<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
______________ _____________
Commission file number 1-10032
------------------
PROVIDENCE ENERGY CORPORATION
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
- -------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
- -------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
401-272-9191
- -------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common stock, $1.00 par value, 5,790,959 shares outstanding at
---------------------------------------------------------------
April 30, 1997
- --------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q
MARCH 31, 1997
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Financial Statements
Consolidated Statements of Income for the
three, six and twelve months ended
March 31, 1997 and 1996 I-1
Consolidated Balance Sheets as of
March 31, 1997, March 31, 1996 and
September 30, 1996 I-2
Consolidated Statements of Cash Flows for the
six months ended March 31, 1997 and 1996 I-3
Consolidated Statements of Capitalization as
of March 31, 1997, March 31, 1996 and
September 30, 1996 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-9
PART II: OTHER INFORMATION
Item 4 Submission of Matters to a Vote of
Security Holders II-1
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED MARCH 31
------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------ ----------
1997 1996 1997 1996
-------- -------- -------- --------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 79,946 $ 81,107 $143,984 $139,513
Cost of gas sold 46,938 47,018 84,218 78,539
-------- -------- -------- --------
Operating margin 33,008 34,089 59,766 60,974
-------- -------- -------- --------
Operating expenses:
Operation and
maintenance 12,930 13,310 24,304 25,042
Depreciation and
amortization 3,297 2,883 6,396 5,766
Taxes -
State gross earnings 2,308 2,295 4,084 3,906
Local property and other 2,103 1,763 3,865 3,431
Federal income 3,588 4,059 5,980 6,484
-------- -------- -------- --------
Total operating expenses 24,226 24,310 44,629 44,629
-------- -------- -------- --------
Operating income 8,782 9,779 15,137 16,345
Other 108 148 61 787
-------- -------- -------- --------
Income before
interest expense 8,890 9,927 15,198 17,132
-------- -------- -------- --------
Interest expense:
Long-term debt 1,512 1,524 3,032 2,837
Other 525 470 916 1,078
Interest capitalized (58) (29) (99) (42)
-------- -------- -------- --------
1,979 1,965 3,849 3,873
-------- -------- -------- --------
Income before preferred
stock dividends of
subsidiary 6,911 7,962 11,349 13,259
Preferred dividends of
subsidiary (174) (174) (348) (348)
-------- -------- -------- --------
Net income $ 6,737 $ 7,788 $ 11,001 $ 12,911
======== ======== ======== ========
Net income per common share $ 1.17 $ 1.37 $ 1.91 $ 2.27
======== ======== ======== ========
Dividends paid per common
share $ .27 $ .27 $ .54 $ .54
======== ======== ======== ========
Weighted average common
shares outstanding 5,779.2 5,700.1 5,768.5 5,690.1
======== ======== ======== ========
</TABLE>
PAGE I-1
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED MARCH 31
------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
TWELVE MONTHS
---------------
1997 1996
---- ----
(thousands, except per share amounts)
<S> <C> <C>
Operating revenues $219,623 $208,041
Cost of gas sold 125,925 116,512
-------- --------
Operating margin 93,698 91,529
-------- --------
Operating expenses:
Operation and
maintenance 48,295 46,409
Depreciation and amortization 12,627 11,055
Taxes -
State gross earnings 6,241 5,806
Local property and other 7,378 6,805
Federal income 4,179 4,628
-------- --------
Total operating expenses 78,720 74,703
-------- --------
Operating income 14,978 16,826
Other, net 219 1,310
-------- --------
Income before
interest expense 15,197 18,136
-------- --------
Interest expense:
Long-term debt 6,084 5,372
Other 1,520 2,301
Interest capitalized (163) (116)
-------- --------
7,441 7,557
-------- --------
Income before preferred
stock dividends of
subsidiary 7,756 10,579
Preferred dividends of
subsidiary (696) (696)
-------- --------
Net income $ 7,060 $ 9,883
======== ========
Net income per common share $ 1.23 $ 1.74
======== ========
Dividends paid per common
share $ 1.08 $ 1.08
======== ========
Weighted average common
shares outstanding 5,748.4 5,668.1
======== ========
</TABLE>
PAGE I-1(a)
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, March 31, September 30,
1997 1996 1996
-------------------------------------
ASSETS
- ------
<S> <C> <C> <C>
Gas plant, at original cost $288,658 $269,955 $279,849
Less - Accumulated depreciation and
utility plant acquisition
adjustments 105,337 97,541 100,242
-------- -------- --------
183,321 172,414 179,607
-------- -------- --------
Nonutility property, net 1,120 1,917 1,141
-------- -------- --------
Current assets:
Cash and temporary cash investments 2,432 1,446 1,424
Accounts receivable, less allowance of
$4,473 at 3/31/97, $4,621 at 3/31/96
and $3,231 at 9/30/96 48,467 44,087 14,665
Unbilled revenues 8,241 9,638 2,357
Deferred gas costs 4,218 - 13,272
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage 7,664 2,227 16,023
Materials and supplies 1,200 1,521 1,259
Prepaid and refundable taxes 3,119 3,054 4,076
Prepayments 548 873 1,540
-------- -------- --------
75,889 62,846 54,616
-------- -------- --------
Deferred charges and other assets 13,574 14,065 14,786
-------- -------- --------
Total assets $273,904 $251,242 $250,150
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization $169,889 $169,500 $163,021
(See accompanying statement) -------- -------- --------
Current liabilities:
Notes payable 33,635 9,325 23,270
Current portion of long-term debt 2,420 2,034 2,022
Accounts payable 18,548 18,757 17,372
Accrued taxes 7,379 7,182 1,980
Accrued vacation 1,942 1,917 1,723
Customer deposits 3,658 3,986 3,996
Refundable gas costs - 6,088 -
Other 4,195 4,392 5,376
-------- -------- --------
71,777 53,681 55,739
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 21,149 19,411 20,713
Unamortized investment tax credits 2,454 2,612 2,533
Other 8,635 6,038 8,144
-------- -------- --------
32,238 28,061 31,390
-------- -------- --------
Commitments and contingencies - - -
Total capitalization and liabilities $273,904 $251,242 $250,150
======== ======== ========
</TABLE>
PAGE I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED MARCH 31
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1997 1996
------- --------
(thousands)
<S> <C> <C>
Cash provided by (used for)
Operating Activities:
- ---------------------
Income after interest expense $11,349 $ 13,259
Items not requiring cash -
Depreciation and amortization -
plant and nonutility 6,381 5,801
Changes as a result of regulatory actions - (1,453)
Deferred Federal income taxes 420 680
Amortization of investment tax credit (79) (79)
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable (33,802) (30,073)
Unbilled revenues (5,884) (6,983)
Deferred gas costs 9,054 -
Inventories 8,418 7,908
Prepaid and refundable taxes 973 2,876
Prepayments 992 493
Accounts payable 1,176 4,655
Accrued taxes 5,399 5,181
Refundable gas costs - 7,281
Accrued vacation, customer deposits
and other (1,262) 697
Deferred charges and other 1,245 1,165
------- --------
Net cash provided by operations 4,380 11,408
------- --------
Investment Activities:
- ----------------------
Expenditures for property, plant
and equipment, net (8,985) (8,755)
------- --------
Financing Activities:
- ---------------------
Issuance of mortgage bonds - 15,000
Proceeds from other long-term debt 1,345 -
Issuance of common stock 44 31
Redemption of preferred stock (1,600) -
Payments on long-term debt (1,798) (1,740)
Increase(decrease) in notes payable, net 10,365 (13,012)
Cash dividends on common stock (2,395) (2,416)
Cash dividends on preferred stock (348) (348)
------- --------
Net cash provided (used) by financing
activities 5,613 ( 2,485)
------- --------
Increase in cash and temporary
cash investments 1,008 168
Cash and cash equivalents at beginning
of period 1,424 1,278
------- --------
Cash and cash equivalents at end of period $ 2,432 $ 1,446
======= ========
Supplemental disclosure of cash-flow information:
Cash paid year to-date for-
Interest (net of amount capitalized) $ 3,771 $ 2,413
Income taxes (net of refunds) $ 1,076 $ 902
Schedule of noncash investing and financing
activities:
Capital lease obligations for equipment $ 232 $ -
Other long-term debt for equipment $ 495 $ -
</TABLE>
PAGE I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
<TABLE>
<CAPTION>
(Unaudited)
March 31, March 31, September 30,
1997 1996 1996
----------------------------------------
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par
Authorized - 20,000 shares at 3/31/97
Outstanding - 5,791 at 3/31/97,
5,708 at 3/31/96
5,748 at 9/30/96 $ 5,791 $ 5,708 $ 5,748
Amount paid in excess of par 56,062 54,692 55,404
Retained earnings 29,304 28,442 21,413
-------- -------- --------
Total common stock equity 91,157 88,842 82,565
-------- -------- --------
Cumulative preferred stock of subsidiary:
Providence Gas Company -
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 64 shares at 3/31/97 and
80 shares as of 3/31/96 and 9/30/96 6,400 8,000 8,000
-------- -------- --------
Long-term debt:
First mortgage bonds 71,200 72,800 72,800
Other long-term debt 1,840 - -
Capital leases 1,712 1,892 1,678
-------- -------- --------
Total long-term debt 74,752 74,692 74,478
Less current portion 2,420 2,034 2,022
-------- -------- --------
Long-term debt, net 72,332 72,658 72,456
-------- -------- --------
Total capitalization $169,889 $169,500 $163,021
======== ======== ========
</TABLE>
PAGE I-4
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in this
report reflects all normal, recurring adjustments necessary to a fair statement
of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein when read
with the annual report for 1996 filed on Form 10-K are adequate to make the
information presented not misleading.
In the second quarter of 1997, the Registrant began to employ derivative
financial instruments in the form of natural gas options for the purpose of
managing commodity price risk. These derivative instruments were purchased under
the Pilot Hedging Program approved by the Rhode Island Public Utilities
Commission (RIPUC) in October 1996. Under the program, expenditures for
purchases and exercises of the financial instruments, net of sales proceeds, are
flowed through the Gas Charge Clause (GCC) and cannot exceed $800,000.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified for consistent presentation
with the current year.
Joint Venture
- -------------
On January 24, 1997, the Registrant agreed to form a new limited liability
company, Providence-Southern, LLC (the "Joint Venture"), together with Southern
Energy, Inc., a subsidiary of Southern Company. The Joint Venture will market
retail electricity, gas and energy services in New England. The Joint Venture
will be owned 60% by Southern Energy, Inc. and 40% by the Registrant.
Providence-Southern, LLC will focus on tailoring its services to the individual
needs of the residential, commercial, and industrial customers as consumers are
given more choices in a competitive energy market. In addition to meeting the
electricity and gas commodity needs of customers, the Joint Venture will also
serve as a marketing platform for other areas of expertise of the Registrant and
Southern Energy, Inc., including energy consulting and energy use analysis, home
and business energy services, and unified billing. The Joint Venture is
expected to become fully operational in the third quarter of 1997.
PAGE I-5
<PAGE>
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or
cleanup 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 March 31, 1997, the Registrant was aware of four sites at which future costs
may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRP's. With respect to one
of the Plympton sites, the Registrant has joined with other PRP's in entering
into an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of March 31,
1997, approximately $1.6 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by the
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at the site.
The Registrant has completed the study which indicates that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the most appropriate
alternative. At March 31, 1997, the Registrant has compiled a preliminary range
of costs based on remediation alternatives, ranging from $1.7 million to
approximately $3.0 million. However, because of the uncertainties associated
with environmental assessment and remediation activities, the future costs of
remediation could be higher than the alternatives noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at March
31, 1997, for anticipated future remediation costs at this site. Also, the
Registrant has negotiated an agreement, 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. The agreement
received Federal regulatory approval in May 1997.
PAGE I-6
<PAGE>
Tests conducted following the recent discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center
confirm the existence of contaminants at this site. The Registrant is currently
conducting tests at this site, the costs of which are being shared equally with
the prior owner, to determine the nature and extent of the contamination. Due to
the fact that the testing is in its early stages, management cannot conclude as
to whether any remediation will be required at this site. In addition, in the
first quarter of 1997, contamination from scrapped meters and regulators was
discovered at this site. The Registrant has reported this to the DEM and the
Rhode Island Department of Health and is in the process of remediation. It is
anticipated that remediation will cost between $30,000 and $100,000. Based on
the expected remediation costs, the Registrant has accrued $30,000 at March 31,
1997, for anticipated future remediation costs.
In prior rate cases filed, the Registrant requested that environmental
investigation and remediation costs be recovered by inclusion in its
depreciation factors consistent with the rate recovery treatment for all types
of cost of removal. Accordingly, environmental investigation costs of
approximately $1.9 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
March 31, 1997. Management believes that this rate recovery mechanism is
appropriate for recovery of future costs. Additionally, it is the Registrant'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
Registrant in paying future costs at the above sites. Management believes that
its program for managing environmental issues combined with rate recovery and
financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
Gas Supply Restructuring
- ------------------------
Federal Energy Regulatory Commission (FERC) Order 636 and other related orders
(the Orders) have significantly changed the structure and types of services
offered by pipeline transportation companies. The most significant components
of the restructuring occurred in November 1993. In response to these changes,
the Registrant has successfully negotiated new pipeline transportation and gas
storage contracts.
At the same time, a number of contracts with gas suppliers have been negotiated
to complement the transportation and storage contracts. The portfolio of supply
contracts is designed to be market responsive and is diversified with respect to
contract lengths, source location and other contract terms. On a
PAGE I-7
<PAGE>
periodic basis, the Registrant reviews all of its contracts to ensure a diverse,
secure, flexible and economical supply portfolio is maintained.
To meet the requirements of the Orders, the pipelines have incurred significant
costs, collectively known as transition costs. The majority of these costs will
be reimbursed by the pipeline's customers, including the Registrant. Based upon
current information, the Registrant anticipates its transition costs to net to
approximately $21.3 million of which $15.2 million has been included in the GCC,
net of refunds received based on FERC settlements, and is currently being
collected from customers. The remaining minimum obligation of $6.1 million has
been recorded in the accompanying consolidated balance sheet along with a
regulatory asset anticipating future recovery through the GCC.
The Registrant's ultimate liability may differ from the above estimate based on
FERC settlements with the Registrant's pipeline transportation suppliers. FERC
has approved settlements with three of its pipelines, which account for the bulk
of the Registrant's transition costs. The Registrant has reached an agreement
on one additional pipeline, which is subject to final approval by FERC. Based
on the information available, the Registrant believes that its current estimate
of transition costs is reasonable.
New Accounting Pronouncements
- -----------------------------
In October 1996, the Registrant adopted Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" and the disclosure-only
option under Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation". The adoption of these statements did
not have an impact on the financial position or results of operations of the
Registrant for the six months ended March 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) Earnings Per Share, which
replaces primary earnings per share with basic earnings per share. The
statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earnings per share calculated in
accordance with SFAS 128 would have been unchanged for the periods presented.
PAGE I-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Providence Energy Corporation (the Registrant) 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), including this quarterly report 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
quarterly 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. Factors which could cause actual results
to differ materially from those anticipated 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.
RESULTS OF OPERATIONS
The Registrant's operating revenues, operating margin and net income for the
three, six and twelve months ended March 31, 1997 and for comparable periods
ended March 31, 1996 are as follows:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31 March 31 March 31
1997 1996 1997 1996 1997 1996
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $79,946 $81,107 $143,984 $139,513 $219,623 $208,041
======= ======= ======== ======== ======== ========
Operating margin $33,008 $34,089 $ 59,766 $ 60,974 $ 93,698 $ 91,529
======= ======= ======== ======== ======== ========
Net income $ 6,737 $ 7,788 $ 11,001 $ 12,911 $ 7,060 $ 9,883
======= ======= ======== ======== ======== ========
</TABLE>
Operating Revenues and Operating Margin
- ---------------------------------------
During the quarter ended March 31, 1997, weather was 5.2 percent warmer than
normal as opposed to 5.1 percent colder than normal in the corresponding
PAGE I-9
<PAGE>
period of the prior year. This resulted in decreased operating margin of $1.8
million from the quarter ended March 31, 1996 to the quarter ended March 31,
1997. This decrease was offset by an increase in margin of $0.2 million as a
result of an increase in revenues for post-retirement expenses approved by the
Rhode Island Public Utilities Commission in September 1996. The Registrant's
operating revenues for the quarter ended March 31, 1997 decreased $1.1 million
as a result of the warmer than normal weather. The decrease in revenue as a
result of the weather was offset by increases in revenue as a result of the
increased revenues for post-retirement expenses. In addition, revenues also
increased as a result of higher gas costs during the most recent quarter. The
increased gas costs did not have a material effect on margin as the Registrant
recovers actual gas costs from its customers through the Gas Charge Clause
(GCC).
For the six months ended March 31, 1997, weather was 3.1 percent warmer than
normal as opposed to 5.1 percent colder than normal for the six months ended
March 31, 1996. This resulted in decreased margin of approximately $2.4
million. This decrease was offset by rate increases effective December 17,
1995. These rate increases accounted for increased margin of approximately $0.8
million. In addition, margin increased approximately $0.3 million as the result
of additional revenues for post-retirement expenses discussed above. Revenues
for the most recent fiscal year to date have increased $4.5 million over the
corresponding period of the prior year as a result of higher gas costs in the
first six months of fiscal year 1997. The Company recovers actual gas costs
through the GCC. In addition, the Registrant had higher revenues due to the
approved rate increase effective December 17, 1995. These increases were offset
by decreases as the result of the warmer than normal weather.
Weather for the twelve month period ended March 31, 1997 was 7.3 percent warmer
than the corresponding period from the prior year, which resulted in decreased
margin of $2.3 million. This decrease was offset by increases of approximately
$1.9 million due to increased rates that became effective December 17, 1995 and
$0.3 million as the result of increased revenues for post-retirement expenses.
In addition, the Company had an increase in margin of $1.5 million as a result
of the RIPUC's approval in February 1996 of the Integrated Resource Plan's (IRP)
performance-based ratemaking mechanism.
Operation and Maintenance Expense
- ---------------------------------
Operation and maintenance expenses for the quarter ended March 31, 1997
decreased approximately $400,000 or 2.9 percent from the same quarter last year.
This decrease was due to a decrease in uncollectible expenses of $700,000 as the
result of improved collection efforts by the Registrant. This decrease was
offset by an increase in labor of $300,000 as the result of performance, cost of
living and negotiated union contract increases in addition to an increase of
$200,000 due to the operations of Providence Energy Services, Inc., a subsidiary
of the Registrant which began operations in August 1996.
Operation and maintenance expenses for the six months ended March 31, 1997
decreased approximately $700,000 or 2.9 percent from the corresponding period of
the prior year for the reasons described above in addition to decreased legal
expenses in the first quarter of the fiscal year.
PAGE I-10
<PAGE>
Operation and maintenance expenses for the twelve months ended March 31, 1997
increased approximately $1.9 million or 4.1 percent over the corresponding
period for the prior year. This is mainly due to $600,000 of expenses in the
third and fourth quarter of fiscal 1996 for outside services associated with the
development of new energy service offerings and $800,000 related to a one-time
funding to a low income assistance program in connection with the IRP agreement.
In addition, this increase was also due to an increase in labor as well as
expenses relating to Providence Energy Services, Inc. which commenced operations
in August 1996.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased approximately $400,000 or 14.4 percent
for the three months ended March 31, 1997, $600,000 or 10.9 percent for the six
months ended March 31, 1997 and $1.6 million or 14.2 percent for the twelve
months ended March 31, 1997. These increases are due to increased capital
spending, including technology related assets with shorter depreciable lives, as
well as an increase in depreciation rates that became effective with the rate
increase on December 17, 1995.
Taxes
- -----
Taxes for the current quarter decreased approximately $100,000 or 1.5 percent.
This decrease was primarily the result of a $400,000 decrease in Federal taxes
due to a decrease in taxable income in the current quarter. This decrease was
offset by an increase of $200,000 in property taxes, which is due to increases
in capital spending as well as increased property tax rates. Taxes for the six
months ended March 31, 1997 increased $100,000 or 0.8 percent primarily for the
reasons noted above. In addition, state gross earnings tax increased
approximately $200,000 or 4.6 percent as the result of increased revenues for
the period.
Taxes for the twelve months ended March 31, 1997 increased approximately
$600,000 or 3.2 percent. State gross earnings tax increased approximately
$400,000 or 7.5 percent due to increased revenues for the period. Local
property and other taxes increased approximately $500,000 as the result of
increased capital spending and property tax rates. These increases were
partially offset by a decrease in Federal income taxes of approximately $400,000
due to a decrease in taxable income for the period.
Other, net
- ----------
Other, net decreased approximately $40,000 or 27.0 percent for the period ended
March 31, 1997. This decrease was primarily due to new energy venture expenses
of approximately $75,000, net of taxes.
Other, net decreased approximately $726,000 during the six months ended March
31, 1997. In addition to the above, this decrease is due to regulatory
adjustments made in the first quarter of fiscal 1996 including a one-time gain
for the regulatory change in accounting for property taxes offset by increases
in the Registrant's allowance for funds used during construction due to
increased capital spending.
Other, net decreased approximately $1.1 million for the twelve month period
ended March 31, 1997. In addition to the above, this decrease is due to
additional energy venture costs incurred in the third and fourth quarters of
fiscal 1996.
PAGE I-11
<PAGE>
Interest Expense
- ----------------
Interest expense for the quarter ended March 31, 1997 remained consistent with
the corresponding quarter of the prior year. Interest expense for the six
months ended March 31, 1997 decreased $24,000 or 0.6 percent from the same
period last year. This decrease was the result of a decrease in short-term
borrowing rates in the first quarter offset by an increase in long-term interest
due to the issuance of Series R First Mortgage Bonds in December of 1995.
Interest expense for the twelve months ended March 31, 1997 decreased $116,000
or 1.5 percent from the same period last year. This decrease was due to a
decrease in other interest as the result of an undercollection of gas costs
under the Gas Charge Clause during the current twelve month period. In the
prior period, the Registrant had overcollected gas costs and therefore incurred
interest expense on this overcollection while in the current period, the
Registrant received interest on the undercollected amounts. This decrease was
offset by an increase in interest on long-term debt as the result of Series R
First Mortgage Bonds issued in December of 1995.
Future Outlook
- --------------
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 Registrant is planning to form business alliances outside
of its traditional utility business. The Registrant will continue to seek
investment opportunities in non-regulated energy ventures.
On January 24, 1997, the Registrant agreed to form a new limited liability
company, Providence-Southern, LLC (the "Joint Venture"), together with Southern
Energy, Inc., a subsidiary of Southern Company, the United States' largest
producer of electricity. The Joint Venture was formed to market retail
electricity, gas and energy services in New England and will be owned 60% by
Southern Energy, Inc. and 40% by the Registrant. Providence-Southern, LLC will
focus on tailoring its services to the individual needs of the residential,
commercial, and industrial customers as consumers have more choices in a
competitive energy market. In addition to meeting the electricity and gas
commodity needs of customers, the Joint Venture will also serve as a marketing
platform for other areas of expertise of the Registrant and Southern Energy,
Inc., including energy consulting and energy use analysis, home and business
energy services, and unified billing. The Joint Venture is expected to
become fully operational in the third quarter of fiscal 1997.
This 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
Registrant estimates these costs to be in the range of $750,000 to $900,000, net
of taxes, in 1997. As of March 31, 1997, the Registrant had incurred
approximately $300,000 of these costs, net of tax.
PAGE I-12
<PAGE>
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, 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 began 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. This initial step was available to
approximately 120 of the largest commercial and industrial customers. In April
1997, the Registrant filed a plan for the second phase of unbundling with the
RIPUC. Under this filing, the Registrant evaluated the services offered in the
first phase of unbundling as well as proposed to further expand the availability
of unbundled services to an additional 3,400 medium and large commercial and
industrial customers. The Registrant hopes to implement the new services in
November 1997.
As the industry is changing, the Registrant is evaluating regulatory filing
alternatives.
On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Settlement Agreement between the Registrant 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 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, under the terms of the Agreement,
cannot exceed $800,000. The Registrant began trading FRM tools in the second
quarter of 1997.
The Registrant is exposed to credit risk in the event of nonperformance by
counter parties to these options, as well as nonperformance by the counter
parties of the transactions against which they are hedged. The Registrant
believes that the credit risk associated with options is no greater than that
associated with the primary contracts which they hedge and that elimination of
the risk of increases in natural gas prices relating to the hedged gas purchases
lowers the Registrant's overall business risk.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the first six months of 1997, the Registrant's accounts
receivable and unbilled revenue have increased $39.7 million. These fluctuations
are the result of higher monthly sales during the latest six months and a
moratorium on residential shut-offs during the heating season as well as an
underrecovery of gas costs. Because of these increases, which negatively impact
cashflow, the Registrant must borrow to maintain an appropriate level of
liquidity. Management believes its available financings are sufficient to meet
these seasonal needs.
PAGE I-13
<PAGE>
The Registrant experienced a decrease in its net cash provided by operations
during the first six months of 1997 as compared to last year, primarily as the
result of the warmer than normal weather as well as an underrecovery of gas
costs in the first six months of 1997.
In February 1997, the Registrant redeemed 16,000 shares of its preferred stock
at the par value of $1,600,000 as a result of the annual sinking fund
requirement.
Capital expenditures for the six months of $9.0 million increased from $8.8
million last year. In addition, the Registrant financed an additional $0.7
million of additions through long-term debt and capital leases. This increase
was due to increased spending for technology to redesign and integrate the
Registrant's customer-related information systems. Capital expenditures for the
remainder of the fiscal year are expected to be approximately $12.7 million of
which approximately $1.4 million is expected to be financed through long-term
debt. Anticipated capital expenditures for the next three years are expected to
total between $50 million and $60 million.
In February 1996, the Registrant received approval of the three-year Settlement
Agreement between itself and the 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
cost.
The Settlement Agreement provides for: (1) funding associated with Demand Side
Management programs, which are designed to provide equipment rebates for
specific load building programs; (2) funding associated with a low income
weatherization program, which is designed to assist low income customers through
the installation of conservation measures; and (3) a performance-based
ratemaking incentive. The Settlement Agreement also contains a general
agreement that the Registrant's strategy and steps included in its supply plan
are reasonable.
An analysis of gas cost savings will be performed in June of each year for the
duration of the IRP, at which time any annual share of the performance-based
ratemaking incentive will be recorded.
The Registrant's warrants to acquire stock in Encon Systems, Inc. (Encon)
expired in January 1997. The Registrant had elected not to exercise its
warrants. In April 1997, Encon filed for protection under Chapter 11 of the
United States Bankruptcy Code. The advances made to Encon under the line of
credit agreement are currently in default and the Registrant has reserved for
the anticipated loss.
PAGE I-14
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The annual meeting of the shareholders was held on January 16, 1997 and the
following nominees to the Registrant's Board of Directors were elected as
Directors for terms expiring at the time of the 1998 annual meeting by the
following vote:
Mr. James H. Dodge 4,272,233 FOR 99,809 WITHHELD
Mr. Kenneth W. Washburn 4,266,288 FOR 105,754 WITHHELD
In addition, Providence Energy Corporation's 1997 Non-Employee Restricted
Stock Plan was approved by a vote of 3,849,406 for, to 358,852 against with
162,982 withheld.
Item 6 (a). Exhibits
- ---------------------
(27) Financial Data Schedule
Item 6 (b). Reports on Form 8-K
- --------------------------------
On January 29, 1997, the Registrant filed a report on Form 8-K regarding the
Registrant's joint venture agreement with Southern Energy, Inc.
PAGE II-1
<PAGE>
PROVIDENCE ENERGY CORPORATION
-----------------------------
It is the opinion of management that the financial information contained in this
report reflects all adjustments necessary for a fair statement of results for
the period reported, but such results are not necessarily indicative of results
to be expected for the year due to the seasonal nature of the Registrant's gas
operations. All accounting policies and practices have been applied in a manner
consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Providence Energy Corporation
(Registrant)
BY:/s/ Gary S. Gillheeney
---------------------------
Gary S. Gillheeney
Senior Vice President,
Treasurer and CFO
Dated: May 14, 1997
------------
PAGE II-2
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