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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, 1996
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OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 1-10032
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PROVIDENCE ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) (Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 401-272-9191
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
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registered
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Common Stock, $1.00 Par Value NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(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
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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. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of December 4, 1996: $101,773,388
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: 5,767,747 shares outstanding at
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December 4, 1996.
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DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the annual report to shareholders for the fiscal year ended
September 30, 1996 are incorporated by reference into Part II.
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TABLE OF CONTENTS
PART I PAGE
Item 1 - Business
General I-1
Operations of the Gas Companies I-2
Nonutility Operations I-9
Special Factors Affecting the Gas Industry I-9
Environmental Regulations I-11
Other Standards I-12
Item 2 - Properties I-13
Item 3 - Legal Proceedings I-13
Item 4 - Submission of Matters to a Vote of Security Holders I-13
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-5
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-11
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PART I
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ITEM 1. BUSINESS
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Providence Energy Corporation (the Registrant or the Company) and its
subsidiaries and their representatives may from time to time make written or
oral statements, including statements contained in the Registrant's filings with
the Securities and Exchange Commission (SEC) and in its reports to shareholders,
including this Form 10-K and annual report to shareholders, which constitute or
contain "forward-looking" information as that term is defined in the Private
Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations
and releases.
All statements other than statements of historical facts included in this Form
10-K and annual report regarding the Registrant's financial position and
strategic initiatives and addressing industry developments are forward-looking
statements. Where, in any forward-looking statement, the Registrant, or its
management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The following
are factors which could cause actual results to differ materially from those
anticipated, and include but are not limited to: general economic, financial
and business conditions; competition in the energy services sector; regional
weather conditions; the availability and cost of natural gas; development and
operating costs; the success and costs of advertising and promotional efforts;
the availability and terms of capital; the business abilities and judgment of
personnel; unanticipated environmental liabilities; changes in, or the failure
to comply with, government regulations; the costs and effects of unanticipated
legal proceedings; the impacts of unusual items resulting from ongoing
evaluations of business strategies and asset valuations; and changes in business
strategy.
General
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The Registrant was organized in 1981 as a Rhode Island business corporation.
As of December 4, 1996, the Registrant's outstanding common shares are listed on
the New York Stock Exchange. Prior to that date, these shares were 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. In August
1996, the Registrant incorporated Providence Energy Services, Inc. to market
natural gas and energy services. 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 163,000 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.
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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
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Customers. The Gas Companies had an average annual number of customers of
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approximately 166,000 for the twelve months ended September 30, 1996, of which
approximately 90% were residential and 10% were commercial and industrial.
The net increase in the average annual number of customers during fiscal 1996
over fiscal 1995 was approximately 1,700 or 1.0%. 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
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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.
The following table shows the distribution of gas to various customer classes,
and the total gas sold and transported by year since 1992:
1996 1995 1994 1993 1992
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Firm 85.8% 76.4% 81.9% 83.9% 73.9%
Interruptible 9.3 17.6 15.8 14.7 23.1
Transportation 4.9 6.0 2.3 1.4 3.0
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100.0% 100.0% 100.0% 100.0% 100.0%
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Total Gas Sold and Transported
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BCF(*) 28.1 28.1 28.7 27.1 29.1
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(*) Gas sales are denominated in billions of cubic feet (Bcf) of natural gas.
Total gas sales include gas sold and transported by the Gas Companies.
Firm Service. In recent years, the distribution of the Gas Companies' firm
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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
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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
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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 not impacted by nonfirm sales due to the fact that the Rhode Island Public
Utilities Commission (RIPUC) requires the Registrant to return any margins
earned from these non-firm customers to firm customers through the Gas Charge
Clause (GCC) during the term of the Integrated Resource Plan - see Rates and
Regulation and Competition and Marketing.
Transportation Service. The Registrant provides both firm and nonfirm
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transportation of gas. Margin from the firm 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 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 firm
transportation service is the same as the margin from firm sales. Margin from
nonfirm transportation service is less than the margin from firm sales, but is
generally comparable to the margin from interruptible sales, depending on 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 firm margin will not be impacted. Total margin is not
impacted by nonfirm transportation due to the fact that the RIPUC requires the
Registrant to return any margins earned from these nonfirm customers to firm
customers through the GCC during the term of the Integrated Resource Plan - see
Rates and Regulation.
Gas Supply. During 1996, the Registrant purchased 84% of its gas supply in
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the production area with transportation to market and storage provided by firm
pipeline contracts. Liquefied natural gas (LNG) provided 5% of supply
requirements. The remaining 11% 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 1996, the Registrant
received $5.7 million in revenue from released capacity, a 10.5% increase over
the $5.1 million of revenue generated in fiscal 1995. The revenues reduced the
firm customer's gas cost, making the Registrant more competitive.
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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 1996, a number of supply contracts were
renegotiated or terminated to reduce fixed fees. The most significant change
was an increase in storage capacity for an expiring supply contract.
Although the Registrant has significantly increased its storage capacities
since the implementation of Federal Energy Regulatory Commission (FERC) Order
636, it continues to explore opportunities to add additional storage to its
portfolio as a replacement for higher cost supplies as 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
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the 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 February 1996, the Company received approval of a three-year Settlement
Agreement between itself and the Rhode Island 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 Company'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
Company's share of the performance-based ratemaking mechanism. The LIAP was
developed in response to the Company's anticipated loss of approximately
$900,000 in Federal funding for the low income heat assistance program
administered by the State of Rhode Island for 1996.
The funding of these programs is generated through annual gas cost savings
beginning in July 1995. The Company has performed an analysis of gas cost
savings since July 1995 and has achieved sufficient savings as of June 30, 1996
to provide funding for these programs without incurring
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a charge to income. Accordingly, in 1996, the Company recorded its annual share
of the performance-based ratemaking mechanism under this agreement which
resulted in a $1.5 million increase to operating margin.
Prior to the IRP, the cost of gas adjustment (CGA) clause contained a
provision that enabled the Registrant to retain margins associated with nonfirm
sales and transportation. Specifically, nonfirm margins above a threshold were
shared at the ratio 66 2/3% to firm customers and 33 1/3% to the Registrant.
This provision is suspended during the term of the IRP.
In February 1995, ProvGas filed for rate relief requesting an approximate 8%
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 recorded several adjustments to its 1996 financial statements.
Specifically:
a) ProvGas 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, ProvGas was required to estimate two year's increase in expense. As
a result, ProvGas reduced its regulatory liability for one year's property tax
expense resulting in a one time gain of approximately $4,100,000, before tax.
b) ProvGas wrote-off the $1,600,000, before tax, of restructuring costs
previously deferred. (See Footnote 9 in 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 wrote-off approximately $440,000, before tax, of previously deferred
rate case expenses. (See Footnote 1 in the Notes to the Consolidated Financial
Statements contained in the Registrant's Annual Report to Shareholders filed
herewith as Exhibit 13.)
d) ProvGas 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 FERC 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 did not result in a material gain or
loss.
The following table sets forth the results of ProvGas' applications
before the RIPUC for revenue increases since 1981.
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<TABLE>
<CAPTION>
Annualized Annualized Authorized
Date of Revenue Increase Date Rates Revenue Increase Return on
Application Requested Effective Allowed (*) Common Equity
- ------------- ---------------------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
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
</TABLE>
(*) Although the RIPUC reviews and approves all changes in gas costs billed to
customers through the GCC, such changes are not part of the general rate filings
described above. See Footnotes 1 and 10 in the Notes to the Consolidated
Financial Statements contained in the Registrant's 1996 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.
(****) 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.
The Registrant has been working closely with the RIPUC to develop a new rate
structure that will allow the Registrant to offer unbundled services designed to
meet 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. The Registrant believes that this rate
structure will foster a more competitive and flexible gas market in Rhode Island
and allow it to remain competitive by offering commercial/industrial businesses
value-added services at competitive prices.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Company, the Division, 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 program is
available to approximately 120 of the largest commercial and industrial
customers, the Company is required to make an additional filing in March 1997
that would expand the eligibility of unbundled services to other customers. The
Company does not know the number of customers that would be impacted by the
March 1997 filing at this time.
The Agreement also included changes to ProvGas' gas cost recovery mechanism.
Specifically, the Agreement replaced the previous CGA with the GCC effective
June 2, 1996. In addition to the commodity and related pipeline transportation
costs historically included in the CGA, the GCC 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) a substantial portion of LNG operating and maintenance
expenses, all
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of which were previously recovered in base rates. Similar to the former CGA,
the GCC provides for reconciliation of total gas costs billed with the actual
cost of gas incurred. Any excess or deficiency in amounts billed as compared to
costs incurred is deferred and either refunded to, or recovered from, customers
over a subsequent period.
On October 8, 1996, the RIPUC approved a one year Pilot Hedging Program
Agreement between the Company and the Division. The objective of the pilot
program is to mitigate the impact of natural gas price escalation through
utilization of Financial Risk Management (FRM) tools, to develop a more balanced
gas supply cost approach and finally, to study in more detail some of the
benefits and costs associated with the program. The FRM tools will be limited
to the use of options, including calls, puts, and collars, under the pilot
program. The total expenditures for the purchase and exercise of the FRM tools
and the net proceeds from the sale of FRM tools will be flowed through the
Variable Gas Cost component of the GCC and cannot exceed $800,000.
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 10 in 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 modest customer growth
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in both the residential and commercial/industrial markets. In all, the average
annual number of customers rose one percent to 166,276. This customer growth
was achieved in an underperforming local economy, one that is now showing signs
of improvement. The Providence Place Mall is scheduled to begin construction in
early 1997 and bring an estimated 3,000 construction jobs and more than 2,800
permanent jobs in sales, management and maintenance. The Fixed Income Group of
Fidelity Investments will bring to Rhode Island 2,500 new jobs and a $75 million
state-of-the art facility, the direct result of a creative package of land,
lease and tax incentives offered by the State of Rhode Island. Also, the newly
expanded T.F. Green Airport, and the arrival of Southwest Airlines, will
significantly improve the competitiveness of transportation options.
In 1997, the Registrant's core marketing efforts will continue to focus on
adding profitable new load and building loyalty with existing customers. The
Registrant will continue joint marketing with the local network of heating
contractors to promote heating conversions of customers on existing gas mains.
In addition, the Registrant will extend its coupon rebate program for high
efficiency heating equipment offered in combination with participating
manufacturers and local distributors.
In 1996, ProvGas instituted a Demand Side Management (DSM) Program, which
furnishes rebates to customers installing new technologies such as gas-fired air
conditioning, cogeneration and gas motors. These technologies use
proportionately more natural gas during the summer months, when the distribution
system has available capacity. The DSM program also allows for the improved
utilization of existing resources, such as mains, services, and year-round
supply contracts.
As a result of the Rate Design Settlement Agreement approved in May
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1996, ProvGas has been allowed to offer unbundled services to approximately 120
of its largest customers. These customers are now able to purchase natural gas
directly from suppliers and use ProvGas to transport the gas. ProvGas will make
an additional filing in March 1997 that would expand the eligibility of
unbundled services to other customers. The Registrant believes that this rate
structure will foster a more competitive and flexible gas market in Rhode Island
and allow it to remain competitive by offering commercial/industrial businesses
value-added services at competitive prices.
There are virtually unlimited opportunities to unbundle services, form
alliances, custom-tailor services for customers, and greatly increase the
Company's ability to compete with other energy suppliers. To facilitate the
transition to a diversified energy marketer, the Company is planning to form
business alliances outside of its traditional utility business. The Company is
also seeking investment opportunities in non-regulated energy ventures. The
Company currently has no material acquisitions pending.
To pursue the opportunities discussed above, the Company on August 1, 1996,
incorporated Providence Energy Services, Inc. to market natural gas and energy
services to customers who are now able to choose their energy suppliers. The
operating results of this new company did not have a material impact on the
Company's results of operations for 1996.
The Company has also established a relationship with Encon Systems, Inc.
(Encon), a full-service energy-management company that develops and implements
energy-efficient systems for commercial, industrial and institutional customers,
as well as residential customers. The Company has established a $350,000 line
of credit as a working capital supply primarily for Encon's PFS (a division of
Pepsico) contract. In connection with the line of credit, the Company received
a warrant to acquire stock representing 45 percent of the outstanding stock of
Encon, which is exercisable until early 1997, subject to extension under certain
circumstances.
Additionally, North Attleboro Gas is currently piloting a new set of service
contracts. North Attleboro Gas' annual service contract for the inspection of
gas heating equipment will now include providing customers with an indoor air
quality screening. Customers will receive a comprehensive indoor air quality
informational report and will be given the opportunity to purchase carbon
monoxide detectors and radon test kits from North Attleboro Gas. Once the
results of the pilot program are analyzed, the Company will determine whether
the indoor air quality program will generate additional growth opportunities.
These and other energy 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 Company estimates these
costs to be in the range of $400,000 to $600,000, net of tax, in 1997.
Employees. As of September 30, 1996, the Gas Companies had 575 full-
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time employees. Approximately 278 distribution and customer service employees
are covered by a collective bargaining agreement with Local 12431 of the United
Steelworkers of America. A new five year agreement became effective in January
1996.
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The agreement was developed by a labor-management negotiations committee and
can be reopened for any reason at any time in order to allow for the committee
to deal with new issues as they arise, which results in increased flexibility in
the use of employees. This will result in increased job security and will
position the Registrant to reduce costs and increase levels of customer service.
The agreement calls for a general wage increase of 3.25% each year from 1997 to
2000.
Additionally, in March 1996, a thirty-eight month Labor Agreement was ratified
by Local 12431-02 of the United Steelworkers of America, which represents 96
office and clerical employees. The agreement calls for a total wage increase of
8.44% over 38 months.
Gas Distribution Systems. The Gas Companies' distribution systems consist of
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approximately 2,400 miles of gas mains ranging in size from 2 to 36 inches in
diameter, approximately 142,000 services, (a service is a pipe connecting a gas
main with piping on a customer's premises), and approximately 163,000 active gas
meters together with related facilities and equipment. The Gas Companies have
regulating and metering facilities at nine points of delivery from Algonquin Gas
Transmission Company (Algonquin) and one point of delivery from Tennessee Gas
Pipeline Company, 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
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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 4,604 million cubic feet (MMcf), which is available for firm delivery.
Also, additional storage capabilities of 210 MMcf are available on an
interruptible basis.
The Registrant has an agreement with Algonquin for the storage of up to the
equivalent of 1,200 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. This agreement was renegotiated in 1996 as a result of
Algonquin's filing with the FERC to make major improvements and modifications to
the LNG facility, including the addition of liquefaction capability and the
replacement of existing equipment with state-of-the-art equipment. The
renegotiation of the contract will yield comparable service while reducing gas
supply and operating costs. The renegotiated contract is contingent upon certain
conditions being met, including FERC approval of the improvements and is
scheduled to become effective November 1, 1998. 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
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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.
Special Factors Affecting the Natural Gas Industry
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General. The natural gas industry is subject to numerous legislative
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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
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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.
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 $21 million and $22 million of which $15.8
million has been included in the GCC and is currently being collected from
customers. The remaining minimum obligation of $5.2 million has been recorded in
the accompanying consolidated balance sheets of the Registrant's 1996 Annual
Report to Shareholders filed herewith as Exhibit 13 along with a regulatory
asset anticipating future recovery through the GCC. To the extent that refunds
are received based on FERC settlements, these refunds are returned to the
customers through the GCC.
The Registrant's ultimate liability may differ from the above estimates based
on FERC settlements with the Registrant's pipeline
I-10
<PAGE>
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, 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 Company 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 Company. As of September 30,
1996, approximately $1.5 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 Company has completed the study which indicates that remediation will be
required. The Company has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the best
alternative. At September 30, 1996, the Company 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
Company has accrued $1.3 million at September 30, 1996, for anticipated future
remediation costs at this site. Also, the Company 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 discovery of an abandoned underground oil storage
tank at the Company's Westerly, Rhode Island operations center
I-11
<PAGE>
confirm the existence of contaminants at this site. The Company 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 fact that the testing is in its early stages, management cannot conclude
as to whether any remediation will be required at this site.
In prior rate cases filed, the Company 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 $1.8 million and an estimated $1.3 for environmental remediation
costs have been charged to the accumulated depreciation reserve at September 30,
1996. Of the environmental investigation costs incurred, approximately $1.0
million and $600,000 were recorded in the years ended September 30, 1996 and
1995, respectively, while the remainder were incurred in prior years.
Management believes that this rate recovery mechanism is appropriate for
recovery of future costs. Additionally, it is the Company's practice to consult
with the RIPUC on a periodic basis when, in management's opinion, significant
amounts might be expended for environmental related costs. Should future
developments warrant additional rate recovery mechanisms, management intends to
seek such recovery.
Management has begun discussions with other parties who may assist the Company
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.
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.
I-12
<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 that 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
I-13
<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 New York Stock Exchange
and trades under the symbol "PVY". Prior to December 4, 1996, the
Registrant's common stock was listed and traded on the American Stock
Exchange under the same symbol. As of December 4, 1996, there were 6,052
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, 1996, 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
20 of the Registrant's Annual Report to shareholders (pages 22 through
25 of this Form 10-K) for the fiscal year ended September 30, 1996,
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 18, of the Registrant's Annual Report to
Shareholders (pages 14 through 21 of this Form 10-K) for the fiscal year
ended September 30, 1996, 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
21 through 33 of the Registrant's Annual Report to Shareholders (pages
26 through 46 of this Form 10-K) for the fiscal year ended September 30,
1996, 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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Office
Name and Age Office First Held
- ------------------------------- ----------------------------- ----------
<S> <C> <C> <C>
James H. Dodge (56) Chairman, President and Chief
Executive Officer 1992
James DeMetro (48) Senior Vice President 1996
Gary S. Gillheeney (41) Senior Vice President, Chief
Financial Officer, Treasurer
and Assistant Secretary 1996
Robert W. Owens (48) Senior Vice President 1996
Alycia L. Goody (44) General Counsel and Secretary 1994
Gerald A. Yurkevicz (39) Vice President, Marketing 1996
</TABLE>
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 Senior Vice President of the Registrant and ProvGas in
February 1996. For more than three years prior thereto, Mr. DeMetro served the
Registrant and ProvGas as Vice President Energy Services. 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 Senior Vice President and Chief Financial Officer of
the Registrant and ProvGas in February 1996, and 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.
Mr. Owens was elected Senior Vice President of the Registrant and ProvGas in
February 1996. For more than a year prior thereto, Mr. Owens served the
Registrant and ProvGas as Vice President Operations 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.
Ms. Goody was elected General Counsel and Secretary of the
III-1
<PAGE>
Registrant in December 1994. Since 1994, Ms. Goody has also served ProvGas as
Vice President, General Counsel and Secretary. For two years prior to that, Ms.
Goody served ProvGas as Corporate Counsel.
Mr. Yurkevicz was elected Vice President, Marketing of the Registrant in August
1996. For ten years prior thereto, Mr. Yurkevicz served as Principal in the
Energy Practice at Mercer Management Consulting.
III-2
<PAGE>
DIRECTORS OF THE REGISTRANT
- ---------------------------
The following information is furnished with respect to the Directors of the
Registrant:
<TABLE>
<CAPTION>
Name Director Since Expiration of Term
- ------------------------ -------------- ------------------
<S> <C> <C>
Gilbert R. Bodell, Jr. 1980 1998
James H. Dodge 1991 1997
John H. Howland 1993 1999
Douglas H. Johnson 1993 1999
Dorothy G. Kramer 1976 1997
William Kreykes 1996 1999
Paul F. Levy 1995 1998
Romolo A. Marsella 1993 1999
M. Anne Szostak 1995 1998
Kenneth W. Washburn 1975 1997
W. Edward Wood 1995 1998
</TABLE>
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).
Dorothy G. Kramer is a retired Senior Vice President, Treasurer and Corporate
Secretary, Taco, Inc. (manufacturers of pumping, heat transfer and hydronic
control equipment).
William Kreykes is President and Chief Executive Officer, Lifespan Corporation
since December 1994; from October 1990 to December 1994: President and Chief
Executive Officer, Rhode Island Hospital.
III-3
<PAGE>
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. From 1991 to
1996: Chairman of the Board, Fleet Bank of 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).
III-4
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
For the information called for by this item, reference is made to pages 5 to
11 of the Registrant's proxy statement filed December 18, 1996 with the
Securities and Exchange Commission for the annual meeting of shareholders to be
held January 16, 1997.
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 18, 1996 with the Securities and
Exchange Commission for the annual meeting of shareholders to be held January
16, 1997.
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 18, 1996 with the Securities and
Exchange Commission for the annual meeting of shareholders to be held January
16, 1997.
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, 1996 and 1995
Consolidated Statements of Income for the years ended September 30,
1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended September 30,
1996, 1995 and 1994
Consolidated Statements of Capitalization--September 30, 1996
and 1995
Consolidated Statements of Changes in Common Stockholders' Investment for
the years ended September 30, 1996, 1995 and 1994
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 25 through 46 of this Form 10-K) for the year ended September 30, 1996,
filed herewith as Exhibit 13.
Schedule II. Reserves for the years ended September 30, 1996, 1995 and 1994.
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, 1996.
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.)
4.6 Eighteenth Supplemental Indenture of The Providence Gas Company dated
as of December 1, 1995. (Filed as Exhibit 4.6 to the report of the
Registrant in Form 10-K for the year ended September 30, 1995
incorporated herein by this reference.)
IV-2
<PAGE>
4.7 Stock Rights Agreement (Filed as Exhibit 1 to the report of the
Registrant in Form 8-K File No. 0-9380 dated August 3,
1988, incorporated herein by this reference.)
10.1 Material contracts filed as Exhibit 10 (a) through 10 (ff) to
Registration 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 10.1
to the report of the The Providence Gas Company 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 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 10.1 to the report of The
Providence Gas Company in Form 10-Q for the quarter ended December
31, 1994, incorporated herein by this reference.)
10.6 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 10.1 to the report of The
Providence Gas Company 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 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 10.1 to the report of The
Providence Gas Company 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 Alycia L. Goody,
Vice President, General Counsel and Secretary, of The Providence Gas
Company, and the said Company. (Filed as Exhibit 10.1 to the report
of The Providence Gas Company in Form 10-Q for the quarter ended
December 31, 1994, incorporated herein by this reference.)
10.9 Management contract dated September 3, 1996 between Gerald A.
IV-3
<PAGE>
Yurkevicz, Vice President, Marketing of the Registrant.
13 Portions of the Annual Report to shareholders for the fiscal year
ended September 30, 1996. (Pages 14 through 46)
22 Subsidiaries of the Registrant.
IV-4
<PAGE>
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 7, 1996.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in the accompanying index to the
financial statements is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein, in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
November 7, 1996
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 7, 1996, 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; S-8 Registration No. 33-43031; and S-8
Registration No. 33-04209. It should be noted that we have not audited any
financial statements of the Company subsequent to September 30, 1996, or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Boston, Massachusetts
December 19, 1996
IV-6
<PAGE>
Supplemental Schedule
PROVIDENCE ENERGY CORPORATION Schedule II
-----------------------------
RESERVES FOR THE YEARS ENDED
----------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
-------------------------------------------------------------
(Thousands of Dollars)
<TABLE>
<CAPTION>
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/95 to Operations Add (Deduct) Created 9/30/96
------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,995 $5,078 $ - $3,878 $ 3,195
Allowance for lease
receivables -
current 337 3 - 313 27
other 80 17 - 88 9
------- ------ ------ ------ -------
Total $ 2,412 $5,098 $ - $4,279 3,231
======= ====== ====== ====== =======
Allowance for lease
receivables -
long-term $ 651 $1,179 $ - $1,427 $ 403
======= ====== ====== ====== =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $18,734 $1,943 $ 36(C) $ - $20,713
------- ------ ------ ------ -------
Unamortized investment
tax credit 2,691 - - 158 2,533
------- ------ ------ ------ -------
Other-
Liability and
damage reserve 334 520 - 293 561
Other 5,307 1,303 1,742(D) 769 7,583
------- ------ ------ ------ -------
Total other 5,641 1,823 1,742 1,062 8,144
------- ------ ------ ------ -------
Total deferred
credits and
reserves $27,066 $3,766 $1,778 $1,220 $31,390
======= ====== ====== ====== =======
</TABLE>
IV-7
<PAGE>
Schedule II (cont'd)
<TABLE>
<CAPTION>
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/94 to Operations Add (Deduct) Created 9/30/95
------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
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 $1,086(C) $ -- $18,734
------- ------ ------ ------ -------
Unamortized investment
tax credit 2,851 -- -- 160 2,691
------- ------ ------ ------ -------
Other-
Liability and
damage reserve 421 400 -- 487 334
Other 5,898 623 418(A) 1,632 5,307
------- ------ ------ ------ -------
Total other 6,319 1,023 418 2,119 5,641
------- ------ ------ ------ -------
Total deferred
credits and
reserves $24,676 $3,165 $1,504 $2,279 $27,066
======= ====== ====== ====== =======
</TABLE>
IV-8
<PAGE>
SCHEDULE II (cont'd)
<TABLE>
<CAPTION>
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/93 to Operations Add (Deduct) Created 9/30/94
------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
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 $1,235 $ 253(C) $ -- $15,506
------- ------ ------ ------ -------
Unamortized investment
tax credit 3,010 -- -- 159 2,851
------- ------ ------ ------ -------
Other-
Liability and
damage reserve 296 145 -- 20 421
Other 4,395 1,232 1,726(B) 1,455 5,898
------- ------ ------ ------ -------
Total other 4,691 1,377 1,726 1,475 6,319
------- ------ ------ ------ -------
Total deferred
credits and
reserves $21,719 $2,612 $1,979 $1,634 $24,676
======= ====== ====== ====== =======
</TABLE>
(A) Includes adjustments to the regulatory pension liability.
(B) Principally a reserve for restructuring charges which was offset by a
deferred regulatory asset. Also reported are adjustments to the regulatory
pension liability.
(C) Represents adjustments to the regulatory asset and liability for FAS No. 109
activity.
(D) Principally an accrual for environmental investigation and remediation costs
in addition to adjustment to the regulatory pension liability.
IV-9
<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, 33-43031 and 33-04209:
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-10
<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 /s/ JAMES H. DODGE
--------------------------------------
James H. Dodge, Chairman,
President and CEO
Date December 19, 1996
------------------------------------
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
--------- ----- ----
/s/ JAMES H. DODGE Chairman, President and CEO 12-19-96
- --------------------------- (Principal Executive Officer) --------
James H. Dodge
/s/ GARY S. GILLHEENEY Senior Vice President, Chief 12-19-96
- --------------------------- Financial Officer, Treasurer --------
Gary S. Gillheeney and Assistant Secretary
/s/ GILBERT R. BODELL, JR. Director 12-19-96
- --------------------------- --------
Gilbert R. Bodell, Jr.
/s/ JOHN H. HOWLAND Director 12-19-96
- --------------------------- --------
John H. Howland
/s/ DOUGLAS H. JOHNSON Director 12-19-96
- --------------------------- --------
Douglas H. Johnson
/s/ DOROTHY G. KRAMER Director 12-19-96
- --------------------------- --------
Dorothy G. Kramer
/s/ WILLIAM KREYKES Director 12-19-96
- --------------------------- --------
William Kreykes
/s/ PAUL F. LEVY Director 12-19-96
- --------------------------- --------
Paul F. Levy
/s/ ROMOLO A. MARSELLA Director 12-19-96
- --------------------------- --------
Romolo A. Marsella
/s/ M. ANNE SZOSTAK Director 12-19-96
- ------------------------- --------
M. Anne Szostak
/s/ KENNETH W. WASHBURN Director 12-19-96
- ------------------------- --------
Kenneth W. Washburn
IV-11
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement is made this 3rd day of September 1996, by
--- ---------
and between PROVIDENCE ENERGY CORPORATION, a Rhode Island Corporation with
principal offices at 100 Weybosset Street, Providence, Rhode Island 02903
(the "Corporation") and Gerald A. Yurkevicz, of Lexington, Massachusetts (the
------------------- ------------------------
"Employee"), with respect to the following facts:
1. The Employee is employed by the Corporation as Vice President, Marketing;
-------------- ---------
the Corporation has confidence in the managerial and other skills of the
Employee and desires to continue the employment of the Employee on the terms and
conditions hereinafter contained; and in order to encourage the full attention
by the Employee to his duties in his capacity aforesaid, the Corporation wishes
to make provision for certain protections for the Employee in the event of the
termination of his employment under specified conditions.
2. The Employee is willing to continue to be employed by the Corporation on
such terms and conditions and with the benefit of such protections.
NOW, THEREFORE, in consideration of the mutual promises hereinafter
contained, the parties hereto mutually agree as follows:
1. Term of Agreement
-----------------
The Corporation hereby employs the Employee, and the Employee
hereby accepts employment by the Corporation for a term commencing
with the date hereof and continuing until September 3, 1997 subject to
-----------------
termination in accordance with the provisions of paragraph 3 below.
2. Capacity and Responsibilities
-----------------------------
The Employee shall be employed by the Corporation in the capacity
of Vice President, Marketing of the Corporation, or in such other
-------------------------
executive capacities or positions as the board of directors of the
Corporation may determine from time to time, with such duties and
authority as customarily appertain to such office or other capacities
or positions, and with such additional duties and authority as may be
agreed upon by the Employee and the Corporation from time
<PAGE>
to time. While in the employ of the Corporation, the Employee agrees
to serve the Corporation faithfully and diligently and to use his best
efforts to promote the interests of the Corporation.
3. Termination After Change in Control
-----------------------------------
(a) If a Change in Control, as hereinafter defined, shall have
occurred, this Agreement and the employment of the Employee hereunder
may be terminated as follows :
(i) by the Employee, on not less than thirty (30) days' notice to
the Corporation; or
(ii) by the Corporation, at any time on not less than thirty (30)
days' notice to the Employee, provided that (A) if there shall
have been a change in Employment Conditions, as defined
hereinafter, prior to the exercise by the Employee of his
termination rights referred to above, or (B) if the termination of
the Employee's employment by the Corporation shall be without
cause (as defined hereinafter), then in either case the Employee
shall be entitled to the payment of an amount equal to the sum of
(i) his annual base compensation for one (1) year, as reportable
to the Internal Revenue Service for federal income tax purposes,
plus (ii) any amounts paid or payable under the Providence Energy
Corporation Performance and Equity Incentive Plan (or under such
other incentive plan of the Providence Energy Corporation as may
be in effect from time to time) for the full fiscal year next
preceding the date of termination. Such amount shall be paid to
the Employee in twelve (12) consecutive equal monthly installments
on the last day of each month beginning with the month next
following the month in which the termination is effective. If and
for as long as the Employee is entitled to payments under this
paragraph, the Corporation will continue to provide to the
Employee, at the Corporation's expense, the health and medical
insurance benefits being provided to the Employee at the time of
termination of his employment.
2
<PAGE>
(b) Any payment provided for in subparagraph (a), above, shall be made
without reduction whether or not any portion thereof shall be deemed
an "excess parachute payment" under the provisions of Section 280G of
the Internal Revenue Code of 1986, as the same may be amended from,
time to time.
(c) For the purposes of this Agreement, the Employee's employment
shall be deemed to have been terminated for cause only if there shall
have been an act of fraud, misappropriation or embezzlement on the
part of the Employee. Notwithstanding the foregoing, the Employee
shall not be deemed to have been terminated for cause unless and until
there shall have been delivered to the Employee a copy of a resolution
duly adopted by the unanimous vote of the entire membership of the
Corporation's board of directors at a meeting of such board duly
called and held for that purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the
Employee's counsel, to be heard by the board) finding that in the good
faith opinion of the board the Employee was guilty of conduct set
forth in the first sentence of this subparagraph (c) and specifying
the particulars thereof in detail.
4. Definition of Change in Control
-------------------------------
For the purposes of this Agreement, a Change in Control shall be
deemed to have occurred if
(a) there shall be consummated (i) any consolidation or merger of the
Corporation, a Rhode Island corporation and the holder of all of the
outstanding capital stock of Providence Gas Company, in which the
Corporation is not the continuing or surviving corporation, or
pursuant to which shares of the Corporation's common stock are
converted into cash, securities, or other property, other than a
merger of the Corporation in which the holders of the Corporation's
common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (ii) any sale, lease, exchange, or
other transfer (in on transaction or a series of related transactions)
of all or substantially all of the assets of Providence Gas Company;
or
(b) the shareholders of Providence Gas Company or of the Corporation
approve any plan or proposal for the liquidation or dissolution of
Providence Gas Company or of the Corporation; or
3
<PAGE>
(c) any person (as such term is used in Sections 13(d) and 14(b)(2) of
the Securities Exchange Act of 1934, as amended [the "Exchange Act"]),
other than Providence Energy or a successor corporation resulting from
a merger excluded under clause (i) of subparagraph (a), above, shall
become directly or indirectly the owner or the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of thirty
percent (30%) or more of the outstanding common stock of the
Corporation, or any person (as such term is so used) shall become
directly or indirectly the owner or the beneficial owner (within the
meaning of said Rule 13d-3) of thirty percent (30%) or more of the
outstanding common stock of the Corporation.
5. Definition of Change in Employment Conditions
---------------------------------------------
For the purposes of this Agreement, a "Change in Employment
Conditions" shall mean any of the following:
(a) a change in the Employee's titles or offices as in effect
immediately prior to a Change in Control, or any removal of the
Employee from any of such positions, except in connection with the
termination of his employment for cause or as a result of the
Employee's retirement, permanent disability, or death;
(b) a reduction by the Corporation in the Employee's annual base
compensation as in effect on the date hereof or as the same may be
increased from time to time during the term of this Agreement, or the
Corporation's failure to increase (within 12 months of the Employee's
last increase in compensation) the Employee's compensation after a
Change in Control in an amount which at least equals, on a percentage
basis, the weighted average percentage increase in compensation for
all officers of the Corporation effected in the preceding 12 months;
(c) any failure by the Corporation to continue in effect any benefit
plan or arrangement in which the Employee is participating at the time
of a Change in Control (or any other plans providing the Employee with
substantially similar benefits) (hereinafter referred to as "Benefit
Plans"), or the taking of any action by the Corporation which would
adversely affect the Employee's participation in or materially reduce
the Employee's benefits under any such Benefit Plan or deprive the
Employee of any material fringe benefit enjoyed by the Employee at the
time of a Change in Control;
(d) a relocation of the Corporation's principal executive offices to a
location outside of the Greater Providence, Rhode Island, area, or the
Employee's relocation to any place other than the location at which
the Employee performed his duties prior to a Change in Control, except
for required travel by the Employee on the Corporation's business to
an extent substantially consistent with the Employee's business travel
obligations at the time of a Change in Control;
4
<PAGE>
(e) any failure by the Corporation to provide the Employee with the
number of paid vacation days to which the Employee is entitled at the
time of a Change in Control; or
(f) any breach by the Corporation of any material provision of this
Agreement.
6. Successor to the Corporation
----------------------------
The Corporation will require any successor to or assignee of
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) all or substantially all of the business and/or assets of
the Corporation, by agreement, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the
same manner and to the same extent that the Corporation would be
required to perform it if no such succession or assignment had taken
place. Any failure of the Corporation to obtain such agreement prior
to the effectiveness of any such succession or assignment shall be
deemed a breach of a material provision of this Agreement. As used in
this Agreement, "Corporation" shall include any successor to or
assignee of the Corporation's business and/or assets as aforesaid
which executes and delivers the agreement provided for in this
paragraph 6 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.
7. Performance and Equity Incentive Plan
-------------------------------------
Nothing in this agreement shall be deemed to alter or modify in
any way such rights as the Employee may now or in the future have
under the 1992 Performance and Equity Incentive Plan (the "Plan") of
Providence Energy Corporation, as the same may be amended from time to
time, including without limitation rights of the Employee with respect
to the accelerated vesting of Grant Shares (as defined in the Plan)
under certain circumstances as provided in the Plan.
8. Notices
-------
5
<PAGE>
Any notice given or required to be furnished to the Employee under
this Agreement shall be mailed to him by registered mail, postage
prepaid, at his last-known mailing address as the same appears on the
records of the Corporation, or at such other address as he may furnish
to the Corporation in writing for the purpose. Any notice given or
required to be furnished to the Corporation hereunder shall be mailed
to it by registered mail, postage prepaid, at 100 Weybosset Street,
Providence, Rhode Island 02903, attention: Secretary, or at such other
address as the Corporation may furnish to the Employee in writing for
the purpose. Any such notice shall be deemed to have been given when
mailed in accordance with the foregoing.
9. Termination of Prior Employment Agreements
------------------------------------------
This Agreement is intended to supersede all prior employment
agreements, oral or written, between the Employee and the Corporation,
all of which are hereby terminated and canceled. Neither the
Corporation nor the Employee shall have any further rights against or
obligations to the other under any of such prior agreement.
10. Binding Effect, etc.
--------------------
This Agreement shall be binding upon and inure to the benefit of
the Employee and his heirs and the representatives of his estate. The
interests of the Employee hereunder shall not be assignable. This
Agreement shall also be binding upon and shall inure to the benefit of
the Corporation and its successors and assigns.
11. Applicable Law
--------------
This Agreement shall be governed in all respects by the laws of
the State of Rhode Island.
IN WITNESS WHEREOF, the parties have executed this employment
Agreement as of the day and year first above written.
PROVIDENCE ENERGY CORPORATION
By: /s/ JAMES H. DODGE /s/ GERALD A. YURKEVICZ
------------------- -----------------------
James H. Dodge Gerald A. Yurkevicz
Chairman, President, and CEO
6
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Providence Energy Corporation (the Company) and its subsidiaries and their
representatives may from time to time make written or oral statements, including
statements contained in the Company's filings with the Securities and Exchange
Commission (SEC) and in its reports to shareholders, including this annual
report to shareholders, which constitute or contain "forward-looking"
information as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations and releases. All
statements other than statements of historical facts included in this annual
report regarding the Company's financial position and strategic initiatives and
addressing industry developments are forward-looking statements. Where, in any
forward-looking statement, the Company, or its management, expresses an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can
be no assurance that the statement of expectation or belief will result or be
achieved or accomplished. The following are factors which could cause actual
results to differ materially from those anticipated, and include but are not
limited to: general economic, financial and business conditions; competition in
the energy services sector; regional weather conditions; the availability and
cost of natural gas; development and operating costs; the success and costs of
advertising and promotional efforts; the availability and terms of capital; the
business abilities and judgment of personnel; unanticipated environmental
liabilities; changes in, or the failure to comply with, government regulations;
the costs and effects of unanticipated legal proceedings; the impacts of unusual
items resulting from ongoing evaluations of business strategies and asset
valuations; and changes in business strategy.
SUMMARY
The Company's current operating revenues, operating margin and net income have
increased over the comparable periods presented, as shown in the table below:
(000's)
Percent
1996 1995 Change Change
- --------------------------------------------------------------
Operating Revenues $215,152 $183,992 $31,160 16.9
Operating Margin 94,906 83,048 11,858 14.3
Net Income 8,970 6,127 2,843 46.4
RESULTS OF OPERATIONS - 1996 VS 1995
Operating Revenues and Operating Margin
During the current year, the Company has experienced colder than normal weather
resulting in temperatures averaging 16.8 percent colder than last year. The
increase in heating load due to the colder temperatures represents approximately
$5.7 million in increased operating margin. As a result of the colder
temperatures experienced during 1996, residential sales, which provide
Page - 14
<PAGE>
the Company with its greatest source of revenues, increased 1,714 million cubic
feet (MMcf) or 13.5 percent over 1995. Also contributing to the increase was a
net increase in the average annual number of customers during 1996 over 1995 of
1,689 or one percent. This increase contributed approximately $300,000 of
operating margin.
Additionally, the Rhode Island Public Utilities Commission (RIPUC) approved a
rate increase effective December 17, 1995. Operating margin for the current
year increased approximately $3.2 million versus last year 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
Company recorded an increase in operating margin of $1.5 million in 1996 as a
result of gas cost savings achieved for the twelve-month plan period which ended
June 1996. These savings were 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
Company'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.
Interruptible and other volumes decreased approximately 2,300 MMcf or 47 percent
versus last year primarily as a result of a decrease in non-firm sales of 1,200
MMcf and a decrease in sales for resale of 1,300 MMcf. These decreases were
offset by an increase in special contracts of 200 MMcf. The decrease in
interruptible and other sales did not have an impact on the Company's operating
margin or results of operations because the RIPUC requires the Company to return
any margins earned from these non-firm customers to firm customers through the
Gas Charge Clause (GCC).
In addition, the Company had an increase in operating margin of approximately
$200,000 due to an increase in revenues associated with the phase-in of expenses
for Statement of Financial Accounting Standards (SFAS) No. 106.
Operating and Maintenance Expenses
Overall, operating and maintenance expenses have increased, approximately $4.7
million or 10.5 percent versus last year. The Company had an increase of $1.1
million in its uncollectible revenue provision due to the increased operating
revenues resulting from the colder-than-normal weather experienced during the
year. As a result of the Company's improved earnings, performance incentive
compensation expense increased approximately $700,000 in 1996 versus 1995.
Additionally, in connection with the RIPUC's approval of the IRP in February
1996, the Company had a one-time charge of $800,000 to fund a low income
assistance program as well as $100,000 of costs associated with the regulatory
proceeding. Also, there were additional wage expenses of approximately $800,000
related to performance, cost of living and negotiated union contract increases,
as well as overtime pay due to the colder-than-normal weather. Finally,
approximately $200,000 of expenses relating to the phase-in of SFAS No. 106
costs were incurred as well as expenses of approximately $600,000 for outside
services associated with the development of new energy service offerings. The
remaining $400,000 is attributable to increases in general operating costs.
The Company continually reviews its operating expenses in order to keep expenses
as low as possible. However, the Company's expenses will vary based on weather
and other factors.
Page -15
<PAGE>
Taxes
Taxes have increased approximately $2.8 million or 18.9 percent during the last
year. The increase in taxes, mainly Federal income and state gross earnings tax,
resulted from higher pretax income and higher operating revenues, respectively.
Interest Expense
Overall, interest expense for 1996 was stable when compared to 1995. A decrease
in weighted average short-term borrowings caused short-term interest expense to
decrease approximately $700,000 for the current year. The Company's long-term
interest expense for the current year has increased approximately $800,000 as a
result of the Series R First Mortgage Bond issuance in December 1995.
Future Outlook
A) Business Opportunities/Industry Restructuring
There are virtually unlimited opportunities to unbundle services, form
alliances, custom-tailor services for customers, and compete with other energy
suppliers. To facilitate the transition to a diversified energy marketer and
service provider, the Company is planning to form business alliances outside of
its traditional utility business. The Company is also seeking investment
opportunities in non-regulated energy ventures. The Company currently has no
material acquisitions pending.
To pursue the opportunities discussed above, the Company on August 1, 1996,
incorporated Providence Energy Services, Inc. to market natural gas and energy
services to customers who are now able to choose their energy suppliers. The
operating results of this new company were not material in 1996.
The Company has also established a relationship with Encon Systems, Inc.
(Encon), a full-service energy-management company that develops and implements
energy-efficient systems for commercial, industrial and institutional customers,
as well as residential customers. The Company has established a $350,000 line
of credit as a working capital supply primarily for Encon's PFS ( a division of
PepsiCo) contract. In connection with the line of credit, the Company received
a warrant to acquire stock representing 45 percent of the outstanding stock of
Encon, which is exercisable until early 1997, subject to extension under certain
circumstances. The companies are also working on joint marketing opportunities.
Additionally, North Attleboro Gas Company (North Attleboro) is currently
piloting a new set of service contracts. North Attleboro's annual service
contract for the inspection of gas heating equipment will now include providing
customers with an indoor air quality screening. Customers will receive a
comprehensive indoor air quality informational report and will be given the
opportunity to purchase carbon monoxide detectors and radon test kits from North
Attleboro. Once the results of the pilot program are analyzed, the Company will
determine whether the indoor air quality program will generate additional growth
opportunities.
These and other energy ventures will increasingly be separate from the
distribution utility. There are strategic long-term planning and operating
costs associated with developing the new energy service offerings. The Company
estimates these costs to be in the range of $400,000 to $600,000, net of taxes,
in 1997.
Page - 16
<PAGE>
B) Regulatory
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Company, the Rhode Island Division of Public Utilities and Carriers (Division),
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
approximately 120 of the largest commercial and industrial customers, the
Company is required to make an additional filing in March 1997 that would expand
the eligibility of unbundled services to other customers. The Company does not
know the number of customers that would be impacted by the March 1997 filing at
this time.
Also on October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Settlement Agreement between the Company and the Division. The objective of the
pilot program is to mitigate the impact of natural gas price escalation through
utilization of Financial Risk Management (FRM) tools, to develop a more balanced
gas supply cost approach, and finally, to study in more detail some of the
benefits and costs associated with the program. The FRM tools will be limited
to the use of options, including calls, puts, and collars, under the pilot
program. The total expenditures for the purchase and exercise of the FRM tools
and the net proceeds from the sale of FRM tools will be flowed through the
Variable Gas Cost component of the GCC and cannot exceed $800,000.
C) Subsidiaries
The Company currently owns and operates North Attleboro, a small gas
distribution company with over 3,000 customers located in Massachusetts. The
Company continues to assess the long-term strategic fit of North Attleboro. The
Company's assessment of this operation is part of its periodic evaluation of the
strategic fit and financial performance of all major assets. The Company is
considering various options for North Attleboro, including a restructuring of
operations, a request for a rate increase or the possible sale of North
Attleboro 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 Company.
D) New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently released 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 Company in 1997. Based on the
current regulatory environment, management does not believe the 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 SFAS No. 123, "Accounting for Stock-Based
Compensation". Although this Statement will increase footnote disclosures
regarding the Company's stock plans, management does not believe SFAS No. 123
will have an impact on the Company's results of operations or financial
position.
Page - 17
<PAGE>
RESULTS OF OPERATIONS - 1995 VS 1994
Operating Revenues and Operating Margin
The Company 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 warmer-than-normal temperatures experienced during 1995,
residential sales, which provide the Company with its greatest source of sales,
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 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. Providence Gas
Company's (ProvGas) increase in non-firm sales generated approximately $200,000
in additional operating margin as a result of ProvGas' non-firm margin sharing
agreement. The decrease in sales of gas for resale purposes did not have an
impact on the Company's operating margin because the RIPUC requires any margin
earned from the sale of gas for resale purposes to be returned to firm customers
through the GCC.
Continuing efforts to be customer focused and to meet customer expectations
resulted in the Company negotiating and receiving regulatory approval for five
special agreements that allowed the offering of 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 for fiscal 1995 decreased $1.9 million or
four percent over the last fiscal year. This decrease was due to a lower
uncollectible revenue provision resulting from the decrease in operating revenue
and a slight improvement in the Company's collection of accounts receivable.
The remainder of the decrease was primarily attributable to a reduction in labor
and related expenses. The restructuring initiative that occurred at ProvGas 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 Company continually reviews its operating expenses in order to keep expenses
as low as possible. However, since the Company's expenses will vary based on
weather and other factors, 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 1995 as compared to
1994. 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
Page - 18
<PAGE>
to warmer-than-normal weather.
Other, Net
Other, net increased by approximately $700,000 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 in 1995 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.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company experienced a substantial decrease in its net cash
provided by operations primarily as the result of the timing of the recovery of
incurred gas costs through the GCC as discussed in Footnote 1 of the
accompanying consolidated financial statements.
Capital expenditures for 1996 were $20.8 million versus $19.6 million in 1995, a
6.1 percent increase. Approximately $400,000 of the increase was due to
increased environmental expenditures, which are included in the Company's
depreciation factors consistent with the rate recovery treatment for all types
of cost of removal. The remainder of the increase was primarily due to increased
expenditures by the Company in new technology. Anticipated capital expenditures
for the next three years are expected to total between $50 million and $60
million.
In December 1995, the Company received proceeds of $15 million related to an
issuance of First Mortgage Bonds, Series R (7.5 percent), which will mature in
December 2025. The net proceeds received from the issuance were used to pay
down short-term debt. The Company meets seasonal cash requirements and finances
its capital expenditures program on an interim basis through short-term
borrowings. As of September 30, 1996, the Company had lines of credit totaling
$61,500,000 with borrowings outstanding of $23,270,000.
During the next two years, the Company intends to make both equity and debt
offerings in amounts ranging from $10 million to $15 million each to finance its
capital expenditures and energy service offerings.
In November 1996, the Company filed an application to list its common stock on
the New York Stock Exchange. The Company is changing stock exchanges in an
effort to make the Company more attractive to portfolio managers who follow its
stock and to enable the Company to reach a broader investment community.
The Company's ability to pay dividends is largely dependent upon receipt of
dividends from ProvGas. Approximately $18 million of ProvGas' retained earning
were available for dividends at the end of fiscal 1996 under the most
restrictive terms of ProvGas' First Mortgage Bond indenture.
The Company continued to offer a Dividend Reinvestment and Cash Stock Purchase
Plan (the Plan) for its current shareholders. During 1996, 41.7 percent of the
Company's shareholders participated in the Plan, with $1.4 million or 22.5
percent of declared dividends reinvested
Page -19
<PAGE>
in new shares rather than paid in cash.
In February 1995, the Company filed for rate relief requesting an approximate
eight 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. In November
1995, the RIPUC authorized the Company 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 Company'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 Company is allowed to
earn a 10.9 percent return on common equity. See Footnote 10 to the accompanying
consolidated financial statements for more details.
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. 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.
In February 1996, the Company received approval of a three-year Settlement
Agreement between itself and the Division regarding the 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 Company'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 Company's
share of the performance-based ratemaking mechanism. The LIAP was developed in
response to the Company's anticipated loss of approximately $900,000 in Federal
funding for the low income heating assistance program administered by the State
of Rhode Island for 1996.
The funding of these programs is generated through annual gas cost savings
beginning in July 1995. The Company has performed an analysis of gas cost
savings since July 1995 and has achieved sufficient savings as of June 30, 1996
to provide funding for these programs without incurring a charge to income.
Accordingly, in 1996, the Company recorded its annual share of the performance-
based ratemaking mechanism under this agreement which resulted in a $1.5 million
increase to operating margin.
For additional information on current and anticipated financial, economic, and
operational data, references are made to the President's Message to Shareholders
and 1996: The Year in Review sections of this Annual Report to Shareholders.
Page - 20
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK INFORMATION
Dividend Paid
Quarter Ended High Low Per Share
- -------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1996 $18 3/4 $16 5/8 $.27
June 30, 1996 18 3/8 16 3/8 .27
March 31, 1996 18 3/4 16 5/8 .27
December 31, 1995 17 1/4 16 .27
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
</TABLE>
Page -21
<PAGE>
SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS
For the Years Ended September 30
(thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $215,152 $183,992 $222,778 $209,315 $190,341 $169,086
Cost of gas sold 120,246 100,944 135,104 126,314 111,568 101,707
-------- -------- -------- -------- -------- --------
Operating margin 94,906 83,048 87,674 83,001 78,773 67,379
-------- -------- -------- -------- -------- --------
Other operating expenses,
excluding taxes 61,030 54,838 55,838 52,921 52,122 47,015
Taxes, other than income 13,007 11,769 12,540 12,597 11,497 11,031
Federal income taxes 4,683 3,104 4,460 3,554 2,774 440
-------- -------- -------- -------- -------- --------
Total operating
expenses 78,720 69,711 72,838 69,072 66,393 58,486
-------- -------- -------- -------- -------- --------
Operating income 16,186 13,337 14,836 13,929 12,380 8,893
Other, net 945 865 196 37 287 1,562
-------- -------- -------- -------- -------- --------
Income from continuing
operations before
interest expense 17,131 14,202 15,032 13,966 12,667 10,455
Interest expense 7,465 7,379 6,247 6,653 6,837 7,764
-------- -------- -------- -------- -------- --------
Income from continuing
operations after
interest expense 9,666 6,823 8,785 7,313 5,830 2,691
Preferred dividends of
subsidiary (696) (696) (696) (696) (696) (280)
-------- -------- -------- -------- -------- --------
Net income 8,970 6,127 8,089 6,617 5,134 2,411
Common dividends 6,155 6,062 5,856 4,889 4,908 6,057
-------- -------- -------- -------- -------- --------
Earnings reinvested in
the corporation $ 2,815 $ 65 $ 2,233 $ 1,728 $ 226 $ (3,646)
======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding 5,709.2 5,624.2 5,534.1 4,761.8 4,478.4 4,337.9
======== ======== ======== ======== ======== ========
Net income per
common share $ 1.57 $ 1.09 $ 1.46 $ 1.39 $ 1.15 $ .56
======== ======== ======== ======== ======== ========
Common dividends $ 1.08 $ 1.08 $ 1.06 $ 1.02 $ 1.10 $ 1.40
======== ======== ======== ======== ======== ========
</TABLE>
Page - 22
<PAGE>
OTHER FINANCIAL DATA
SEPTEMBER 30
(thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total assets $250,150 $227,127 $233,311 $224,550 $197,459 $189,422
Gas plant--at
original cost 279,849 262,769 239,830 221,769 210,087 199,216
Gas plant--net of
depreciation 179,473 169,792 159,012 149,272 144,767 139,741
Capitalization:
Common stockholders'
equity 82,565 78,524 77,156 73,368 54,491 52,302
Redeemable cumulative
preferred stock 8,000 8,000 8,000 8,000 8,000 8,000
Long-term debt 72,456 74,482 60,079 62,163 60,958 42,885
Shares of common stock
at year-end 5,748 5,668 5,581 5,486 4,534 4,408
Book value per share $ 14.36 $ 13.85 $ 13.82 $ 13.37 $ 12.02 $ 11.87
======== ======== ======== ======== ======== ========
</TABLE>
Page - 23
<PAGE>
FINANCIAL AND OPERATING STATISTICS
For the Years Ended September 30
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues (thousands of dollars):
Residential $128,875 $106,387 $130,888 $120,997 $104,658 $ 92,660
Commercial/
industrial 74,625 61,491 76,174 72,974 63,405 57,153
-------- -------- -------- -------- -------- --------
Total firm 203,500 167,878 207,062 193,971 168,063 149,813
Interruptible and other 9,882 14,026 14,471 14,336 21,394 17,681
Transportation 741 804 287 54 74 735
Other 1,029 1,284 958 954 810 857
-------- -------- -------- -------- -------- --------
Total operating
revenues $215,152 $183,992 $222,778 $209,315 $190,341 $169,086
======== ======== ======== ======== ======== ========
Gas sold and transported (MMcf):
Residential 14,423 12,709 14,122 13,783 13,166 11,534
Commercial/
industrial 9,694 8,772 9,360 8,926 8,363 7,637
-------- -------- -------- -------- -------- --------
Total firm 24,117 21,481 23,482 22,709 21,529 19,171
Interruptible and other 2,610 4,950 4,547 3,985 6,717 5,659
Transportation 1,380 1,681 656 386 869 4,127
-------- -------- -------- -------- -------- --------
Total gas sold
and transported 28,107 28,112 28,685 27,080 29,115 28,957
Company use and
losses 605 919 1,182 1,187 1,264 1,445
-------- -------- -------- -------- -------- --------
Total sendout 28,712 29,031 29,867 28,267 30,379 30,402
======== ======= ======== ======== ======== ========
Gas purchased, produced and
transported (MMcf):
Pipeline natural
gas-contract 17,567 16,591 22,880 18,044 20,150 21,051
Pipeline natural
gas-spot purchases 5,197 7,935 3,533 7,936 7,374 3,210
Pipeline natural
gas-transportation 1,380 1,681 656 386 869 4,127
Underground storage 3,129 2,270 1,697 879 594 1,038
Liquefied natural gas 1,439 554 1,101 1,022 1,329 975
Liquid propane and
synthetic natural gas - - - - 63 1
-------- -------- -------- -------- -------- --------
Total 28,712 29,031 29,867 28,267 30,379 30,402
======== ======= ======== ======== ======== ========
Average annual number of customers:
Residential 149,487 147,935 145,793 143,771 143,114 143,207
Commercial/
industrial 16,645 16,509 16,337 16,264 15,889 15,114
-------- -------- -------- -------- -------- --------
Total firm 166,132 164,444 162,130 160,035 159,003 158,321
</TABLE>
Page - 24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interruptible and
transportation 144 143 141 123 115 79
-------- -------- -------- -------- -------- ---------
Total 166,276 164,587 162,271 160,158 159,118 158,400
======== ======== ======== ======== ======== =========
Total number of customers
at year-end 164,312 163,294 159,375 159,135 157,087 159,234
======== ======== ======== ======== ======== =========
Residential heating:
Average consumption per
customer (Mcf) 116 103 117 116 112 97
Average revenue per
customer $ 1,016 $ 844 $ 1,068 $ 1,008 $ 870 $ 766
Average rate per
Mcf $ 8.77 $ 8.19 $ 9.10 $ 8.68 $ 7.80 $ 7.91
Average annual number
of customers 118,724 116,826 114,461 112,497 111,176 110,997
Maximum daily sendout
(MMcf) 189 202 206 185 174 172
Calendar degree days 5,967 5,111 5,977 5,718 5,502 4,893
</TABLE>
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet.
Normal calendar degree days for fiscal year 1996 are 5,682; 1995 and 1994 are
5,709; 1993, 1992 and 1991 are 5,811.
Page - 25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30
<S> <C> <C>
(thousands of dollars) 1996 1995
- ------------------------------------------------------------- -------- --------
ASSETS
Gas plant, at original cost (notes 1,4,7, and 10) $279,849 $262,769
Less--Accumulated depreciation and
utility plant acquisition adjustments 100,242 92,868
-------- --------
179,607 169,901
-------- --------
Nonutility property, net (note 12) 1,141 1,958
-------- --------
Current assets:
Cash and temporary cash
investments (notes 1 and 8) 1,424 1,278
Accounts receivable, less allowance of
$3,231 in 1996 and $2,412 in 1995(notes 1,3,7,
and 14) 14,665 14,031
Unbilled revenues (note 1) 2,357 2,655
Deferred gas costs (notes 1 and 7) 13,272 1,193
Inventories, at average cost-
Liquefied natural gas, propane and under-
ground storage 16,023 10,116
Materials and supplies 1,259 1,540
Prepaid and refundable taxes (note 2) 4,076 5,933
Prepayments 1,540 1,366
-------- --------
54,616 38,112
-------- --------
Deferred charges and other assets
(notes 1,3,6,7,9, and 10) 14,786 17,156
-------- --------
Total assets $250,150 $227,127
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statement) $163,021 $161,006
-------- --------
Current liabilities:
Notes payable (notes 5 and 8) 23,270 7,337
Current portion of long-term debt (note 4) 2,022 1,950
Accounts payable (notes 6 and 7) 17,372 14,102
Accrued taxes (note 10) 1,980 6,059
Accrued vacation 1,723 1,679
Customer deposits 3,996 3,981
Other 5,376 3,947
-------- --------
55,739 39,055
-------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 20,713 18,734
Unamortized investment tax credits (note 2) 2,533 2,691
Other (notes 6,7 and 9) 8,144 5,641
-------- --------
31,390 27,066
-------- --------
Commitments and contingencies (note 7) - -
Total capitalization and liabilities $250,150 $227,127
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page - 26
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30
<TABLE>
<CAPTION>
(thousands, except per share amounts) 1996 1995 1994
- --------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Operating revenues $215,152 $183,992 $222,778
Cost of gas sold 120,246 100,944 135,104
-------- -------- --------
Operating margin 94,906 83,048 87,674
-------- -------- --------
Operating expenses:
Operation and maintenance 49,033 44,368 46,223
Depreciation and amortization 11,997 10,470 9,615
Taxes--
State gross earnings 6,063 5,005 6,326
Local property and other 6,944 6,764 6,214
Federal income (note 2) 4,683 3,104 4,460
-------- -------- --------
Total operating expenses 78,720 69,711 72,838
-------- -------- --------
Operating income 16,186 13,337 14,836
-------- -------- --------
Other, net (notes 1, 10, and 12) 945 865 196
-------- -------- --------
Income before interest expense 17,131 14,202 15,032
-------- -------- --------
Interest expense:
Long-term debt 5,889 5,086 4,987
Other 1,682 2,437 1,412
Interest capitalized (106) (144) (152)
-------- -------- --------
7,465 7,379 6,247
-------- -------- --------
Income after interest expense 9,666 6,823 8,785
Preferred dividends of subsidiary
(note 4) (696) (696) (696)
-------- -------- --------
Net income $ 8,970 $ 6,127 $ 8,089
======== ======== ========
Earnings per common share (note 16) $ 1.57 $ 1.09 $ 1.46
======== ======== ========
Weighted average common shares
outstanding (note 16) 5,709.2 5,624.2 5,534.1
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page - 27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30
(thousands of dollars) 1996 1995 1994
- -------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash provided by -
Operating Activities:
Income after interest expense $ 9,666 $ 6,823 $ 8,785
Items not requiring cash:
Depreciation and amortization 12,012 10,529 9,759
Changes as a result of regulatory action (1,453) - -
Deferred Federal income taxes 1,943 2,142 1,235
Gain on sale of nonutility property (note 12) (699) - -
Write-down of nonutility property (note 12) 714 - -
Amortization of investment tax credits (158) (160) (159)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (634) 3,861 (654)
Unbilled revenues 298 240 (41)
Deferred gas costs (12,079) 14,626 1,734
Inventories (5,626) 1,278 310
Prepaid and refundable taxes 1,857 (1,017) 2,407
Prepayments (174) 133 (589)
Accounts payable 3,270 (4,222) (934)
Accrued taxes (21) (165) (71)
Accrued vacation, customer deposits
and other 1,462 572 211
Deferred charges and other 1,307 (2,011) (932)
-------- -------- --------
Net cash provided by operations 11,685 32,629 21,061
-------- -------- --------
Investment Activities:
Expenditures for property, plant
and equipment, net (20,781) (19,597) (19,809)
Proceeds from sale of nonutility property(note 12) 725 - -
-------- -------- --------
Total (20,056) (19,597) (19,809)
-------- -------- --------
Financing Activities:
Issuance of common stock 31 - 265
Issuance of mortgage bonds 15,000 - 16,000
Payments on long-term debt (1,954) (2,081) (465)
Increase (decrease) in notes payable 933 (5,363) (12,100)
Cash dividends on preferred shares (note 4) (696) (696) (696)
Cash dividends on common shares (4,797) (4,759) (4,566)
-------- -------- --------
Total 8,517 (12,899) (1,562)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 146 133 (310)
Cash and cash equivalents at beginning of year 1,278 1,145 1,455
-------- -------- --------
Cash and cash equivalents at end of year $ 1,424 $ 1,278 $ 1,145
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for-
Interest (net of amount capitalized) $ 6,738 $ 6,663 $ 6,091
Income taxes (net of refunds) $ 2,851 $ 1,388 $ 856
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page - 28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30
(thousands of dollars) 1996 1995
- ----------------------------------------------------------- -------- --------
<S> <C> <C>
Common stockholders' investment (notes 4, 6 and 11):
Common stock, $1 Par, Authorized -20,000 shares
Outstanding -5,748 shares in 1996 and 5,668
shares in 1995 $ 5,748 $ 5,668
Amount paid in excess of par 55,404 54,258
Retained earnings 21,413 18,598
-------- --------
82,565 78,524
-------- --------
Cumulative preferred stock of subsidiary (notes 4 and 8):
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 80 shares as of 1996 and 1995 8,000 8,000
-------- --------
Long-term debt (notes 4, 7 and 8):
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 12,800 14,400
Series R, 7.50%, due December 30, 2025 15,000 15,000
Capital Leases 1,678 2,032
-------- --------
74,478 76,432
-------- --------
Less-current portion 2,022 1,950
-------- --------
72,456 74,482
-------- --------
Total capitalization $163,021 $161,006
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page - 29
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN COMMON STOCKHOLDERS' INVESTMENT
For the Three Years Ended September 30
<TABLE>
<CAPTION>
Shares Amount
Issued and Outstanding Paid In
-------------------- Excess Retained
(thousands) Number Amount of Par Earnings
- -------------------------------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, September 30, 1993 5,486 $5,486 $51,582 $16,300
Add (deduct):
Net income - - - 8,089
Dividends ($1.06 per share) - - - (5,856)
Dividend reinvestment, cash
stock purchase plan and
employee benefit plans 95 95 1,531 -
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
Dividends ($1.08 per share) - - - (6,062)
Dividend reinvestment, 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
Add (deduct):
Net income - - - 8,970
Dividends ($1.08 per share) - - - (6,155)
Dividend reinvestment, cash
stock purchase plan and employee
benefit plans 80 80 1,309 -
Accrual for Executive Stock
Compensation Plan - - (163) -
--------- -------- ------- -------
Balance, September 30, 1996 5,748 $5,748 $55,404 $21,413
========= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page - 30
<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 Company).
Revenues from natural gas sales and distribution businesses are reflected in the
accompanying consolidated statements of income to arrive at operating income.
Revenues and expenses of nonutility operations include sales and rentals of
appliances as well as real estate rentals and are presented after operating
income in the accompanying consolidated statements of income. All significant
intercompany transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements. The preparation
of financial statements in conformity with Generally Accepted Accounting
Principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Regulation. The Providence Gas Company (ProvGas) is subject to regulation by
the Rhode Island Public Utilities Commission (RIPUC). The accounting policies
of ProvGas conform to GAAP as applied in the case of regulated public utilities
and are in accordance with the regulators' accounting requirements and rate-
making practices. North Attleboro Gas Company (North Attleboro) is subject to
regulation by the Massachusetts Department of Public Utilities (MDPU).
Operating Revenues. Operating revenues are generated principally from natural
gas activities. 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 being
amortized over periods ranging from 1 to 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 3.85 percent for 1996 and
3.75 percent for 1995 and 1994.
The Company retires property units by charging original cost, cost of
removal, including environmental investigation and remediation costs, and
salvage value to accumulated depreciation.
Gas Charge Clause. In May 1996, the RIPUC approved a Rate Design Settlement
Agreement. The Agreement included changes to ProvGas' gas cost recovery
mechanism. Specifically, the
Page - 31
<PAGE>
Agreement replaced the previous Cost of Gas Adjustment Clause (CGA) with Gas
Charge Clauses (GCC) effective June 2, 1996. In addition to the commodity and
related pipeline transportation costs historically included in 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) a substantial portion of
liquefied natural gas operating and maintenance expenses, all of which were
previously recovered in base rates. Similar to the former CGA, the GCC provides
for reconciliation of total gas costs billed with the actual cost of gas
incurred. Any excess or deficiency in amounts billed as compared to costs
incurred is deferred and either refunded to, or recovered from, 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, net.
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:
(thousands of dollars) 1996 1995
- -------------------------------------- -------- --------
Cost of fuel assistance program $ 1,271 $ 1,836
Restructuring program (note 9) - 1,600
Pension costs 6,920 6,361
Deferred costs related to
phase-in plan 449 601
Unamortized debt expense 2,109 2,217
Postretirement benefits 1,041 1,041
Pipeline interconnection costs 309 625
Deferred rate case expense (note 10) 246 853
Other deferred charges 2,441 2,022
------- -------
Total $14,786 $17,156
======= =======
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 year amounts have been reclassified for
consistent presentation with the current year.
2. FEDERAL INCOME TAXES
The Company records income taxes in accordance with the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
deferred taxes to be provided for all temporary differences.
Page - 32
<PAGE>
The following is a summary of the provision for Federal income taxes for the
three years in the period ended September 30:
<TABLE>
<CAPTION>
(thousands of dollars) 1996 1995 1994
- ---------------------------------- ------ ------ -------
<S> <C> <C> <C>
Current $2,989 $1,300 $3,211
Deferred 1,943 2,142 1,235
------ ------ ------
Total Federal income tax
provision $4,932 $3,442 $4,446
====== ====== ======
Income tax is charged (credited)
to the following:
Charged to operating
expenses $4,683 $3,104 $4,460
Included in other, net 249 338 (14)
------ ------ ------
Total Federal income tax
provision $4,932 $3,442 $4,446
====== ====== ======
</TABLE>
The effective Federal income tax rates and the reasons for their differences
from the statutory Federal income tax rates are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax
rates 34.0% 34.0% 34.0%
Reversing temporary differences .5 (.1) (.4)
Charitable contribution (.4) - -
Amortization of investment
tax credits (.4) (.6) (.4)
Other .1 .3 .4
---- ---- ----
Effective Federal income tax
rate 33.8% 33.6% 33.6%
==== ==== ====
</TABLE>
The Company's deferred tax assets and liabilities for each of the two years in
the period ended September 30 are the result of the following temporary
differences:
<TABLE>
<CAPTION>
(thousands of dollars) 1996 1995
- ---------------------------------------------- --------- --------
<S> <C> <C>
Long-term deferred taxes
- ------------------------
Tax assets
Unamortized ITC............................. $ 883 $ 934
Other....................................... 361 420
Tax liabilities
Property related............................ (20,328) (17,992)
Pension costs............................... (519) (614)
Deferred charges............................ (1,110) (1,482)
-------- --------
Net deferred tax liability included in
accompanying consolidated balance sheet..... $(20,713) $(18,734)
======== ========
</TABLE>
Page - 33
<PAGE>
<TABLE>
<CAPTION>
Prepaid Taxes
- -------------
<S> <C> <C>
Tax assets
Accounts receivable reserves................ $1,284 $ 814
Property tax reserves....................... (384) 1,108
Alternative minimum tax..................... 876 -
Other....................................... 1,020 1,194
Tax liabilities
Employee severance.......................... 56 (541)
Other....................................... (40) (121)
------ ------
Net prepaid taxes............................. 2,812 2,454
Prepaid gross earnings tax and other.......... 1,264 3,479
------ ------
Net prepaid and refundable taxes included in
accompanying consolidated balance sheet..... $4,076 $5,933
====== ======
</TABLE>
Investment tax credits are amortized through credits to other, net over the
estimated lives of related property.
3. LEASE RECEIVABLES
The Company presently finances the installation of water heaters and other
appliances for its customers under one to three year finance agreements.
Previously, the Company leased water heaters and appliances to customers under
10-year sales-type leases.
Future minimum lease payments to be received are:
(thousands of dollars)
- -------------------------------------------------
1997 $ 544
1998 544
1999 544
2000 360
2001 362
------
2,354
Amount representing interest 388
------
Amount representing principal $1,966
======
4. CAPITALIZATION
A. Long-term Debt
In December 1995, ProvGas issued $15 million of First Mortgage Bonds. These
First Mortgage Bonds are designated as Series R (7.5 percent) and will mature in
December 2025. The net proceeds provided by this indebtness were used to pay
down ProvGas' short-term debt.
The Company's ability to pay dividends is largely dependent on receipt of
dividends from its principal subsidiary, ProvGas. Approximately $18 million of
ProvGas' retained earnings were available for dividends under the most
restrictive terms of ProvGas' First Mortgage Bond indenture.
ProvGas' First Mortgage Bonds are secured by a lien on substantially all of the
tangible and real property.
Page - 34
<PAGE>
As of September 30, 1996, the annual sinking fund requirements and maturities of
long-term debt for the next five fiscal years are $1,600,000 in 1997, $2,509,000
in 1998, $2,509,000 in 1999, $2,509,000 in 2000, and $2,509,000 in 2001.
B. Redeemable Preferred Stock
ProvGas' preferred stock, which consists of 80,000 shares of $100 par value, has
an 8.7 percent cumulative annual dividend rate payable on a quarterly basis, and
has no voting power or privileges. The stock is subject to a cumulative annual
sinking fund requirement of 16,000 shares per year at par ($1,600,000) plus
accrued or unpaid dividends commencing in February 1997.
5. NOTES PAYABLE
The Company meets seasonal cash requirements and finances its construction
program on an interim basis through short-term bank borrowings. As of September
30, 1996, the Company had lines of credit totaling $61,500,000 with borrowings
outstanding of $23,270,000. The Company pays a fee for its lines of credit
rather than maintaining compensating balances. The weighted average interest
rate for borrowings outstanding at the end of the years was 5.65 percent in
1996, 6.15 percent in 1995 and 5.29 percent in 1994.
6. EMPLOYEE BENEFITS
A. Retirement Plans
The Company 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
Company's policy to fund at least the minimum required contribution.
In 1996, the Company changed its plans as a result of negotiated union
contracts. The plans are to be formally amended by the Board of Directors in
1997. The changes resulted in additional service time being recognized, a
change in the benefit formula and an increase in the period of supplemental
payments. The net effect of these changes was an increase in the projected
benefit obligation and unrecognized prior service cost of approximately
$2,153,000.
The following table sets forth the funding status of the pension plans and
amounts recognized in the Company's consolidated balance sheets at September 30,
1996 and 1995:
<TABLE>
<CAPTION>
(thousands of dollars) 1996 1995
- ------------------------------------------------------------ --------------------
<S> <C> <C>
Accumulated benefit obligation, including
vested benefit obligation of $(36,463)
as of September 30, 1996 and $(37,034)
as of September 30, 1995 $(42,578) $(38,519)
======== ========
Projected benefit obligation for service
rendered to date $(57,209) $(50,708)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 63,019 58,058
-------- --------
Excess of plan assets over projected benefit
obligation 5,810 7,350
Unrecognized (gain)/loss (13,139) (12,584)
</TABLE>
Page - 35
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Unrecognized prior service cost 3,126 1,193
Unrecognized net transition asset
being recognized over 15 years from
October 1, 1985 (545) (681)
------- --------
Net accrued pension cost included in other
deferred credits and accounts payable
at September 30, 1996 and 1995 $(4,748) $(4,722)
======= =======
</TABLE>
Net pension cost for fiscal years 1996, 1995 and 1994 included the following
components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(thousands of dollars) 1996 1995 1994
- ----------------------------------------------------------- --------------------------
Service cost $ 1,709 $ 1,541 $ 1,589
Interest cost on benefit obligations 4,262 3,872 3,814
Actual return on plan assets (7,481) (10,300) 995
Net amortization and deferral 2,091 5,713 (6,229)
------- -------- --------
Net periodic pension cost 581 826 169
Adjustments due to regulatory
action (442) (424) (131)
------- -------- --------
Net periodic pension cost recognized $ 139 $ 402 $ 38
======= ======== ========
</TABLE>
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.
ProvGas recovers pension costs in rates when such costs are funded. Therefore,
the amount by which funding differs from pension expense, determined in
accordance with GAAP, is deferred and recorded as a regulatory asset or
liability.
B. Postretirement Benefits Other Than Pensions
ProvGas currently offers retirees who have attained age 55 and worked five years
for ProvGas healthcare and life insurance benefits during retirement (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.
Since 1993, postretirement benefit costs for active employees are recorded by
ProvGas on an accrual basis, ratably over their service periods. Benefits of
$10,526,000 earned prior to 1993 have been deferred as an unrecognized
transition obligation, which ProvGas will amortize over a 20 year period.
ProvGas funds its postretirement benefit obligation to a Voluntary Employee
Benefit Association (VEBA) Trust. Total obligations of $1,454,000 in 1996,
$1,561,000 in 1995, and $1,566,000 in 1994 were contributed to the VEBA Trust.
ProvGas recovers its postretirement benefit obligations in rates to the extent
allowed by the RIPUC. The RIPUC generally allows such costs to be recovered if
amounts are funded into tax
Page - 36
<PAGE>
favored investment funds, such as the VEBA Trust. Accordingly, ProvGas fully
recovered its 1996, 1995 and 1994 postretirement obligations because such
amounts were funded into the VEBA Trust. Of the total postretirement benefit
obligations, $1,454,000, $1,231,000 and $855,000 were included in rates during
1996, 1995 and 1994, respectively. In September 1996, the Commission approved a
ratable recovery of the cumulative unrecovered difference of $1,041,000 during
1997, 1998, and 1999.
The Plan's costs and accumulated postretirement benefit obligation for 1996,
1995 and 1994 are calculated by ProvGas' actuaries using assumptions and
estimates which include:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------- ---------------------
<S> <C> <C> <C>
Healthcare cost annual growth rate.................. 11.4% 12.6% 12.6%
Healthcare cost annual growth rate - long-term...... 6.0 6.0 6.0
Expected long-term rate of return (union)........... 8.5 8.5 8.5
Expected long-term rate of return (non-union)....... 5.5 5.5 5.5
Discount rate....................................... 8.0 8.0 8.0
</TABLE>
The healthcare cost annual growth rate significantly impacts the estimated Plan
obligation and annual expense. For example, in 1996, a one percent change in
the above rates would change the obligation by $833,000 and would change the
annual expense by $90,000.
The obligations and assets of the Plan at September 30, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------- ---------------------
<S> <C> <C>
Accumulated post-retirement
benefit obligation:
Current retirees $ (6,975) $ (7,426)
Active employees-eligible for
benefits (889) (845)
Active employees (3,876) (3,694)
-------- --------
Total post-retirement benefit
obligation (11,740) (11,965)
Plan assets at fair value 3,106 2,080
-------- --------
Unfunded post-retirement benefit
obligation (8,634) (9,885)
Unrecognized transition obligation 8,947 9,474
Unrecognized net (gain) or loss (313) 402
-------- --------
Accrued post-retirement
benefit obligation included
in the accompanying consolidated
balance sheet $ (-) $ (9)
======== ========
</TABLE>
Page - 37
<PAGE>
ProvGas' actuarial determined Plan costs for 1996, 1995 and 1994 include the
following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ----------------------------------- ------- ------- -------
<S> <C> <C> <C>
Service cost $ 222 $ 230 $ 238
Interest cost 896 909 835
Actual return on plan assets (98) (28) (37)
Amortization and deferral 434 450 530
------ ------ ------
Total annual plan costs $1,454 $1,561 $1,566
====== ====== ======
</TABLE>
C. Supplemental Retirement Plans
ProvGas provides certain supplemental retirement plans for key employees. The
projected benefit obligation is approximately $1,098,000 which is being accrued
over the service period of these key employees. The supplemental retirement
plans are unfunded. ProvGas accrued and expensed $310,000, $150,000 and $44,000
related to these benefits in 1996, 1995, and 1994, respectively.
D. Performance and Equity Incentive Plan
The Providence Energy Corporation Performance and Equity Incentive Plan (the
Plan) provides that up to 225,000 shares of common stock may be granted to key
employees, including employees of ProvGas, at no cost to the employees. Key
employees who received common shares are entitled to receive dividends, but full
beneficial ownership vests on the fifth anniversary of the date of the grant
provided the participant is still employed by the Company. Vesting may be
accelerated under certain circumstances. The Plan also provides for cash
compensation to key employees.
The executive compensation incentive awards totaled approximately $381,000 for
1996, $248,000 for 1995, and $240,000 for 1994. Amounts paid in cash are
charged to expense when earned. However, amounts paid in restricted stock are
deferred and amortized to expense over the five-year vesting period.
Of the $240,000 1994 award, $153,000 was paid in cash during fiscal 1995. Of
the $248,000 1995 award, $167,000 was paid in cash during fiscal 1996. Of the
$381,000 1996 award, $269,000 will be paid in cash during 1997. Grant shares
totaling 4,491, 5,371 and 4,902 were purchased by the Company and reissued to
key employees during 1996, 1995 and 1994, respectively.
E. Restricted Stock Incentive Plan
During 1996, the Company adopted a Restricted Stock Incentive Plan. The
Restricted Stock Incentive Plan provides that up to 60,000 shares of common
stock may be granted to employees of the Company with at least three months of
service, who are not officers or covered by a collective bargaining agreement,
at no cost to the employee. All participants are entitled to receive dividends,
however, full beneficial ownership vests on the third anniversary of the date of
the grant provided that the participant is still employed by the Company.
Vesting may be accelerated under certain circumstances.
Awards under the Restricted Incentive Stock Plan totaled approximately $146,000
in 1996 consisting of 7,954 shares. All amounts awarded under the Restricted
Stock Incentive Plan are deferred and amortized to expense over a three-year
period.
Page - 38
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
A. Legal Proceedings
The Company is involved in legal and administrative proceedings in the normal
course of business, including certain proceedings involving material amounts in
which claims have been or may be made. However, management believes, after
review of insurance coverage and consultation with legal counsel, that the
ultimate resolution of the legal proceedings to which it is or can at the
present time be reasonably expected to be a party, will not have a materially
adverse effect on the Company's results of operations or financial condition.
B. Capital Leases
ProvGas has a capital lease with Algonquin Gas Transmission Company (Algonquin)
for storage space in a liquefied natural gas (LNG) tank. The capital lease
arrangement also provides that Algonquin lease from ProvGas, for a corresponding
term at an annual amount of $150,000, the land on which the tank is situated.
ProvGas also leases certain information systems equipment under capital leases.
Property under Capital Leases:
- -----------------------------
<TABLE>
<CAPTION>
(thousands of dollars) 1996 1995
- ------------------------------------------- -------- -----------------
<S> <C> <C>
Gas plant $ 6,116 $ 6,116
Information Systems 1,551 1,551
Accumulated depreciation (6,072) (5,659)
------- -------
$ 1,595 $ 2,008
======= =======
Commitments for Capital Leases are:
- ----------------------------------
LNG Computer
(thousands of dollars) Storage Equipment Total
- ------------------------------ --------------------------------------
1997 $ 136 $ 404 $ 540
1998 136 373 509
1999 136 373 509
2000 136 186 322
2001 135 - 135
------ ------- -------
$ 679 $ 1,336 2,015
====== =======
Amounts representing interest 337
-------
Amounts representing principal $ 1,678
</TABLE> ======
C. Operating Leases
The Company also leases facilities and equipment under operating leases with a
total future obligation of approximately $483,000 as of September 30, 1996.
D. Gas Supply Restructuring
Federal Energy Regulatory Commission (FERC) Order 636 and other related orders
(the Orders) have
Page - 39
<PAGE>
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 Company 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 Company 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 Company. Based upon
current information, the Company anticipates its transition costs to net between
$21 million and $22 million of which $15.8 million has been included in the GCC
and is currently being collected from customers. The remaining minimum
obligation of $5.2 million has been recorded in the accompanying consolidated
balance sheets along with a regulatory asset anticipating future recovery
through the GCC. To the extent that refunds are received based on FERC
settlements, these refunds are returned to the customers through the GCC.
The Company's ultimate liability may differ from the above estimates based on
FERC settlements with the Company's pipeline transportation suppliers. FERC has
approved settlements with three of the Company's transportation pipelines, which
account for the bulk of the Company's transition costs. Negotiations are
continuing on one additional pipeline and, based on the information available,
the Company believes that its current range for transition costs is reasonable.
E. Environmental Matters
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Company cannot predict the future impact of
such standards and requirements which are subject to change and can take effect
retroactively. The Company continues to monitor the status of these laws and
regulations. Such monitoring involves the review of past activities and current
operations, and may include expending funds to investigate or clean up certain
sites. To the best of its knowledge, subject to the following paragraphs, the
Company believes it is in substantial compliance with such laws and regulations.
At September 30, 1996, the Company was aware of four sites at which future costs
may be incurred.
The Company has been designated as a "potentially responsible party" ("PRP")
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites in Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Company and other PRP's. With respect to one of
the Plympton sites, the Company 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 Company, in connection with both
Plympton sites, are not anticipated to be material to the financial condition of
the Company.
During 1995, the Company voluntarily began a study at its primary gas
distribution facility
Page - 40
<PAGE>
located in Providence, Rhode Island. This site formerly contained a
manufactured gas plant operated by the Company. As of September 30, 1996,
approximately $1.5 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
Company has completed the study which indicates that remediation will be
required. The Company has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the best
alternative. At September 30, 1996, the Company 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
Company has accrued $1.3 million at September 30, 1996, for anticipated future
remediation costs at this site. Also, the Company 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 Company's Westerly, Rhode Island operations center confirm
the existence of contaminants at this site. The Company 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 fact
that the testing is in its early stages, management cannot conclude as to
whether any remediation will be required at this site.
In prior rate cases filed, the Company 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 $1.8 million and an estimated $1.3 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
September 30, 1996. Of the environmental investigation costs incurred,
approximately $1.0 million and $600,000 were recorded in the years ended
September 30, 1996 and 1995, respectively, while the remainder were incurred in
prior years. Management believes that this rate recovery mechanism is
appropriate for recovery of future costs. Additionally, it is the Company's
practice to consult with the RIPUC on a periodic basis when, in management's
opinion, significant amounts might be expended for environmental related costs.
Should future developments warrant additional rate recovery mechanisms,
management intends to seek such recovery.
Management has begun discussions with other parties who may assist the Company
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.
F. Fuel Assistance Program
The Company participates in the State of Rhode Island's Fuel Assistance Program,
the Percentage of Income Payment Plan. As a result, ProvGas has agreed to
accept partial payment on certain customer accounts from various state agencies.
As of September 30, 1996, approximately $800,000 was due from the State of Rhode
Island related to gas consumed by customers over the last two years.
Page - 41
<PAGE>
8. 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 Company's financial
instruments at September 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- --------------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,424 $ 1,424 $ 1,278 $ 1,278
Short-term debt* 23,270 23,270 7,337 7,337
Long-term debt* 74,478 77,924 76,432 81,816
Preferred stock 8,000 8,395 8,000 8,800
</TABLE>
* 1995 balances adjusted for the issuance of $15,000,000 in First Mortgage Bonds
Series R subsequent to year-end.
The difference between the carrying amount and the fair value of the Company's
preferred stock and long-term debt, if they were settled at amounts reflected
above, would likely be recovered in the Company's rates over a prescribed
amortization period. Accordingly, any settlement should not result in a
material impact on the Company's financial position or results of operations.
9. RESTRUCTURING
In June 1994, the Company, 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 Company's customer services,
lower operating costs and increase operating efficiencies.
Approximately 30 people were separated from the Company, while approximately 18
new employees have been hired to fill newly defined positions. The employees
bring skill, expertise and experience to the Company not previously available
within its work force.
The direct cost of this realignment was approximately $1 million, net of tax
consisting primarily of severance pay and related benefits for personnel who
were separated during 1994. Substantially all costs were paid as of September
30, 1995. The Company had discussed the reorganization with the RIPUC and based
on prior RIPUC allowance of similar costs, the Company deferred these costs in
1995 in anticipation of recovery in its most recent rate case. (See Footnote
10.)
Page - 42
<PAGE>
10. 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.
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
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 rate decision, ProvGas recorded several adjustments in its 1996 financial
statements. Specifically:
a) ProvGas 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, ProvGas was required to estimate two year's increase in expense.
As a result, ProvGas reduced its regulatory liability for one year's property
tax expense resulting in a one time gain of approximately $4,100,000 before
tax.
b) ProvGas wrote-off the $1,600,000, before tax, of restructuring costs
previously deferred. (See Footnote 9.) 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 wrote-off approximately $440,000, before tax, of previously
deferred rate case expenses. (See Footnote 1.)
d) ProvGas wrote-off approximately $470,000, before tax, of construction
expenditures previously capitalized. These costs were capitalized in
accordance with GAAP and were based on FERC 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 did not result in a material gain or
loss.
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:
<TABLE>
<CAPTION>
Estimated
Estimated Percentage
Additional Increase in
Annual Rate Base
Date Effective Revenues Revenues
- ---------------------------- ---------- ------------
<S> <C> <C>
November 1, 1991 $188,096 8.13%
November 1, 1992 203,042 8.12
November 1, 1993 200,967 7.43
</TABLE>
Page - 43
<PAGE>
<TABLE>
<S> <C> <C>
November 1, 1994 141,137 4.86
November 1, 1995 94,445 3.10
</TABLE>
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 $61,000 in 1996, $136,000 in 1995 and $198,000 in 1994 related
primarily to the gas plant not yet phased into North Attleboro's rates under the
plan. North Attleboro amortized $212,000 in 1996, $185,000 in 1995 and $114,000
in 1994 of amounts previously deferred.
11. STOCK RIGHTS AND OPTIONS
Currently, one common stock purchase Right is attached to each outstanding
share of common stock. Each Right entitles the holder to purchase one share of
common stock at a price of $110 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 Company in certain circumstances) which at the time
of the transaction has a market value of two times the exercise price. These
Rights expire on August 17, 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.
The Company offers two stock option plans for officers, directors and key
employees covering 250,000 shares of the Company'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 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,
1996, 1995, and 1994:
Number of Shares
- -------------------------------------------------
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)
Page - 44
<PAGE>
Surrendered -
-----
Outstanding, September 30, 1995 54,789
Granted at $17.000 per share 7,449
Exercised -
Terminated -
Surrendered -
------
Outstanding, September 30, 1996 62,238
======
12. NONUTILITY PROPERTY
During 1996, the Company sold land which was previously being rented to a third
party for use as a parking lot. The land was sold for $725,000 generating a
gain, net of taxes, of $522,000.
Additionally, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 5, "Accounting for Contingencies", the Company performed an economic
analysis of the value of its significant nonutility real estate. Based on the
results of that analysis, the Company wrote down the carrying value of its
nonutility real estate by $471,000 net of taxes, due to a decline in real estate
prices.
13. HEDGING
On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Settlement Agreement between the Company and the Rhode Island Division of Public
Utilities and Carriers. The Agreement allows the Company to use options,
including calls, puts and collars, in order to mitigate the impact of
escalations in natural gas prices. The total expenditures for the purchase and
exercise of Financial Risk Management (FRM) tools and the net proceeds from the
sale of FRM tools will be flowed through the Variable Gas Cost component of the
GCC and cannot exceed $800,000.
The Company had not entered into any hedging transactions as of September 30,
1996 and, depending on market conditions, would anticipate utilizing FRM tools
in the first quarter of fiscal 1997.
14. ACQUISITION ACTIVITY
The Company is seeking investment opportunities in nonregulated energy ventures.
During 1996, the Company established a relationship with Encon Systems, Inc.
(Encon), a full-service energy-management company that develops and implements
energy-efficient systems for commercial, industrial and institutional customers,
as well as residential customers. The Company has established a $350,000 line
of credit as a working capital supply primarily for Encon's PFS (a division of
PepsiCo) contract. In connection with the line of credit, the Company received
a warrant to acquire stock representing 45 percent of the outstanding stock of
Encon, which is exercisable until early 1997, but subject to extension under
certain circumstances. The companies are also working on joint marketing
opportunities.
Currently, no material acquisitions are pending.
Page - 45
<PAGE>
15. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", effective for fiscal years beginning after December
15, 1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets and requires that regulatory assets which are no longer
probable of recovery through future revenues be charged to earnings. SFAS No.
121 will be effective for the Company in fiscal 1997. At that time, the Company
will perform a full analysis of its long-lived assets. Based on the current
regulatory environment, management does not believe the adoption of SFAS No. 121
will have a material impact on the Company's financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", effective for fiscal years beginning after December 15, 1995.
SFAS No. 123 allows an alternative accounting for stock-based employee
compensation agreements and requires that financial statements include certain
disclosures related to stock-based employee compensation agreements. The
Company does not plan to adopt the alternative accounting under this
pronouncement but will update its disclosures with respect to its stock plans,
as required.
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited quarterly financial information for the two years
ended September 30, 1996 and 1995. Quarterly variations between periods are
caused primarily by the seasonal nature of gas sales and the availability of
gas.
<TABLE>
<CAPTION>
(thousands, except
per share amounts)
<S> <C> <C> <C> <C>
Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30
------------------------------------
Fiscal 1996
- ---------------------------------------------------------------
Operating revenues $58,406 $81,107 $43,273 $32,366
Operating income (loss) 6,566 9,779 906 (1,065)
Net income (loss) 5,123 7,788 (909) (3,032)
Net income (loss)
per share* .90 1.37 (.16) (.54)
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)
</TABLE>
* Calculated on the basis of weighted average shares outstanding during
the quarter.
Page - 46
<PAGE>
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.
Providence Energy Services, Inc. - Incorporated under the laws of Rhode Island.
North Attleboro Gas Company - Incorporated under the laws of Massachusetts.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 179,607
<OTHER-PROPERTY-AND-INVEST> 1,141
<TOTAL-CURRENT-ASSETS> 54,616
<TOTAL-DEFERRED-CHARGES> 14,786
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 250,150
<COMMON> 5,748
<CAPITAL-SURPLUS-PAID-IN> 55,404
<RETAINED-EARNINGS> 21,413
<TOTAL-COMMON-STOCKHOLDERS-EQ> 82,565
8,000
0
<LONG-TERM-DEBT-NET> 72,456
<SHORT-TERM-NOTES> 23,270
<LONG-TERM-NOTES-PAYABLE> 72,800
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,600
0
<CAPITAL-LEASE-OBLIGATIONS> 1,678
<LEASES-CURRENT> 422
<OTHER-ITEMS-CAPITAL-AND-LIAB> 61,837
<TOT-CAPITALIZATION-AND-LIAB> 250,150
<GROSS-OPERATING-REVENUE> 215,152
<INCOME-TAX-EXPENSE> 4,683
<OTHER-OPERATING-EXPENSES> 194,283
<TOTAL-OPERATING-EXPENSES> 198,966
<OPERATING-INCOME-LOSS> 16,186
<OTHER-INCOME-NET> 945
<INCOME-BEFORE-INTEREST-EXPEN> 17,131
<TOTAL-INTEREST-EXPENSE> 7,465
<NET-INCOME> 9,666
696
<EARNINGS-AVAILABLE-FOR-COMM> 8,970
<COMMON-STOCK-DIVIDENDS> 6,155
<TOTAL-INTEREST-ON-BONDS> 5,889
<CASH-FLOW-OPERATIONS> 11,685
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
