<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1997
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________to______________________
Commission file number 1-10032
----------------
PROVIDENCE ENERGY CORPORATION
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
- ------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
401-272-9191
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Registrant's telephone number, including area code
- ------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No ___.
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1.00 par value; 5,811,984 shares outstanding at July 31, 1997.
- ----------------------------------------------------------------------------
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PROVIDENCE ENERGY CORPORATION
FORM 10-Q
JUNE 30, 1997
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1997 and 1996 I-1
Consolidated Balance Sheets as of June 30, 1997,
June 30, 1996 and September 30, 1996 I-2
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1997
and 1996 I-3
Consolidated Statements of Capitalization
as of June 30, 1997, June 30, 1996 and
September 30, 1996 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-9
PART II OTHER INFORMATION
Item 6 Reports on Form 8-K II-1
Signature II-2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM I. FINANCIAL STATEMENTS
- ------------------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
(thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTH TWELVE MONTHS
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $42,921 $43,273 $186,905 $182,786 $219,271 $213,157
Cost of gas sold 22,594 23,990 106,812 102,529 124,529 119,258
------- ------- -------- -------- -------- --------
Operating margin 20,327 19,283 80,093 80,257 94,742 93,899
------- ------- -------- -------- -------- --------
Operating expenses:
Operating and maintenance 11,613 12,728 35,917 37,770 47,180 48,070
Depreciation and amortization 3,259 3,157 9,655 8,923 12,729 11,632
Taxes -
State gross earnings 1,102 1,247 5,186 5,153 6,096 6,009
Local property and other 1,990 1,692 5,855 5,123 7,676 6,771
Federal income 153 (447) 6,133 6,037 4,779 4,577
------- ------- -------- -------- -------- --------
Total operating expenses 18,117 18,377 62,746 63,006 78,460 77,059
------- ------- -------- -------- -------- --------
Operating income 2,210 906 17,347 17,251 16,282 16,840
Other, net (48) 197 13 984 (26) 1,204
------- ------- -------- -------- -------- --------
Income before interest expense 2,162 1,103 17,360 18,235 16,256 18,044
------- ------- -------- -------- -------- --------
Interest expense:
Long-term debt 1,505 1,525 4,537 4,362 6,064 5,629
Other 441 346 1,357 1,424 1,615 2,011
Interest capitalized (58) (33) (157) (75) (188) (110)
------- ------- -------- -------- -------- --------
1,888 1,838 5,737 5,711 7,491 7,530
------- ------- -------- -------- -------- --------
Income (loss) after interest expense 274 (735) 11,623 12,524 8,765 10,514
Preferred dividends of subsidiary (139) (174) (487) (522) (661) (696)
------- ------- -------- -------- -------- --------
Net income (loss) $ 135 $ (909) $ 11,136 $ 12,002 $ 8,104 $ 9,818
======= ======= ======== ======== ======== ========
Net income (loss) per common share $ .02 $ (.16) $ 1.93 $ 2.11 $ 1.40 $ 1.73
======= ======= ======== ======== ======== ========
Dividends paid per common share $ .27 $ .27 $ .81 $ .81 $ 1.08 $ 1.08
======= ======= ======== ======== ======== ========
Weighted average common shares outstanding 5,801.4 5,718.3 5,779.5 5,699.5 5,769.2 5,688.9
======= ======= ======== ======== ======== ========
</TABLE>
PAGE I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands)
-----------
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1997 1996 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $293,432 $274,011 $279,849
Less - accumulated depreciation and
utility plant acquisition
adjustments 108,498 98,296 100,242
-------- -------- --------
184,934 175,715 179,607
-------- -------- --------
Nonutility property, net 1,179 1,896 1,141
-------- -------- --------
Current assets:
Cash and temporary cash investments 1,625 1,531 1,424
Accounts receivable
less allowance of $3,474 at 6/30/97,
$5,406 at 6/30/96, and $3,231 at 9/30/96 29,318 25,003 14,665
Unbilled revenues 690 1,645 2,357
Deferred gas costs 1,447 2,453 13,272
Inventories, at average cost -
Liquefied natural gas, propane and under-
ground storage 11,623 7,394 16,023
Materials and supplies 1,224 1,361 1,259
Prepaid and refundable taxes 5,245 4,631 4,076
Prepayments 1,228 1,023 1,540
-------- -------- --------
52,400 45,041 54,616
-------- -------- --------
Deferred charges and other assets 12,962 13,644 14,786
-------- -------- --------
Total assets $251,475 $236,296 $250,150
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ---------------------------------------------
Capitalization $169,361 $167,324 $163,021
(See accompanying statement) -------- -------- --------
Current liabilities:
Notes payable 12,890 7,300 23,270
Current portion of long-term debt 2,649 1,994 2,022
Accounts payable 17,740 14,280 17,372
Accrued taxes 6,049 4,719 1,980
Accrued vacation 1,978 1,982 1,723
Customer deposits 3,463 4,049 3,996
Other 5,204 4,774 5,376
-------- -------- --------
49,973 39,098 55,739
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes 20,912 19,751 20,713
Unamortized investment tax credits 2,415 2,573 2,533
Other 8,814 7,550 8,144
-------- -------- --------
32,141 29,874 31,390
-------- -------- --------
Commitments and contingencies -- -- --
Total capitalization and liabilities $251,475 $236,296 $250,150
======== ======== ========
</TABLE>
PAGE I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1997 1996
-------- --------
(thousands)
<S> <C> <C>
Cash provided by (used for)
Operating Activities:
Income after interest expense $ 11,623 $ 12,524
Items not requiring cash -
Depreciation and amortization-Plant
& non-utility 9,633 8,938
Changes as a result of regulatory action -- (1,453)
Deferred Federal income taxes 183 1,021
Amortization of investment tax credits (118) (118)
Change in assets and liabilities
which provided (used) cash:
Accounts receivable (14,653) (10,989)
Unbilled Revenue 1,667 1,010
Deferred gas costs 11,825 (1,260)
Inventories 4,435 2,901
Prepaid and refundable taxes (1,153) 1,298
Prepayments 312 343
Accounts payable 368 178
Accrued taxes 4,069 2,718
Accrued vacation, customer deposits & other (399) 1,216
Deferred charges & other 2,063 1,825
-------- --------
Net cash provided by operations 29,855 20,152
-------- --------
Investment Activities:
- ---------------------
Expenditures for property, plant
and equipment, net (13,087) (13,884)
-------- --------
Financing Activities:
- --------------------
Issuance of common stock 44 31
Proceeds from exercise of stock options 35 --
Issuance of mortgage bonds -- 15,000
Redemption of preferred stock (1,600) --
Issuance of long-term debt 1,345 --
Payments on long-term debt (1,924) (1,881)
Decrease in notes payable, net (10,380) (15,037)
Cash dividends on preferred shares (487) (522)
Cash dividends on common shares (3,600) (3,606)
-------- --------
Net cash used by financing activities (16,567) (6,015)
-------- --------
Increase in cash and temporary
cash investments 201 253
Cash and cash equivalents at beginning
of period 1,424 1,278
-------- --------
Cash and cash equivalents at end of period $ 1,625 $ 1,531
======== ========
Supplemental disclosures of cash flow information:
Cash paid year-to-date for -
Interest (net of amount capitalized) $ 5,617 $ 5,040
Income taxes (net of refunds) $ 2,033 $ 1,914
Schedule of noncash investing and financing
activities:
Capital lease obligations for equipment $ 232 $ --
Other long-term debt for equipment $ 1,330 $ --
</TABLE>
PAGE I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1997 1996 1996
------------------------------------
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 5,812 at 6/30/97
5,728 at 6/30/96
5,748 at 9/30/96 $ 5,812 $ 5,728 $ 5,748
Amount paid in excess of par 56,461 55,048 55,404
Retained earnings 27,876 25,991 21,413
-------- -------- --------
Total common stock equity 90,149 86,767 82,565
-------- -------- --------
Cumulative preferred stock of subsidiary:
The Providence Gas Company -
Redeemable 8.7% Series, $100 par
Authorized -80 shares
Outstanding - 64 shares as of 6/30/97
and 80 shares as of
6/30/96 and 9/30/96 6,400 8,000 8,000
-------- -------- --------
Long-term debt:
First mortgage bonds 71,200 72,800 72,800
Other long-term debt 2,675 -- --
Capital leases 1,586 1,751 1,678
-------- -------- --------
Total long-term debt 75,461 74,551 74,478
Less current portion 2,649 1,994 2,022
-------- -------- --------
Long-term debt, net 72,812 72,557 72,456
-------- -------- --------
Total capitalization $169,361 $167,324 $163,021
======== ======== ========
</TABLE>
PAGE I-4
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in this
report reflects all normal, recurring adjustments necessary to a fair statement
of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein when read
with the annual report for 1996 filed on Form 10-K are adequate to make the
information presented not misleading.
In the second quarter of 1997, the Registrant began to employ derivative
financial instruments in the form of natural gas options for the purpose of
managing commodity price risk. These derivative instruments were purchased
under the Pilot Hedging Program approved by the Rhode Island Public Utilities
Commission (RIPUC) in October 1996. Under the program, expenditures for
purchases and exercises of financial instruments, net of sales proceeds, are
flowed through the Gas Charge Clause (GCC) and cannot exceed $800,000.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified for consistent presentation
with the current year.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or
cleanup certain sites. To the best of its knowledge, subject to the following,
the Registrant believes it is in substantial compliance with such laws and
regulations.
At June 30, 1997, the Registrant was aware of four sites at which future costs
may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRP's. With respect to one
of the Plympton
PAGE I-5
<PAGE>
sites, the Registrant has joined with other PRP's in entering into an
Administrative Consent Order with the Massachusetts Department of Environmental
Protection. The costs to be borne by the Registrant, in connection with both
Plympton sites, are not anticipated to be material to the financial condition of
the Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of June 30,
1997, approximately $1.7 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by the
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at the site.
The Registrant has completed the study which indicates that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the most appropriate
alternative. At June 30, 1997, the Registrant has compiled a preliminary range
of costs based on remediation alternatives, ranging from $1.7 million to
approximately $3.0 million. However, because of the uncertainties associated
with environmental assessment and remediation activities, the future costs of
remediation could be higher than the alternatives noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at June
30, 1997 for anticipated future remediation costs at this site. Also, the
Registrant has negotiated an agreement, subject to Federal regulatory approval,
with a third party which provides for reimbursement of up to $2.5 million of
certain remediation costs to be incurred at this site. The agreement received
Federal regulatory approval in May 1997; however, the approval allows for
rehearing prior to acceptance by the filing party. The agreement has not been
accepted or enacted by the third party.
Tests conducted following the recent discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center
confirm the existence of contaminants at this site. The Registrant is currently
conducting tests at this site, the costs of which are being shared equally with
the prior owner, to determine the nature and extent of the contamination. Due to
the fact that the testing is in its early stages, management cannot conclude as
to whether any remediation will be required at this site. In addition, in the
first quarter of 1997, contamination from scrapped meters and regulators was
discovered at this site. The Registrant has reported this to the DEM and the
Rhode Island Department of Health and is in the process of remediation. It is
anticipated that remediation will cost between $30,000 and $100,000. Based on
the expected remediation costs, the Registrant has accrued $30,000 at June 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 $2.0 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
June 30, 1997. Management
PAGE I-6
<PAGE>
believes that this rate recovery mechanism is appropriate for recovery of future
costs. Additionally, it is the Registrant's practice to consult with the RIPUC
on a periodic basis when, in management's opinion, significant amounts might be
expended for environmental related costs. Should future developments warrant
additional rate recovery mechanisms, management intends to seek such recovery.
Management has begun discussions with other parties who may assist the
Registrant in paying future costs at the above sites. Management believes that
its program for managing environmental issues combined with rate recovery and
financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
Gas Supply Restructuring
- ------------------------
Federal Energy Regulatory Commission (FERC) Order 636 and other related orders
(the Orders) have significantly changed the structure and types of services
offered by pipeline transportation companies. The most significant components
of the restructuring occurred in November 1993. In response to these changes,
the Registrant has successfully negotiated new pipeline transportation and gas
storage contracts.
At the same time, a number of contracts with gas suppliers have been negotiated
to complement the transportation and storage contracts. The portfolio of supply
contracts is designed to be market responsive and is diversified with respect to
contract lengths, source location and other contract terms. On a periodic
basis, the Registrant reviews all of its contracts to ensure a diverse, secure,
flexible and economical supply portfolio is maintained.
To meet the requirements of the Orders, the pipelines have incurred significant
costs, collectively known as transition costs. The majority of these costs will
be reimbursed by the pipeline's customers, including the Registrant. Based upon
current information, the Registrant anticipates its transition costs to net to
approximately $21.5 million of which $15.5 million has been included in the GCC,
net of refunds received based on FERC settlements, and is currently being
collected from customers. The remaining minimum obligation of $6.0 million has
been recorded in the accompanying consolidated balance sheet along with a
regulatory asset anticipating future recovery through the GCC.
The Registrant's ultimate liability may differ from the above estimate based on
FERC settlements with the Registrant's pipeline transportation suppliers. FERC
has approved settlements with four of its pipelines, which account for the bulk
of the Registrant's transition costs. Based on the information available, the
Registrant believes that its current estimate of transition costs is reasonable.
New Accounting Pronouncements
- -----------------------------
In October 1996, the Registrant adopted
PAGE I-7
<PAGE>
the disclosure-only option under Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation". The adoption
of this statement did not have an impact on the financial position or results
of operations of the Registrant for the nine months ended June 30, 1997.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings
Per Share", which replaces primary earnings per share with basic earnings per
share. The statement is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earnings per share calculated in
accordance with SFAS No. 128 would have been unchanged for the periods
presented.
In July 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS No. 130), "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements and is effective for
fiscal years beginning after December 15, 1997. The statement requires
additional disclosure only and will not effect the financial position or results
of operations of the Registrant.
In July 1997, FASB issued Statement of Financial Accounting Standards No. 131
(SFAS No. 131), "Disclosure about Segments of an Enterprise and Related
Information", which requires the management approach in determining segment
reporting. The statement is effective for fiscal years beginning after December
15, 1997. SFAS No. 131 requires additional disclosure only and will not effect
the financial position or results of operations of the Registrant.
PAGE I-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Providence Energy Corporation (the Registrant) and its subsidiaries and
their representatives may from time to time make written or oral statements,
including statements contained in the Registrant's filings with the Securities
and Exchange Commission (SEC), including this quarterly report which constitute
or contain "forward-looking" information as that term is defined in the Private
Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations
and releases.
All statements other than statements of historical facts included in this
quarterly report regarding the Registrant's financial position and strategic
initiatives and addressing industry developments are forward-looking statements.
Where, in any forward-looking statement, the Registrant, or its management,
expresses an expectation or belief as to future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished. Factors which could cause actual results
to differ materially from those anticipated include but are not limited to:
general economic, financial and business conditions; competition in the energy
services sector; regional weather conditions; the availability and cost of
natural gas; development and operating costs; the success and costs of
advertising and promotional efforts; the availability and terms of capital; the
business abilities and judgment of personnel; unanticipated environmental
liabilities; changes in, or the failure to comply with, government regulations;
the costs and effects of unanticipated legal proceedings; the impacts of unusual
items resulting from ongoing evaluations of business strategies and asset
valuations; and changes in business strategy.
RESULTS OF OPERATIONS
The Registrant's operating revenues, operating margin and net income for the
three, nine and twelve months ended June 30, 1997 and for comparable periods
ended June 30, 1996 are as follows:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30 June 30 June 30
1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $42,921 $43,273 $186,905 $182,786 $219,271 $213,157
======= ======= ======== ======== ======== ========
Operating margin $20,327 $19,283 $ 80,093 $ 80,257 $ 94,742 $ 93,899
======= ======= ======== ======== ======== ========
Net income $ 135 $ (909) $ 11,136 $ 12,002 $ 8,104 $ 9,818
======= ======= ======== ======== ======== ========
</TABLE>
Operating Revenues and Operating Margin
- ---------------------------------------
During the quarter ended June 30, 1997, weather was 24.9 percent colder than
normal as opposed to 7.9 percent colder than normal in the corresponding period
PAGE I-9
<PAGE>
of the prior year. This resulted in increased operating margin of $0.7 million
from the quarter ended June 30, 1996 to the quarter ended June 30, 1997.
Revenues for the current quarter have decreased from the corresponding quarter
of the prior year primarily due to lower gas costs in the current quarter. The
Registrant recovers actual gas costs through the Gas Charge Clause (GCC);
therefore the lower gas costs had no effect on margin.
For the nine months ended June 30, 1997, weather was normal as opposed to 5.5
percent colder than normal for the nine months ended June 30, 1996. This
resulted in decreased margin of approximately $1.7 million. This decrease was
offset by rate increases effective December 17, 1995. These rate increases
accounted for increased margin of approximately $0.8 million. In addition,
margin increased approximately $0.4 million as the result of phasing in to rates
the Registrant's post-retirement expenses approved by the Rhode Island Public
Utilities Commission (RIPUC) in September 1996. Also, Providence Energy
Services, which began operations in August 1996, generated $0.3 million of
operating margin during the period. Revenues for the most recent fiscal year to
date have increased $4.1 million over the corresponding period of the prior year
primarily as the result of the revenues generated by Providence Energy Services.
Weather for the twelve month period ended June 30, 1997 was 3.6 percent warmer
than the corresponding period from the prior year, which resulted in decreased
margin of $1.8 million. This decrease was offset by an increase of
approximately $1.3 million due to increased rates that became effective December
17, 1995. In addition, margin increased approximately $0.4 million as the
result of phasing in to rates the Registrant's post-retirement expenses
discussed above as well as an increase of approximately $0.3 million from the
operations of Providence Energy Services.
Operating and Maintenance Expense
- ---------------------------------
Operating and maintenance expenses for the quarter ended June 30, 1997 decreased
approximately $1.1 million or 8.8 percent from the same period last year. This
decrease was due to a decrease in uncollectible expenses of approximately $0.9
million primarily as the result of a one-time funding of a low income assistance
program of $0.8 million made in the prior year in connection with the Integrated
Resource Plan (IRP) as well as improved collection efforts by the Registrant.
Also, outside services decreased by approximately $0.5 million due to
expenditures made in the prior year relating to new energy service offerings and
the filing of the IRP with the RIPUC. These decreases were offset by an increase
in labor of approximately $0.2 million as the result of performance, cost of
living and negotiated union contract increases.
Operating and maintenance expenses for the nine months ended June 30, 1997
decreased approximately $1.9 million or 4.9 percent from the same period last
year. This decrease was due to a decrease in uncollectible expenses of
approximately $1.9 million as the result of a one-time funding of a low income
assistance program of $0.8 million made in the prior year as well as improved
collection efforts by the Registrant. Also, outside services decreased by
approximately $0.5 million due to expenditures made in the prior year relating
to new energy service offerings and the filing of the Registrant's Integrated
Resource Plan (IRP) with the RIPUC. These decreases were offset by an increase
in labor of approximately $0.7 million as the result of performance, cost of
living and negotiated union contract increases. In addition, the Registrant's
post-retirement expenses increased by $0.2 million as the result of phasing
these expenses into rates in the current year. The remaining decrease was
primarily due to decreases in the Registrant's pension expense as a result of
the performance of the pension plan's assets in the current fiscal year as well
as decreased maintenance expense due to one-time projects in the prior year.
PAGE I-10
<PAGE>
Operating and maintenance expenses for the twelve months ended June 30, 1997
decreased approximately $0.9 or 1.9 percent as a result of the decrease in
uncollectible expenses offset by the increases in labor.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased approximately $100,000 or 3.2 percent
for the quarter ended June 30, 1997, $700,000 or 8.2 percent for the nine months
ended June 30, 1997 and $1.1 million or 9.4 percent for the twelve month period
ended June 30, 1997. These increases are due to increased capital spending,
including technology related assets with shorter depreciable lives, as well as
an increase in depreciation rates that became effective with the rate increase
on December 15, 1995.
Taxes
- -----
Taxes for the current quarter increased approximately $0.8 million or 30.1
percent. This increase was primarily the result of an increase in Federal income
taxes of $0.6 million due to the increase in taxable income during the current
quarter. In addition, property taxes increased approximately $0.4 million as
the result of increased capital spending as well as increased property tax
rates. These increases were offset by a decrease in gross earnings taxes due to
the decreased revenues during the quarter.
Taxes for the nine months ended June 30, 1997 increased $0.8 million or 5.3
percent. This increase was due to an increase in property taxes of $0.7 million
due to increased capital spending as well as increased property tax rates.
Taxes for the twelve months ended June 30, 1997 increased approximately $1.2
million or 6.9 percent primarily as the result of a $0.9 million increase in
property taxes as well as a $0.2 million increase in Federal income tax as the
result of increased taxable income during the period.
Other, net
- ----------
For the quarter ended June 30, 1997, other, net decreased approximately $0.2
million from the quarter ended June 30, 1996. This decrease was the result of
additional costs incurred in 1997 in relation to the development of new energy
ventures. For the nine months ended June 30, 1997, other, net decreased
approximately $1.0 million from the corresponding period of the prior year
primarily due to regulatory adjustments made in the first quarter of 1996
including a one-time gain for the regulatory change in accounting for property
taxes. For the twelve months ended June 30, 1997, other, net has decreased
approximately $1.2 million as a result of the regulatory adjustments and the
additional energy venture costs in 1997.
Interest Expense
- ----------------
Interest expense for the quarter ended June 30, 1997 increased approximately
$0.1 million as the result of additional debt incurred in connection with
capital expenditures. Interest expense for the nine and twelve month periods
ended June 30, 1997 was consistent with the same period last year. Interest on
long-term debt increased as the result of the issuance of Series R First
Mortgage Bonds in December of 1995. This increase was offset by a decrease in
other interest expense due to a decrease in interest incurred on overcollections
of gas costs in the prior period. As a result of higher natural gas prices in
the first two quarters of fiscal 1997, the Registrant has undercollected gas
costs in the current period.
PAGE I-11
<PAGE>
Future Outlook
- --------------
There are virtually unlimited opportunities to unbundle services, form
alliances, custom-tailor services for customers, and compete with other energy
suppliers. To facilitate the transition to a diversified energy marketer and
service provider, the Registrant is planning to form business alliances outside
of its traditional utility business. The Registrant will continue to seek
investment opportunities in non-regulated energy ventures.
On January 24, 1997, the Registrant agreed to form a new limited liability
company, Providence-Southern, LLC (the "Joint Venture"), together with Southern
Energy, Inc., a subsidiary of Southern Company, the United States' largest
producer of electricity. The Joint Venture was formed to market retail
electricity, gas and energy services in New England and will be owned 60% by
Southern Energy, Inc. and 40% by the Registrant. Providence-Southern, LLC will
focus on tailoring its services to the individual needs of the residential,
commercial, and industrial customers as consumers have more choices in a
competitive energy market. In addition to meeting the electricity and gas
commodity needs of customers, the Joint Venture will also serve as a marketing
platform for other areas of expertise of the Registrant and Southern Energy,
Inc., including energy consulting and energy use analysis, home and business
energy services, and unified billing. The Joint Venture is expected to become
fully operational in the fourth quarter of fiscal 1997.
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 and operating
costs associated with developing the new energy service offerings. The
Registrant estimates these costs to be in the range of $750,000 to $900,000, net
of taxes, in 1997. As of June 30, 1997, the Registrant had incurred
approximately $550,000 of these costs, net of tax.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, the Rhode Island Division of Public Utilities and Carriers
(Division), The Energy Council of Rhode Island (TEC-RI) and a consortium of oil
heat organizations. The Agreement began a process of unbundling natural gas
service in Rhode Island enabling customers to choose their gas suppliers. The
Agreement went into effect June 2, 1996. This initial step was available to
approximately 120 of the largest commercial and industrial customers. In April
1997, the Registrant filed a plan for the second phase of unbundling with the
RIPUC. Under this filing, the Registrant evaluated the services offered in the
first phase of unbundling as well as proposed to further expand the availability
of unbundled services to an additional 3,400 medium and large commercial and
industrial customers. The Registrant hopes to implement the new services in
December 1997.
PAGE I-12
<PAGE>
In August 1997, the Registrant filed a Settlement Agreement in Docket No. 2581,
the Price Stabilization Proceeding. The Agreement, which is an alternative to a
general rate increase filing, provides for implementation of a three-year price
stabilization plan beginning in October 1997 that includes: (1) an immediate
decrease in the Gas Charge to residential, commercial and industrial sales
service customers; (2) a three-year freeze in the Gas Charge and base rates at
those reduced levels; and (3) revenues to fund the Registrant's commitment to
incremental capital investments and further unbundling of services. The
Agreement is currently under review by the RIPUC.
On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Settlement Agreement between the Registrant and the Division. The objective of
the pilot program is to mitigate the impact of natural gas price escalation
through utilization of Financial Risk Management (FRM) tools, to develop a more
balanced gas supply cost approach, and finally, to study in more detail the
benefits and costs associated with the program. The FRM tools will be limited
to the use of options, including calls, puts and collars, under the pilot
program. The total expenditures for the purchase and exercise of the FRM tools
and the net proceeds from the sale of FRM tools will be flowed through the
Variable Gas Cost component of the GCC and, under the terms of the Agreement,
cannot exceed $800,000. The Registrant began trading FRM tools in the second
quarter of 1997.
The Registrant is exposed to credit risk in the event of nonperformance by
counter parties to these options, as well as nonperformance by the counter
parties of the transactions against which they are hedged. The Registrant
believes that the credit risk associated with these options is no greater than
that associated with the primary contracts which they hedge and that elimination
of the risk of increases in natural gas prices relating to the hedged gas
purchases lowers the Registrant's overall business risk.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the nine months ended June 30, 1997, the Registrant's accounts
receivable and unbilled revenue have increased approximately $13.0 million.
These fluctuations are the result of higher monthly sales primarily during the
first and second quarters and a moratorium on residential shut-offs during the
heating season. Because of these increases, which negatively impact cash flow,
the Registrant must borrow to maintain an appropriate level of liquidity.
Management believes its available financings are sufficient to meet these
seasonal needs.
The Registrant experienced an increase in its net cash provided by operations
during the first nine months of 1997 as compared to last year, primarily as the
result of a decrease in deferred gas costs. This decrease was due to the
collection of prior period gas cost underrecoveries in the current period.
PAGE I-13
<PAGE>
In February 1997, the Registrant redeemed 16,000 shares of its preferred stock
at the par value of $1,600,000 as a result of the annual sinking fund
requirement.
Capital expenditures for the nine months of $14.7 million which includes $1.6
million of capital financed directly through long-term debt and capital leases,
increased from $13.9 million last year. The increase was due to increased
spending for technology to redesign and integrate the Registrant's customer-
related information systems. Capital expenditures for the remainder of the
fiscal year are expected to be approximately $8.0 million of which approximately
$0.5 million is expected to be financed through long-term debt. Anticipated
capital expenditures for the next three years are expected to total between $50
million and $60 million. If the Price Stabilization Plan discussed above is
approved, the expected expenditure range will increase.
In February 1996, the Registrant received approval of the three-year Settlement
Agreement between itself and the Division regarding the Integrated Resource Plan
(IRP), which was filed with the RIPUC in July 1994. The purpose of the IRP is
to optimize the utilization of production transmission and distribution
resources so that customers receive high quality services at the lowest possible
cost.
The Settlement Agreement provides for: (1) funding associated with Demand Side
Management programs, which are designed to provide equipment rebates for
specific load building programs; (2) funding associated with a low income
weatherization program, which is designed to assist low income customers through
the installation of conservation measures; and (3) a performance-based
ratemaking incentive. The Settlement Agreement also contains a general
agreement that the Registrant's strategy and steps included in its supply plan
are reasonable.
The funding of these programs is generated through annual gas cost savings
beginning in July of each year. The Registrant has performed an analysis of gas
cost savings since July of 1996 and believes that sufficient savings have been
achieved as of June 30, 1997 to provide funding for these programs without
incurring a charge to income. Accordingly, in the current quarter, the
Registrant recorded its annual share of the performance-based ratemaking
incentive under this agreement, which resulted in a $1.5 million increase to
operating margin. Although the Settlement Agreement contains a methodology used
to calculate the actual gas cost savings, the ultimate analysis of savings is
subject to RIPUC review and approval which will occur in the fourth quarter of
the fiscal year.
If the Price Stabilization Plan discussed previously is approved, the Registrant
would continue to fund the programs described above and would no longer have the
same performance based ratemaking incentive.
PAGE I-14
<PAGE>
PROVIDENCE ENERGY CORPORATION
-----------------------------
PART II. OTHER INFORMATION
- ---------------------------
REPORTS ON FORM 8-K
- -------------------
No reports on Form 8-K were filed during the quarter for which
this report is filed.
PAGE II-1
<PAGE>
PROVIDENCE ENERGY CORPORATION
-----------------------------
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary to a fair statement of results
for the period reported, but such results are not necessarily indicative of
results to be expected for the year, due to the seasonal nature of the
Registrant's gas operations. All accounting policies and practices
have been applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly author-
ized.
Providence Energy Corporation
(Registrant)
BY: /s/ Gary S. Gillheeney
-----------------------------
GARY S. GILLHEENEY
Senior Vice President, Treasurer
CFO, and Assistant Secretary
Date: August 14, 1997
---------------
PAGE II-2
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