<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1996
-------------------------------------------
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 incorporation (I.R.S. Employer
Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
- ----------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
401-272-9191
- ----------------------------------------------------------------------
Registrant's telephone number,including area code
(Former name, former address and former fiscal year, if changed since
- ----------------------------------------------------------------------
last report)
Indicate by checkmark whether the registrant (1) has filed allreports
required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of
1934 during the preceding 12 months (or for such shorterperiod 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 .
--- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1.00 par value; 5,728,119 shares outstanding at August 13, 1996.
- ------------------------------------------------------------------------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10 Q
JUNE 30, 1996
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1996 and 1995 I-1
Consolidated Balance Sheets as of June 30, 1996,
June 30, 1995 and September 30, 1995 I-2
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1996
and 1995 I-3
Consolidated Statements of Capitalization
as of June 30, 1996, June 30, 1995 and
September 30, 1995 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-9
PART II OTHER INFORMATION
Item 6 Reports on Form 8-K II-1
Signature II-2
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
- -------------------------------
ITEM I. FINANCIAL STATEMENTS
- ------------------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-------------
(thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
------------------ ------------------ -------------------
1996 1995 1996 1995 1996 1995
------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 43,273 $ 38,157 $182,786 $153,621 $213,157 $187,380
Cost of gas sold 23,990 21,244 102,529 84,215 119,258 103,435
-------- ------- -------- -------- ------- -------
Operating margin 19,283 16,913 80,257 69,406 93,899 83,945
-------- ------- -------- -------- ------- -------
Operating expenses:
Operating and maintenance 12,728 11,067 37,770 34,069 48,070 43,052
Depreciation and amortization 3,157 2,580 8,923 7,760 11,632 10,210
Taxes -
State gross receipts 1,247 1,044 5,153 4,149 6,009 5,118
Local property and other 1,692 1,726 5,123 5,116 6,771 6,233
Federal income (447) (396) 6,037 4,564 4,577 4,445
-------- ------- -------- -------- ------- -------
Total operating expenses 18,377 16,021 63,006 55,658 77,059 69,058
-------- ------- -------- -------- ------- -------
Operating income 906 892 17,251 13,748 16,840 14,887
Other income, net 197 303 984 645 1,204 306
-------- ------- -------- -------- ------- -------
Income before interest expense 1,103 1,195 18,235 14,393 18,044 15,193
-------- ------- -------- -------- ------- -------
Interest expense:
Long term debt 1,525 1,268 4,362 3,819 5,629 5,118
Other 346 635 1,424 1,849 2,011 2,169
Interest capitalized (33) (38) (75) (108) (110) (149)
-------- ------- -------- -------- ------- -------
1,838 1,865 5,711 5,560 7,530 7,138
-------- ------- -------- -------- ------- -------
Income (loss) after interest expense (735) (670) 12,524 8,833 10,514 8,055
Preferred dividends of subsidiary (174) (174) (522) (522) (696) (696)
-------- ------- -------- -------- ------- -------
Net income (loss) $ (909) $ (844) $ 12,002 $ 8,311 $ 9,818 $ 7,359
======== ======= ======== ======== ======== =======
Net income (loss) per common share $ (.16) $ (.15) $ 2.11 $ 1.48 $ 1.73 $ 1.31
======== ======= ======== ======== ======== =======
Dividends paid per common share $ .27 $ .27 $ .81 $ .81 $ 1.08 $ 1.08
======== ======= ======== ======== ======== =======
Weighted average common shares outstanding 5,718.3 5,635.0 5,699.5 5,613.2 5,688.9 5,602.4
======== ======= ======== ======== ======== =======
</TABLE>
PAGE I-1
<PAGE>
PART I. FINANCIAL INFORMATION
- -------------------------------
ITEM I. FINANCIAL STATEMENTS
- ------------------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
(thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
--------------------
1996 1995
----- -----
<S> <C> <C>
Operating revenues $ 43,273 $ 38,157
Cost of gas sold 23,990 21,244
-------- --------
Operating margin 19,283 16,913
-------- --------
Operating expenses:
Operation and maintenance
12,728 11,067
Depreciation and amortization 3,157 2,580
Taxes -
State gross receipts 1,247 1,044
Local property and other 1,692 1,726
Federal income (447) (396)
-------- --------
Total operating expenses 18,377 16,021
-------- --------
Operating income 906 892
Other income, net 197 303
-------- --------
Income before interest expense 1,103 1,195
-------- --------
Interest expense:
Long-term debt 1,525 1,268
Other 346 635
Interest capitalized (33) (38)
-------- --------
1,838 1,865
-------- --------
Income (loss) after interest expense (735) (670)
Preferred dividends of subsidiary (174) (174)
-------- --------
Net income (loss) $ (909) $ (844)
======== ========
Net income (loss) per common share $ (.16) $ (.15)
======== ========
Dividends paid per common share $ .27 $ .27
======== ========
Weighted average common shares outstanding 5,718.3 5,635.0
======== ========
</TABLE>
PAGE I-1
<PAGE>
PART I. FINANCIAL INFORMATION
- -------------------------------
ITEM I. FINANCIAL STATEMENTS
- ------------------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
(thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS
-----------------
1996 1995
----- -----
<S> <C> <C>
Operating revenues $182,786 $153,621
Cost of gas sold 102,529 84,215
-------- --------
Operating margin 80,257 69,406
-------- --------
Operating expenses:
Operating and maintenance 37,770 34,069
Depreciation and amortization 8,923 7,760
Taxes -
State gross receipts 5,153 4,149
Local property and other 5,123 5,116
Federal income 6,037 4,564
-------- --------
Total operating expenses 63,006 55,658
-------- --------
Operating income 17,251 13,748
Other income, net 984 645
-------- --------
Income before interest expense 18,235 14,393
-------- --------
Interest expense:
Long-term debt 4,362 3,819
Other 1,424 1,849
Interest capitalized (75) (108)
-------- --------
5,711 5,560
-------- --------
Income (loss) after interest expense 12,524 8,833
Preferred dividends of subsidiary (522) (522)
-------- --------
Net income $ 12,002 $ 8,311
======== ========
Net income per common share $ 2.11 $ 1.48
======== ========
Dividends paid per common share $ .81 $ .81
======== ========
Weighted average common shares outstanding 5,699.5 5,613.2
======== ========
</TABLE>
PAGE I-1
<PAGE>
PART I. FINANCIAL INFROMATION
- ------------------------------
ITEM I. FINANCIAL STATEMENTS
- -----------------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
----------------------------
(Unaudited)
-----------
(thousands, except per share amounts)
<TABLE>
<CAPTION>
TWELVE MONTHS
-------------------
1996 1995
------ ------
<S> <C> <C>
Operating revenues $213,157 $187,380
Cost of gas sold 119,258 103,435
-------- --------
Operating margin 93,899 83,945
-------- --------
Operating expenses:
Operating and
maintenance 48,070 43,052
Depreciation and
amortization 11,632 10,210
Taxes -
State gross earnings 6,009 5,118
Local property and
other 6,771 6,233
Federal income 4,577 4,445
-------- --------
Total operating
expenses 77,059 69,058
-------- --------
Operating income 16,840 14,887
Other income, net 1,204 306
-------- --------
Income before interest
expense 18,044 15,193
-------- --------
Interest expense:
Long-term debt 5,629 5,118
Other 2,011 2,169
Interest capitalized (110) (149)
-------- --------
7,530 7,138
-------- --------
Income (loss) after
interest expense 10,514 8,055
Preferred dividends of
subsidiary (696) (696)
-------- --------
Net income $ 9,818 $ 7,359
======== ========
Net income per
common share $ 1.73 $ 1.31
======== ========
Dividends paid per
common share $ 1.08 $ 1.08
======== ========
Weight average common
shares outstanding 5,688.9 5,602.4
======== ========
</TABLE>
PAGE I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands)
-------------
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1996 1995 1995
-----------------------------------
ASSETS
- ------
<S> <C> <C> <C>
Gas plant, at original cost $274,011 $252,566 $257,264
Less - accumulated depreciation and
utility plant acquisition
adjustments 98,296 87,414 87,363
-------- -------- --------
175,715 165,152 169,901
-------- -------- --------
Nonutility property, net 1,896 1,974 1,958
-------- -------- --------
Current assets:
Cash and temporary cash investments 1,531 1,581 1,278
Accounts receivable
less allowance of $5,406 at 6/30/96, $3,745
at 6/30/95 and $2,412 at 9/30/95 25,003 22,414 14,031
Unbilled revenues 1,645 2,022 2,655
Deferred gas costs 2,453 -- 1,193
Inventories, at average cost -
Liquefied natural gas, propane and under-
ground storage 7,394 7,179 10,116
Materials and supplies 1,361 1,504 1,540
Prepaid and refundable taxes 4,631 6,155 5,933
Prepayments 1,023 751 1,366
-------- -------- --------
45,041 41,606 38,112
-------- -------- --------
Deferred charges and other assets 13,644 16,387 17,156
-------- -------- --------
Total assets $236,296 $225,119 $227,127
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization $167,324 $148,256 $161,006
-------- -------- --------
(See accompanying statement)
Current liabilities:
Notes payable 7,300 10,700 7,337
Current portion of long-term debt 1,994 1,875 1,950
Accounts payable 14,280 15,971 14,102
Accrued taxes 4,719 8,758 6,059
Accrued vacation 1,982 1,918 1,679
Customer deposits 4,049 3,822 3,981
Refundable gas costs -- 5,373 --
Other 4,774 3,686 3,947
-------- -------- --------
39,098 52,103 39,055
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes 19,751 16,756 18,734
Unamortized investment tax credits 2,573 2,732 2,691
Other 7,550 5,272 5,641
-------- -------- --------
29,874 24,760 27,066
-------- -------- --------
Total capitalization and liabilities $236,296 $225,119 $227,127
======== ======== ========
</TABLE>
PAGE I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1996 1995
---------------------
(thousands)
Cash provided (used for)
Operations:
- ----------
<S> <C> <C>
Income after interest expense $ 12,524 $ 8,833
Items not requiring cash -
Depreciation and amortization-Plant
& non-utility 8,938 7,959
Changes as a result of regulatory action (1,453) --
Amortization of deferred charges & other 1,312 1,186
Deferred Federal income taxes 1,021 1,250
Amortization of investment tax credits (118) (119)
Change in assets and liabilities
which provided (used) cash:
Accounts receivable (10,989) (4,522)
Unbilled Revenue 1,010 873
Deferred gas costs (1,260) 15,819
Inventories 2,901 4,251
Prepaid and refundable taxes 1,298 (2,125)
Prepayments 343 748
Accounts payable 178 (2,353)
Accrued taxes 2,718 2,534
Refundable gas costs -- 5,373
Accrued vacation, customer deposits & other 1,216 458
Deferred charges & other 513 (3,070)
-------- --------
Net cash provided by operations 20,152 37,095
-------- --------
Investment Activities:
- ---------------------
Expenditures for property, plant
and equipment, net (13,884) (13,708)
-------- --------
Total (13,884) (13,708)
-------- --------
Financing Activities:
- --------------------
Issuance of common stock 1,034 1,019
Issuance of mortgage bonds 15,000 --
Payments on long-term debt (1,881) (1,910)
Decrease in notes payable, net (15,037) (17,000)
Cash dividends on preferred shares (522) (522)
Cash dividends on common shares (4,609) (4,538)
-------- --------
Total (6,015) (22,951)
-------- --------
Increase in cash and temporary
cash investments 253 436
Cash and cash equivalents at beginning
of period 1,278 1,145
-------- --------
Cash and cash equivalents at end of peiod $ 1,531 $ 1,581
======== ========
Supplemental disclosures of cash floww information:
Cash paid year-to-date for -
Interest (net of amount capitalized $ 5,040 $ 4,650
Income taxes (net of refunds) $ 1,914 $ 1,385
</TABLE>
PAGE I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1996 1995 1995
-----------------------------------------
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 5,728 at 6/30/96
5,646 at 6/30/95
5,668 at 9/30/95 $ 5,728 $ 5,646 $ 5,668
Amount paid in excess of par 55,048 53,925 54,258
Retained earnings 25,991 22,306 18,598
-------- -------- --------
Total common stock equity 86,767 81,877 78,524
-------- -------- --------
Cumulative preferred stock of subsidiary:
The Providence Gas Company -
Redeemable 8.7% Series, $100 par
Authorized -80 shares
Outstanding - 80 shares as of
6/30/96, 6/30/95 and
9/30/95 8,000 8,000 8,000
-------- -------- --------
Long-term debt:
First mortgage bonds 72,800 59,400 74,400
Capital leases 1,751 854 2,032
-------- -------- --------
Total long-term debt 74,551 60,254 76,432
Less current portion 1,994 1,875 1,950
-------- -------- --------
Long-term debt, net 72,557 58,379 74,482
-------- -------- --------
Total capitalization $167,324 $148,256 $161,006
======== ======== ========
</TABLE>
PAGE I-4
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the consolidated financial information
contained in this report reflects all normal, recurring adjustments necessary to
provide a fair statement of the results for the periods reported; however, such
results are not necessarily indicative of results to be expected for the year,
due to the seasonal nature of the Registrant's operations. Certain information
and footnote disclosures normally included in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. However, the disclosures
herein when read with the annual report for 1995 filed on Form 10-K are adequate
to make the information presented not misleading.
Gas Charge Clause
- -----------------
In May 1996, the Rhode Island Public Utilities Commission approved a Rate
Design Settlement Agreement. The Agreement included changes to the Registrant's
gas cost recovery mechanism; specifically, the Agreement replaced the previous
Cost of Gas Adjustment Clause (CGA) with Gas Charge Adjustment Clauses (GCC)
effective June 2, 1996. In addition to those items previously recovered through
the CGA, the GCC provides for the recovery of: (1) inventory financing costs;
(2) working capital associated with gas supply purchases; (3) bad debt expenses
associated with the gas revenue portion of customer bills; and (4) liquefied
natural gas operating and maintenance expenses, all of which were previously
recovered in base rates. The GCC provides for reconciliation of total gas costs
billed with 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, customers over a subsequent period.
Reclassification
- ----------------
Certain prior period amounts have been reclassified for consistent
presentation with the current period.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The 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 paragraph, the
Registrant believes it is in substantial compliance with such laws and
regulations.
PAGE I-5
<PAGE>
At June 30, 1996, the Registrant was aware of four 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 PRP's. With
respect to one of the Plympton sites, the Registrant has joined with other PRP's
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, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of June 30,
1996, approximately $1.1 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by the
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at the site.
The Registrant has completed the study which indicates that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the best
alternative. At June 30, 1996, the Registrant has compiled a preliminary range
of costs based on remediation alternatives, ranging from $1.3 million to in
excess of $5.0 million. Based on the proposals for remediation work the
Registrant has accrued $1.3 million at June 30, 1996, for anticipated future
remediation costs at this site. Also, the Registrant has negotiated an
agreement, which is subject to Federal regulatory approval, with a third party
which provides for reimbursement of up to $2.5 million of certain remediation
costs to be incurred at this site.
Tests conducted following the recent discovery of an abandoned
underground oil storage tank at the Registrant's Westerly, Rhode Island
operations center confirm the existence of contaminants at this site. The
Registrant is currently conducting tests at this site, the costs of which are
being shared equally with the prior owner, to determine the nature and extent of
the contamination. Due to the early stages of investigation, management cannot
offer any conclusions as to whether any remediation will be required 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 cost of
approximately $1.4 million and an estimated $1.3 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
June 30, 1996. Management believes that this rate recovery mechanism is
appropriate for recovery of future costs. Should future developments warrant
PAGE I-6
<PAGE>
additional rate recovery mechanisms, management will seek such recovery.
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
and financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
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 successfully 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 Orders, the pipelines have incurred
significant costs, collectively known as transition costs. The majority of these
costs will be reimbursed by the pipeline customers, including the Registrant.
Based upon current information, the Registrant anticipates its transition costs
to net between $19 million and $21 million of which $15.2 million has been
included in the GCC and is currently being collected from customers. The
remaining minimum obligation of $3.8 million has been recorded in the
accompanying consolidated balance sheets along with a regulatory asset
anticipating future recovery through the GCC.
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 the one additional pipeline, and based on the information
available, the Registrant believes that its current range for transition costs
is reasonable.
Rate Case
- ---------
In February 1995, the Registrant 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 the
Registrant. In its decision, the RIPUC authorized the Registration to increase
its rates to recover additional annual revenues in the amount of $3,990,000.
PAGE I-7
<PAGE>
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, the Registrant recorded several adjustments to its first
quarter 1996 financial statements. Specifically:
a) The Registrant began 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, the Registrant was required to estimate two year's increase
in expense. As a result, the Registrant reduced its regulatory liability for one
year's property tax expense resulting in a one time gain of approximately $4.1
million before tax.
b) The Registrant wrote-off and will not recover approximately $1.6 million,
before tax, of restructuring costs previously deferred. The RIPUC had previously
allowed the Registrant recovery of similar costs, but determined that the costs
of the 1994 reorganization should not be recovered in rates.
c) The Registrant wrote-off approximately $440,000, before tax, of previously
deferred rate case expenses.
d) The Registrant wrote-off approximately $470,000, 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.
New Accounting Pronouncements
- -----------------------------
Management continues to analyze the new accounting statement, 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".
Based on the current regulatory environment, management does not believe
adoption of SFAS No. 121 will have a material impact on the financial position
or results of operations of the regulated business. Management continues to
analyze the effect of the adoption of SFAS No. 121 on its non-regulated business
and has not yet concluded what effect the adoption of SFAS No. 121 will have.
Adoption of SFAS No.121 is required in fiscal 1997 although the Registrant may
adopt at an earlier date.
PAGE I-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The Registrant's current operating revenues and operating margin for the
quarter, nine and twelve month periods, increased over comparable prior periods.
Net income for the quarter decreased while the nine and twelve month periods
posted increases as shown in the table below.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(000's)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $43,273 $38,157 $182,786 $153,621 $213,157 $187,380
======= ======= ======== ======== ======== ========
Operating margin $19,283 $16,913 $ 80,257 $ 69,406 $ 93,899 $ 83,945
======= ======= ======== ======== ======== ========
Net income (loss) $ (909) $ (844) $ 12,002 $ 8,311 $ 9,818 $ 7,359
======= ======= ======== ======== ======== ========
</TABLE>
Operating Revenues and Operating Margin
- ---------------------------------------
During the current year period, the Registrant has experienced colder than
normal weather resulting in temperatures averaging 17.6 percent colder than last
year. This increase in heating load due to the colder temperatures represents
approximately $5.7 million in increased operating margin for the nine and twelve
month periods, respectively.
Additionally, the Rhode Island Public Utilities Commission (RIPUC) approved
a rate increase effective December 17, 1995. Operating margin for the current
quarter and nine month period, versus last year, increased approximately
$600,000 and $2.9 million, respectively, as a result of the rate increase. As a
result of the RIPUC's approval in February 1996 of the Integrated Resource
Plan's (IRP) performance-based ratemaking mechanism, the Registrant recorded an
increase in operating margin of $1.5 million in the current quarter as a result
of gas cost savings achieved for the twelve month plan period which ended June
1996. This saving was somewhat offset by a one time charge to operating and
maintenance expenses of $800,000 to fund a low income assistance program as
discussed below. The IRP settlement agreement covers a three year period. The
Registrant's ability to record up to $1.5 million in operating margin annually
is dependent upon achieving certain levels of gas cost savings for each plan
year. Also see Liquidity and Capital Resource discussion.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased, during the current
quarter versus last year, approximately $1.7 million or 15.0 percent. The
increase is primarily attributable to a higher uncollectible revenue provision
due to the increased operating revenues resulting from the colder temperatures,
a one time charge of $800,000 to fund a low income assistance program associated
PAGE I-9
<PAGE>
with the RIPUC's February 1996 approval of the IRP, and a one time charge of
approximately $100,000 for costs associated with the IRP regulatory proceeding.
In addition, expenses of approximately $400,000 were incurred for outside
services associated with the development of new energy service offerings.
Operation and maintenance expenses increased approximately $3.7 million or 10.9
percent and $5.0 million or 11.7 percent for the nine and twelve month periods,
respectively, for the reasons described above.
Taxes
- -----
Taxes for the current quarter versus last year were flat while the nine and
twelve month periods versus last year increased approximately $2.5 million or
18.0 percent and $1.6 million or 9.9 percent, respectively. The increase in
taxes, mainly Federal income and state gross receipts tax, resulted from higher
pretax income and higher operating revenues, respectively.
Other Income
- ------------
Other income for the nine and twelve month periods versus last year
increased approximately $339,000 and $898,000 respectively. The increase is due
to regulatory adjustments including a one-time gain for the regulatory change in
accounting for property taxes which was offset by the write-offs of previously
deferred reorganization and other costs for which recovery was not allowed as
part of the rate award received from the RIPUC on November 17, 1995. (See notes
to consolidated financial statements.)
Interest Expense
- ----------------
Interest expense for the current quarter versus last year was flat while
increasing approximately $151,000 or 2.7 percent and $392,000 or 5.5 percent for
the nine and twelve month periods, respectively. A decrease in weighted average
short-term borrowings caused short-term interest expense to decrease for the
current quarter, nine and twelve month periods versus last year. The
Registrant's long-term interest expense for the current quarter, nine and twelve
month periods has increased slightly as a result of the Series R First Mortgage
Bond issuance in December 1995.
Future Outlook
- --------------
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 continues to assess the
long-term strategic fit of North Attleboro Gas. The Registrant's assessment of
this operation is part of its periodic evaluation of the strategic fit and
financial performance of all major assets. The Registrant is considering various
options for North Attleboro Gas, including a restructuring of operations, a
PAGE I-10
<PAGE>
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 the current
regulatory environment, management does not believe adoption of SFAS No. 121
will have a material impact on the financial position or results of operations
of the regulated business. Management continues to analyze the effect of the
adoption of SFAS No. 121 on its non-regulated business and has not yet concluded
what effect the adoption of SFAS No. 121 will have. 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.
There are virtually unlimited opportunities to unbundle services, form
alliances, custom-tailor services for customers, and greatly increase the
competition with other energy suppliers. To facilitate the transition to a
diversified energy marketer, the Registrant is planning to form business
alliances outside of its traditional utility business. The Registrant is also
seeking investment opportunities in non-regulated energy ventures. These energy
marketing ventures will increasingly be separate from the distribution utility.
There are strategic long-term planning costs associated with developing the new
energy service offerings. The Registrant estimates these costs to be in the
range of $400,000 to $900,000 for fiscal year 1996.
To pursue the opportunities discussed above, the Registrant on August 1,
1996, incorporated Providence Energy Services, Inc. to market natural gas and
services to all eligible transportation customers. The operating results of this
new company will not have a material impact on the Registrant's results of
operations for 1996.
In May 1996, the Rhode Island Public Utilities Commission approved a Rate
Design Settlement Agreement among The Registrant, the Division of Public
Utilities and Carriers, The Energy Council of Rhode Island (TEC-RI) and a
consortium of oil heat organizations. The Agreement begins a process of
unbundling natural gas service in Rhode Island enabling customers to choose
their gas suppliers. The Agreement went into effect June 2, 1996. While this
initial step is available to the largest commercial and industrial customers,
approximately 120, the Registrant is required to make an additional filing in
March 1997 that would expand the eligibility of unbundled services to other
customers. The Registrant does not know the number of customers that would be
impacted by the March 1997 filing at this time.
PAGE I-11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the latest nine months, the Registrant's accounts receivable and
unbilled revenue have increased approximately $10 million. These fluctuations
are the result of higher monthly sales primarily during the first and second
quarters and a moratorium on residential shut-offs during the heating season.
Because of these increases, which negatively impact cashflow, the Registrant
must borrow to maintain an appropriate level of liquidity. Management believes
its available financings are sufficient to meet these seasonal needs.
The Registrant experienced a sharp decrease in its net cash provided by
operations during the latest quarter as compared to last year, primarily as the
result of gas cost collections. Last year, the net cash provided by operations
increased as a result of the collection of gas costs from a substantial
underrecovery which previously existed.
In December 1995, the Registrant received proceeds of $15 million related
to an issuance of First Mortgage Bonds, Series R (7.5%), which will mature in
December 2025. The net proceeds received from the issuance were used to pay down
short-term debt.
Capital expenditures for the latest fiscal year-to-date period of $13.9
million were stable when compared to $13.7 million last year. Capital
expenditures for the remainder of the fiscal year are expected to be
approximately $6.6 million. Anticipated capital expenditures for the next three
years are expected to total between $55 million to $65 million.
In February 1995, the Registrant filed for rate relief requesting an
approximate eight percent general rate increase. In November 1995, the RIPUC
authorized the Registrant 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, the Registrant is allowed to earn a 10.9%
return on common equity.
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 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 of this award, the
final revenue increase of $94,445 was phased in on November 1, 1995.
PAGE I-12
<PAGE>
In February 1996, the Registrant received approval of a three-year
Settlement Agreement between itself and the Division of Public Utilities and
Carriers (Division) regarding the Integrated Resource Plan (IRP), which was
filed with the RIPUC in July 1994. The purpose of the IRP is to optimize the
utilization of production transmission and distribution resources so that
customers receive high quality services at the lowest possible costs.
The Settlement Agreement provides for: (1) funding associated with Demand
Side Management programs of $500,000, which are designed to provide equipment
rebates for specific load building programs; (2) funding associated with a low
income weatherization program of $200,000, which is designed to assist low
income customers through the installation of conservation measures; and (3) a
performance-based ratemaking mechanism. The Settlement Agreement also contains a
general agreement that the Registrant's strategy and steps included in its
supply plan are reasonable.
The Settlement Agreement also provides for a one-time funding of up to
$800,000 for a Low Income Assistance Program (LIAP) through a portion of the
Registrant's share of the performance-based ratemaking mechanism. The LIAP was
developed in response to the Registrant's anticipated loss of approximately $1.5
million in Federal funding for the low income heat assistance program
administered by the State of Rhode Island for fiscal 1996.
The funding of these programs is generated through annual gas cost savings
beginning in July 1995. The Registrant has performed an analysis of gas cost
savings since July 1995 and believes that sufficient savings have been achieved
as of June 30, 1996 to provide funding for these programs without incurring a
charge to income. Accordingly, in the current quarter, the Registrant recorded
its annual share of the performance-based ratemaking mechanism under this
agreement which resulted in a $1.5 million increase to operating margin.
Although the Settlement Agreement contains a methodology used to calculate the
actual gas cost savings, the ultimate analysis of savings is subject to RIPUC
review and approval which will occur in the fourth quarter of the fiscal year.
PAGE I-13
<PAGE>
PROVIDENCE ENERGY CORPORATION
-----------------------------
PART II. OTHER INFORMATION
- ---------------------------
REPORTS ON FORM 8-K
- -------------------
No reports or Form 8-K were filed during the quarter for which this report
is filed.
PAGE II-1
<PAGE>
PROVIDENCE ENERGY CORPORATION
-----------------------------
It is the opinion of management that the financial information contained in this
report reflects all adjustments necessary to a fair statement of results for the
period reported, but such results are not necessarily indicative of results to
be expected for the year, due to the seasonal nature of the Registrant's gas
operations. All accounting policies and practices have been applied in a manner
consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements 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
(Registrant)
/s/ GARY S. GILLHEENEY
By:______________________________
GARY S. GILLHEENEY
Senior Vice President, Treasurer
and CFO
Date: August 13, 1996
---------------
PAGE II-2
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