<PAGE>
THE PROVIDENCE ENERGY CORPORATION
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file number 1-10032
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PROVIDENCE ENERGY CORPORATION
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
- ----------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) 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 check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common stock, $1.00 par value, 5,767,366 shares outstanding at
- ---------------------------------------------------------------
February 10, 1997.
- ------------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q
DECEMBER 31, 1996
PAGE
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
three and twelve months ended
December 31, 1996 and 1995 I-1
Consolidated Balance Sheets as of
December 31, 1996, December 31, 1995 and
September 30, 1996 I-2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1996 and 1995 I-3
Consolidated Statements of Capitalization as of
December 31, 1996, December 31, 1995 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-8
PART II: OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED DECEMBER 31
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
------------------ -----------------
1996 1995 1996 1995
------------------ -----------------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 64,038 $ 58,406 $220,784 $193,096
Cost of gas sold 37,280 31,521 126,005 106,339
-------- -------- -------- --------
Operating margin 26,758 26,885 94,779 86,757
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 11,374 11,732 48,675 45,200
Depreciation and amortization 3,099 2,883 12,213 10,752
Taxes -
State gross earnings 1,776 1,611 6,228 5,323
Local property and other 1,762 1,668 7,038 6,797
Federal income 2,392 2,425 4,650 3,804
-------- -------- -------- --------
Total operating expenses 20,403 20,319 78,804 71,876
-------- -------- -------- --------
Operating income 6,355 6,566 15,975 14,881
Other, net (47) 639 259 1,345
-------- -------- -------- --------
Income before interest expense 6,308 7,205 16,234 16,226
-------- -------- -------- --------
Interest expense:
Long-term debt 1,520 1,313 6,096 5,116
Other 391 608 1,465 2,594
Interest capitalized (41) (13) (134) (123)
-------- -------- -------- --------
1,870 1,908 7,427 7,587
-------- -------- -------- --------
Net income 4,438 5,297 8,807 8,639
Preferred dividends of subsidiary (174) (174) (696) (696)
-------- -------- -------- --------
Net income applicable to common
stock $ 4,264 $ 5,123 $ 8,111 $ 7,943
======== ======== ======== ========
Earnings per common share $.74 $.90 $1.42 $1.41
======== ======== ======== ========
Dividends paid per common share $.27 $.27 $1.08 $1.08
======== ======== ======== ========
Weighted average common shares
outstanding 5,757.8 5,680.1 5,728.6 5,646.3
======== ======== ======== ========
</TABLE>
I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
----------------------------
(Unaudited)
-----------
(thousands)
-----------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1996 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $285,047 $266,283 $279,849
Less - Accumulated depreciation and
utility plant acquisition
adjustments 103,034 94,995 100,242
-------- -------- --------
182,013 171,288 179,607
Nonutility property, net 1,130 1,937 1,141
-------- -------- --------
Current assets:
Cash and temporary cash investments 3,054 2,979 1,424
Accounts receivable, less allowance of
$3,138 at 12/31/96, $2,540 at
12/31/95 and $3,231 at 9/30/96 32,841 29,032 14,665
Unbilled revenues 10,469 13,925 2,357
Deferred gas costs 15,797 - 13,272
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage 14,896 8,643 16,023
Materials and supplies 1,198 1,584 1,259
Prepaid and refundable taxes 3,023 3,631 4,076
Prepayments 805 783 1,540
-------- -------- --------
82,083 60,577 54,616
-------- -------- --------
Deferred charges and other assets 14,162 14,516 14,786
-------- -------- --------
Total assets $279,388 $248,318 $250,150
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
(See accompanying statement) $164,413 $163,265 $163,021
-------- -------- --------
Current liabilities:
Notes payable 40,965 23,240 23,270
Current portion of long-term debt 2,029 1,983 2,022
Accounts payable 25,397 18,146 17,372
Accrued taxes 4,848 3,633 1,980
Accrued vacation 1,687 1,657 1,723
Customer deposits 3,957 4,041 3,996
Refundable gas costs - 446 -
Other 4,379 4,084 5,376
-------- -------- --------
83,262 57,230 55,739
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 20,939 19,070 20,713
Unamortized investment tax credits 2,493 2,652 2,533
Other 8,281 6,101 8,144
-------- -------- --------
31,713 27,823 31,390
-------- -------- --------
Commitments and contingencies - - -
Total capitalization and liabilities $279,388 $248,318 $250,150
======== ======== ========
</TABLE>
I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE MONTHS ENDED DECEMBER 31
--------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
------------
1996 1995
--------------------
(thousands)
<S> <C> <C>
Cash provided by (used for) Operating Activities:
Income after interest expense $ 4,438 $ 5,297
Items not requiring cash:
Depreciation and amortization-
plant and nonutility 3,125 2,889
Changes as a result of regulatory actions - (1,453)
Deferred Federal income taxes 226 340
Amortization of investment tax credits (40) (39)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (18,176) (15,018)
Unbilled revenues (8,112) (11,270)
Deferred gas costs (2,525) 1,639
Inventories 1,188 1,429
Prepaid and refundable taxes 1,053 2,298
Prepayments 735 583
Accounts payable 8,025 4,044
Accrued taxes 2,868 1,632
Accrued vacation, customer deposits
and other (996) 242
Deferred charges and other 791 992
-------- --------
Net cash used for
operations (7,400) (6,395)
-------- --------
Investing Activities:
Expenditures for property, plant
and equipment, net (5,596) (4,793)
-------- --------
Financing Activities:
Issuance of common stock - 31
Issuance of mortgage bonds - 15,000
Payments on long-term debt (1,697) (1,692)
Increase in notes payable, net 17,695 903
Cash dividends on preferred shares (174) (174)
Cash dividends on common shares (1,198) (1,179)
-------- --------
Net cash provided by financing activities 14,626 12,889
-------- --------
Increase in cash and cash equivalents 1,630 1,701
Cash and cash equivalents at beginning
of period 1,424 1,278
-------- --------
Cash and cash equivalents at end of period $ 3,054 $ 2,979
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for-
Interest (net of amount capitalized) $ 1,757 $ 1,478
Income taxes (net of refunds) $ 13 $ 92
</TABLE>
I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(Unaudited)
-----------
(Thousands)
-----------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1996 1995 1996
--------------------------------------------
<S> <C> <C> <C>
Common stockholders' investment:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 5,768 at 12/31/96,
5,692 at 12/31/95
and 5,748 at
9/30/96 $ 5,768 $ 5,692 $ 5,748
Amount paid in excess of par 55,768 54,625 55,404
Retained earnings 24,125 22,191 21,413
-------- -------- --------
Total common equity 85,661 82,508 82,565
-------- -------- --------
Cumulative preferred stock of subsidiary:
Providence Gas Company -
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 80 shares as of
12/31/96, 12/31/95 and 9/30/96 8,000 8,000 8,000
-------- -------- --------
Long-term debt:
First Mortgage Bonds 71,200 72,800 72,800
Capital Leases 1,581 1,940 1,678
-------- -------- --------
Total long-term debt 72,781 74,740 74,478
Less current portion 2,029 1,983 2,022
-------- -------- --------
Long-term debt, net 70,752 72,757 72,456
-------- -------- --------
Total capitalization $164,413 $163,265 $163,021
======== ======== ========
</TABLE>
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.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified for consistent
presentation with the current year.
Joint Venture
- -------------
On January 24, 1997, the Registrant agreed to form a new limited liability
company, Providence Southern Energy, LLC (the "Joint Venture"), together with
Southern Energy, Inc., a subsidiary of Southern Company. The Joint Venture will
market retail electricity, gas and energy services in New England. The Joint
Venture will be owned 60% by Southern Energy, Inc. and 40% by the Registrant.
Providence Southern Energy, LLC will focus on tailoring its services to the
individual needs of the residential, commercial, and industrial customers as
consumers are given more choices in a competitive energy market. In addition to
meeting the electricity and gas commodity needs of customers, the Joint Venture
will also serve as a marketing platform for other areas of expertise of the
Registrant and Southern Energy, Inc., including energy consulting and energy use
analysis, home and business energy services, and unified billing. The business
operations of Providence Energy Services, Inc., a subsidiary of the Registrant,
will be contributed to Providence Southern Energy, LLC, which will be
headquartered in or near Providence, Rhode Island. The capital contributions to
the Joint Venture from each party will be determined over the next several
months.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean-
up certain sites. To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.
At December 31, 1996, the Registrant was aware of four sites at which future
costs may be incurred.
I-5
<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 December
31, 1996, approximately $1.6 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by the
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at the site.
The Registrant has completed the study which indicates that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the most appropriate
alternative. At December 31, 1996, the Registrant has compiled a preliminary
range of costs based on remediation alternatives, ranging from $1.3 million to
in excess of $5.0 million. Based on the proposals for remediation work, the
Registrant has accrued $1.3 million at December 31, 1996, for anticipated future
remediation costs at this site. Also, the Registrant has negotiated an
agreement, which is subject to Federal regulatory approval, with a third party
which provides for reimbursement of up to $2.5 million of certain remediation
costs to be incurred at this site.
Tests conducted following the recent discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center
confirm the existence of contaminants at this site. The Registrant is currently
conducting tests at this site, the costs of which are being shared equally with
the prior owner, to determine the nature and extent of the contamination. Due to
the 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 $50,000 and $100,000.
In prior rate cases filed, the Registrant requested that environmental
investigation and remediation costs be recovered by inclusion in its
depreciation factors consistent with the rate recovery treatment for all types
of cost of removal. Accordingly, environmental investigation costs of
approximately $1.8 million and an estimated $1.3 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
December 31, 1996. Management believes that this rate recovery mechanism is
appropriate for recovery of future costs. Additionally, it is the Registrant's
practice to consult with the Rhode Island Public Utilities Commission (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.
I-6
<PAGE>
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 between $21 million and $22 million of which $14.2
million has been included in the Gas Charge Clause(GCC), net of refunds received
based on FERC settlements, and is currently being collected from customers. The
remaining minimum obligation of $6.8 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 estimates based
on FERC settlements with the Registrant's pipeline transportation suppliers.
FERC has approved settlements with three of its pipelines, which account for the
bulk of the Registrant's transition costs. Negotiations are continuing on one
additional pipeline, and based on the information available, the Registrant
believes that its current range for transition costs is reasonable.
New Accounting Pronouncements
- -----------------------------
In October 1996, the Registrant adopted Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" and the disclosure-only
option under Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation". The adoption of these statements did
not have an impact on the financial position or results of operations of the
Registrant for the quarter ended December 31, 1996.
I-7
<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
For the current quarter, the Registrant's operating revenues have increased,
while operating margin and net income have decreased over the comparable period
presented, as shown in the table below:
(thousands where applicable)
<TABLE>
<CAPTION>
Percent
-------
1996 1995 Change Change
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues $64,038 $58,406 $5,632 9.6
======= ======= ====== =====
Operating margin $26,758 $26,885 $ (127) (0.5)
======= ======= ====== =====
Net income $ 4,264 $ 5,123 $ (859) (16.8)
======= ======= ====== =====
</TABLE>
Operating Revenues and Operating Margin
- ---------------------------------------
During the latest quarter, the Registrant experienced normal weather, however
temperatures averaged 4.8 percent warmer than the same quarter last year. The
Registrant's operating revenues increased approximately $5.6 million or 9.6
percent due to rate increases offset by the warmer weather. The increased
revenues were offset by increased gas costs, which resulted in decreased
operating margin of approximately $127,000 or 0.5 percent. The increased gas
costs had no effect on operating margin due to the fact that the Registrant
recovers actual gas costs from its customers through the Gas Charge Clause
(GCC).
I-8
<PAGE>
Operating and Maintenance Expenses
- ----------------------------------
Overall, other operating and maintenance expenses decreased approximately
$358,000 or 3.1 percent from the same quarter last year. This decrease is
attributable to lower uncollectible revenues due to improved collection efforts
and a decrease in pension expense due to the funded status of the Registrant's
plans. These decreases were partially offset by inflationary increases and the
start-up and initial operations of Providence Energy Services, Inc., a
subsidiary of the Registrant, which began operations in August 1996.
Taxes
- -----
Taxes for the current quarter versus last year increased approximately
$226,000 or 4.0 percent. The increase in taxes, mainly state gross earnings
tax, was the result of higher operating revenues.
Other, net
- ----------
Other, net for the current quarter decreased approximately $686,000 from the
first quarter of the prior year. This decrease is due to regulatory adjustments
in the first quarter of fiscal 1996 including a one-time gain for the regulatory
change in accounting for property taxes which was offset by the write-offs of
previously deferred reorganization and other costs for which recovery was not
allowed as part of the rate award received from the Rhode Island Public
Utilities Commission (RIPUC) on November 17, 1995.
Interest Expense
- ----------------
Interest expense decreased approximately $38,000 or 2.0 percent. The decrease
in interest was due to a decrease in the Registrant's short-term borrowing
rates. This decrease was offset by an increase in weighted average short-term
borrowings and an increase in long-term debt resulting from the issuance of $15
million of Series R First Mortgage Bonds 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 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 Energy, 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 Energy,
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
I-9
<PAGE>
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 business operations of Providence
Energy Services, Inc., a subsidiary of the Registrant formed on August 1, 1996,
will be contributed to Providence Southern Energy, LLC, which will be
headquartered in or near Providence, Rhode Island. The capital contributions to
the Joint Venture from each party will be determined over the next several
months.
This and other energy ventures will increasingly be separate from the
distribution utility. There are strategic long-term planning and operating
costs associated with developing the new energy service offerings. The
Registrant estimates these costs to be in the range of $750,000 to $900,000, net
of taxes, in 1997.
Additionally, during the fourth quarter of 1996, North Attleboro Gas Company
(North Attleboro) began piloting a new set of service contracts. As part of this
pilot program, North Attleboro's annual service contract for the inspection of
gas heating equipment included providing customers with an indoor air quality
screening. Customers received a comprehensive indoor air quality informational
report and were given the opportunity to purchase carbon monoxide detectors and
radon test kits from North Attleboro. Once the results of the pilot program are
analyzed, the Registrant will determine whether the indoor air quality program
will generate additional growth opportunities.
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 and a consortium of oil heat
organizations. The Agreement begins a process of unbundling natural gas service
in Rhode Island enabling customers to choose their gas suppliers. The Agreement
went into effect June 2, 1996. While this initial step is available to
approximately 120 of the largest commercial and industrial customers, the
Registrant is required to make an additional filing in March 1997 that would
expand the eligibility of unbundled services to other customers. The Registrant
does not know the number of customers that would be impacted by the March 1997
filing at this time.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the latest quarter, the Registrant's accounts receivable and
unbilled revenue have increased $26.3 million. These fluctuations are the result
of higher monthly sales during the latest quarter and a moratorium on
residential shut-offs during the
I-10
<PAGE>
heating season. Because of these increases, which negatively impact cashflow,
the Registrant must borrow to maintain an appropriate level of liquidity.
Management believes its available financings are sufficient to meet these
seasonal needs.
The Registrant experienced an increase in its net cash used by operations
during the latest quarter as compared to last year, primarily as the result of a
substantial underrecovery of gas costs in the first quarter of 1997.
In December 1995, the Registrant received proceeds of $15 million related to
an issuance of First Mortgage Bonds, Series R (7.5%), which will mature in
December 2025. The net proceeds received from the issuance were used to pay
down short-term debt.
Capital expenditures for the latest quarter of $5.6 million increased from
$4.8 million last year. This increase was due to increased spending for
technology to redesign and integrate the Registrant's customer-related
information systems. Capital expenditures for the remainder of the fiscal year
are expected to be approximately $15.1 million. Anticipated capital
expenditures for the next three years are expected to total between $50 million
to $60 million.
In February 1995, the Registrant filed for rate relief requesting an
approximate eight percent general rate increase. In November 1995, the RIPUC
authorized the Registrant to increase its rates to recover additional annual
revenues in the amount of $3,990,000. Subsequent to the issuance of the rate
decision, the RIPUC approved the Registrant's motion to reconsider a revenue
adjustment of $171,572. That approval increases the overall rate increase to
$4,161,572. As part of this award, the Registrant is allowed to earn a 10.9%
return on common equity. As previously discussed, the rate decision also
resulted in several accounting adjustments which had no impact on the
Registrant's cash flow in the first quarter of 1996.
On October 3, 1991, the Massachusetts Department of Public Utilities (MDPU)
approved a settlement order reached between the Massachusetts Attorney General's
Office and North Attleboro Gas Company. Due to the magnitude of the award (32
percent), the MDPU ordered North Attleboro Gas to phase-in the award over a five
year period effective November 1, 1991. As a result of this award, the final
revenue increase of $94,445 was phased-in on November 1, 1995.
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.
I-11
<PAGE>
The Settlement Agreement also provided for a one-time funding of $800,000 in
1996 for a Low Income Assistance Program (LIAP) through a portion of the
Registrant's share of the performance-based ratemaking incentive. The LIAP was
developed in response to the Registrant's anticipated decrease in 1996 of
approximately $900,000 in Federal funding for the low income heat assistance
program administered by the State of Rhode Island.
The funding of these programs is generated through annual gas cost savings
beginning in July 1995. The Registrant performed an analysis of gas cost
savings from July 1995 through June 1996 and achieved sufficient savings to
provide funding for these programs without incurring a charge to income.
Accordingly, in 1996, 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. An analysis of gas cost savings will
be performed in June of each year for the duration of the IRP, at which time any
annual share of the performance-based ratemaking incentive will be recorded.
The Registrant's warrants to acquire stock in Encon Systems, Inc. (Encon)
expired in January 1997. The Registrant had elected not to exercise its
warrants. The advances made to Encon under the line of credit agreement are
currently in default and the Registrant has reserved for the anticipated loss.
In December 4, 1996, the Registrant's common stock began trading on the New
York Stock Exchange under the current trading symbol, "PVY". Prior thereto, the
Registrant's common stock was traded on the American Stock Exchange.
I-12
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) List of Exhibits:
10.1 1997 Non-Employee Director Restricted Stock Plan
(b) Reports on Form 8-K:
On November 13, 1996, the Registrant filed a report on Form 8-K
regarding the Registrant's filing of an application to list its common
stock on the New York Stock Exchange.
On January 29, 1997, the Registrant filed a report on Form 8-K regarding
the Registrant's joint venture agreement with Southern Energy, Inc.
II-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of results
for the periods reported, but such results are not necessarily indicative of
results to be expected for the year due to the seasonal nature of the
Registrant's gas operations. All accounting policies and practices have been
applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providence Energy Corporation
(Registrant)
BY:/s/ Gary S. Gillheeney
-----------------------------
GARY S. GILLHEENEY
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant
Secretary
Dated: February 14, 1997
-----------------
II-2
<PAGE>
Exhibit 10.1
PROVIDENCE ENERGY CORPORATION
NON-EMPLOYEE DIRECTOR STOCK PLAN
This Providence Energy Corporation Non-Employee Director Stock Plan (the
"Plan") is adopted by Providence Energy Corporation (the "Corporation") for the
purpose of advancing the interests of the Corporation by giving the
Corporation's non-employee directors a proprietary interest in the Corporation's
success, by compensating them for their services to the Corporation and by
attracting able individuals to directorships with the Corporation.
1. Definitions. For purposes of this Plan, the following terms shall have
the meanings set forth below:
"ADMINISTRATOR" means the person(s) appointed by the Board to administer the
Plan as provided in Paragraph 2 hereof.
"ANNUAL FEE" means, for each full year of service as a director of the
Corporation, an annual retainer in the amount established by the Board as
compensation for such service.
"ANNUAL MEETING" means the annual meeting of the Corporation's shareholders.
"BOARD" means the Board of Directors of Providence Energy Corporation.
"CHAIRMAN FEE(S)" means, for a director who is the chairman of any committee
of the Board, an annual retainer (in addition to the Annual Fee and Meeting
Fee(s)) in an amount established by the Board as compensation for service by the
chairman.
"CHANGE IN CONTROL" shall have the meaning set forth in Paragraph 4(b)(ii)
hereof.
"COMMON SHARES" means the Corporation's common stock, $1.00 par value per
share.
"CORPORATION" means Providence Energy Corporation, a Rhode Island
corporation.
"EFFECTIVE DATE" means November 21, 1996, subject to the approval of the
Plan by the Corporation's shareholders.
"GRANT DATE" means the effective date of a grant of Common Shares pursuant
to Paragraph 4 hereof.
"GRANT SHARES" means the Common Shares granted and issued to a Participant
pursuant to Paragraph 4 hereof and any securities issued with respect thereto as
a result of a stock dividend, stock split, recapitalization or otherwise.
<PAGE>
"MARKET VALUE" means, as of any Grant Date, (i) the average of the closing
prices for the Common Shares on the principal national securities exchange on
which the Common Shares are listed or admitted to trading, on the last five (5)
days immediately preceding the Grant Date on which the Common Shares are traded
on such exchange, or (ii) if the Common Shares are not so listed or admitted to
trading, then the average of the last quoted prices with respect to the Common
Shares or, if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market with respect to the Common Shares, in either case as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or such other system as may then be in use, for the last five
(5) days immediately preceding the Grant Date for which such quotation or
reports are available.
"MEETING FEE(S)" means an amount per each meeting of the Board or committee
of the Board attended as established by the Board as compensation for such
attendance.
"PARTICIPANT" means a director who has met the requirements of eligibility
and participation described in Paragraph 3 hereof.
2. Administration. The Plan shall be administered by the Administrator.
The Administrator may establish, subject to the provisions of the Plan, such
rules and regulations as it deems necessary for the proper administration of the
Plan, and make such determination and take such action in connection therewith
or in relation to the Plan as it deems necessary or advisable, consistent with
the Plan.
3. Eligibility and Participation.
(a) All non-employee directors of the Corporation shall automatically
participate in the Plan as of the later of (i) the Effective Date, or (ii) the
date of initial election to the Board. A director who is a regular employee or
officer of the Corporation is not eligible to participate in the Plan.
(b) A Participant shall cease participation in the Plan as of the date the
Participant (i) fails to be reelected to the Board, (ii) resigns or otherwise
vacates his or her position on the Board, or (iii) becomes a regular employee or
officer of the Corporation.
4. Stock Awards. Commencing with October 1, 1997, on the first day of
the Corporation's fiscal year in each fiscal year, a Participant shall be
awarded that number of shares with a Market Value on such date equal to 25
percent of such Participant's aggregate Annual Fee, Meeting Fees and Chairman
Fees for the prior fiscal year provided, however, that no awards shall be
granted pursuant to this Plan after September 30, 2007. Such awards shall be
subject to the following terms and conditions:
(a) Three-Year Vesting. The interest of a Participant in any Common
Shares granted hereunder ("Grant Shares") shall vest on the third anniversary of
the Grant Date, provided that the Participant shall have remained a director of
the Corporation or one of its participating subsidiaries for the three years
following the Grant Date; if such Participant fails to complete such three-year
service requirement and his or her interest in such Grant Shares is not
otherwise vested under paragraph (b) or (c) below, such
<PAGE>
Participant shall forfeit to the Corporation all unvested Grant Shares
theretofore issued to such Participant hereunder and such Participant shall
thereafter have no further rights with respect to such Grant Shares.
(b) Acceleration of Vesting. Notwithstanding the provisions of
paragraph (a), a Participant's interest in Grant Shares shall become immediately
vested upon any of the following occurrences:
(i) The Participant ceases to be a director of the Corporation or
any of its participating subsidiaries by reason of such Participant's death
or disability (as defined in Section 72(m)(7) of the Internal Revenue Code
of 1986, as amended); or
(ii) There is a "Change in Control" of the Corporation. A "Change
in Control" shall mean the occurrence of any of the following:
A. Any Person (as hereinafter defined) shall, together with
all Affiliates (as hereinafter defined) of such Person, become the
Beneficial Owner (as hereinafter defined) of twenty percent (20%) or
more of the outstanding Common Shares of the Corporation. The term
"Person" shall mean an individual, a corporation, association,
partnership, joint venture, trust, organization or any other entity.
An "Affiliate", with respect to any Person, shall mean any other Person
who is, or who would be deemed to be, an "affiliate" or an "associate"
of such Person within the respective meanings ascribed to such terms in
Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as such Rule is
in effect from time to time. A Person shall be deemed to be the
"Beneficial Owner" of any Common Shares of which such Person or any of
such Person's Affiliates is deemed to be a "beneficial owner" within
the meaning of Rule 13d-3 of the General Rules and Regulations under
the Exchange Act, as such Rule is in effect from time to time.
B. The Board of the Corporation approves any consolidation
or merger of the Corporation in which the Corporation is not to be the
surviving corporation or pursuant to which the Common Shares or other
voting common stock of the Corporation are to be converted into cash,
securities or other property, or any sale, lease, exchange or other
transfer (in a single transaction or in a series of related
transactions) of all or substantially all the assets of the
Corporation; or
C. During any 24-month period individuals who at the
beginning of such period constituted the Board of the Corporation cease
for any reason to constitute a majority thereof; provided, however,
that any Director who was not in office at the beginning of such 24-
month period, but whose election by the Board or by the Corporation's
shareholders was to fill a vacancy caused by the death or retirement of
a Director and who was approved by a vote of at least two-thirds of the
Directors then in office
<PAGE>
who either were Directors at the beginning of such period or whose
election was previously so approved shall be deemed to have been in
office at the beginning of such period for purposes of this clause C.
(c) Vesting on Retirement. If a Participant to whom Grant Shares are
issued hereunder ceases to be a director of the Corporation or any of its
participating subsidiaries during the three-year period provided for in
paragraph (a) by reason of his or her retirement following attaining age 65, the
interest of the Participant in any Grant Shares then subject to forfeiture shall
become vested on the date of such retirement.
(d) Rights as a Shareholder. Except as otherwise provided in this
Paragraph 4, a Participant shall have all of the rights of a shareholder of the
Corporation with respect to Grant Shares registered in his or her name,
including the right to vote such Grant Shares and receive dividends and other
distributions paid or made with respect to such Grant Shares.
(e) Share Adjustments. The provisions contained in the Plan shall
apply to any other shares of capital stock of the Corporation or other
securities which may be acquired by the Participant as a result of a share
dividend, share split, share combination or exchange for other securities
resulting from any recapitalization, reorganization or any other transaction
affecting the Grant Shares.
(f) Custody of Grant Shares. At the time of the issuance of Grant
Shares to a Participant, the Participant shall deposit the certificate therefor
with the Corporation, together with an assignment thereof duly executed in
blank, with signature guaranteed as required by the Corporation. The
Corporation shall, so long as such Grant Shares are subject to forfeiture under
paragraph (a), retain custody of such certificate and assignment for the account
and benefit of the Participant. If such Grant Shares shall be forfeited
pursuant to paragraph (a), the Corporation may cause such Grant Shares to be
transferred of record into the name of the Corporation, or its nominee. At the
time all forfeiture provisions relating to such Grant Shares shall terminate,
the Corporation will, upon payment to the Corporation by the Participant of an
amount equal to all taxes required to be withheld by the Corporation as a result
of such termination, or upon the making of alternative arrangements under
paragraph (g) below, deliver such certificate to the Participant, together with
assignment referred to above, without restrictions except for such restrictions
as may be required to ensure compliance with Federal and state securities laws.
Any such restrictions may at the Corporation's discretion be noted or referred
to conspicuously on such certificate prior to its delivery to the Participant.
(g) Withholding Taxes. At the time of the issuance of Grant Shares to
a Participant, and as a condition of the Corporation's obligation to deliver a
certificate for such Grant Shares to the Participant, the Participant shall pay
to the Corporation an amount equal to all taxes required to be withheld by the
Corporation for the account of the Participant as a result of such issuance; or,
in lieu of such payment, the Corporation may, at its sole option, accept the
written authorization of the Participant to withhold such taxes from
compensation thereafter becoming payable to the Participant by the Corporation.
If the Participant shall elect under Section 83 of the Internal Revenue Code of
1986, as amended, to accelerate the recognition of income attributable to the
receipt of
<PAGE>
Grant Shares, the Participant shall furnish the Corporation with a copy of such
election concurrently with its filing with the Internal Revenue Service and
shall pay to the Corporation the amount of taxes required to be withheld for the
account of the Participant by reason of such election.
(h) Compliance with Securities Laws. Common Shares issued by the
Corporation shall be granted and issued only in full compliance with all
applicable securities laws, including laws, rules and regulations of the
Securities and Exchange Commission and applicable state Blue Sky Laws. With
respect thereto, the Administrator may impose such conditions on transfer,
restrictions and limitations as it may deem necessary and appropriate to assure
compliance with such applicable securities laws.
5. Shares Subject to the Plan.
(a) The Common Shares to be issued and delivered by the Corporation
under the Plan may be either authorized but unissued shares or treasury shares
of the Corporation.
(b) The aggregate number of Common Shares of the Corporation which may
be issued under the Plan shall not exceed 50,000 shares; subject, however, to
the adjustment provided in Paragraphs 4(a) and 5(c) in the event of stock
splits, stock dividends, exchanges of shares of the like occurring after the
Effective Date of this Plan.
(c) In the event there is any change in the Corporation's Common Shares
resulting from stock splits, stock dividends, combinations or exchanges of
shares, or other similar capital adjustments, equitable proportionate
adjustments shall automatically be made without further action by the Board or
Administrator in the number of the Common Shares available for award under this
Plan.
6. Amendment or Termination. The Board may terminate this Plan at any
time, and may amend the Plan at any time or from time to time; provided,
however, that the Plan shall not be amended more than once every six months,
other than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder; and further provided
that any amendment that would increase the aggregate number of Common Shares
that may be issued under the Plan, materially increase the benefits accruing to
Participants under the Plan, or materially modify the requirements as to
eligibility for participation in the Plan shall be subject to the approval of
the Corporation shareholders to the extent required by Rule 16b-3 under the
Exchange Act, or any other governing rules or regulations except that such
increase or modification that may result from adjustments authorized by
Paragraph 4(e) does not require such approval. No suspension, amendment or
termination shall adversely affect or impair the rights of a Participant to any
then issued and outstanding Grant Shares without the consent of such
Participant.
7. Corporation Responsibility. All expenses of this Plan, including the
cost of maintaining records, shall be borne by the Corporation.
<PAGE>
8. Implied Consent. Every Participant, by acceptance of an award under
this Plan, shall be deemed to have consented to be bound, on his or her own
behalf and on behalf of his or her heirs, assigns and legal representatives, by
all of the terms and conditions of this Plan.
9. Rhode Island Law to Govern. This Plan shall be construed and
administered in accordance with and governed by the laws of the State of Rhode
Island.
10. Indemnification of the Administrator. In addition to such other rights
of indemnification he or she may have as an officer, the Administrator shall be
indemnified by the Corporation against the reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
herein, to which he or she may be a party by reason or any action taken or any
failure to act under or in connection with the Plan, or any award granted
hereunder, and against all amounts paid by him or her in satisfaction of a
judgment in any such action, suit or proceeding in which he or she has been
determined to be liable for misconduct in his or her duties; provided that
within fifteen (15) days after receipt of service of process in connection with
any such action, suit or proceeding the Administrator shall in writing offer the
Corporation the opportunity, at the Corporation's expense, to defend the same on
his or her behalf.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 182,013
<OTHER-PROPERTY-AND-INVEST> 1,130
<TOTAL-CURRENT-ASSETS> 82,083
<TOTAL-DEFERRED-CHARGES> 14,162
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 279,388
<COMMON> 5,768
<CAPITAL-SURPLUS-PAID-IN> 55,768
<RETAINED-EARNINGS> 24,125
<TOTAL-COMMON-STOCKHOLDERS-EQ> 85,661
0
8,000
<LONG-TERM-DEBT-NET> 70,752
<SHORT-TERM-NOTES> 40,965
<LONG-TERM-NOTES-PAYABLE> 71,200
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,600
0
<CAPITAL-LEASE-OBLIGATIONS> 1,581
<LEASES-CURRENT> 429
<OTHER-ITEMS-CAPITAL-AND-LIAB> 71,981
<TOT-CAPITALIZATION-AND-LIAB> 279,388
<GROSS-OPERATING-REVENUE> 64,038
<INCOME-TAX-EXPENSE> 2,392
<OTHER-OPERATING-EXPENSES> 11,374
<TOTAL-OPERATING-EXPENSES> 20,403
<OPERATING-INCOME-LOSS> 6,355
<OTHER-INCOME-NET> (47)
<INCOME-BEFORE-INTEREST-EXPEN> 6,308
<TOTAL-INTEREST-EXPENSE> 1,870
<NET-INCOME> 4,438
174
<EARNINGS-AVAILABLE-FOR-COMM> 4,264
<COMMON-STOCK-DIVIDENDS> 1,552
<TOTAL-INTEREST-ON-BONDS> 1,520
<CASH-FLOW-OPERATIONS> (7,400)
<EPS-PRIMARY> 0.74
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</TABLE>
