<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION-
Washington, D. C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1997
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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 _______________
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 3, 1997: $111,064,747
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: 5,881,441 shares outstanding at
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December 3, 1997.
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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, 1997 are incorporated by reference into Part II.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
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-10
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-2
</TABLE>
<PAGE>
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" statements 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; changes in, or the failure to comply with, government
regulations; 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; the ability of the Registrant to modify or redesign its computer
systems to work properly in the year 2000; unanticipated environmental
liabilities; the ability of the Registrant to form alliances and establish joint
ventures outside of the traditional utility business and the success of any
alliances or joint ventures; 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.
The Registrant's outstanding common shares are listed on the New York 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. In January 1997, the Registrant agreed to form
a new limited liability company, Providence-Southern, LLC, (the "Joint
Venture"), together with an affiliate of Southern Company (Southern). The Joint
Venture was formed to market retail electricity, gas and energy service in New
England and will be owned 60% by Southern and 40% by the Registrant. As part of
the agreement, the net assets of Providence Energy Services, Inc. will be
contributed to the Joint Venture. The Registrant also conducts its nonutility
operations through a wholly-owned nonutility subsidiary, Newport America
Corporation.
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<PAGE>
(Newport America)-see "Nonutility Operations".
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ProvGas, Rhode Island's largest natural gas distributor, was founded in 1847
and serves approximately 165,000 customers in Providence, Newport and 23 other
cities and towns in Rhode Island. North Attleboro Gas serves over 3,000
customers in North Attleboro and Plainville, Massachusetts, towns adjacent to
the northeastern Rhode Island border. The total natural gas service territory of
the Gas Companies encompasses 410 square miles and has a population of
approximately 850,000.
The corporate offices of the Registrant are located at 100 Weybosset Street,
Providence, Rhode Island 02903 (Telephone 401-272-9191).
Operations of the Gas Companies
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Customers. The Gas Companies had an average annual number of customers of
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approximately 168,000 for the twelve months ended September 30, 1997, of which
approximately 90% were residential and 10% were commercial and industrial.
The net increase in the average annual number of customers during fiscal 1997
over fiscal 1996 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.
Gas Service. The gas services provided by the Gas Companies can be grouped
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into four categories -- firm sales, firm transportation, non-firm sales and non-
firm transportation. Firm service is provided to those residential, commercial
and industrial customers that use natural gas throughout the year. Non-firm
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 1993:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Firm 80.4% 85.8% 76.4% 81.9% 83.9%
Non-Firm 9.6 9.3 17.6 15.8 14.7
Transportation 10.0 4.9 6.0 2.3 1.4
---- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
<CAPTION>
Total Gas Sold and Transported
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<S> <C> <C> <C> <C> <C>
BCF(*) 27.3 28.1 28.1 28.7 27.1
===== ===== ===== ===== =====
</TABLE>
(*) 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'
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I-2
<PAGE>
firm sales has been approximately 60% to residential and 40% to commercial and
industrial customers. Firm sales represent the highest percentage of operating
margin and represent the core of the Gas Companies' business.
Non-Firm. Non-firm customers consist of two types: seasonal customers that
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typically use gas only during the nonwinter months and dual-fuel customers that
contract for gas service on a year round basis, but agree to service
interruption during certain peak periods. By retaining the right to interrupt
service to the dual-fuel customers, the Gas Companies can balance daily demand
from firm customers with available gas supply and pipeline capacity. Non-firm
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'
non-firm sales fluctuates depending upon the relative price of natural gas to
alternative fuels.
Non-firm sales produce substantially less margin to the Gas Companies than
firm sales due to the more competitive nature of non-firm sales. Service rates
charged to dual-fuel customers are based on the price that the customer would
otherwise pay for its alternative fuel. Through September 30, 1997, total
margin was not impacted by non-firm sales due to the fact that the Rhode Island
Public Utilities Commission (RIPUC) required 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. Beginning
October 1, 1997, under the terms of the Price Stabilization Agreement, any
margins earned from these non-firm customers will be retained by the Registrant
- - See "Rates and Regulation" and "Competition & Marketing".
-------------------- -----------------------
Transportation Service. The Registrant provides both firm and non-firm
-----------------------
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 "Rates and
---------
Regulation". 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 comparable to 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 materially impacted. Through
September 30, 1997, total margin was not impacted by nonfirm transportation due
to the fact that the RIPUC required 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. Beginning October 1, 1997, under the terms of
the Price Stabilization Agreement, any margins earned from these non-firm
customers will be retained by the Registrant - See "Rates and Regulation" and
--------------------
"Competition & Marketing".
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I-3
<PAGE>
Gas Supply. During 1997, 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 3% of supply
requirements. The remaining 13% was purchased in the market area, generally on
an interruptible basis.
The Registrant's principal subsidiary, ProvGas, has entered into a full
requirements contract with Duke Energy Trading and Marketing, LLC (DETM) to
provide all of its gas supply needs beginning October 1, 1997 and continuing
through September 30, 2000. DETM is a joint venture of Duke Energy (60%) and
Mobil (40%). DETM will provide all gas supplies required by ProvGas while
ProvGas is committed to purchase all supplies exclusively from DETM. Supplies
required by ProvGas' firm sales customers will be purchased at a single, fixed
commodity price for the entire contract period. In order to provide this
service, DETM, for the contract period, will take responsibility for ProvGas'
pipeline capacity resources not previously released, all storage contracts and
all LNG capacity. Under the contract, DETM will purchase all working gas in
storage including both LNG and contract storage as of October 1, 1997. All
supply resources assigned to DETM will revert back to ProvGas on October 1,
2000. The contract was entered into following a competitive bidding process.
As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover ProvGas' non-firm sales customers' needs
and to make up the supply imbalances of transportation customers. DETM will
also provide various other services to ProvGas' transportation service
customers, including enhanced balancing, standby and the storage and peaking
services available under ProvGas' recently approved FT-2 storage service
effective December 1, 1997. DETM will receive the supply related revenues from
these services in exchange for providing the supply management inherent in these
services.
Included in the DETM contract are a number of other important features.
ProvGas has retained the right to continue to make portfolio changes to reduce
supply costs. To the extent it makes such changes, it must keep DETM whole for
the value lost over the remainder of the contract period. The contract relieves
ProvGas of the need to perform certain upstream supply management functions
which will make it possible for ProvGas to take on the additional supply
management workload required by the further unbundling of firm sales customers
without major staffing additions.
When not using capacity for its own sales, the Registrant released the
capacity or used it to make off-system sales. In fiscal 1997, the Registrant
received $7.2 million in revenue from released capacity, a 26.3% increase over
the $5.7 million of revenue generated in fiscal 1996. The revenues reduced the
firm customer's gas cost, making the Registrant more competitive. As a result
of the DETM contract noted above, the Registrant will no longer generate revenue
from released capacity.
Rates and Regulation. ProvGas is subject to the regulatory jurisdiction of
---------------------
the RIPUC with respect to rates and charges, standards of service, accounting
and other matters. The standards set by the RIPUC affect all aspects of
ProvGas' business, including its ability to market to new customers and to meet
competition from other fuel suppliers. (see
I-4
<PAGE>
"Competition and Marketing".) In August 1997, the RIPUC approved the Price
-------------------------
Stabilization Plan Settlement Agreement, (the Plan or Energize R.I.) among
ProvGas, the Rhode Island Division of Public Utilities and Carriers (the
Division), The Energy Council of Rhode Island, and the George Wiley Center.
Effective October 1, 1997 through September 30, 2000, Energize R.I. provides
customers with an initial price decrease of approximately four percent and a
three-year price freeze. Under Energize R.I., the GCC will be suspended for the
entire three-year term of the Plan. Any excess or deficiency between amounts
billed and actual incurred gas costs will be retained or borne by ProvGas.
Energize R.I. also requires ProvGas to make significant capital investments to
improve its distribution system. Capital investments required by Energize R.I.
are estimated to total approximately $26 million over its three-year term. In
addition, ProvGas is required to fund the Demand Side Management Program Rebate
Assistance Program and the Low Income Weatherization Program at annual levels of
$.5 million and $.2 million, respectively. Energize R.I. also calls for ProvGas
to fund the Low Income Assistance Program at an annual level of $1.0 million.
Finally, Energize R.I. continues the process of unbundling by requiring ProvGas
to provide unbundled service offerings up to 10 percent per year of firm system
throughput.
As part of Energize R.I., ProvGas will amortize approximately $4.0 million of
environmental costs previously charged to the accumulated depreciation reserve
over a ten year period. All environmental costs incurred during the term of
Energize R.I. will also be amortized over a ten year period.
Under Energize R.I. ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million and $92.0 million in
fiscal 1998, 1999, 2000, respectively. In addition, ProvGas may not earn less
than a 7 percent return on common equity. In the event that ProvGas earns in
excess of 10.9 percent or less than 7 percent, ProvGas will defer revenues or
costs through a deferred revenue account over the term of the Plan. Any balance
in the deferred revenue account at the end of the Plan will be refunded to or
recovered from customers in a manner determined by all parties and approved by
the RIPUC.
As a result of the above Plan, the three-year Settlement Agreement regarding
the Integrated Resource Plan (IRP) approved by the RIPUC in February 1996 was
terminated. The Settlement Agreement called for (1) $0.5 million annual funding
associated with the Demand Side Management Program; (2) $0.2 million annual
funding associated with a low-income weatherization program; and (3) a
performance-based ratemaking mechanism. In 1997 and 1996, ProvGas was able to
record its annual share of the performance-based ratemaking mechanism under this
agreement which resulted in a $1.5 million increase to operating margin.
Under the IRP, ProvGas was required to return all margins earned from non-firm
sales to firm customers through the GCC. As a result of Energize R.I., ProvGas
will be able to retain all margins earned from non-firm customers.
The following table sets forth the results of ProvGas' applications
before the RIPUC for revenue increases since 1990.
I-5
<PAGE>
<TABLE>
<CAPTION>
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 1997 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 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
Registrant, the 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
program was available to approximately 120 of the largest commercial and
industrial customers. In April 1997, the Registrant filed a plan, "Business
Choice", 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 plans to implement the new services in December 1997.
The Rate Design Settlement 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
I-6
<PAGE>
debt expenses associated with the gas revenue portion of customer bills; and (4)
a substantial portion of LNG operating and maintenance expenses, all of which
were previously recovered in base rates. Prior to October 1, 1997, the GCC
provided for reconciliation of total gas costs billed with the actual cost of
gas incurred. Any excess or deficiency in amounts billed as compared to costs
incurred was deferred and either refunded to, or recovered from, customers over
a subsequent period. Effective October 1, 1997, as part of the Price
Stabilization Plan Agreement described above, the variable gas cost component of
the GCC was eliminated for a period of three years through September 30, 2000.
Accordingly, any excess or deficiency in amounts billed as compared to costs
incurred will be retained or borne by the Registrant.
On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Agreement between ProvGas and the Division. The objective of the pilot program
was 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 were 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 were flowed through the Variable Gas Cost component
of the GCC and could not exceed $800,000. For fiscal year 1997, total
expenditures, net of sales proceeds, made under the program were approximately
$154,000. The program expired on September 30, 1997 and was not extended since
its objectives were met through Energize R.I., described above. The Registrant
held no open positions at September 30, 1997.
Competition and Marketing. The Registrant experienced modest customer growth
--------------------------
in both the residential and commercial/industrial markets. In all, the average
annual number of customers rose one percent to 167,983. This customer growth was
achieved in an underperforming local economy, one that is now showing signs of
improvement. The Providence Place Mall began construction in early 1997 and
will 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, have begun to
significantly improve the competitiveness of transportation options.
In 1998, 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, the Registrant 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
I-7
<PAGE>
program also allows for the improved utilization of existing resources, such as
mains, services, and year-round supply contracts. Under the Price Stabilization
Plan Agreement described in "Rates and Regulation", the Registrant is committed
--------------------
to funding this program at an annual level of $0.5 million through September 30,
2000.
As a result of the Rate Design Settlement Agreements approved in May 1996 and
April 1997, the Registrant has been allowed to offer unbundled services to
approximately 3500 of its largest customers. These customers are now able to
purchase natural gas directly from suppliers and use the Registrant to transport
the gas. In addition, under the Price Stabilization Plan Agreement, the
Registrant is committed to providing unbundled service offerings to up to 10
percent per year of firm system throughput. 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
Registrant's ability to compete with other energy suppliers. To facilitate the
transition to a diversified energy marketer, the Registrant is planning to form
business alliances outside of its traditional utility business. The Registrant
is also seeking investment opportunities in non-regulated energy ventures. In
November 1997, as part of the Registrant's strategic plan to strengthen its
position in the energy industry, the Registrant purchased two Rhode Island-based
oil distribution companies, which together serve over 4,000 customers. These
acquisitions continue the Registrant's transition to a diversified energy
marketer and service provider.
In January, 1997, the Registrant agreed to form a new limited liability
company, Providence-Southern, LLC (the "Joint Venture"), together with an
affiliate of Southern Company, (Southern), 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 percent by Southern and
40 percent 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, including energy consulting
and energy use analysis, home and business energy services, and unified billing.
The definitive operating agreement ("Agreement") of the Joint Venture is
expected to be finalized early in 1998.
As part of the Joint Venture agreement described above, the operations of
Providence Energy Services, Inc. will be contributed to the Joint Venture.
Providence Energy Services, Inc. was incorporated in August 1996 to market
natural gas and energy services and presently serves approximately 51 customers.
In its first full year of operations in 1997, Providence Energy Services, Inc.
recorded sales of approximately $5.1 million and established itself in the New
England retail natural gas market.
I-8
<PAGE>
In August 1997, the Registrant was selected by Salve Regina University in
Newport, Rhode Island to provide energy management services for the development
and implementation of a comprehensive energy plan. The plan includes
utilization of the latest energy management technology, installation of
insulation, conversion of many campus buildings to natural gas, and a variety of
other energy measures. This project is estimated to generate $1.5 million of
revenues for the Registrant.
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. These costs were approximately
$700,000, net of tax, in 1997.
Employees. As of September 30, 1997, the Registrant had 562 full-time
----------
employees. Approximately 275 distribution and customer service employees are
covered by a collective bargaining agreement with Local 12431 of the United
Steelworkers of America. A new five year agreement became effective in January
1996.
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 38 month Labor Agreement was ratified by
Local 12431-02 of the United Steelworkers of America, which represents 92 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 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.
Nonutility Operations
- ---------------------
As described earlier, the Registrant conducts its nonutility operations
through a wholly-owned subsidiary, Newport America. These operations total less
than two percent of the Registrant's consolidated assets and consolidated
revenues.
Special Factors Affecting the Natural Gas Industry
- --------------------------------------------------
General. The natural gas industry is subject to numerous legislative
--------
and regulatory requirements, standards and restrictions that are subject to
change and that affect the Gas Companies to varying degrees. Significant
industry factors that have affected or may affect the Gas
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<PAGE>
Companies from time to time include: lack of assurance that rate increases can
be obtained from regulatory authorities in adequate amounts on a timely basis;
changes in the regulations governing the Gas Companies' operations; reductions
in the prices of oil and propane, which can make those fuels less costly than
natural gas in some markets; increases in the price of natural gas; and
competition with other gas suppliers for industrial customers, including
potential attempts to bypass the Gas Companies' facilities.
FERC Regulations. In recent years FERC has been attempting to increase
- -----------------
competition with regard to the transportation and sale of natural gas in
interstate commerce. Beginning in late 1985, FERC began promulgating orders
that allow all industry participants access to pipeline transportation on an
open, nondiscriminatory basis to the extent of available capacity.
Recent FERC orders are in furtherance of its policy to make gas
transportation and alternate supply sources more accessible to all parties,
including local distribution companies and their customers. Such open access
allows the Gas Companies to obtain its supply through a more competitive
national gas pipeline system, where and when capacity is available.
FERC Order 636 and other related orders (the Orders) have significantly
changed the structure and types of services offered by pipeline transportation
companies. The most significant components of the restructuring occurred in
November 1993. In response to these changes, the Registrant had negotiated new
pipeline transportation and gas storage contracts.
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 be approximately $21.7 million of which $16.2 million has
been included in the GCC and has been collected from customers. The remaining
minimum obligation of $5.5 million at September 30, 1997 will be assumed by DETM
under the gas supply contract described in "Gas Supply". At the end of the
----------
three year term of the contract at September 30, 2000, the Registrant will
assume any remaining liability, which cannot be estimated at September 30, 1997.
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, 1997, the Registrant was aware of four sites at which
future costs may be incurred.
I-10
<PAGE>
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
September 30, 1997, approximately $1.8 million has been spent primarily on
studies at this site. In accordance with state laws, such a voluntary study is
monitored by the Rhode Island Department of Environmental Management (DEM). The
purpose of this study was to determine the extent of environmental contamination
at the site. The Registrant has completed the study which indicates that
remediation will be required. The Registrant has several remediation options for
the site and is currently negotiating with DEM and contractors to arrive at the
best alternative. At September 30, 1997, the Registrant has compiled a
preliminary range of costs based on remediation alternatives, ranging from $1.7
million to in excess of $5.0 million. However, because of the uncertainties
associated with environmental assessment and remediation activities, the future
cost 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
September 30, 1997, for anticipated future remediation costs at this site.
Tests conducted following the discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center in
1996 confirm the existence of contaminants at this site. The Registrant is
currently conducting tests at this site, the costs of which are being shared
equally with the prior owner, to determine the nature and extent of the
contamination. Due to the early stages of investigation, management cannot
offer any conclusions as to whether any remediation will be required at this
site. In addition, in 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 $50,000 and $100,000.
Accordingly, the Registrant has accrued $50,000 at September 30, 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 $2.3 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
September 30, 1997. Of the environmental investigation costs incurred,
approximately $0.9 million and $1.0 million were recorded in the years ended
September 30, 1997 and 1996, respectively, while the remainder were incurred in
prior years.
I-11
<PAGE>
Due to the materiality of the Registrant's environmental investigation and
remediation expenditures, the Registrant sought new treatment of these amounts.
As a result, included in the Price Stabilization Plan Settlement Agreement
described in "Rates and Regulation", which is effective October 1, 1997, all
--------------------
environmental investigation and remediation costs incurred through September 30,
1997 as well as all costs incurred during the three-year term of the Plan, will
be amortized over a ten-year period. 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.
Management has begun discussions with other parties who may assist the
Registrant in paying any 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 STOCKHOLDERS'
- ----------------------------------------------------------------------------
MATTERS
-------
The Registrant's common stock is listed on the New York Stock Exchange and
trades under the symbol "PVY". As of December 3, 1997, there were 6,458 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, 1997, 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 12 through 13 of this
Form 10-K) for the fiscal year ended September 30, 1997, 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 1
through 9 of this Form 10-K) for the fiscal year ended September 30, 1997, 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 14 through
36 of this Form 10-K) for the fiscal year ended September 30, 1997, 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 (57) Chairman, President and Chief
Executive Officer 1992
James DeMetro (49) Senior Vice President 1996
Gary S. Gillheeney (42) Senior Vice President, Chief
Financial Officer, Treasurer
and Assistant Secretary 1996
Robert W. Owens (49) Senior Vice President 1996
Alycia L. Goody (45) General Counsel and Secretary 1994
Gerald A. Yurkevicz (40) Vice President, Marketing 1996
James A. Grasso (43) Vice President, Public and
Government Affairs 1997
</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 Regulation.
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.
III-1
<PAGE>
Ms. Goody was elected General Counsel and Secretary of the 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.
Mr. Grasso was elected Vice President, Public and Government Affairs in May
1997. For three years prior thereto, Mr. Grasso served as Director of Public and
Government Relations of the Eastern Region of Pan Energy Corporation and Manager
of Public and Government Relations of Algonquin Gas Transmission Company. For
ten years prior thereto, Mr. Grasso served as Manager of Land, Public and
Government Relations of Algonquin Gas Transmission Company.
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 2000
John H. Howland 1993 1999
Douglas H. Johnson 1993 1999
William Kreykes 1996 1999
Paul F. Levy 1995 1998
Romolo A. Marsella 1993 1999
M. Anne Szostak 1995 1998
Kenneth W. Washburn 1975 2000
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 Executive Officer, Original Bradford
Soap Works, Inc.
Douglas H. Johnson is 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).
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 1995: 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 and Chief Executive Officer, Coaxial
Communications of Central Ohio and Coaxial Communications of Southern Ohio
(Effective January 1998). From 1991 to 1997: 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 7 to
14 of the Registrant's proxy statement filed December 16, 1997 with the
Securities and Exchange Commission for the annual meeting of shareholders to be
held January 15, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------------------------------------------------------------
MANAGEMENT
----------
For the information called for by this item, reference is made to page 15 of
the Registrant's proxy statement filed December 16, 1998 with the Securities and
Exchange Commission for the annual meeting of shareholders to be held January
15, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
For the information called for by this item, reference is made to page 6 of
the Registrant's proxy statement filed December 16, 1997 with the Securities and
Exchange Commission for the annual meeting of shareholders to be held January
15, 1998.
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, 1997 and 1996
Consolidated Statements of Income for the years ended September 30,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995
Consolidated Statements of Capitalization--September 30, 1997
and 1996
Consolidated Statements of Changes in Common Stockholders' Investment for
the years ended September 30, 1997, 1996 and 1995
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 14 through 36 of this Form 10-K) for the year ended September 30,
1997, filed herewith as Exhibit 13.
Schedule II. Reserves for the years ended September 30, 1997, 1996 and 1995.
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
-------------------
On September 5, 1997, the Registrant filed a report on Form 8-K regarding
the Rhode Island Public Utilities Commission's approval of the three-year
Price Stabilization Plan for the Providence Gas Company.
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).
4.3 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 October 29, 1997 between James H. Dodge,
Chairman, President and Chief Executive Officer of The Providence Gas
Company, and the said Company. (Filed as Exhibit 10.2 to the report of
The Providence Gas Company in Form 10-K for the year ended September
30, 1997, 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 October 29, 1997 between James DeMetro,
Senior Vice President, Energy Services of The Providence Gas Company,
and the said Company. (Filed as Exhibit 10.3 to the report of The
Providence Gas Company in Form 10-K for the year ended September 30,
1997, incorporated herein by this reference.)
10.6 Management contract dated October 29, 1997 between Robert W. Owens,
Senior Vice President, Gas Distribution of The Providence Gas Company,
and the said Company. (Filed as Exhibit 10.4 to the report of The
Providence Gas Company in Form 10-K for the year ended September 30,
1997, incorporated herein by this reference.)
10.7 Management contract dated October 29, 1997 between Gary S. Gillheeney,
Senior Vice President, Chief Financial Officer and Treasurer of The
Providence Gas Company, and Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of the said Company. (Filed
as Exhibit 10.5 to the report of The Providence Gas Company in Form 10-
K for the year ended September 30, 1997, incorporated herein by this
reference.)
10.8 Management contract dated October 29, 1997 between Alycia L. Goody,
Vice President, General Counsel and Secretary, of The Providence Gas
Company, and General Counsel and Secretary of the said Company. (Filed
as Exhibit 10.6 to the report of The Providence Gas Company in Form 10-
K for the year ended September 30, 1997, incorporated herein by this
reference.)
10.9 Management contract dated October 29, 1997 between Gerald A.
IV-3
<PAGE>
Yurkevicz, Vice President, Marketing of the Registrant.
10.10 Non-Employee Director Stock Plan (incorporated by reference to Exhibit
4.3 in Form S-8 (Registration No. 333-25415)).
13 Portions of the Annual Report to Shareholders for the fiscal year ended
September 30, 1997. (Pages 1 through 36)
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 4, 1997. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the accompanying index to the financial statements is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein, in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
November 4, 1997
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 4, 1997, 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; S-8,
Registration No. 33-04209; S-8, Registration No. 33-25415; and S-8, Registration
No. 33-31769. It should be noted that we have not audited any financial
statements of the Company subsequent to September 30, 1997, or performed any
audit procedures subsequent to the date of our report.
Arthur Andersen LLP
Boston, Massachusetts
December 18, 1997
IV-6
<PAGE>
Supplemental Schedule
PROVIDENCE ENERGY CORPORATION Schedule II
-----------------------------
RESERVES FOR THE YEARS ENDED
-----------------------------
SEPTEMBER 30, 1997, SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
-------------------------------------------------------------
(Thousands of Dollars)
<TABLE>
<CAPTION>
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/96 to Operations Add (Deduct) Created 9/30/97
------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 3,195 $ 5,200 $ -- $ 6,584 $ 1,811
Allowance for lease
receivables -
current 27 1 -- 1 27
other 9 94 -- 55 48
------- ------- ------- ------- -------
Total $ 3,231 $ 5,295 $ -- $ 6,640 $ 1,886
======= ======= ======= ======= =======
Allowance for lease
receivables -
long-term $ 403 $ 138 $ -- $ 140 $ 401
======= ======= ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $20,713 $ 782 $ -- $ -- $21,495
------- ------- ------- ------- -------
Unamortized investment
tax credit 2,533 -- -- 158 2,375
------- ------- ------- ------- -------
Other-
Liability and
damage reserve 561 281 -- 221 621
Other 7,583 1,265 925(B) 537 9,236
------- ------- ------- ------- -------
Total other 8,144 1,546 925 758 9,857
------- ------- ------- ------- -------
Total deferred
credits and
reserves $31,390 $ 2,328 $ 925 $ 916 $33,727
======= ======= ======= ======= =======
</TABLE>
IV-7
<PAGE>
Schedule II (cont'd)
<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(B) 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-8
<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>
(A) Includes adjustments to the regulatory pension liability.
(B) Principally an accrual for environmental investigation and remediation costs
in addition to adjustment to the regulatory pension liability.
(C) Represents adjustments to the regulatory asset and liability for FAS No. 109
activity.
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, 33-04209, and 33-25415.
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 23, 1997
----------------------------------------
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/JAMES H. DODGE Chairman, President and CEO 12-23-97
- ------------------------ (Principal Executive Officer) --------
James H. Dodge
/s/GARY S. GILLHEENEY Senior Vice President, Chief 12-23-97
- ------------------------ Financial Officer, Treasurer --------
Gary S. Gillheeney and Assistant Secretary
/s/GILBERT R. BODELL, JR. Director 12-23-97
- ------------------------ --------
Gilbert R. Bodell, Jr.
/s/JOHN H. HOWLAND Director 12-23-97
- ------------------------ --------
John H. Howland
/s/DOUGLAS H. JOHNSON Director 12-23-97
- ------------------------ --------
Douglas H. Johnson
/s/WILLIAM KREYKES Director 12-23-97
- ------------------------ --------
William Kreykes
/s/PAUL F. LEVY Director 12-23-97
- ------------------------ --------
Paul F. Levy
/s/ROMOLO A. MARSELLA Director 12-23-97
- ------------------------ --------
Romolo A. Marsella
/s/M. ANNE SZOSTAK Director 12-23-97
- ------------------------ --------
M. Anne Szostak
/s/KENNETH W. WASHBURN Director 12-23-97
- ------------------------ --------
Kenneth W. Washburn
/s/W. EDWARD WOOD Director 12-23-97
- ------------------------ --------
W. Edward Wood
</TABLE>
IV-11
<PAGE>
Contents Exhibit 10.9
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Term of Employment 1
Section 2. Position and Responsibilities 2
Section 3. Standard of Care 2
Section 4. Compensation 3
Section 5. Expenses 5
Section 6. Employment Terminations 5
Section 7. Change in Control 10
Section 8. Confidentiality and Noncompetition 13
Section 9. Indemnification 14
Section 10. Assignment 14
Section 11. Dispute Resolution and Notice 15
Section 12. Miscellaneous 15
Section 13. Governing Law 16
</TABLE>
<PAGE>
Providence Energy Corporation
Employment Agreement
This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of this
29th day of October, 1997 (hereinafter referred to as the "Effective Date"), by
and between Providence Energy Corporation, together with its subsidiaries and
affiliates (hereinafter referred to as the "Company"), a Rhode Island
corporation having its principal offices at Providence Rhode Island and Gerald
A. Yurkevicz (hereinafter referred to as the "Executive").
WHEREAS, the Executive is presently employed by the Company in the capacity of
Vice President of the Company;
WHEREAS, the Executive possesses considerable experience and an intimate
knowledge of the business and affairs of the Company, its policies, methods,
personnel, and operations; and
WHEREAS, the Company recognizes that the Executive's contribution has been
substantial and meritorious and, as such, the Executive has demonstrated unique
qualifications to act in an executive capacity for the Company; and
WHEREAS, the Company is desirous of assuring the continued employment of the
Executive in the above stated capacity, and Executive is desirous of having such
assurance.
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and
agreements of the parties set forth in this Agreement, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Term of Employment
The Company hereby agrees to employ the Executive and the Executive hereby
agrees to continue to serve the Company, in accordance with the terms and
conditions set forth herein, for an initial period of one (1) year, commencing
as of the Effective Date of this Agreement, as indicated above; subject,
however, to earlier termination as expressly provided in Section 6 herein.
The initial one (1) year period of employment automatically shall be extended
for one (1) additional year at the end of the initial one (1) year term, and
then again after each successive year thereafter. However, either party may
terminate this Agreement at the end of the initial one (1) year period, or at
the end of any successive year thereafter, by giving the other party written
notice of intent not to renew, delivered at least ninety (90) calendar days
prior to the end of such initial period or successive term.
In the event such notice of intent not to renew is properly delivered by the
Company, this Agreement, along with all corresponding rights, duties, and
covenants, shall automatically expire at the end of the initial period or
successive term then in progress, with the exception of the provisions contained
in Section 8 herein (which shall survive such
1
<PAGE>
expiration). However, upon the effective date of the expiration, the Company
shall provide to the Executive a continuation of his Base Salary (at the rate
then in effect, as provided in Paragraph 4.1 herein) for a period of twelve (12)
months, paid in equal monthly installments in accordance with the normal payroll
practices of the Company. The Company also shall provide to the Executive all
benefits to which the Executive has a vested right to at that time including,
but not limited to, the retirement benefits described in Paragraph 4.4 herein,
and the retiree medical insurance benefits described in Paragraph 4.6 herein.
However, regardless of the above, if at any time during the initial period of
employment, or successive term, a Change in Control of the Company occurs (as
defined in Section 7 herein), then this Agreement shall become immediately
irrevocable for the longer of: (a) one (1) year beyond the month in which the
effective date of such Change in Control occurs; or (b) until all obligations of
the Company hereunder have been fulfilled, and until all benefits provided
hereunder have been paid.
Section 2. Position and Responsibilities
During the term of this Agreement, the Executive agrees to serve as Vice
President of the Company. In his capacity as Vice President, the Executive
shall maintain the level of duties and responsibilities as in effect as of the
Effective Date, or such higher level of duties and responsibilities as he may be
assigned during the term of this Agreement. The Executive shall have the same
status, privileges, and responsibilities normally inherent in such capacities in
corporations of similar size and character.
Section 3. Standard of Care
During the term of this Agreement, the Executive agrees to devote substantially
his full time, attention, and energies to the Company's business and shall not
be engaged in any other business activity, whether or not such business activity
is pursued for gain, profit, or other pecuniary advantage. However, subject to
Section 8 herein, the Executive may serve as a director of other companies so
long as such service is not injurious to the Company. The Executive covenants,
warrants, and represents that he shall:
(a) Devote his full and best efforts to the fulfillment of his employment
obligations; and
(b) Exercise the highest degree of loyalty and the highest standards of
conduct in the performance of his duties.
This Section 3 shall not be construed as preventing the Executive from investing
assets in such form or manner as will not require his services in the daily
operations of the affairs of the companies in which such investments are made.
Section 4. Compensation
As remuneration for all services to be rendered by the Executive during the term
of this Agreement, and as consideration for complying with the covenants herein,
the Company shall pay
2
<PAGE>
and provide to the Executive the following:
4.1 Base Salary. The Company shall pay the Executive a Base Salary in an amount
which shall be established from time to time by the Board of Directors of the
Company or the Board's designee provided, however, that such Base Salary shall
not be less than $130,000.00 per year. This Base Salary shall be paid to the
Executive in equal monthly installments throughout the year, consistent with the
normal payroll practices of the Company.
The annual Base Salary shall be reviewed at least annually following the
Effective Date of this Agreement, while this Agreement is in force, to ascertain
whether, in the judgment of the Board or the Board's designee, such Base Salary
should be increased, based primarily on the performance of the Executive during
the year and on the then current rate of inflation. If so increased, the Base
Salary as stated above shall, likewise, be increased for all purposes of this
Agreement.
4.2 Annual Cash Incentive Compensation. The Company shall provide the Executive
with the opportunity to earn an annual cash incentive compensation payment, at a
level which is in accordance with the provisions of the Performance and Equity
Incentive Plan or any such successor plan, and which is commensurate with the
opportunity typically offered to executives having the same or similar duties
and responsibilities as the Executive at companies similar in size and character
to the Company.
Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing and/or amending the Performance and Equity Incentive Plan
so long as such changes are similarly applicable to all executives generally.
4.3 Long-Term Incentives. The Company shall provide the Executive the
opportunity to earn a long-term incentive award, at a level which is in
accordance with the provisions of the Performance and Equity Incentive Plan or
any such successor plan, and which is commensurate with the opportunity
typically offered to executives having the same or similar duties and
responsibilities as the Executive at companies similar in size and in character
to the Company.
Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing, and/or amending the Performance and Equity Incentive
Plan, so long as such changes are similarly applicable to all executives
generally.
4.4 Retirement Benefits. The Company shall provide to the Executive
participation in all Company qualified defined benefit and defined contribution
retirement plans, subject to the eligibility and participation requirements of
such plans. In addition, the Company shall provide to the Executive
participation in the Supplemental Retirement Plan and all other nonqualified
retirement programs typically offered to executives having the same or similar
duties and responsibilities at the Company.
Nothing in this paragraph shall be construed as obligating the Company to
refrain from
3
<PAGE>
changing, and/or amending the nonqualified retirement programs, so long as such
changes are similarly applicable to all executives generally.
4.5 Employee Benefits. During the term of this Agreement, and as otherwise
provided within the provisions of each of the respective plans, the Company
shall provide to the Executive all benefits to which other executives and
employees of the Company are entitled to receive, as commensurate with the
Executive's position. Such benefits shall include, but not be limited to, group
term life insurance, whole life insurance, comprehensive health and major
medical insurance, dental insurance, vision insurance, and short-term and long-
term disability.
The Executive shall be entitled to paid vacation in accordance with the standard
written policy of the Company with regard to vacations of employees. The
Executive shall likewise participate in any additional benefit as may be
established during the term of this Agreement, by standard written policy of the
Company.
4.6 Perquisites. The Company shall provide to the Executive, at the Company's
cost, all perquisites to which other executives of the Company are entitled to
receive and such other perquisites which are suitable to the character of
Executive's position with the Company and adequate for the performance of his
duties hereunder.
4.7 Right to Change Plans. By reason of Paragraphs 4.5, and 4.6 herein, the
Company shall not be obligated to institute, maintain, or refrain from changing,
amending, or discontinuing any benefit plan, program, or perquisite, so long as
such changes are similarly applicable to executive employees generally.
4.8 Deferrals. The Company may permit the Executive to defer the Executive's
receipt of the payment of up to one hundred (100%) percent of the cash
component of the Executive's Annual Incentive Compensation. If any such
deferral election is permitted, the Company shall, in its sole discretion,
establish rules and procedures for such payment deferrals.
Section 5. Expenses
The Company shall pay, or reimburse the Executive, for all ordinary and
necessary expenses, in a reasonable amount, which the Executive incurs in
performing his duties under this Agreement including, but not limited to,
travel, entertainment, professional dues and subscriptions, and all dues, fees,
and expenses associated with membership in various professional, business, and
civic associations and societies of which the Executive's participation is in
the best interest of the Company.
Section 6. Employment Terminations
6.1 Termination Due to Retirement. In the event the Executive's employment is
terminated, while this Agreement is in force, by reason of Retirement (as
defined under the then established rules of the Company's tax-qualified
retirement plan), the Executive's benefits shall be determined in accordance
with the Company's retirement, survivor's benefits,
4
<PAGE>
insurance, and other applicable programs of the Company then in effect.
Upon the effective date of such termination, the Company's obligation to pay and
provide to the Executive Base Salary, Annual Cash Incentive Compensation and
Long-Term Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3 herein,
respectively), shall immediately expire. However, the Executive shall receive a
pro rata portion of the total annual incentive compensation (both cash and
long-term), calculated at target, to which he would be entitled during the year
in which he retires, and shall receive all rights and benefits that he is vested
in, pursuant to other plans and programs of the Company including, but not
limited to, the retirement benefits as described in Paragraph 4.4 herein.
6.2 Termination Due to Death. In the event of the death of the Executive during
the term of this Agreement, or during any period of Disability during which he
is receiving compensation pursuant to Paragraph 6.3 herein, the Company shall
pay to the Executive's surviving spouse, or other beneficiary as so designated
by the Executive during his lifetime, or to the Executive's estate, as
appropriate, all benefits to which the Executive had a vested right to pursuant
to this Agreement.
6.3 Termination Due to Disability. In the event that the Executive becomes
Disabled during the term of this Agreement and is, therefore, unable to perform
his duties herein for a period of more than ninety (90) calendar days in the
aggregate, during any period of twelve (12) consecutive months, or in the event
of the Board's reasonable expectation that the Executive's Disability will exist
for more than a period of ninety (90) calendar days, the Company shall have the
right to terminate the Executive's active employment as provided in this
Agreement. However, the Board shall deliver written notice to the Executive of
the Company's intent to terminate for Disability at least thirty (30) calendar
days prior to the effective date of such termination.
A termination for Disability shall become effective upon the end of the thirty
(30) day notice period. Upon such effective date, the Company's obligation to
pay and provide to the Executive Base Salary, Annual Bonus, and Long-Term
Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3, respectively), shall
immediately expire. However, the Executive shall receive a pro rata portion of
the total annual incentive compensation (both cash and long-term), calculated at
target, to which he would be entitled during the year in which disability occurs
and shall receive all rights and benefits that he is vested in, pursuant to
other plans and programs of the Company, including, but not limited to, short-
and long-term disability benefits, and retirement benefits as described in
Paragraph 4.4.
The term "Disability" shall mean, for all purposes of this Agreement, the
incapacity of the Executive, due to injury, illness, disease, or bodily or
mental infirmity, to engage in the performance of substantially all of the usual
duties of employment with the Company as contemplated by Section 2 herein, such
Disability to be determined by the Board of Directors of the Company upon
receipt and in reliance on competent medical advice from one or more
individuals, selected by the Board, who are qualified to give such professional
medical
5
<PAGE>
advice.
If the Executive and the Company shall not be in agreement as to whether the
Executive has suffered a Disability for the purposes of this Agreement, the
matter shall be referred to a panel of three medical doctors, one of which shall
be selected by the Executive, one of which shall be selected by the Company, and
one of which shall be selected by the two doctors as so selected, and the
decision of a majority of the panel with respect to the question of whether the
Executive has suffered a Disability shall be binding upon the Executive and the
Company. The expenses of any such referral shall be borne by the party against
whom the decision of the panel is rendered. The Executive may be required by the
Company to submit to medical examination at any time during the period of his
employment hereunder, but not more often than quarter-annually, to determine
whether a Disability exists for the purposes of this Agreement.
It is expressly understood that the Disability of the Executive for a period of
ninety (90) calendar days or less in the aggregate during any period of twelve
(12) consecutive months, in the absence of any reasonable expectation that his
Disability will exist for more than such a period of time, shall not constitute
a failure by him to perform his duties hereunder and shall not be deemed a
breach or default and the Executive shall receive full compensation for any such
period of Disability or for any other temporary illness or incapacity during the
term of this Agreement.
6.4 Voluntary Termination by the Executive. The Executive may terminate this
Agreement at any time by giving the Board of Directors of the Company written
notice of intent to terminate, delivered at least thirty (30) calendar days
prior to the effective date of such termination (such period not to include
vacation). The termination automatically shall become effective upon the
expiration of the thirty (30) day notice period.
Upon the effective date of such termination, the Company shall pay to the
Executive his full Base Salary, at the rate then in effect as provided in
Paragraph 4.1 herein, through the effective date of termination, plus all other
benefits to which the Executive has a vested right to at that time including,
but not limited to, accrued vacation pay. The Company also shall provide to the
Executive the vested retirement benefits described in Paragraph 4.4 herein. With
the exception of the covenants contained in Sections 8.1, 8.3 and 8.4 herein
(which shall survive such termination), the Company and the Executive thereafter
shall have no further obligations under this Agreement.
6.5 Involuntary Termination by the Company Without Cause. At all times prior to
six (6) full calendar months before the effective date of a Change in Control
(as defined in Section 7.2), or at any time more than two (2) years after the
effective date of a Change in Control (as defined in Section 7.2), the Board may
terminate the Executive's employment, as provided under this Agreement, at any
time, for reasons other than death, Disability, Retirement, or for Cause, by
notifying the Executive in writing of the Company's intent to terminate, at
least thirty (30) calendar days prior to the effective date of such termination.
Upon the effective date of such termination, following the expiration of the
thirty (30) day
6
<PAGE>
notice period, the Company shall pay to the Executive in twelve (12) equal
monthly installments an amount equal to the Executive's annual Base Salary then
in effect. Additionally, the Company shall continue to provide the Executive
with health and welfare benefits for the twelve (12) month time period.
In the event that, during the twelve (12) month period following the effective
date of termination, the Executive becomes employed at the same or greater
annual Base Salary than that which was in effect during the year in which
termination occurred, the Company's obligation to make payments under this
Section will immediately cease upon the date of the Executive's subsequent
employment. In the event that, during the twelve (12) month period following
the effective date of termination, the Executive becomes employed at a lesser
annual Base Salary than that which was in effect during the year in which
termination occurred, then upon the date of the Executive's re-employment, the
Company's obligation to make payments under this section will be limited to a
monthly amount reflecting the difference between the Executive's Base Salary at
the date of re-employment and the Executive's Base Salary during the year in
which termination occurred. The continuation of health and welfare benefits
shall be discontinued prior to the end of the twelve (12) month period in the
event the Executive has available substantially similar benefits from a
subsequent employer.
Further, the Company shall pay the Executive all other benefits to which the
Executive has a vested right at the time, according to the provisions of the
governing plan or program. With the exceptions of the covenants contained in
Section 8 herein (which shall survive such termination) the Company and the
Executive thereafter shall have no further obligations under this Agreement.
If the Executive's employment is terminated for any of the reasons set forth in
Section 7.1 herein, the Executive shall be entitled to receive the benefits
provided in Section 7.1 herein in lieu of the benefits set forth in this Section
6.5.
6.6 Termination For Cause. Nothing in this Agreement shall be construed to
prevent the Board from terminating the Executive's employment under this
Agreement for "Cause." Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the unanimous
vote of the entire membership of the Board at a meeting of such Board duly
called and held for that purpose (after reasonable notice to the Executive and
an opportunity for the Executive, together with the Executive's counsel, to be
heard by the Board) finding that in the good faith opinion of the Board that the
Executive was guilty of conduct set forth in the second paragraph of this
Section 6.6 and specifying the particulars thereof in detail. In the event the
Board determines that Cause exists, the Board shall deliver written notice to
the Executive of the facts and circumstances leading to the Board's
determination. Upon receipt of this written notification, all provisions of this
Agreement shall terminate, except for the confidentiality and noncompete
provisions of Section 8 herein (which shall survive such termination). The
Company shall pay the Executive his full Base Salary and accrued
7
<PAGE>
vacation time through the date notice of a for Cause termination is delivered to
the Executive, plus all other benefits to which the Executive has a vested right
to at that time. The Company and the Executive thereafter shall have no further
obligations under this Agreement other than the Executive's obligations under
Section 8 hereof.
"Cause" shall be determined by the Board in the exercise of good faith and
reasonable judgment; and shall mean the willful misconduct, fraud, conviction of
a felony, consistent gross neglect of duties, or wanton negligence by the
Executive in the performance of his duties hereunder, or the material breach by
the Executive of the terms of this Agreement.
6.7 Termination for Good Reason. At any time during the six (6) full calendar
month period prior to the effective date of a Change in Control (as defined in
Section 7.2) or the twenty four (24) month period following the effective date
of a Change in Control (as defined in Section 7.2), the Executive may terminate
this Agreement for Good Reason (as defined below) by giving the Board of
Directors of the Company thirty (30) calendar days written notice of intent to
terminate, which notice sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for such termination.
Upon the expiration of the thirty (30) day notice period, the Good Reason
termination shall become effective, and the Company shall pay and provide to the
Executive the benefits set forth in Section 7.1 herein.
Good Reason shall mean, without the Executive's express written consent, the
occurrence of any one or more of the following:
(a) The assignment of the Executive to duties materially inconsistent with the
Executive's authorities, duties, responsibilities, and status as an
officer of the Company, or a reduction or alteration in the nature or
status of the Executive's authorities, duties, or responsibilities from
those in effect during the immediately preceding fiscal year;
(b) The Company's requiring the Executive to be based at a location which is
at least fifty (50) miles further from the Executive's current primary
residence than is such residence from the Company's current headquarters,
except for required travel on the Company's business to an extent
substantially consistent with the Executive's business obligations as of
the Effective Date;
(c) A reduction by the Company in the Executive's Base Salary as in effect on
the Effective Date, as provided in Section 4.1 herein, or as the same
shall be increased from time to time;
(d) A material reduction in the Executive's level of participation in any of
the Company's short- and/or long-term incentive compensation plans, or
employee benefit or retirement plans, policies, practices, or arrangements
in which the Executive participates as of the Effective Date; provided,
however, that reductions in the levels of participation
8
<PAGE>
in any such plans shall not be deemed to be "Good Reason" if the Executive's
reduced level of participation in each such program remains substantially
consistent with the average level of participation of other executives who
have positions commensurate with the Executive's position; or
(e) The failure of the Company to obtain a satisfactory agreement from any
successor to the Company to assume and agree to perform this Agreement, as
contemplated in Section 11.1 herein.
Upon a termination for Good Reason within the six (6) full calendar month period
prior to the effective date of a Change in Control, or within the twenty-four
(24) months following the effective date of a Change in Control, the Executive
shall be entitled to receive the payments and benefits set forth in Section 7.1
herein.
The Executive's right to terminate employment for Good Reason shall not be
affected by the Executive's incapacity due to physical or mental illness. The
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstance constituting Good Reason herein.
Section 7. Change in Control
7.1 Employment Terminations in Connection with a Change in Control. In the
event of a Qualifying Termination (as defined below) within six (6) full
calendar months prior to the effective date of a Change in Control, or within
twenty-four (24) months following the effective date of a Change in Control,
then in lieu of all other benefits provided to the Executive under the
provisions of this Agreement, the Company shall pay to the Executive in a lump
sum payment and provide him with the following severance benefits (hereinafter
referred to as the "Severance Benefits"):
(a) An amount equal to two (2) times the highest rate of the Executive's
annualized Base Salary rate in effect at any time up to and including the
effective date of termination;
(b) An amount equal to two (2) times the Executive's target incentive award
(both cash and long-term) established for the fiscal year in which the
Executive's effective date of termination occurs;
(c) An amount equal to the Executive's unpaid Base Salary and accrued vacation
pay through the effective date of termination;
(d) An amount equal to the Executive's unpaid targeted annual bonus,
established for the plan year in which the Executive's effective date of
termination occurs, multiplied by a fraction, the numerator of which is
the number of completed days in the then existing fiscal year through the
effective date of termination, and the denominator of which is three
hundred sixty-five (365);
9
<PAGE>
(e) A continuation of the welfare benefits of medical insurance, dental
insurance, and group term life insurance for two (2) full years after the
effective date of termination. These benefits shall be provided to the
Executive at the same premium cost, and at the same coverage level, as in
effect as of the Executive's effective date of termination. However, in
the event the premium cost and/or level of coverage shall change for all
employees of the Company, the cost and/or coverage level, likewise, shall
change for the Executive in a corresponding manner.
The continuation of these welfare benefits shall be discontinued prior to
the end of the two (2) year period in the event the Executive has
available substantially similar benefits from a subsequent employer, as
determined by the Company's Board of Directors or the Board's designee.
(f) A lump-sum cash payment of the actuarial present value equivalent of
the aggregate benefits accrued by the Executive as of the effective date
of termination under the terms of any and all supplemental retirement
plans in which the Executive participates. For purposes of determining
"final average pay" under such programs, the Executive's actual pay
history as of the effective date of termination shall be used.
For purposes of this Section 7, a Qualifying Termination shall mean any
termination of the Executive's employment other than: (1) by the Company for
Cause (as provided in Section 6.6 herein); (2) by reason of death, Disability
(as provided in Section 6.2 herein), or Retirement (as such term is then defined
in the Company's tax qualified defined benefit retirement plan; [provided that a
termination which qualifies as a Retirement and which would otherwise qualify as
a termination for Good Reason under Section 6.7 herein will be deemed to be a
Qualifying Termination]).
7.2 Definition of "Change in Control." A Change in Control of the Company shall
be deemed to have occurred as of the first day any one or more of the following
conditions shall have been satisfied:
(a) Any individual, corporation (other than the Company), partnership, trust,
association, pool, syndicate, or any other entity or any group of persons
acting in concert becomes the beneficial owner, as that concept is defined
in Rule 13d-3 promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, of securities of the Company
possessing twenty percent (20%) or more of the voting power for the
election of directors of the Company;
(b) There shall be consummated any consolidation, merger, or other business
combination involving the Company or the securities of the Company in
which holders of voting securities of the Company immediately prior to
such consummation own, as a group, immediately after such consummation,
voting securities of the Company (or, if the Company does not survive such
transaction, voting securities of the corporation surviving such
transaction) having less than sixty percent (60%) of the total voting
power in an election of directors of the Company (or such other surviving
corporation);
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<PAGE>
(c) During any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the directors of the Company cease for
any reason to constitute at least a majority thereof unless the election,
or the nomination for election by the Company's shareholders, of each new
director of the Company was approved by a vote of at least two-thirds
(2/3) of the directors of the Company then still in office who were
directors of the Company at the beginning of any such period; or
(d) There shall be consummated any sale, lease, exchange, or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company (on a consolidated
basis) to a party which is not controlled by or under common control with
the Company.
7.3 Excise Tax Equalization Payment. In the event that the Executive becomes
entitled to Severance Benefits or any other payment or benefit under this Plan,
or under any other agreement with or plan of the Company (in the aggregate, the
"Total Payments"), if any of the Total Payments will be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may
hereafter be imposed), the Company shall pay to the Executive in cash an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the Executive after deduction of any Excise Tax upon the Total Payments and any
Federal, state and local income tax and Excise Tax upon the Gross-Up Payment
provided for by this Section 7.3 (including FICA and FUTA), shall be equal to
the Total Payments. Such payment shall be made by the Company to the Executive
as soon as practical following the effective date of termination, but in no
event beyond thirty (30) days from such date.
7.4 Tax Computation. For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amounts of such Excise Tax:
(a) Any other payments or benefits received or to be received by the Executive
in connection with a Change in Control of the Company or the Executive's
termination of employment (whether pursuant to the terms of this Plan or
any other plan, arrangement, or agreement with the Company, or with any
person (which shall have the meaning set forth in Section 3(a)(9) of the
Securities Exchange Act of 1934, including a "group" as defined in Section
13(d) therein) whose actions result in a Change in Control of the Company
or any person affiliated with the Company or such persons) shall be
treated as "parachute payments" within the meaning of Section 280G(b)(2)
of the Code, and all "excess parachute payments" within the meaning of
Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless
in the opinion of tax counsel as supported by the Company's independent
auditors and acceptable to the Executive, such other payments or benefits
(in whole or in part) do not constitute parachute payments, or unless such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the base amount within the meaning of
Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise
Tax;
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(b) The amount of the Total Payments which shall be treated as subject to the
Excise Tax shall be equal to the lesser of: (i) the total amount of the
Total Payments; or (ii) the amount of excess parachute payments within the
meaning of Section 280G(b)(1) (after applying clause (a) above); and
(c) The value of any noncash benefits or any deferred payment or benefit shall
be determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment, the Executive
shall be deemed to pay federal income taxes at the highest marginal rate of
Federal income taxation in the calendar year in which the Gross-Up Payment is to
be made, and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Executive's residence on the effective
date of termination, net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local taxes.
7.5 Subsequent Recalculation. In the event the Internal Revenue Service adjusts
the computation of the Company under Section 7.4 herein so that the Executive
did not receive the greatest net benefit, the Company shall reimburse the
Executive for the full amount necessary to make the Executive whole, plus a
market rate of interest, as determined by the Committee.
7.6 Payment of Legal Fees. To the extent permitted by law, the Company shall
pay all legal fees, costs of litigation, prejudgment interest, and other
expenses incurred in good faith by the Executive as a result of the Company's
refusal to provide the severance benefits under this Section 7 to which the
Executive becomes entitled under this Agreement, or as a result of the Company's
contesting the validity, enforceability, or interpretation of this Agreement, or
as a result of any conflict (including conflicts related to the calculation of
parachute payments) between the parties pertaining to this Agreement.
Section 8. Confidentiality and Noncompetition
8.1 Confidentiality. During the term of this Agreement and thereafter in
perpetuity, the Executive will not directly or indirectly divulge or appropriate
to his own use, or to the use of any third party, and "trade secrets" (as
defined in Section 8.3), other secret or confidential information, knowledge or
financial information of the Company or any of the Company's subsidiaries or
affiliates (hereinafter, the Company and its subsidiaries and affiliates shall
be collectively referred to as the "Company Group"), except as may be in the
public domain other than by violation of this Agreement.
8.2 Noncompetition. From the date hereof until two (2) years after the
termination of his employment hereunder, the Executive will not (i) directly or
indirectly own any equity or proprietary interest in (except for ownership of
shares in a publicly traded company not exceeding five percent (5%) of any class
of outstanding securities), or be an employee, agent, director, advisor, or
consultant to or for any corporation (other than the Company Group), business
enterprise or any person engaged anywhere in the State of Rhode
12
<PAGE>
Island or the Commonwealth of Massachusetts, whether on his own behalf or on
behalf of any person other than the Company Group, in the manufacture,
procuring, sale, marketing, promotion or distribution of any product or product
lines functioning competitively with any product or product lines of the Company
Group during the term of this Agreement, and the Executive will not assist in,
manage or supervise any of the foregone activities; (ii) undertake any action to
induce or cause any customer or client of the Company Group to discontinue any
part of its business with the Company Group; (iii) cause, induce or in any way
facilitate the employment by any other persons or organization of any employee
of or consultant to the Company Group, provided, that this covenant shall become
operative only upon the termination of the Executive's employment; or (iv) take
or assist directly or indirectly in the taking, by acting as consultant to a
third party or otherwise of any position on any matter involving the Company and
pending before any state or other public agency, when such position is adverse
to the position being promoted before such agency at the time by the Company.
8.3 Trade Secrets. "Trade Secrets" as used herein means all secret discoveries,
invention, formulae, designs, methods, processes, techniques of production and
know-how relating to the Company Group's business. "Confidential Information" as
used herein means the Company Group's internal policies and procedures,
suppliers, customers, financial information and marketing practices, as well as
secret discoveries, inventions, formulae, designs, techniques of production,
know-how and other information relating to the Company Group's business not
rising to the level of a trade secret under applicable law.
8.4 The breach by the Executive of any of the covenants continued in this
Paragraph 8 shall relieve the company of all further payment obligation under
Paragraph 6 or Paragraph 7.
Section 9. Indemnification
The Company hereby covenants and agrees to indemnify and hold harmless the
Executive fully, completely, and absolutely against and in respect to any and
all actions, suits, proceedings, claims, demands, judgments, costs, expenses
(including attorney's fees), losses, and damages resulting from the Executive's
good faith performance of his duties and obligations under the terms of this
Agreement.
Section 10. Outplacement Assistance
Following a termination of the Executive's employment as described in Sections
6.5, 6.7, or 7.1 herein, the Executive shall be reimbursed by the Company for
the costs of all outplacement services obtained by the Executive within the one
(1) year (for termination pursuant to Section 6.5) and two (2) year (for
terminations pursuant to Section 6.7 or 7.1) periods after the effective date
of termination; provided, however, that the total reimbursement shall be limited
to an amount equal to fifteen percent (15%) of the Executive's Base Salary as of
the effective date of termination.
Section 11. Assignment
11.1 Assignment by Company. This Agreement may and shall be assigned or
transferred to, and shall be binding upon and shall inure to the benefit of, any
successor of the Company, and any
13
<PAGE>
such successor shall be deemed substituted for all purposes of the "Company"
under the terms of this Agreement. As used in this Agreement, the term
"successor" shall mean any person, firm, corporation, or business entity which
at any time, whether by merger, purchase, or otherwise, acquires all or
essentially all of the assets of business of the Company. Notwithstanding such
assignment, the Company shall remain, with such successor, jointly and severally
liable for all its obligations hereunder.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall immediately
entitle the Executive to compensation from the Company in the same amount and on
the same terms as the Executive would be entitled in the event of an involuntary
termination by the Company, as provided in Paragraph 6.6 herein.
Except as herein provided, this Agreement may not otherwise be assigned by the
Company.
11.2 Assignment by Executive. This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives, executors,
and administrators, successors, heirs, distributees, devisees, and legatees. If
the Executive should die while any amounts payable to the Executive hereunder
remain outstanding, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee, or other designee or, in the absence of such designee, to the
Executive's estate.
Section 12. Dispute Resolution and Notice
12.1 Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled by arbitration, conducted before a panel of
three (3) arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of his employment with the Company, in
accordance with the rules of the American Arbitration Association then in
effect.
Judgment may be entered on the award of the arbitrator in any court
having proper jurisdiction. All expenses of such arbitration, including the fees
and expenses of the counsel for the Executive, shall be borne by the Company.
12.2 Notice. Any notices, requests, demands, or other communications provided
for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing with the Company or, in the case of the Company, at its principal
offices.
Section 13. Miscellaneous
13.1 Gender and Number. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
14
<PAGE>
13.2 Entire Agreement. This Agreement supersedes any prior agreements or
understandings, oral or written, between the parties hereto or between the
Executive and the Company, with respect to the subject matter hereof and
constitutes the entire Agreement of the parties with respect thereto.
13.3 Modification. This Agreement shall not be varied, altered, modified,
canceled, changed, or in any way amended except by mutual agreement of the
parties in a written instrument executed by the parties hereto or their legal
representatives.
13.4 Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
13.5 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same Agreement.
13.6 Tax Withholding. The Company may withhold from any benefits payable under
this Agreement all federal, state, city, or other taxes as may be required
pursuant to any law or governmental regulation or ruling.
13.7 Beneficiaries. The Executive may designate one or more persons or
entities as the primary and/or contingent beneficiaries of any amounts to be
received under this Agreement. Such designation must be in the form of a signed
writing acceptable to the Board or the Board's designee. The Executive may make
or change such designation at any time.
Section 14. Governing Law
To the extent not preempted by federal law, the provisions of this Agreement
shall be construed and enforced in accordance with the laws of the state of
Rhode Island.
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<PAGE>
IN WITNESS WHEREOF, the Executive and the Company (pursuant to a resolution
adopted at a duly constituted meeting of its Board of Directors) have executed
this Agreement, as of the day and year first above written.
Executive:
/s/ Gerald A. Yurkevicz
------------------------------------
ATTEST Providence Energy Corporation
By: /s/ Alycia L. Goody By: /s/ James H. Dodge
---------------------------- ---------------------------------
Corporate Secretary Chairman, President and CEO
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<PAGE>
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 "forward-looking" statements 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;
changes in, or the failure to comply with, government regulations; 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; the ability of the Company to
modify or redesign its computer systems to work properly in the year 2000;
unanticipated environmental liabilities; ability of the Company to form
alliances and establish joint ventures outside of the traditional utility
business and the success of any alliances or joint ventures; 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 and operating margin have
increased, while net income has decreased over the comparable periods presented,
as shown in the table below:
<TABLE>
<CAPTION>
(000's)
Percent
1997 1996 Change Change
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Operating Revenues $220,420 $215,152 5,268 2.4
Operating Margin 96,044 94,906 1,138 1.2
Net Income 7,831 8,970 (1,139) (12.7)
</TABLE>
RESULTS OF OPERATIONS - 1997 VS 1996
Operating Revenues and Operating Margin
During the current year, the Company experienced normal weather as opposed
to colder-
<PAGE>
than-normal weather in 1996, which resulted in 1997 temperatures that were 5.2
percent warmer than 1996. The decrease in heating load due to the warmer
temperatures resulted in decreased margin of approximately $1.7 million, which
was offset by increased margin of $0.7 million as a result of load growth and an
increase in the customer base of 1,707 or one percent. Primarily as a result of
the warmer temperatures experienced in 1997, residential sales decreased 570
million cubic feet (MMcf) or 4.0 percent. The Company's commercial and
industrial firm sales decreased approximately 1,608 MMcf or 16.6 percent as a
result of warmer weather and customer migrations from sales service to
transportation service in connection with unbundling natural gas service in
Rhode Island. In 1996, approximately 120 of the largest commercial and
industrial customers were eligible for unbundled service offerings. In December
1997, an additional 3,400 medium and large commercial and industrial customers
are eligible. This migration of customers to transportation does not have a
material effect on margin.
The decrease due to weather was also offset by increases in margin of $0.8
million as a result of the rate increase effective December 17, 1995, and $0.4
million as the result of an increase in revenues associated with the phase-in of
post-retirement expenses related to Statement of Financial Accounting Standards
(SFAS) No. 106. The remaining increase in margin was primarily due to the
Company's non-regulated joint venture, Providence-Southern, LLC (Providence-
Southern) previously Providence Energy Services, Inc., (PES) which began
operations in August of 1996 and improved operating efficiencies in the tracking
and delivery of gas.
Interruptible and other volumes remained consistent with last year.
Operating margin from interruptible and other sales did not affect the Company's
operating margin or results of operations because the Rhode Island Public
Utilities Commission (RIPUC) required the Company to return any margins earned
from these non-firm customers to firm customers through the Gas Charge Clause
(GCC). Beginning October 1, 1997, under the Price Stabilization Plan Agreement
discussed in Note 9 to the accompanying financial statements, the Company will
retain all margins earned from these non-firm sales.
The Company's transportation volumes increased approximately 1,345 MMcf as
the result of the unbundling process described above. As the unbundling process
continues, the Company expects transportation revenues and volumes will continue
to increase as customers migrate from sales to transportation.
Operating and Maintenance Expenses
Overall, operating and maintenance expenses have decreased approximately
$0.3 million or 0.5 percent versus last year. The Company had a $0.8 million
decrease in outside services due to expenditures made in the prior year to
develop new energy service offerings as well as expenses related to the
Integrated Resource Plan (IRP). This decrease was offset by an increase in
operating expenses of $0.7 million from Providence-Southern, the Company's non-
regulated joint venture which markets natural gas and other energy services
throughout New England. In addition, the Company's labor increased by $0.8
million related to cost of living and negotiated union contract increases. This
increase in labor was offset by an increase in capitalized labor and
administrative expenses of $0.7 million. This increase was the result of
increased capital projects in 1997 as well as an increase in expenses allocated
to capital projects. The Company also incurred increased post-retirement
benefit expenses of $0.3 million as the result of the continued phasing of these
expenses into the Company's rates in 1997. The remaining decrease of $0.6
million relates primarily to cost controls instituted by the Company.
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<PAGE>
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.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $0.9 million
or 7.3 percent primarily as the result of increased capital additions, 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 have increased approximately $0.7 million or 3.7 percent primarily as
the result of increased property taxes due to capital spending as well as
increased property tax rates in 1997.
Other, net
Other, net decreased approximately $0.9 million. This decrease was the
result of increased energy venture costs of approximately $0.3 million in 1997.
The remainder of the decrease was primarily due to regulatory adjustments of
$0.9 million in 1996 as the result of the rate decision effective December 17,
1995, offset by increases in the allowance for funds used during construction of
$0.2 million as the result of increased capital spending.
Interest Expense
Interest expense for 1997 was stable when compared to 1996. Interest
expense increased approximately $0.1 million primarily as the result of an
increase in interest on long-term debt due to 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.
In January 1997, the Company agreed to form a new limited liability
company, Providence-Southern, LLC (the "Joint Venture"), together with an
affiliate of Southern Company(Southern), the United States' largest producer of
electricity. The Joint Venture was formed to market electricity, gas, and
energy services throughout New England and will be owned 60 percent by Southern
and 40 percent by the Company. The Joint Venture 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 providing for 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 Company and of Southern, including energy consulting and energy
use analysis, and home and business energy services. As part of the Joint
Venture described above, the operations of PES will be contributed to the Joint
Venture. PES was incorporated in August 1996 to market natural gas and energy
services.
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<PAGE>
In November 1997, as part of the Company's strategic plan to strengthen its
position in the energy industry, the Company purchased two Rhode Island-based
oil distribution companies, which together service over 4,000 customers. These
acquisitions continue the Company's transition to a diversified energy marketer
and service provider.
In August 1997, the Company was selected by Salve Regina University in
Newport, Rhode Island to provide energy management services for the development
and implementation of a comprehensive energy plan. The plan includes utilization
of the latest energy management technology, installation of insulation,
conversion of many campus buildings to natural gas, and a variety of other
energy measures. Management estimates that this project will generate $1.5
million of revenues for the Company.
These and other energy ventures will increasingly be separate from the
distribution utility. There are strategic planning and operating costs
associated with developing the new energy service offerings. These costs were
approximately $0.7 million and $0.5 million, net of taxes, for 1997 and 1996,
respectively.
B) Regulatory
In August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement (the Plan or Energize R.I.) among The Providence Gas Company
(ProvGas), the Rhode Island Division of Public Utilities and Carriers (the
Division), The Energy Council of Rhode Island (TEC-RI), and the George Wiley
Center. Effective October 1, 1997 through September 30, 2000, Energize R.I.
provides customers with an initial price decrease of approximately four percent
and a three-year price freeze. Under Energize R.I., the GCC will be suspended
for the entire term. Any excess or deficiency between amounts billed and actual
gas costs incurred will be retained or borne by the Company. Energize R.I. also
requires the Company to make significant capital investments to improve its
distribution system. Capital investments required by Energize R.I. are
estimated to total approximately $26 million over its three year term. Similar
to the IRP approved by the RIPUC in February 1996, which is superseded by
Energize R.I., the Company is required to fund the Demand Side Management (DSM)
Rebate Program and the Low-Income Weatherization Program at annual levels of
$0.5 million and $0.2 million, respectively. In addition, Energize R.I. calls
for the Company to fund the Low-Income Assistance Program at an annual level of
$1.0 million. Energize R.I. also continues the process of unbundling by
requiring ProvGas to provide unbundled service offerings to up to 10 percent per
year of firm system throughput.
As part of Energize R.I., ProvGas will amortize approximately $4 million of
environmental costs previously charged to the accumulated depreciation reserve
over a ten year period. All environmental costs incurred during the term of
Energize R.I. will also be amortized over a 10-year period. All environmental
costs incurred during the term of Energize R.I. will also be amortized over a
10-year period.
Under Energize R.I., ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, or $92.0 million in
fiscal 1998, 1999, and 2000, respectively. In addition, ProvGas may not earn
less than a seven percent return on common equity. In the event that ProvGas
earns in excess of 10.9 percent or less than seven percent, the Company will
defer revenues or costs through a deferred revenue account. Any balance in the
deferred revenue account at the end of the Plan will be refunded to or recovered
from customers in a manner determined by all parties and approved by the RIPUC.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among
ProvGas, the Division, TEC-RI, and a consortium of oil heat organizations. The
Agreement began a process
Page-4
<PAGE>
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 August 1997, the RIPUC approved a plan, called "Business Choice",
to further expand the availability of unbundled services to an additional 3,400
medium and large commercial and industrial customers. The Company plans to
commence Business Choice in December 1997.
In 1998, North Attleboro Gas Company, a small distribution company with over
3,500 customers located in Massachusetts that is owned and operated by the
Company, expects to file plans with the Massachusetts Department of Public
Utilities for a comprehensive unbundling of rates in collaboration with other
local distribution companies.
As described in Note 1 to the consolidated financial statements, the Company
complies with the provisions of Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71).
In the event the Company determines that it no longer meets the criteria for
following SFAS No. 71, the accounting impact would be an extraordinary, non-cash
charge to operations of an amount that could be material.
Criteria that give rise to the discontinuance of SFAS NO. 71 include: (1)
increasing competition that restricts the Company's ability to establish prices
to recover specific costs, and (2) a significant change in the manner in which
rates are set by regulators from cost-based regulation to another form of
regulation. The Company periodically reviews these criteria to ensure the
continuing application of SFAS No. 71 is appropriate. Based on a current
evaluation of the various factors and conditions that are expected to impact
future cost recovery, the Company believes that its regulatory assets are
probable of future recovery.
C) New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share", effective for financial statements issued
for periods ending after December 15, 1997. SFAS No. 128 replaces the
presentation of primary earnings per share with the presentation of basic
earnings per share on the face of the income statement. Basic earnings per
share excludes dilution and is calculated by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Earnings per share calculated under SFAS No. 128 would have been
unchanged for the periods presented.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segment of an Enterprise and Related
Information". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 131, which is effective for financial statements
for periods beginning after December 15, 1997, requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. These statements require additional disclosure only and
will not effect the financial position or results of operations of the Company.
Effective October 1, 1997, the Company will adopt the provisions of
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities". This
Statement provides authoritative
Page-5
<PAGE>
guidance for recognition, measurement, display, and disclosure of environmental
remediation liabilities in financial statements. The Company has recorded
environmental remediation liabilities of approximately $1.7 million at September
30, 1997. SOP 96-1 is not expected to have a material impact on the Company's
financial position or results of operations upon adoption.
RESULTS OF OPERATIONS - 1996 versus 1995
Operating Revenues and Operating Margin
During 1996, the Company experienced colder-than-normal weather resulting in
temperatures averaging 16.8 percent colder than 1995. The increase in heating
load due to the colder temperatures represented approximately $5.7 million in
increased operating margin. As a result of the colder temperatures experienced
during 1996, residential sales, which provide the Company with its greatest
source of sales, 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 $0.3 million of operating margin.
Additionally, the RIPUC approved a rate increase effective December 17,
1995. Operating margin for 1996 increased approximately $3.2 million versus
1995 as a result of the rate increase. As a result of the RIPUC's approval in
February 1996 of the IRP's 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 12-month plan period which ended June 1996.
These savings were somewhat offset by a one-time charge to operating and
maintenance expenses of $0.8 million to fund a Low-Income Assistance Program as
discussed below. The IRP Settlement Agreement was terminated in connection
with the approval of Energize R.I. in August 1997.
Interruptible and other volumes decreased approximately 2,300 MMcf or 47
percent versus 1995 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 required the Company to return
any margins earned from these non-firm customers to firm customers through the
GCC.
In addition, the Company had an increase in operating margin of
approximately $0.2 million due to an increase in revenues associated with the
phase-in of expenses for SFAS No. 106.
Operating and Maintenance Expenses
Overall operating and maintenance expenses for 1996 increased, approximately
$4.7 million or 10.5 percent versus 1995. 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 $0.7 million 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 $0.8 million to fund a Low-Income
Assistance Program as well as $0.1 million of costs associated with the
regulatory proceeding. Also, there were additional wage expenses of
approximately $0.8 million 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 $0.2 million of
Page-6
<PAGE>
expenses relating to the phase-in of SFAS No. 106 costs were incurred as well as
expenses of approximately $0.6 million for outside services associated with the
development of new energy service offerings. The remaining $0.4 million is
attributable to increases in general operating costs.
Taxes
Taxes for 1996 have increased approximately $2.8 million or 18.9 percent
from 1995. The increase in taxes, mainly Federal income and state gross
earnings tax, resulted from higher pre-tax 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 $0.7 million for 1996. The Company's long-
term interest expense for 1996 increased approximately $0.8 million as a result
of the Series R First Mortgage Bond issuance in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company experienced a substantial increase in its net cash
provided by operations primarily due to a decrease in deferred gas costs as the
result of the timing of the recovery of incurred gas costs through the GCC, as
discussed in Note 1 of the accompanying financial statements. This increase was
offset by a decrease in cash flow due to increased inventories of approximately
$2.2 million. On October 1, 1997, these inventories will be transferred at book
value to Duke Energy Trading and Marketing, L.L.C. (DETM) under the terms of
ProvGas' new gas supply contract described in Note 7 to the accompanying
consolidated financial statements.
Capital expenditures for 1997 of $23.3 million, which includes $2.4 million
of equipment financed through long-term debt and capital leases, increased by
approximately $2.5 million when compared to 1996 capital expenditures of $20.8
million. This increase was primarily due to expenditures related to the
technology to integrate the Company's customer-related systems which is expected
to be completed in 1998. As a result of Energize R.I. discussed in Note 9 to the
accompanying financial statements, the Company is committed to making
significant capital improvements to its distribution system during its three-
year term. These improvements will be made by expanding the distribution system
into economic development areas of Rhode Island as well as accelerating the
replacement of mains and services. The Company anticipates its capital
expenditures over the next three years to total approximately $75 million.
During 1997, the Company entered into notes with five-year maturities in the
amount of $3.3 million in order to finance capital expenditures. The notes have
interest rates ranging from 4.9 to 7.5 percent. The Company meets seasonal cash
requirements and finances its capital expenditures on an interim basis through
short-term borrowings. As of September 30, 1997, the Company had lines of
credit totaling $66.5 million with borrowings outstanding of $23.7 million.
Page-7
<PAGE>
The Company, like most owners of computer software, will be required to
modify or replace significant portions of its software so that it will function
properly in the year 2000. The Company has performed a Year 2000 impact
assessment and is currently pursuing viable options, including renovation and
replacement of existing systems, to ensure that its computer software
applications and hardware will be Year 2000 compliant.
In February 1997, the Company redeemed 16,000 shares of its preferred stock
at the par value totaling $1.6 million in accordance with the annual sinking
fund requirement.
During the next two years, the Company intends to make a debt offering of
$15 million to finance its capital expenditures and energy service offerings.
The Company's ability to pay dividends is largely dependent upon receipt of
dividends from ProvGas. Approximately $19 million of ProvGas' retained earnings
were available for dividends at the end of fiscal 1997 under the most
restrictive terms of ProvGas' First Mortgage Bond indenture.
The Company offers a Dividend Reinvestment and Cash Stock Purchase Plan (the
Plan) for its current shareholders. During 1997, 43.1 percent of the Company's
shareholders participated in the Plan, with $1.4 million or 22.9 percent of
declared dividends reinvested in new shares rather than paid in cash.
In August 1997, the RIPUC approved Energize R.I., which provides customers
with an initial price decrease of approximately four percent and a three-year
price freeze.
In addition, Energize R.I. suspends the GCC, which results in the Company
retaining or bearing any excess or deficiency between gas costs billed and gas
costs incurred. Energize R.I. requires the Company to make significant capital
investments to improve its distribution system. Capital investments required by
Energize R.I. are expected to total $26 million during its term . Energize R.I.
also requires the Company to provide funding of the Low-Income Assistance
Program, the DSM Rebate Program, and Low-Income Weatherization Program at an
annual level of $1 million, $0.5 million, and $0.2 million, respectively.
Under Energize R.I., ProvGas is allowed to earn a 10.9 percent return on
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998,1999, and 2000, respectively.
As a result of Energize R.I., the three-year Settlement Agreement regarding
the IRP approved by the RIPUC in February 1996 was terminated. The Settlement
Agreement called for (1) $0.5 million annual funding associated with the DSM
Rebate Program; (2) $0.2 million annual funding associated with a Low-Income
Weatherization Program; and (3) a performance-based ratemaking mechanism. In
1997 and 1996, the Company was able to record its annual share of the
performance-based ratemaking mechanism under this agreement which resulted in
$1.5 million of operating margin in each of those years.
The savings to fund the rate decrease and freeze under Energize R.I. were
generated by ongoing cost control initiatives and a full requirements contract
with DETM. Under the contract, which runs from October 1, 1997 through
September 30, 2000, supplies required by the Company's firm sales customers will
be purchased at a single, fixed commodity price for the entire contract period.
In order to provide this service, DETM will take responsibility for the
Company's
Page-8
<PAGE>
pipeline capacity resources, storage contracts, and LNG capacity. Under the
contract, DETM will provide all gas supplies required by the Company while the
Company must purchase all supplies exclusively from DETM. All non-firm gas
supply will be provided at market prices.
For additional information on current and anticipated financial, economic,
and operational data, references are made to the President's Message to Our
Shareholders and 1997 The Year in Review sections of this Annual Report to
Shareholders.
<TABLE>
<CAPTION>
Common Stock Information
Dividend Paid
Quarter Ended High Low Per Share
- -------------------------- --------- ------- -------------
<S> <C> <C> <C>
September 30, 1997 $19 11/16 $17 1/4 $.27
June 30, 1997 18 3/8 17 1/8 .27
March 31, 1997 20 1/2 16 1/2 .27
December 31, 1996 18 3/4 16 3/4 .27
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
</TABLE>
Page-9
<PAGE>
FINANCIAL AND OPERATING STATISTICS
For the Years Ended September 30
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating revenues (thousands of dollars):
Residential $135,259 $128,875 $106,387 $130,888 $120,997 $104,658
Commercial/
industrial 66,352 74,625 61,491 76,174 72,974 63,405
Total firm sales 201,611 203,500 167,878 207,062 193,971 168,063
Interruptible and other 10,299 9,882 14,026 14,471 14,336 21,394
Transportation 2,755 741 804 287 54 74
Other 5,755 1,029 1,284 958 954 810
-------- -------- -------- -------- -------- --------
Total operating
revenues $220,420 $215,152 $183,992 $222,778 $209,315 $190,341
======== ======== ======== ======== ======== ========
Gas sold and transported (MMcf):
Residential 13,853 14,423 12,709 14,122 13,783 13,166
Commercial/
industrial 8,086 9,694 8,772 9,360 8,926 8,363
-------- -------- -------- -------- -------- --------
Total firm sales 21,939 24,117 21,481 23,482 22,709 21,529
Interruptible and other 2,633 2,610 4,950 4,547 3,985 6,717
Transportation 2,725 1,380 1,681 656 386 869
Company use and other 871 1,017 919 1,182 1,187 1,264
-------- -------- -------- -------- -------- --------
Total gas sold
and transported 28,168 29,124 29,031 29,867 28,267 30,379
Less:off-system sales 280 412 1,682 2,179 501 5
-------- -------- -------- -------- -------- --------
Total throughput 27,888 28,712 27,349 27,688 27,766 30,374
======== ======== ======== ======== ======== ========
Gas purchased, produced and
transported (MMcf):
Pipeline natural
gas-contract 17,328 17,979 16,591 22,880 18,044 20,150
Pipeline natural
gas-spot purchases 3,271 5,197 7,935 3,533 7,936 7,374
Pipeline natural
gas-transportation 2,725 1,380 1,681 656 386 869
Underground storage 4,163 3,129 2,270 1,697 879 594
Liquefied natural gas 681 1,439 554 1,101 1,022 1,329
Liquid propane and
synthetic natural gas - - - - - 63
-------- -------- -------- -------- -------- --------
Total 28,168 29,124 29,031 29,867 28,267 30,379
======== ======== ======== ======== ======== ========
Average annual number of gas
distribution customers:
Residential 151,152 149,487 147,935 145,793 143,771 143,114
Commercial/
industrial 16,656 16,645 16,509 16,337 16,264 15,889
-------- -------- -------- -------- -------- --------
Total firm 167,808 166,132 164,444 162,130 160,035 159,003
Interruptible and
transportation 175 144 143 141 123 115
-------- -------- -------- -------- -------- --------
Total 167,983 166,276 164,587 162,271 160,158 159,118
======== ======== ======== ======== ======== ========
</TABLE>
Page-10
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total number of a gas distribution customers
at year-end 166,535 164,312 163,294 159,375 159,135 157,087
======== ======== ======== ======== ======== ========
Residential heating:
Average consumption per customer (Mcf) 109 116 103 117 116 112
Average revenue per customer $ 1,043 $ 1,016 $ 844 $ 1,068 $ 1,008 $ 870
Average rate per Mcf $ 9.55 $ 8.77 $ 8.19 $ 9.10 $ 8.68 $ 7.80
Average annual number of customers 120,826 118,724 116,826 114,461 112,497 111,176
Maximum daily sendout (MMcf) 188 189 202 206 185 174
Actual calendar degree days 5,657 5,967 5,111 5,977 5,718 5,502
Normal calendar degree days 5,652 5,682 5,709 5,709 5,811 5,811
</TABLE>
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet.
Page-11
<PAGE>
SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS
For the Years Ended September 30
(thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $220,420 $215,152 $183,992 $222,778 $209,315 $190,341
Cost of gas sold 124,376 120,246 100,944 135,104 126,314 111,568
-------- --------- -------- -------- -------- --------
Operating margin 96,044 94,906 83,048 87,674 83,001 78,773
-------- -------- -------- -------- -------- --------
Other operating expenses,
excluding taxes 61,642 61,030 54,838 55,838 52,921 52,122
Taxes, other than income 13,732 13,007 11,769 12,540 12,597 11,497
Federal income taxes 4,608 4,683 3,104 4,460 3,554 2,774
-------- -------- -------- -------- -------- --------
Total operating
expenses 79,982 78,720 69,711 72,838 69,072 66,393
-------- -------- -------- -------- -------- --------
Operating income 16,062 16,186 13,337 14,836 13,929 12,380
Other, net (2) 945 865 196 37 287
-------- -------- -------- -------- -------- -------
Income from continuing
operations before
interest expense 16,060 17,131 14,202 15,032 13,966 12,667
Interest expense 7,603 7,465 7,379 6,247 6,653 6,837
-------- -------- ------- --------- -------- ------
Income from continuing
operations after
interest expense 8,457 9,666 6,823 8,785 7,313 5,830
Preferred dividends of
subsidiary (626) (696) (696) (696) (696) (696)
-------- --------- ------- --------- -------- -------
Net income 7,831 8,970 6,127 8,089 6,617 5,134
Common dividends 6,242 6,155 6,062 5,856 4,889 4,908
-------- -------- ------- --------- -------- -------
Earnings reinvested in
the corporation $ 1,589 $ 2,815 $ 65 $ 2,233 $ 1,728 $ 226
======== ======== ======= ========= ======== =======
Weighted average common
shares outstanding 5,790.1 5,709.2 5,624.2 5,534.1 4,761.8 4,478.4
======== ======== ======= ========= ======== =======
Net income per
common share $ 1.35 $ 1.57 $ 1.09 $ 1.46 $ 1.39 $ 1.15
======== ======== ======= ========= ======== =======
Common dividends $ 1.08 $ 1.08 $ 1.08 $ 1.06 $ 1.02 $ 1.10
======== ======== ======= ========= ======== =======
</TABLE>
Page-12
<PAGE>
OTHER FINANCIAL DATA
SEPTEMBER 30
(thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
----- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total assets $255,510 $250,150 $227,127 $233,311 $224,550 $197,459
Gas plant--at
original cost 300,829 279,849 262,769 239,830 221,769 210,087
Gas plant--net of
depreciation 190,307 179,473 169,792 159,012 149,272 144,767
Capitalization:
Common stockholders'
equity 85,661 82,565 78,524 77,156 73,368 54,491
Redeemable cumulative
preferred stock 6,400 8,000 8,000 8,000 8,000 8,000
Long-term debt 72,372 72,456 74,482 60,079 62,163 60,958
Shares of common stock
at year-end 5,832 5,748 5,668 5,581 5,486 4,534
Book value per share $14.69 $14.36 $ 13.85 $ 13.82 $ 13.37 $ 12.02
====== ====== ======= ======== ======== ========
</TABLE>
Page-13
<PAGE>
CONSOLIDATED BALANCE SHEETS
September 30
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Gas plant, at original cost (notes 1, 4, 7, and 9) $300,829 $279,849
Less--Accumulated depreciation and
utility plant acquisition adjustments(note 9) 110,365 100,242
-------- --------
190,464 179,607
-------- --------
Non-utility property, net (note 11) 1,182 1,141
-------- --------
Current assets:
Cash and temporary cash
investments (notes 1 and 8) 1,063 1,424
Accounts receivable, less allowance of
$1,886 in 1997 and 3,231 in 1996 (notes 1, 3, and 7) 14,852 14,665
Unbilled revenues (note 1) 2,683 2,357
Deferred gas costs (notes 1, 7, and 9) 7,231 13,272
Inventories, at average cost-
Liquefied natural gas, propane and under-
ground storage 18,217 16,023
Materials and supplies 1,287 1,259
Prepaid and refundable taxes (note 2) 4,005 4,076
Prepayments 1,039 1,540
-------- --------
50,377 54,616
-------- --------
Deferred charges and other assets
(notes 1, 3, 6 and 7) 13,487 14,786
-------- --------
Total assets $255,510 $250,150
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statement) $164,433 $163,021
-------- --------
Current liabilities:
Notes payable (notes 5 and 8) 23,675 23,270
Current portion of long-term debt (note 4) 3,707 2,022
Accounts payable (notes 6 and 7) 16,755 17,372
Accrued taxes 2,506 1,980
Accrued vacation 1,715 1,723
Customer deposits 3,461 3,996
Other 5,531 5,376
-------- --------
57,350 55,739
-------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 21,495 20,713
Unamortized investment tax credits (note 2) 2,375 2,533
Other (notes 6 and 7) 9,857 8,144
-------- --------
33,727 31,390
-------- --------
Commitments and contingencies (notes 7 and 9) - -
Total capitalization and liabilities $255,510 $250,150
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-14
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30
<TABLE>
<CAPTION>
(thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $220,420 $215,152 $183,992
Cost of gas sold 124,376 120,246 100,944
-------- -------- --------
Operating margin 96,044 94,906 83,048
-------- -------- --------
Operating expenses:
Operation and maintenance 48,768 49,033 44,368
Depreciation and amortization 12,874 11,997 10,470
Taxes--
State gross earnings 6,045 6,063 5,005
Local property and other 7,687 6,944 6,764
Federal income (note 2) 4,608 4,683 3,104
-------- -------- --------
Total operating expenses 79,982 78,720 69,711
-------- -------- --------
Operating income 16,062 16,186 13,337
Other, net (notes 1 and 11) (2) 945 865
-------- -------- --------
Income before interest expense 16,060 17,131 14,202
-------- -------- --------
Interest expense:
Long-term debt 6,042 5,889 5,086
Other 1,786 1,682 2,437
Interest capitalized (225) (106) (144)
-------- -------- --------
7,603 7,465 7,379
-------- -------- --------
Income after interest expense 8,457 9,666 6,823
Preferred dividends of subsidiary
(note 4) (626) (696) (696)
--------- -------- --------
Net income $ 7,831 $ 8,970 $ 6,127
========= ======== ========
Earnings per common share (note 14) $ 1.35 $ 1.57 $ 1.09
========= ======== ========
Weighted average common shares
outstanding (note 14) 5,790.1 5,709.2 5,624.2
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30
(thousands of dollars) 1997 1996 1995
- --------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
Cash provided by -
Operating Activities:
Income after interest expense $ 8,457 $ 9,666 $ 6,823
Items not requiring cash:
Depreciation and amortization 12,846 12,012 10,529
Changes as a result of regulatory
action - (1,453) -
Deferred Federal income taxes 703 1,943 2,142
Gain on sale of nonutility property
(note 11) - (699) -
Write-down of nonutility property
(note 11) - 714 -
Amortization of investment tax credits (158) (158) (160)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (187) (634) 3,861
Unbilled revenues (326) 298 240
Deferred gas costs 6,041 (12,079) 14,626
Inventories (2,222) (5,626) 1,278
Prepaid and refundable taxes 14 1,857 (1,017)
Prepayments 501 (174) 133
Accounts payable (617) 3,270 (4,222)
Accrued taxes 526 (21) (165)
Accrued vacation, customer deposits
and other (388) 1,462 572
Deferred charges and other 2,697 1,307 (2,011)
-------- -------- --------
Net cash provided by operating
activities 27,887 11,685 32,629
-------- -------- --------
Investment Activities:
Expenditures for property, plant
and equipment, net (20,875) (20,781) (19,597)
Proceeds from sale of nonutility
property(note 11) - 725 -
-------- -------- --------
Net cash used by investing activities (20,875) (20,056) (19,597)
-------- -------- --------
Financing Activities:
Issuance of common stock 44 31 -
Proceeds from exercise of stock options 34 - -
Issuance of mortgage bonds - 15,000 -
Redemption of preferred stock (1,600) - -
Issuance of long-term debt 1,345 - -
Payments on long-term debt (2,164) (1,954) (2,081)
Increase (decrease) in notes payable 405 933 (5,363)
Cash dividends on preferred shares (note
4) (626) (696) (696)
Cash dividends on common shares (4,811) (4,797) (4,759)
-------- -------- --------
Net cash provided (used) by
financing activities (7,373) 8,517 (12,899)
-------- -------- --------
Increase (decrease) in cash (361) 146 133
Cash and temporary cash investments at
beginning of year 1,424 1,278 1,145
-------- -------- --------
Cash and temporary cash investments at the
end of year $ 1,063 $ 1,424 $ 1,278
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for-
Interest (net of amount capitalized) $ 7,476 $ 6,738 $ 6,663
Income taxes (net of refunds) $ 2,036 $ 2,851 $ 1,388
Schedule of noncash investing activities:
Capital lease obligations for equipment $ 437 $ - $ -
Other long-term debt for equipment $ 1,983 $ - $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30
(thousands) 1997 1996
- ----------------------------------------------------------- -------- --------
<S> <C> <C>
Common stockholders' investment (notes 4, 6, and 10):
Common stock, $1 Par, Authorized-20,000 shares
Outstanding-5,832 shares in 1997 and 5,748 shares
in 1996 $ 5,832 $ 5,748
Amount paid in excess of par 56,827 55,404
Retained earnings 23,002 21,413
-------- --------
85,661 82,565
-------- --------
Cumulative preferred stock of subsidiary (notes 4 and 8):
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 64 shares as of 1997 and
80 shares as of 1996 6,400 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 11,200 12,800
Series R, 7.50%, due December 30, 2025 15,000 15,000
Other long-term debt 3,207 -
Capital Leases 1,672 1,678
-------- --------
76,079 74,478
Less-current portion 3,707 2,022
-------- --------
72,372 72,456
-------- --------
Total capitalization $164,433 $163,021
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-17
<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, 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 stock
compensation plans - - (87) -
Amortization of deferred
compensation for stock
compensation plans - - 24 -
-------- --------- ------- -------
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 stock compensation
plans - - (227) -
Amortization of deferred
compensation for stock
compensation plans - - 64 -
-------- --------- ------- -------
Balance, September 30, 1996 5,748 5,748 55,404 21,413
Add (deduct):
Net income - - - 7,831
Dividends ($1.08 per share) - - - (6,242)
Dividend reinvestment, cash
stock purchase plan and
employee
benefit plans 82 82 1,392 -
Exercise of stock options 2 2 32 -
Accrual for stock compensation
plan - - (110) -
Amortization of deferred
compensation for stock
compensation plan - - 109 -
-------- --------- ------- -------
Balance, September 30, 1997 5,832 $5,832 $56,827 $23,002
======== ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-18
<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 non-utility 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 Gas) 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. These leases are recorded on the accompanying
balance sheet at the gross investment in the leases less unearned income.
Unearned income is recognized in such a manner as to produce a constant periodic
rate of return on the net investment in the finance lease.
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.
Impairment of Long-Lived Assets. Statement of Financial Accounting Standards
No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" which became effective for the Company in
1997 established accounting standards for the impairment of long-lived assets.
SFAS No. 121 also required that regulatory assets which are no longer probable
of recovery through future revenues be charged to earnings. SFAS 121 did not
have an impact on the Company's financial position or results of operations upon
adoption.
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
Page-19
<PAGE>
was approximately 3.85 percent for 1997 and 1996 and 3.75 percent for 1995.
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 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 provided for the recovery of: (1)
inventory financing costs; (2) working capital associated with gas supply
purchases; (3) bad debt expenses associated with the gas revenue portion of
customer bills; and (4) a substantial portion of liquefied natural gas operating
and maintenance expenses, all of which were previously recovered in base rates.
Similar to the former CGA, the GCC provided for reconciliation of total gas
costs billed with the actual cost of gas incurred. Any excess or deficiency in
amounts billed as compared to costs incurred is deferred and either refunded to,
or recovered from, customers over a subsequent period. As a result of the Price
Stabilization Plan described in Note 9, the GCC will be suspended for the period
of October 1, 1997 through September 30, 2000. Any excess or deficiency in
amounts billed as compared to costs incurred, will be retained or borne by the
Company.
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 related 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:
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1996
- ------------------------------------- ------- -------
<S> <C> <C>
Cost of fuel assistance program $ 808 $ 1,271
Pension costs 7,379 6,920
Deferred costs related to
phase-in plan 272 449
Unamortized debt expense 1,901 2,109
Post-retirement benefits 691 1,041
Pipeline interconnection costs - 309
Deferred rate case expense (note 9) 164 246
Other deferred charges 2,272 2,441
------- -------
Total $13,487 $14,786
======= =======
</TABLE>
Temporary Cash Investments. Temporary cash investments are short term, highly
liquid
Page-20
<PAGE>
investments with original maturities to the Company of not more than 90 days.
Stock-Based Compensation. Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value method of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (Note 10).
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.
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) 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Current $3,688 $2,989 $1,300
Deferred 703 1,943 2,142
------ ------ ------
Total Federal income tax
provision $4,391 $4,932 $3,442
====== ====== ======
Income tax is charged (credited)
to the following:
Charged to operating
expenses $4,608 $4,683 $3,104
Included in other, net (217) 249 338
------ ------ ------
Total Federal income tax
provision $4,391 $4,932 $3,442
====== ====== ======
</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>
1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax
rates 34.0% 34.0% 34.0%
Reversing temporary differences (.3) .5 (.1)
Charitable contribution - (.4) -
Amortization of investment
tax credits (.4) (.4) (.6)
Other .9 .1 .3
---- ---- ----
Effective Federal income tax
rate 34.2% 33.8% 33.6%
==== ==== ====
</TABLE>
Page-22
<PAGE>
The Company's deferred tax assets and liabilities for each of the two years
in the period September 30 are the result of the following temporary
differences:
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term deferred taxes
- ------------------------
Tax assets
Unamortized ITC................................. $ 828 $ 883
Other........................................... 305 361
Tax liabilities
Property related................................ (21,828) (20,328)
Pension costs................................... (222) (519)
Deferred charges................................ (578) (1,110)
-------- --------
Net deferred tax liability included in
accompanying consolidated balance sheet......... $(21,495) $(20,713)
======== ========
Prepaid Taxes
- -------------
Tax assets
Accounts receivable reserves.................... $ 458 $ 1,284
Property tax reserves........................... (229) (384)
Alternative minimum tax......................... 703 876
Other........................................... 1,229 1,020
Tax liabilities
Employee severance.............................. 56 56
Other........................................... (111) (40)
------- --------
Net prepaid taxes................................. 2,106 2,812
Prepaid gross earnings tax and other.............. 1,899 1,264
------- --------
Net prepaid and refundable taxes included in
accompanying consolidated balance sheet......... $ 4,005 $ 4,076
======= ========
</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.
<TABLE>
<CAPTION>
Future minimum lease payments to be received are:
(thousands of dollars)
- ------------------------------------------------
<S> <C> <C>
1998 $ 529
1999 491
2000 397
2001 342
------
1,759
Amount representing interest 312
------
Amount representing principal $1,447
======
</TABLE>
Page-23
<PAGE>
4. Capitalization
A. First Mortgage Bonds
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 indebtedness 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 $19 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.
As of September 30, 1997, the annual sinking fund requirements and
maturities of long-term debt for each of the next five fiscal years are
$2,509,000.
B. Other Long-term Debt
During 1997, the Company financed equipment purchases of approximately
$3,328,000 through the issuance of long-term notes to IBM Credit Corporation.
The notes have five-year terms and interest rates ranging from 4.9 to 7.5
percent. As of September 30, 1997, the maturities of these long-term notes over
the next five years are $686,000 in 1998, $639,000 in 1999, $675,000 in 2000,
$713,000 in 2001, and $490,000 in 2002.
C. Redeemable Preferred Stock
ProvGas' preferred stock, which consists of 80,000 shares of $100 par value,
has an 8.7 percent cumulative annual dividend rate payable on a quarterly basis,
and has no voting power or privileges. The stock is subject to a cumulative
annual sinking fund requirement of 16,000 shares per year at par ($1,600,000)
plus accrued or unpaid dividends which commenced in February 1997. Accordingly,
16,000 shares were redeemed by the Company at par value in February 1997.
5. Notes Payable
The Company meets seasonal cash requirements and finances capital
expenditures on an interim basis through short-term bank borrowings. As of
September 30, 1997, the Company had lines of credit totaling $66,500,000 with
borrowings outstanding of $23,675,000. 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 5.79
percent in 1997, 5.65 percent in 1996, and 6.15 percent in 1995.
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.
Page-24
<PAGE>
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,
1997 and 1996:
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, including
vested benefit obligation of $(38,094)
as of September 30, 1997 and $(36,463)
as of September 30, 1996 $ 45,022 $(42,578)
======== ========
Projected benefit obligation for service
rendered to date $(60,323) $(57,209)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 76,479 63,019
-------- --------
Excess of plan assets over projected benefit
obligation 16,156 5,810
Unrecognized (gain)/loss (23,813) (13,139)
Unrecognized prior service cost 2,842 3,126
Unrecognized net transition asset
being recognized over 15 years from
October 1, 1985 (408) (545)
-------- --------
Net accrued pension cost included in other
deferred credits and accounts payable
at September 30, 1997 and 1996 $ (5,223) $ (4,748)
======== ========
</TABLE>
Net pension cost for fiscal years 1997, 1996, and 1995 included the following
components:
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,824 $ 1,709 $ 1,541
Interest cost on benefit obligations 4,583 4,262 3,872
Actual return on plan assets (16,458) (7,481) (10,300)
Net amortization and deferral 10,526 2,091 5,713
-------- ------- --------
Net periodic pension cost 475 581 826
Adjustments due to regulatory
action 475 (442) (424)
-------- ------- --------
Net periodic pension cost recognized $ - $ 139 $ 402
======== ======= ========
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the projected benefit obligation were eight percent and six percent,
respectively. The expected long-term rate of return on assets was nine 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
Page-25
<PAGE>
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 $1,372,000 in 1997,
$1,454,000 in 1996, and $1,561,000 in 1995, 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 favored investment funds, such as the
VEBA Trust. Accordingly, ProvGas fully recovered its 1997, 1996, and 1995
postretirement obligations because such amounts were funded into the VEBA Trust.
In addition, in September 1996, the Commission approved a ratable recovery of
the cumulative unrecovered difference of $1,041,000 during 1997, 1998, and 1999.
Of the total postretirement benefit obligations, $1,718,000, $1,454,000, and
$1,231,000 were included in rates during 1997, 1996, and 1995, respectively.
The Plan's costs and accumulated postretirement benefit obligation for 1997,
1996 and 1995 are calculated by ProvGas' actuaries using assumptions and
estimates which include:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Healthcare cost annual growth rate.................... 10.2% 11.4% 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 1997, a one percent change
in the above rates would change the obligation by $799,000 and would change the
annual expense by $85,000.
The obligations and assets of the Plan at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement
benefit obligation:
Current retirees $(6,626) $(6,975)
Active employees-eligible for
benefits (1,361) (889)
Active employees (3,761) (3,876)
------- -------
Total post-retirement benefit
obligation (11,748) (11,740)
Plan assets at fair value 4,704 3,106
-------- --------
Unfunded post-retirement benefit
obligation (7,044) (8,634)
Unrecognized transition obligation 8,421 8,947
Unrecognized net (gain) or loss (1,360) (313)
-------- --------
Prepaid post-retirement
benefit obligation included
in the accompanying consolidated
balance sheet $ 17 $ (-)
======== ========
</TABLE>
Page-26
<PAGE>
ProvGas' actuarial determined Plan costs for 1997, 1996, and 1995 include
the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 228 $ 222 $ 230
Interest cost 896 896 909
Actual return on plan assets (278) (98) (28)
Amortization and deferral 526 434 450
------ ------ ------
Total annual plan costs $1,372 $1,454 $1,561
====== ====== ======
</TABLE>
C. Supplemental Retirement Plans
ProvGas provides certain supplemental retirement plans for key employees.
The projected benefit obligation is approximately $1,375,000 which is being
accrued over the service period of these key employees. The supplemental
retirement plans are unfunded. ProvGas accrued and expensed $612,000, $310,000,
and $150,000 related to these benefits in 1997, 1996, and 1995, 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 $439,000
for 1997, $381,000 for 1996, and $248,000 for 1995. 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 $248,000 1995 award, $167,000 was paid in cash during fiscal 1996.
Of the $381,000 1996 award, $269,000 was paid in cash during 1997. Of the
$439,000 1997 award, $297,000 will be
Page-27
<PAGE>
paid in cash during 1998. Grant shares totaling 5,989, 4,491, and 5,371 were
purchased by the Company and reissued to key employees during 1997, 1996, and
1995, respectively.
E. 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 Stock Incentive Plan totaled approximately
$146,000 in 1996 consisting of 7,954 shares. There were no awards under the
Restricted Stock Incentive Plan in 1997. All amounts awarded under the
Restricted Stock Incentive Plan are deferred and amortized to expense over a
three-year period.
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 and other
equipment under capital leases.
Property under Capital Leases:
- -----------------------------
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Gas plant $ 6,116 $ 6,116
Computer and other equipment 1,988 1,551
Accumulated depreciation (6,484) (6,072)
------- -------
$ 1,620 $ 1,595
======= =======
</TABLE>
Commitments for Capital Leases are:
- -------------------------------------
<TABLE>
<CAPTION>
LNG Computer
(thousands of dollars) Storage Equipment Total
- -----------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 136 $ 492 $ 628
1999 136 484 620
2000 136 297 433
2001 135 111 246
2002 - 35 35
------ ------ ------
$ 543 $1,419 1,962
====== ======
Amounts representing interest 290
------
Amounts representing principal $1,672
======
</TABLE>
Page-28
<PAGE>
C. Operating Leases
The Company also leases facilities and equipment under operating leases with
a total future obligation of approximately $354,000 as of September 30, 1997.
D. Gas Supply
As part of the Price Stabilization Plan Settlement Agreement described in
Note 9, the Company's largest subsidiary, ProvGas, has entered into a full
requirements gas supply contract with Duke Energy Trading and Marketing L.L.C.
(DETM) for a term of three years. Under the contract, DETM guarantees to meet
ProvGas' supply requirements, however, ProvGas must purchase all of its gas
supply exclusively from DETM . Under the contract, ProvGas will transfer
responsibility for its pipeline capacity resources, storage contracts, and LNG
capacity to DETM. As a result, ProvGas' gas inventories at September 30, 1997,
of approximately $18 million will be sold for book value to the supplier on
October 1, 1997.
As a result of Federal Energy Regulatory Commission (FERC) Order 636 and
other related orders (the Orders), pipeline transportation companies have
incurred significant costs, collectively known as transition costs. The
majority of these costs will be reimbursed by the pipeline's customers,
including the Company. The Company estimates its transition costs to be
approximately $21.7 million, of which $16.2 million has been included in the GCC
and collected from customers through September 30, 1997. The remaining minimum
obligation of $5.5 million has been recorded in the accompanying consolidated
balance sheet along with a regulatory asset anticipating future recovery. As
part of the above supply contract, DETM will assume liability for these
transition costs during the contract's three-year term. At the end of the
three-year term of the contract, the Company will assume any remaining
liability, which cannot be estimated at September 30, 1997.
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, 1997, 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
Page-29
<PAGE>
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 located in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Company. As of September 30,
1997, approximately $1.8 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, 1997, the Company has compiled a preliminary
range of costs based on remediation alternatives, ranging from $1.7 million to
in excess of $5.0 million. However, because of the uncertainties associated
with environmental assessment and remediation activities, the future cost of
remediation could be higher than the alternatives noted above. Based on the
proposals for remediation work, the Company has accrued $1.7 million at
September 30, 1997, for anticipated future remediation costs at this site.
Tests conducted following the discovery of an abandoned underground oil
storage tank at the Company's Westerly, Rhode Island operations center in 1996
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 addition, in
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 $50,000 and $100,000. Accordingly, the
Company has accrued $50,000 at September 30, 1997 for anticipated future
remediation costs.
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 $2.3 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
September 30, 1997. Of the environmental investigation costs incurred,
approximately $0.4 million and $1.0 million were recorded in the years ended
September 30, 1997 and 1996, respectively, while the remainder were incurred in
prior years.
Due to the materiality of the Company's environmental investigation and
remediation expenditures, the Company sought new treatment of these amounts. As
a result, included in the Price Stabilization Plan Settlement Agreement
described in Note 9, which is effective October 1, 1997, all environmental
investigation and remediation costs incurred through September 30, 1997 as well
as all costs incurred during the three-year term of the Plan will be amortized
over a ten-year period. 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
Page-30
<PAGE>
environmental related costs.
Effective October 1, 1997, the Company will adopt the provisions of
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities". This
Statement provides authoritative guidance for recognition, measurement, display,
and disclosure of environmental remediation liabilities in financial statements.
SOP 96-1 is not expected to have a material impact on the Company's financial
position or results of operation upon adoption.
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, 1997, approximately $629,000 was due from the
State of Rhode Island related to gas consumed by customers over the last two
years.
8. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
disclosures for the following financial instruments:
Cash, Cash Equivalents 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>
1997 1996
-------------------------- --------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,063 $ 1,063 $ 1,424 $ 1,424
Short-term debt 23,675 23,675 23,270 23,270
Long-term debt 76,079 84,039 74,478 77,924
Preferred stock 6,400 7,030 8,000 8,395
</TABLE>
Page-31
<PAGE>
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. Rate Changes
A. Price Stabilization Plan Settlement Agreement
In August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement (Energize R.I. or the Plan) among ProvGas, the Division of Public
Utilities and Carriers (the Division), The Energy Council of Rhode Island, and
the George Wiley Center. Effective for the period from October 1, 1997 to
September 30, 2000, Energize R.I. provides customers with an initial price
decrease of approximately four percent in addition to a three-year price
freeze. Under Energize R.I., the GCC will be suspended for the entire term.
Energize R.I. also requires ProvGas to make significant capital investments to
improve its distribution system. Capital investments required by Energize R.I.
are estimated to total approximately $26 million over its three-year term. In
addition, Energize R.I. requires ProvGas to fund the Low-Income Assistance
Program at an annual level of $1 million, the Demand Side Management Rebate
Program at an annual level of $500,000 and the low income weatherization program
at an annual level of $200,000. Energize R.I. also continues the process of
unbundling by requiring ProvGas to provide unbundled service offerings to up to
10 percent per year of firm system throughput.
As part of Energize R.I., ProvGas will amortize approximately $4 million of
environmental costs previously charged to the accumulated depreciation reserve.
These costs and all environmental costs incurred during the term of the Plan
will be amortized over a 10-year period. In addition, as part of the Plan,
ProvGas will write-off approximately $1.5 million of deferred revenues in
October 1997.
Under Energize R.I., ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, or $92.0 million in
fiscal 1998, 1999, and 2000, respectively. In addition, ProvGas may not earn
less than a seven percent return on average common equity under the Plan. In
the event that the Company earns in excess of 10.9 percent or less than seven
percent, the Company will defer revenues or costs through a deferred revenue
account. Any balance in the deferred revenue account at the end of the Plan will
be refunded or recovered from customers in a manner determined by all parties
and approved by the RIPUC.
B. ProvGas Rate Increase
In February 1995, ProvGas filed for rate relief requesting an approximate
eight 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.
C. North Attleboro Gas Rate Increase
Page-32
<PAGE>
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 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%
November 1, 1994 141,137 4.86%
November 1, 1995 94,445 3.10%
</TABLE>
The rate settlement further required North Attleboro Gas 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 Gas meets certain
growth requirements by the year 2000. North Attleboro Gas capitalized AFUDC and
other costs of approximately $37,000 in 1997, $61,000 in 1996, and $136,000 in
1995 that related primarily to the gas plant not yet phased into North
Attleboro Gas' rates under the plan. North Attleboro amortized $214,000 in
1997, $212,000 in 1996, and $185,000 in 1995 of amounts previously deferred.
10. Stock Rights and Options
Currently, one common stock purchase Right is attached to each outstanding
share of common stock. Each Right entitles the holder to purchase one share of
common stock at a price of $110 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 10 years from the date of grant and in the case of options
granted to the directors, the options become exercisable after the first
anniversary of the date of such grant.
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, 1997, 1996, and 1995:
Page-33
<PAGE>
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, September 30, 1994 56,508 $16.99
Granted 8,042 15.63
Exercised - -
Expired (9,761) 17.23
------- ------
Outstanding, September 30, 1995 54,789 16.74
Granted 7,449 17.00
Exercised - -
Expired - -
------- ------
Outstanding, September 30, 1996 62,238 16.77
Granted 9,319 17.50
Exercised (2,130) 16.11
Expired (10,009) 17.71
------- ------
Outstanding, September 30, 1997 59,418 $16.75
======= ======
</TABLE>
The following table sets forth information regarding options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Number Weighted Average Exercise Price
Number of Range of Currently Average Remaining for Currently
Options Exercise Prices Exercisable Exercise Price Life Exercisable
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
59,418 $13.875-$19 50,927 $16.75 5.30 $16.63
</TABLE>
At September 30, 1996 and 1995, 54,789 and 48,815 were currently exercisable,
respectively.
As described in Note 1, the Company uses the intrinsic method to measure
compensation expense associated with grants of stock options or awards to
employees. Had the Company used the fair value method to measure compensation,
reported net income would have been $7,822,000 in 1997 and $8,963,000 in 1996.
Earnings per share for both years would not have been affected.
For purposes of determining the above disclosure required by Statement of
Financial Accounting Standards No. 123, the fair value of options on their grant
date was measured using the Black/Scholes option pricing model. Key assumptions
used to apply this pricing model were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate 5.43% 6.24%
Expected life of option grants (years) 7.0 7.0
Expected volatility of underlying stock 15% 15%
</TABLE>
The pro-forma presentation only includes the effects of grants made
subsequent to October 1, 1995. The estimated fair value of option grants made
during 1997 and 1996 was $1.41 and $1.42, respectively, per option.
Page-34
<PAGE>
In January 1997, the shareholders of the Company adopted the Non-Employee
Director Stock Plan, which provides that up to 50,000 shares of common stock may
be granted to non-employee directors. The shares will be granted, at no cost to
the director, on the first day of each fiscal year based on each director's
aggregate fees earned in the prior fiscal year. All participants are entitled
to vote the grant shares and receive dividends on the grant shares, however,
full beneficial ownership vests on the third anniversary of the grant date
provided the participant is still a director of the Company. Vesting may be
accelerated under certain circumstances. There were no shares issued under the
Non-Employee Director Stock Plan in fiscal 1997.
11. Non-utility 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 in 1996. 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.
12. Hedging
On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Settlement Agreement (the Settlement Agreement) between the Company and the
Division. The Agreement allowed 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 were
flowed through the Variable Gas Cost component of the GCC and could not exceed
$800,000. The total expenditures, net of sales proceeds, made under the Program
in 1997 were approximately $154,000.
The Company did not hold any open contracts at September 30, 1997. The
Settlement Agreement expired on September 30, 1997. The Settlement Agreement
was not extended since its objectives were met through the Price Stabilization
Plan Settlement Agreement described in Note 9.
13. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share", effective for financial statements issued for
periods ending after December 15, 1997. SFAS No. 128 replaces the presentation
of primary earnings per share with the presentation of basic earnings per share
on the face of the income statement. Basic earnings per share excludes dilution
and is calculated by dividing income available to common stockholders by
weighted average number of common shares outstanding for the period. Earnings
per share calculated under SFAS No. 128 would have been unchanged for the
periods presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings
Page-35
<PAGE>
and additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 131, which is effective for financial statements for periods
beginning after December 15, 1997, requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. These statements require additional disclosure only and will not
effect the financial position or results of operations of the Company.
14. Unaudited Quarterly Financial Information
The following is unaudited quarterly financial information for the two years
ended September 30, 1997 and 1996. 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)
Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30
------------------------------------
Fiscal 1997
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $64,038 $79,946 $42,921 $33,515
Operating income (loss) 6,355 8,782 2,210 (1,285)
Net income (loss) 4,264 6,737 135 (3,305)
Net income (loss)
per share* .74 1.17 .02 (.58)
<CAPTION>
Dec. 31 Mar. 31 June 30 Sept. 30
------------------------------------
Fiscal 1996
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
</TABLE>
* Calculated on the basis of the weighted average shares outstanding during
the quarter.
Page-36
<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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 190,464
<OTHER-PROPERTY-AND-INVEST> 1,182
<TOTAL-CURRENT-ASSETS> 50,377
<TOTAL-DEFERRED-CHARGES> 13,487
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 255,510
<COMMON> 5,832
<CAPITAL-SURPLUS-PAID-IN> 56,827
<RETAINED-EARNINGS> 23,002
<TOTAL-COMMON-STOCKHOLDERS-EQ> 85,661
0
6,400
<LONG-TERM-DEBT-NET> 72,372
<SHORT-TERM-NOTES> 23,675
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,707
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 63,695
<TOT-CAPITALIZATION-AND-LIAB> 255,510
<GROSS-OPERATING-REVENUE> 220,420
<INCOME-TAX-EXPENSE> 4,608
<OTHER-OPERATING-EXPENSES> 75,374
<TOTAL-OPERATING-EXPENSES> 79,982
<OPERATING-INCOME-LOSS> 16,062
<OTHER-INCOME-NET> (2)
<INCOME-BEFORE-INTEREST-EXPEN> 16,060
<TOTAL-INTEREST-EXPENSE> 8,457
<NET-INCOME> 7,831
626
<EARNINGS-AVAILABLE-FOR-COMM> 7,831
<COMMON-STOCK-DIVIDENDS> 6,242
<TOTAL-INTEREST-ON-BONDS> 6,042
<CASH-FLOW-OPERATIONS> 27,887
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
