subsequent
retirement of the note payable.
PAGE - 37
The Registrant's ability to pay dividends is largely dependent on receipt of
dividends from its principal subsidiary, ProvGas. Approximately $14 million
of ProvGas' retained earnings were available for dividends under the most
restrictive terms of the Registrant's First Mortgage Bond indenture.
The Registrant's First Mortgage Bonds are secured by a lien on substantially
all of the tangible and real property.
As of September 30, 1995, the annual sinking fund requirements and
maturities of long-term debt for the next five fiscal years are $1,600,000
in 1996, $1,600,000 in 1997, $2,509,000 in 1998, $2,509,000 in 1999, and
$2,509,000 in 2000.
B. Redeemable Preferred Stock
The Registrant's 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 unless a default in
the payment of dividends or sinking fund obligations occurs. 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 commencing at the
end of 1997.
4. NOTES PAYABLE
The Registrant meets seasonal cash requirements and finances its
construction program on an interim basis through short-term bank borrowings.
As of September 30, 1995, the Registrant had lines of credit totaling
$66,000,000 ($48,500,000 committed) with borrowings outstanding of
$22,337,000. The accompanying consolidated balance sheets reflect an
adjusted note payable balance of $7,337,000 reflecting the anticipated
paydown of short-term borrowings with proceeds from a First Mortgage Bond
issuance as discussed in Footnote 3. The Registrant pays a fee for its
committed lines of credit rather than maintaining compensating balances.
The weighted average interest rate for borrowings outstanding at the end of
the years was 6.15% in 1995, 5.29% in 1994 and 3.47% in 1993.
5. EMPLOYEE BENEFITS
A. Retirement Plans
The Registrant has two pension plans providing retirement benefits for
substantially all of its employees. The benefits under the plans are based
on years of service and the employee's final average compensation. It is
the Registrant's policy to fund at least the minimum required contribution.
PAGE - 38
The following table sets forth the funding status of the pension plans and
amounts recognized in the Registrant's consolidated balance sheets at
September 30, 1995 and 1994 (in thousands):
1995 1994
Accumulated benefit obligation, including
vested benefit obligation of ($37,034)
as of September 30, 1995 and ($35,850)
as of September 30, 1994 $(38,519) $(37,233)
======== ========
Projected benefit obligation for service
rendered to date $(50,708) $(49,867)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 58,058 50,897
Projected benefit obligation less than
plan assets 7,350 1,030
Unrecognized net (gain) loss (12,584) (5,413)
Unrecognized prior service cost 1,193 1,304
Unrecognized net transition asset
being recognized over 15 years from
October 1, 1985 (681) (817)
Net accrued pension cost included in other
deferred credits and accounts payable
at September 30, 1995 and 1994 $ (4,722) $ (3,896)
======= ========
Net pension cost for fiscal years 1995, 1994 and 1993 included the following
components (in thousands):
1995 1994 1993
Service cost $ 1,541 $ 1,589 $ 1,502
Interest cost on benefit obligations 3,872 3,814 3,673
Annual return on plan assets (10,300) 995 (8,890)
Net amortization and deferral 5,713 (6,229) 4,453
Net periodic pension cost 826 169 738
Adjustments due to regulatory
action (410) (131) (655)
Net periodic pension cost recognized $ 416 $ 38 $ 83
======= ======= =======
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.
The Registrant recovers pension costs in rates when such costs are funded.
Therefore, the amount by which funding differs from pension expense,
determined in accordance with generally accepted accounting principles, is
deferred and recorded as a regulatory asset or liability.
PAGE - 39
B. Post-retirement Benefits Other Than Pensions
The Registrant currently offers retirees, who have attained age 55 and
worked five years for the Registrant, healthcare and life insurance benefits
during retirement (the Plan). These benefits are similar to the benefits
offered to active employees. Although retirees are not required to make
contributions to the Plan currently, future contributions may be required if
the cost of the Plan exceeds certain limits.
On October 1, 1993, the Registrant adopted the provisions of the Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for Post-
retirement Benefits Other Than Pensions" (SFAS No. 106). SFAS No. 106
requires that these benefits be accrued over the service life of covered
employees. Prior to the adoption of SFAS No. 106, the Registrant accounted
for these costs when paid. These costs were $604,000 in 1993.
Upon adoption of SFAS No. 106, the Registrant calculated an unrecognized
transition obligation of $10,526,000, which the Registrant will recognize
over a 20-year amortization period.
The Registrant funds its SFAS No. 106 expense to a Voluntary Employee
Benefit Association (VEBA) Trust. Contributions to the VEBA Trust were
approximately $1,561,000 in 1995 and $1,566,000 in 1994.
The Registrant recovers its SFAS No. 106 costs 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, the Registrant will fully recover its 1995 and 1994
SFAS No. 106 expense of $1,561,000 and $1,566,000, respectively because such
amounts were funded into the VEBA Trust. Of the total SFAS No. 106 costs,
$1,231,000 and $855,000 were recovered in rates during 1995 and 1994,
respectively. The cumulative unrecovered difference of $1,041,000 has been
deferred and will be recovered in future years.
The Plan's costs and accumulated post-retirement benefit obligation for 1995
and 1994 are calculated by the Registrant's actuaries using assumptions and
estimates which include the following:
Percent
Healthcare cost annual growth rate.............12.6
Healthcare cost annual growth rate - long-term..6.0
Expected long-term rate of return (union).......5.5
Expected long-term rate of return (non-union)...8.5
Discount rate...................................8.0
The healthcare cost annual growth rate significantly impacts the estimated
Plan obligation and annual expense. For example, in 1995, a one percent
change in the above rates would change the obligation by $838,000 and would
change the annual expense by $91,000.
PAGE - 40
The obligations and assets of the Plan at September 30, 1995 and 1994 are as
follows:
1995 1994
Accumulated post-retirement
benefit obligation:
Current retirees $ (7,425,800) $ (6,518,300)
Active employees-eligible for
benefits (844,700) (795,100)
Active employees (3,694,600) (3,618,700)
Total post-retirement benefit
obligation (11,965,100) (10,932,100)
Plan assets at fair value 2,080,300 856,400
Unfunded post-retirement benefit
obligation (9,884,800) (10,075,700)
Unrecognized transition obligation 9,473,600 9,999,900
Unrecognized net (gain) or loss 402,300 75,800
Accrued post-retirement
benefit obligation included
in the accompanying consolidated
balance sheet $ (8,900) $ --
============ ============
The Registrant's actuarial determined Plan costs for 1995 and 1994 include
the following:
1995 1994
Service cost $ 229,400 $ 238,400
Interest cost 909,200 834,500
Actual return on plan assets (28,300) (36,600)
Amortization and deferral 450,200 529,700
Total annual plan costs $1,560,500 $1,566,000
========== ==========
C. Supplemental Retirement Plans
The Registrant provides certain supplemental retirement plans for key
employees. The projected benefit obligation is approximately $688,000 which
is being accrued over the service period of these key employees. The
supplemental retirement plans are unfunded. The Registrant expensed
$150,000, $44,000 and $39,000 related to these benefits in 1995, 1994 and
1993, respectively.
PAGE - 41
<PAGE>
D. Performance and Equity Incentive Plan
During 1993, the Board of Directors, with subsequent approval of the
Registrant's common shareholders, adopted the Providence Energy Corporation
Performance and Equity Incentive Plan (the Plan). The Plan provides that up
to 225,000 shares of common stock may be granted to key employees, including
employees of the Registrant, at no cost to the employees. Key employees,
who received common shares, are entitled to receive dividends, but
assumption of full beneficial ownership is contingent upon future service of
the employee. The Plan also provides for cash compensation to key
employees.
The executive compensation incentive awards totaled approximately $248,000
for 1995, $240,000 for 1994 and $260,000 for 1993. Amounts paid in cash are
charged to expense when earned, however, amounts paid in restricted stock
are deferred and amortized to expense over a five-year period.
Of the $260,000 1993 award, $177,000 was paid in cash during fiscal 1994.
Of the $240,000 1994 award, $153,000 was paid in cash during fiscal 1995.
The Registrant estimates $167,000 of the 1995 award will be paid in cash
during 1996. Grant shares totaling 5,371 and 4,902 were purchased by the
Registrant for key employees during 1995 and 1994, respectively.
6. COMMITMENTS AND CONTINGENCIES
A. Legal Proceedings
The Registrant 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 Registrant's results of operations
or financial condition.
B. Capital Leases
The Registrant has a capital lease with Algonquin Gas Transmission Company
(Algonquin) for storage space in a liquefied natural gas (LNG) tank. The
capital lease arrangement also provides that Algonquin lease from the
Registrant, for a corresponding term at an annual amount of $150,000, the
land on which the tank is situated. The Registrant also leases certain
information systems equipment under capital leases.
Property under Capital Leases:
(thousands of dollars) 1995 1994
Gas plant $6,116 $ 6,116
Information systems 1,551 --
Accumulated depreciation 5,659 5,256
$2,008 $ 860
====== ======
PAGE - 42
Commitments for Capital Leases:
LNG Computer
(thousands of dollars) Storage Equipment Total
1996 $ 155 $ 373 $ 528
1997 134 373 507
1998 136 373 509
1999 136 373 509
2000 136 186 322
2001-2005 430 - 430
$1,127 $1,678 2,805
====== ======
Amounts representing interest 773
Amounts representing principal $2,032
======
C. Operating Leases
The Registrant also leases facilities and equipment under operating leases
with a total future obligation of approximately $530,000 as of September 30,
1995.
D. Gas Supply Restructuring
Federal Energy Regulatory Commission (FERC) Order 636 and other related
orders (the Orders) have significantly changed the structure and types of
services offered by pipeline transportation companies. The most significant
components of the restructuring occurred in November 1993. In response to
these changes, the Registrant has negotiated new pipeline transportation and
gas storage contracts.
At the same time, a number of contracts with gas suppliers have been
negotiated to complement the transportation and storage contracts. The
portfolio of supply contracts is designed to be market responsive and is
diversified with respect to contract lengths, source location and other
contract terms. On a periodic basis, the Registrant reviews all of its
contracts to ensure a diverse, secure, flexible and economical supply
portfolio is maintained.
To meet the requirements of the Order, the pipelines have incurred
significant costs, collectively known as transition costs. The majority of
these costs will be reimbursed by the pipeline's customers including the
Registrant. Based upon current information, the Registrant anticipates its
transition costs to net between $17 million and $19 million of which $12.6
million has been included in the CGA and is currently being collected from
customers. The remaining minimum obligation of the $4.4 million has been
recorded in the accompanying consolidated balance sheets along with a
regulatory asset anticipating future recovery through the CGA.
The Registrant's ultimate liability may differ from the above estimates
based on FERC settlements with the Registrant's pipeline transportation
suppliers. FERC has approved settlements with three of its pipelines, which
account for the bulk of the Registrant's transition costs. Negotiations are
PAGE - 43
continuing on one additional pipeline, and based on the information
available, the Registrant believes that its current range for transition
costs is reasonable.
E.Environmental
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 Registrant cannot predict the future
impact of such standards and requirements which are subject to change and
can take effect retroactively. The Registrant 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 Registrant believes it is in substantial
compliance with such laws and regulations.
At September 30, 1995, the Registrant is aware of three sites at which
future costs may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability
Act of 1980 at two sites at 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 Registrant and other PRPs. With
respect to one of the Plympton sites, the Registrant 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
Registrant, in connection with both Plympton sites, are not anticipated to
be material to the financial condition of the Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence. In accordance with state laws,
such a voluntary study is monitored by the Rhode Island Department of
Environmental Management. The purpose of this study is to determine the
extent of environmental contamination on the site, if any. The study is
continuing, and although results are not conclusive, preliminary findings
indicate that clean-up may be required. The level of clean-up is likely to
vary significantly depending upon the proposed future use of the site. In
fact, if the site remains in its present use, only minimal clean-up may be
required. As of September 30, 1995, the Registrant cannot estimate the
future cost of investigation and clean-up as a result of the uncertainties
discussed. As of September 30, 1995, approximately $590,000 had been spent
on studies at this site.
In its rate case filed in February 1995, the Registrant 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. Accordingly, environmental investigation
costs of approximately $841,000 have been charged to the accumulated
depreciation reserve at September 30, 1995. Management believes that this
PAGE - 44
rate recovery mechanism is appropriate for recovery of future costs. Should
future developments warrant additional rate recovery mechanisms, management
will seek such recovery.
In addition to rate recovery, management has a program to ascertain the
possibility of recovery under prior insurance coverage. Also, management
has begun discussions with other parties who may assist the Registrant in
paying future costs at the above sites. Management believes that its
program for managing environmental issues combined with rate recovery,
possible insurance 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
three sites.
F.Fuel Assistance Program
The Registrant participates in the State of Rhode Island's Fuel Assistance
Program, the Percentage of Income Payment Plan. As a result, the Registrant
has agreed to accept partial payment on certain customer accounts from
various state agencies. As of September 30, 1995, $2.5 million was due from
the State of Rhode Island related to gas consumed by customers over the last
two years.
G. Lease Receivables
In prior years, the Registrant sold to a financial institution lease
receivables of hot water heaters and conversion burners installed at
customers' homes or businesses. These receivables were sold with recourse
limited to default by the lessee. In the event of default, the Registrant
would recognize as a loss the excess of the receivable balance, net of
established reserves for such default over the value of the equipment. The
balance of these receivables as of September 30, 1995 was approximately
$1,062,000.
7.Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value
disclosures for the following financial instruments:
Cash, Cash Equivalents and Short-term Debt
The carrying amount approximates fair value due to the short-term maturity
of these instruments.
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 Registrant's
financial instruments at September 30 are as follows:
PAGE - 45
1995
Carrying Fair
(in thousands) Amount Value
Cash and cash equivalents $ 1,278 $ 1,278
Short-term debt * 7,337 7,337
Long-term debt * 76,432 81,816
Preferred stock 8,000 8,800
* Adjusted for the issuance of $15,000,000 in First Mortgage Bonds Series
R issued subsequent to year-end.
1994
Carrying Fair
(in thousands) Amount Value
Cash and cash equivalents $ 1,145 $ 1,145
Short-term debt 27,700 27,700
Long-term debt 62,164 64,565
Preferred stock 8,000 8,000
The difference between the carrying amount and the fair value of the
Registrant's preferred stock and long-term debt, if they were settled at
amounts reflected above, would likely be recovered in the Registrant's rates
over a prescribed amortization period. Accordingly, any settlement would
not result in a material impact on the Registrant's financial position or
results of operations.
8.Restructuring
In June 1994, the Registrant, following a six month study of its major
processes, realigned its personnel to meet the existing and future
challenges associated with an increasingly competitive energy marketplace.
The intent of the restructuring was to significantly improve the
Registrant's customer services, lower operating costs and increase operating
efficiencies.
Approximately 30 people were separated from the Registrant, while
approximately 18 new employees have been hired to fill newly defined
positions. The employees bring skill, expertise and experiences to the
Registrant not previously available within its work force.
The direct cost of this realignment is estimated to be about $1 million,
net of tax. A significant portion of this $1 million is severance pay and
related benefits for personnel who were separated during 1994.
Substantially, all costs have been paid as of September 30, 1995. The
Registrant has discussed the reorganization with the RIPUC and based on
prior RIPUC allowance of similar costs, the Registrant deferred these costs
in anticipation of recovery in its next rate case. (See Footnote 11 for
subsequent event.)
PAGE - 46
9.Rate Changes
A.ProvGas Rate Increase
In February 1995, ProvGas filed for rate relief requesting an approximate 8
percent general rate increase. The major issues contributing to the rate
request were an increase in depreciation due to capital spending, an
increase in working capital needs and an increase in capital expenditures.
(See Footnote 11 for subsequent event.)
B.North Attleboro Gas Rate Increase
In October 1991, the MDPU released its settlement order in regards to a rate
request which included a qualified phase-in plan. Due to the magnitude of
the rate request, the MDPU ordered North Attleboro Gas Company to phase-in
a 32 percent increase over five years as follows:
Estimated
Estimated Percentage
Additional Increase in
Annual Rate Base
Date Effective Revenues Revenues
November 1, 1991 $188,096 8.13
November 1, 1992 203,042 8.12
November 1, 1993 200,967 7.43
November 1, 1994 141,137 4.86
November 1, 1995 94,445 3.10
The rate settlement further required North Attleboro to classify $545,000 of
gas plant as plant held for future use for rate case purposes. This plant
will be included in future rates if North Attleboro meets certain growth
requirements by the year 2000. North Attleboro capitalized AFUDC and other
costs of approximately $136,000 in 1995, $198,000 in 1994 and $239,000 in
1993 related to the gas plant not yet phased into North Attleboro's rates
under the plan. North Attleboro amortized $185,000 in 1995, $114,000 in
1994 and $4,000 in 1993 of amounts previously deferred.
10.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 $110.00 per share, subject to adjustment. In
the event that certain transactions as defined in the Rights Agreement
occur, each Right will become exercisable for that number of shares of
common stock of the acquiring company (or of the Registrant 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, 1998 and
may be redeemed by a two-thirds vote of the Directors at a redemption price
of $.01 per Right. Due to the anti-dilutive characteristics of these
Rights, there is no assumed impact on earnings per share.
PAGE - 47
The Registrant offers two stock option plans for officers, directors and
key employees covering 250,000 shares of the Registrant's common stock.
Options under the plans are granted at 100 percent of fair market value at
the date of grant. The options expire ten 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.
Under the stock option plans, stock appreciation rights may be granted in
conjunction with all or part of any stock option grants to key employees.
Such rights offer optionees the alternative of electing not to exercise the
related stock option, but to receive instead an amount in cash, stock or a
combination of cash and stock equivalents for the difference between the
option price and the fair market value of the share.
Stock option data are summarized as follows for the years ended September
30, 1995, 1994 and 1993:
Number of Shares
Outstanding, September 30, 1992 59,883
Granted at $16.375 per share 8,017
Exercised (6,803)
Terminated (3,658)
Surrendered --
Outstanding, September 30, 1993 57,439
Granted at $19.000 per share 7,117
Exercised --
Terminated (8,048)
Surrendered --
Outstanding, September 30, 1994 56,508
Granted at $15.625 per share 8,042
Exercised --
Terminated (9,761)
Surrendered --
Outstanding, September 30, 1995 54,789
======
11. Subsequent Event - Rate Order
On November 17, 1995, the RIPUC issued its decision on the rate request
made by ProvGas in February 1995. In its decision, the RIPUC authorized
ProvGas to increase its rates to recover additional annual revenues in the
amount of $3,990,000. Subsequent to the issuance of the rate decision, the
RIPUC approved the Registrant's motion to reconsider a revenue adjustment of
$171,572. That approval increases the overall rate increase to $4,161,572.
Additionally, as a result of the order, ProvGas will record several
adjustments to its first quarter 1996 financial statements. Specifically:
PAGE - 48
a) ProvGas will begin calculating property tax expense for rate purposes
based on the current year's expense plus an estimate of one year's increase
in expense. Previously, ProvGas was required to estimate two year's
increase in expense. As a result, ProvGas will reduce its regulatory
liability for one year's property tax expense resulting in a one time gain
of approximately $3,900,000 before tax.
b) ProvGas will write-off and not recover the $1,600,000, before tax, of
restructuring costs previously deferred. (See Footnote 8.) The RIPUC had
previously allowed ProvGas recovery of similar costs, but determined that
the costs of the 1994 reorganization should not be recovered in rates.
c) ProvGas will write-off approximately $400,000, before tax, of previously
deferred rate case expenses. (See Footnote 1.)
d) ProvGas will write-off approximately $461,000, before tax, of
construction expenditures previously capitalized. These costs were
capitalized in accordance with generally accepted accounting principles and
were based on Federal Energy Regulatory Commission guidance on accounting
for such costs. The RIPUC agreed that such costs could be capitalized
beginning in 1996, but did not allow recovery of the previously capitalized
costs.
The net effect of the above adjustments will be recorded in ProvGas' first
quarter financial statements and based on management's current estimates
will not result in a material impact.
12.Unaudited Quarterly Financial Information
The following is unaudited quarterly financial information for the two
years ended September 30, 1995 and 1994. Quarterly variations between
periods are caused primarily by the seasonal nature of gas sales and the
availability of gas.
(thousands, except per share amounts)
Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30
Fiscal 1995
Operating revenues $49,302 $66,162 $38,157 $30,371
Operating income (loss) 5,022 7,834 892 (411)
Net income (loss) 3,307 5,848 (844) (2,184)
Net income (loss)
per share* .59 1.04 (.15) (.39)
Fiscal 1994
Operating revenues $62,957 $83,570 $42,492 $33,759
Operating income 5,106 8,075 516 1,139
Net income (loss) 3,714 6,509 (1,182) (952)
Net income (loss)
per share* .68 1.18 (.21) (.17)
* Calculated on the basis of weighted average shares outstanding during
the quarter.
PAGE - 49
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,278
<SECURITIES> 0
<RECEIVABLES> 14,031
<ALLOWANCES> 2,412
<INVENTORY> 11,656
<CURRENT-ASSETS> 38,112
<PP&E> 257,264
<DEPRECIATION> 87,363
<TOTAL-ASSETS> 227,127
<CURRENT-LIABILITIES> 38,279
<BONDS> 74,400
<COMMON> 78,524
0
8,000
<OTHER-SE> 82
<TOTAL-LIABILITY-AND-EQUITY> 227,127
<SALES> 183,992
<TOTAL-REVENUES> 13,337
<CGS> 0
<TOTAL-COSTS> 100,944
<OTHER-EXPENSES> 66,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,379
<INCOME-PRETAX> 16,441
<INCOME-TAX> 3,104
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,127
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
