<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1998
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OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to ___________________
Commission file number 1-10032
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PROVIDENCE ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 401-272-9191
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
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registered
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Common Stock, $1.00 Par Value NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of December 2, 1998: $125,381,227
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $1.00 Par Value: 5,981,898 shares outstanding at December 2,
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1998.
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DOCUMENTS INCORPORATED BY REFERENCE
- -----------------------------------
Portions of the annual report to shareholders for the fiscal year ended
September 30, 1998 are incorporated by reference into Part II.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item 1 - Business
General I-1
Operations of the Gas Companies I-2
Nonregulated Businesses I-9
Special Factors Affecting the
Natural Gas Industry I-10
Environmental Regulations I-11
Other Standards I-13
Item 2 - Properties I-14
Item 3 - Legal Proceedings I-14
Item 4 - Submission of Matters to a Vote of Security Holders I-14
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholders' Matters II-1
Item 6 - Selected Financial Data II-1
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1
Item 8 - Financial Statements and Supplementary Data II-1
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-1
PART III
Item 10 - Directors and Executive Officers of the Registrant III-1
Item 11 - Executive Compensation III-4
Item 12 - Security Ownership of Certain Beneficial Owners
and Management III-4
Item 13 - Certain Relationships and Related Transactions III-4
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Experts Consent IV-5
Supplemental Schedule IV-6
Signatures IV-10
</TABLE>
<PAGE>
PART I
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ITEM 1. BUSINESS
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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) and in its reports to shareholders, including this
Form 10-K and annual report to shareholders, which constitute "forward-looking"
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations and releases.
All statements other than statements of historical facts included in this
Form 10-K and annual report regarding the Registrant's financial position and
strategic initiatives and addressing industry developments are forward-looking
statements. Where, in any forward-looking statement, the Registrant, or its
management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The following
are some of the factors which could cause actual results to differ materially
from those anticipated: general economic, financial and business conditions;
changes in government regulations; effectiveness of hedging strategies;
competition in the energy services sector; regional weather conditions; the
availability and cost of natural gas and oil; development and operating costs;
the success and costs of advertising and promotional efforts; the availability
and terms of capital; the business abilities and judgment of personnel; the
ability of the Registrant and its suppliers and customers to modify or redesign
their computer systems to work properly by the Year 2000; unanticipated
environmental liabilities; the Registrant's ability to grow its business through
acquisitions and/or significant customer growth; 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. For more information, please see "Special Factors Affecting
the Natural Gas Industry".
General
- -------
The Registrant was organized in 1981 as a Rhode Island business
corporation. The Registrant's outstanding common shares are listed on the New
York Stock Exchange under the ticker symbol (PVY).
The Registrant is the parent of two wholly-owned natural gas distribution
utilities, The Providence Gas Company (ProvGas) and North Attleboro Gas Company
(North Attleboro Gas), together referred to as the Gas Companies.
In August 1996, the Registrant incorporated Providence Energy Services,
Inc. (ProvEnergy Services) to market natural gas and energy services. In May
1998, the Registrant and Southern Energy, Inc., (Southern) agreed to end their
joint efforts to develop a New England retail energy business using ProvEnergy
Services, which was doing business under the name Providence-Southern. The
Registrant will continue to use ProvEnergy Services as the vehicle to grow its
natural gas, oil, and electricity business to retail accounts in New England.
I-1
<PAGE>
In November 1997, as part of the Registrant's strategic plan to strengthen
its position in the energy industry, the Registrant purchased two Rhode Island-
based oil distribution companies, Super Service Oil and Mohawk Oil. Together
with three smaller acquisitions that the Registrant also completed during 1998,
the Registrant's oil business serves over 4,000 residential customers and a
large commercial base.
ProvGas, Rhode Island's largest natural gas distributor, was founded in
1847 and serves approximately 166,000 customers in Providence, Newport and 23
other cities and towns in Rhode Island. North Attleboro Gas serves approximately
4,000 customers in North Attleboro and Plainville, Massachusetts, towns adjacent
to the northeastern Rhode Island border. The total natural gas service territory
of the Gas Companies encompasses 760 square miles and has a population of
approximately 850,000.
The corporate offices of the Registrant are located at 100 Weybosset
Street, Providence, Rhode Island 02903 (Telephone 401-272-5040).
Operations of the Gas Companies
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Customers
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The Gas Companies had an average number of customers of approximately
170,000 for the twelve months ended September 30, 1998, of which approximately
90% were residential and 10% were commercial and industrial.
The net increase in the average number of customers during fiscal 1998 over
fiscal 1997 was approximately 1,800 or 1.0%. This increase was the result of
new housing construction and conversions from other energy sources.
This increase was achieved in a local economy which is just now beginning
to prosper. Seasonally adjusted unemployment stood at 4.9 percent in September
1998, down from 5.2 percent twelve months earlier, and slightly above the
national average of 4.6 percent. Also, there is considerable new construction
throughout the state, especially in Providence, where the Providence Place Mall
is expected to be completed by August 1999, and six new hotels have been
proposed. A recent University of Rhode Island study predicts economic stability
in the state for the immediate future.
Gas Service
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The gas services provided by the Gas Companies can be grouped into four
categories -- firm sales, firm transportation, non-firm sales and non-firm
transportation. Firm service is provided to those residential, commercial and
industrial customers that use natural gas throughout the year. Non-firm service
is provided to those commercial and industrial customers that do not require
assured gas service because they can utilize an alternative fuel or otherwise
operate without gas service. Transportation service is a service where the Gas
Companies transport to certain large customers gas owned by those customers or
by third parties selling gas to those customers.
I-2
<PAGE>
The following table shows the distribution of gas to various customer
classes, and the total gas sold and transported by year since 1994:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Firm Sales 73.9% 80.4% 85.8% 76.4% 81.9%
Firm Transportation 16.6 6.7 1.3 0.7 -
Non-Firm Sales 5.6 9.6 9.3 17.6 15.8
Non-Firm Transportation 3.9 3.3 3.6 5.3 2.3
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Total Gas Sold and Transported
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<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BCF(*) 25.4 27.3 28.1 28.1 28.7
==== ==== ==== ==== ====
</TABLE>
(*) Gas sales are denominated in billions of cubic feet (Bcf) of natural gas.
Total gas sales include gas sold and transported by the Gas Companies.
Firm Sales
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In the recent year, the distribution of the Gas Companies' firm sales was
approximately 70% to residential and 30% to commercial and industrial customers.
Firm sales represent the highest percentage of operating margin and represent
the core of the Gas Companies' business.
Non-Firm
- --------
Non-firm customers consist of two types: seasonal customers that typically
use gas only during the nonwinter months and dual-fuel customers that contract
for gas service on a year round basis, but agree to service interruption during
certain peak periods. By retaining the right to interrupt service to the dual-
fuel customers, the Gas Companies can balance daily demand from firm customers
with available gas supply and pipeline capacity. Non-firm customers may
interrupt their gas service, as well, when it is more economical to utilize an
alternative fuel. Accordingly, the amount of the Gas Companies' non-firm sales
fluctuates depending upon the relative price of natural gas to alternative
fuels.
Non-firm sales produce substantially less margin to the Gas Companies than
firm sales due to the more competitive nature of non-firm sales. Service rates
charged to dual-fuel customers are based on the price that the customer would
otherwise pay for its alternative fuel. In fiscal year 1998, under the terms of
the Price Stabilization Plan Settlement Agreement, any margin earned from these
non-firm customers was retained by the Registrant - See "Rates and Regulation"
--------------------
and "Competition and Marketing".
-------------------------
Transportation Service
- ----------------------
The Registrant provides both firm and non-firm transportation of gas.
Margin from the firm transportation of gas purchased by certain large customers
from third parties is likely to represent an increasing percentage of the Gas
Companies' future total margin due to the continuing developments affecting the
natural gas industry - see "Competition and Marketing." In general, these
--------------------------
developments now allow customers to buy gas directly from the producer-supplier
rather than solely from the local gas distribution company. Customer-owned gas
is transported to the customer's premises through a combination of the
interstate pipelines and the Gas Companies' distribution systems.
I-3
<PAGE>
For a given quantity of gas, the Gas Companies' margin from firm
transportation service is comparable to the margin from firm sales. Margin from
nonfirm transportation service is less than the margin from firm sales, but is
generally comparable to the margin from interruptible sales, depending on the
price of alternative fuels. To the extent that the Gas Companies' existing
customers buy gas directly from producer-suppliers, the Gas Companies' revenue
will decrease although firm margin will not be materially impacted. In fiscal
year 1998, under the terms of the Price Stabilization Plan Settlement Agreement,
any margin earned from these non-firm customers will be retained by the
Registrant - See "Rates and Regulation" and "Competition and Marketing."
-------------------- --------------------------
Gas Supply
- ----------
The Registrant's principal subsidiary, ProvGas, entered into a full
requirements gas supply contract with Duke Energy Trading and Marketing, L.L.C.
(DETM) for a term of three years. Under the contract, DETM guarantees to meet
ProvGas' supply requirements; however, ProvGas must purchase all of its gas
supply exclusively from DETM. Under the contract, ProvGas transferred
responsibility for its pipeline capacity resources, storage contracts and all
liquified natural gas capacity to DETM. As a result, ProvGas' gas inventories
of approximately $18 million as of September 30, 1997 were sold at book value to
DETM on October 1, 1997.
As well as providing supply for firm customers at a fixed price, DETM
provides gas at market prices to cover ProvGas' non-firm sales customers' needs
and to make up the supply imbalances of transportation customers. DETM also
provides various other services to ProvGas' transportation service customers
including enhanced balancing, standby and the storage and peaking services
available under ProvGas' firm transportation storage service in effect since
December 1, 1997. DETM receives the supply-related revenues from these services
in exchange for providing the supply management inherent in these services.
Included in the DETM contract are a number of other important features.
ProvGas has retained the right to continue to make portfolio changes to reduce
supply costs. To the extent ProvGas makes such changes, ProvGas must keep DETM
whole for the value lost over the remainder of the contract period. The contract
relieves ProvGas of the need to perform certain upstream supply management
functions which makes it possible for ProvGas to take on the additional supply
management workload required by the further unbundling of firm sales customers
without major staffing additions.
As a result of Federal Energy Regulatory Commission (FERC) Order 636 and
other related orders (the Orders), pipeline transportation companies have
incurred significant costs, collectively known as transition costs. The
majority of these costs will be reimbursed by the pipeline's customers,
including ProvGas. ProvGas estimates its transition costs to be approximately
$21.7 million, of which $16.2 million has been included in the Gas Charge Clause
(GCC) and collected from customers through September 30, 1997. At September 30,
1997, the remaining minimum obligation of $5.5 million was recorded in the
accompanying Consolidated Balance Sheets along with a regulatory asset
anticipating future recovery. As part of the above supply contract, DETM assumed
liability for these transition costs during the contract's three-year term. At
the end of the three-year term of the contract, ProvGas will assume any
remaining liability, which is not expected to be material.
I-4
<PAGE>
Rates and Regulation
- --------------------
ProvGas is subject to the regulatory jurisdiction of the Rhode Island
Public Utilities Commission (RIPUC) and North Attleboro Gas is subject to the
jurisdiction of the Massachusetts Department of Telecommunications and Energy
(MDTE) with respect to rates and charges, standards of service, accounting and
other matters.
In August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement (Energize RI or the Plan) among ProvGas, the Rhode Island Division of
Public Utilities and Carriers (the Division), The Energy Council of Rhode Island
(TEC-RI), and the George Wiley Center. Effective October 1, 1997 through
September 30, 2000, Energize RI provides customers with an initial price
decrease of approximately four percent in addition to a three-year price freeze.
Under Energize RI, the GCC was suspended for the entire term. Energize RI also
requires ProvGas to make significant capital investments to improve its
distribution system. In addition, Energize RI requires ProvGas to fund the Low-
Income Assistance Program at an annual level of $1 million, the Demand Side
Management Rebate Program at annual level of $.5 million and the Low-Income
Weatherization Program at an annual level of $.2 million. Energize RI also
continues the process of unbundling by requiring ProvGas to provide unbundled
service offerings for up to 10 percent per year of firm deliveries.
As part of Energize RI, ProvGas will amortize approximately $4.0 million of
environmental costs previously charged to the accumulated depreciation reserve.
These costs and all environmental costs incurred during the term of the Plan
will be amortized over a 10-year period. Also, in connection with the Plan,
ProvGas wrote off approximately $1.5 million of previously deferred gas costs in
October 1997.
Under Energize RI, ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million and $92.0 million in
fiscal 1998, 1999 and 2000, respectively. In addition, ProvGas may not earn less
than a seven percent return on average common equity. In the event that ProvGas
earns in excess of 10.9 percent or less than seven percent, ProvGas will defer
revenues or costs through a deferred revenue account over the term of the Plan.
Any balance in the deferred revenue account at the end of the Plan will be
refunded to or recovered from customers in a manner to be determined by all
parties to the Plan and to be approved by the RIPUC.
As part of Energize RI, ProvGas is permitted to file with the Division for
the recovery of the impact of exogenous Changes (Changes) which may occur during
the three-year term of the Plan. Changes are defined as "...significant
increases or decreases in ProvGas' costs or revenues which are beyond ProvGas'
reasonable control." Any disputes regarding either the nature or quantification
of the Changes are to be resolved by the RIPUC. The impact of any such Changes
will be debited or credited to a regulatory asset or liability account
throughout the term of Energize RI and will be recovered or refunded at the
expiration of the Plan through a method to be determined.
During 1998, due to the extremely warm temperatures, ProvGas experienced a
margin loss of approximately $4.0 million. ProvGas also experienced a non-firm
margin loss of approximately $2.2 million due to adverse market prices of
natural gas versus alternate fuels. ProvGas believes the causes of these two
events were beyond its control and thus considers them as Changes. In fiscal
1999, ProvGas intends to file with the Division for recovery of a portion of
these losses.
I-5
<PAGE>
In 1998, ProvGas did not earn its allowed rate of return primarily as a
result of the extremely warm weather and the loss of non-firm margin. Under the
Plan's design, which assumed normal weather, ProvGas should have had earnings in
year one of the Plan in excess of 10.9 percent. The earnings in excess of 10.9
percent were to be deferred in the deferred revenue account to fund capital
investments and other Plan commitments in the remaining two years of the Plan.
Absent favorable recovery for the Changes discussed above, and/or other factors
such as colder than normal weather, ProvGas' ability to earn a 10.9 percent
return on average common equity in future Plan years is substantially impaired.
The following table sets forth the results of ProvGas' applications
before the RIPUC, prior to Energize RI, for revenue increases since 1990.
<TABLE>
<CAPTION>
Authorized
Date of Revenue Increase Date Rates Revenue Increase Return on
Application Requested Effective Allowed (*) Common Equity
- ------------- -------------- ------------ ----------------- --------------
<S> <C> <C> <C> <C>
5/17/90 $15,800,000 03/15/91 $9,176,000 12.8%
1/15/93 9,100,000 (**) 11/14/93 694,000 11.2
2/16/95 14,880,000 (***) 12/17/95 4,161,572 (****) 10.9
</TABLE>
(*) Although the RIPUC reviews and approves all changes in gas costs billed
to customers through the GCC, such changes are not part of the general rate
filings described above. See Footnotes 1 and 9 in the Notes to the Consolidated
Financial Statements contained in the Registrant's 1998 Annual Report to
Shareholders filed herewith as Exhibit 13.
(**) Rate increase requested on January 15, 1993 of $9.1 million was
recalculated to $6,970,000 on September 14, 1993 due to cost of service
adjustments reflecting cost savings.
(***) Rate increase requested on February 16, 1995 of $14.9 million was revised
to $13,222,000 on July 18, 1995 due to lower projected costs.
(****) The allowed annualized revenue increase of $4,161,572 is comprised of an
initial award of $3,990,000 plus a revenue adjustment of $171,572 due to a
reconsideration motion.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement (the
Agreement) among ProvGas, the Division, 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 included changes to ProvGas' gas cost recovery mechanism.
Specifically, the Agreement replaced the previous Cost of Gas Adjustment Clause
(CGA) with Gas Charge Clauses (GCC) effective June 2, 1996. In addition to the
commodity and related pipeline transportation costs historically included in the
CGA, the GCC provided for the recovery of: (1) inventory financing costs; (2)
working capital associated with gas supply purchases; (3) bad debt expenses
associated with the gas revenue portion of customer bills; and (4) a substantial
portion of liquefied natural gas operating and maintenance expenses, all of
which were previously recovered in base rates. Similar to the former CGA, the
GCC provided for reconciliation of total gas costs billed with the actual cost
of gas incurred. Any excess or deficiency in amounts billed as compared to costs
incurred was deferred and either refunded to, or recovered from, customers over
a subsequent period. As a result of the Price Stabilization Plan Settlement
Agreement described in Note 9 of the Consolidated Financial Statements
included in the
I-6
<PAGE>
Annual Report to Shareholders filed as Exhibit 13, the GCC will be suspended for
the period of October 1, 1997 through September 30, 2000. Any excess or
deficiency in amounts billed as compared to costs incurred will be retained or
borne by ProvGas during this period.
In a decision issued September 1, 1998, the Division rejected allegations
made in a complaint brought by Aurora Natural Gas that ProvGas provided advance
information and undue preference in pricing to its marketing affiliate,
ProvEnergy Services. As part of its investigation, the Division ordered
marketer refunds of $.3 million. The Division ordered this refund based on its
belief that an unfair rate was charged to customers who did not have operational
telemeters in place when they began transporting gas. ProvGas intends to pursue
all available options in order to reverse this decision.
Competition and Marketing
- -------------------------
In addition to funding investments related to system integrity, Energize RI
provides opportunities for ProvGas to expand sales. For example, high pressure
service to Quonset/Davisville Industrial Port & Commerce Park, a key area for
State economic development, provides tremendous opportunities for sales growth
as commercial and industrial businesses locate within the park. In addition,
Demand-Side Management, an equipment rebate program, provides opportunities to
expand sales to nontraditional applications, such as air conditioning and fuel
cells. ProvGas has redirected its sales and marketing efforts to leverage
Energize RI, as well as other opportunities to promote sales growth within its
service territory.
In response to the large increase of both state-owned and private fleet
vehicles powered by natural gas, ProvGas invested approximately $.3 million to
renovate its Providence "quick-fill" station for natural gas vehicles - one of
three stations ProvGas operates in the state. Fleet operators throughout the
region are expressing greater interest in alternative-fuel vehicles. One of
these operators is the Rhode Island Public Transit Authority, which recently
launched a major program to replace a large number of its 200 diesel buses with
buses that operate solely on natural gas. A new Rhode Island law provides
substantial tax incentives which, along with the Federal Department of Energy's
designation of Providence as a "clean city" should increase use and awareness of
the benefits of natural gas vehicles.
Per the Agreement with the RIPUC that went into effect in June 1996, the
initial phase of unbundling was available to approximately 120 of the largest
commercial and industrial customers. In August 1997, the RIPUC approved a plan,
called Business Choice, to further unbundle services to an additional 3,400
medium and large commercial and industrial customers. ProvGas commenced Business
Choice in December 1997. Energize RI continues the process of unbundling by
requiring ProvGas to provide unbundled service offerings for up to 10 percent
per year of firm deliveries. At the conclusion of the latest enrollment period
on October 1, 1998, an additional 530 customers had signed up for Business
Choice. The program now has approximately 1,500 firm transportation customers
with annual deliveries of over 5 billion cubic feet per year which is
approximately 25 percent of ProvGas' total annual firm deliveries. There are 14
different marketers serving ProvGas' customers and transporting on the system.
I-7
<PAGE>
In 1996, ProvGas implemented a Demand Side Management (DSM) Program, which
furnishes rebates to customers installing new technologies, such as gas fired
air conditioning, cogeneration and gas motors. These technologies use
proportionately more natural gas during the summer months, when the distribution
system has available capacity. The DSM Program also allows for the utilization
of existing resources, such as mains, services and year-round supply contracts.
This DSM Program will continue to be funded under Energize RI.
The discussion of Competition and Marketing for the Registrant's non-
regulated businesses can be found in the "Nonregulated Businesses" section.
-----------------------
Employees
- ---------
As of September 30, 1998, the Registrant had 637 full-time employees.
Approximately 269 of ProvGas' distribution and customer service employees are
covered by a collective bargaining agreement with Local 12431-01 of the United
Steelworkers of America, which became effective in January 1996.
The bargaining agreement was developed by a labor-management negotiations
committee and contains a provision allowing the agreement to be reopened for any
reason at any time in order for the committee to deal with new issues as they
arise. The provision results in increased flexibility in the use of employees.
The original agreement called for a general wage increase of 3.25% each year
from 1997 to 2000.
In April 1998 the contract with Local 12431-01 was renegotiated and
extended to January 2002. This negotiation provides for a 3.5% wage increase
in January 1999, January 2000, and January 2001.
Additionally, in March 1996, a 38 month Labor Agreement was ratified by
Local 12431-02 of the United Steelworkers of America, which represents 90 office
and clerical employees of ProvGas. The agreement called for an average general
wage increase of 2.9 percent in 1998.
In April 1998 the contract with Local 12431-02 was renegotiated and
extended to May 2002. This negotiation provides for a 3.5% wage increase in
June 1999, June 2000, and June 2001.
Gas Distribution Systems
- ------------------------
The Gas Companies' distribution systems consist of approximately 2,400
miles of gas mains ranging in size from 2 to 36 inches in diameter,
approximately 144,000 services (a "service" meaning a pipe connecting a gas main
with piping on a customer's premises), and approximately 168,000 active gas
meters together with related facilities and equipment. The Gas Companies have
regulating and metering facilities at nine points of delivery from Algonquin Gas
Transmission Company and one point of delivery from Tennessee Gas Pipeline
Company, which the Gas Companies presently believe to be adequate for receiving
gas into their distribution systems.
I-8
<PAGE>
Nonregulated Businesses
- -----------------------
In November 1997, as part of the Registrant's strategic plan to strengthen
its position in the energy industry, the Registrant purchased two Rhode Island-
based oil distribution companies, Super Service Oil and Mohawk Oil. Together
with three smaller acquisitions that the Registrant also completed during 1998,
the Registrant's oil business serves over 4,000 residential customers with a
large commercial base. While these acquisitions further the Registrant's
transition to a diversified energy provider, the oil business sustained
substantial operating losses in 1998 during the first year of operations. These
losses were primarily due to lost operating margin from warmer than normal
weather, lower than anticipated commercial margins and the costs associated with
liquidating fixed purchase commitments and option contracts for oil when market
prices dropped significantly.
An increase in sales to customers to be acquired by acquisition, as well as
a planned return to typical profit margins, are expected to reduce the loss
sustained in 1998 so that only a small loss is generated in 1999. More
favorable profit margins should be achieved as substantially all sales
commitments have been hedged with financial instruments to protect the business
from the impact of dramatic price movements. Additionally, management is
focusing its marketing efforts on the higher margin residential segment.
The Registrant's retail energy marketing subsidiary, ProvEnergy Services,
also has substantial growth opportunities as the New England energy markets
deregulate. ProvEnergy Services experienced natural gas sales volume growth of
150 percent and a fifteen-fold increase in the number of customers in 1998.
ProvEnergy Services expects significant customer growth again in 1999, but
forecasts a small operating loss.
In May 1998, the Registrant and Southern Energy, Inc. (Southern) agreed to
end their joint efforts to develop a New England retail energy business using
ProvEnergy Services, which was doing business under the name Providence-
Southern. The Registrant will continue to use ProvEnergy Services as the vehicle
to grow its natural gas, oil and electricity business to retail accounts
throughout New England.
During 1998, ProvEnergy Services made a successful transition from Southern
to other natural gas suppliers, including DETM, to provide its wholesale natural
gas supply. In the future, ProvEnergy Services anticipates the continued
availability of competitively priced wholesale energy supplies.
Through May 1998, Southern funded 60 percent of the net retail start-up
operating expenses incurred by ProvEnergy Services. ProvEnergy Services
anticipates growing the business sufficiently to generate only a small operating
loss for 1999.
In July 1998, the Registrant and ERI Services, Inc. (ERI Services) formed a
joint venture, Capital Center Energy Company, LLC (CCEC). CCEC is owned 50
percent by the Registrant's subsidiary, ProvEnergy Power Company, LLC, and 50
percent by ERI Services' subsidiary, ERI Providence, LLC. CCEC's wholly-owned
subsidiary, DownCity Energy Company, LLC (DownCity Energy), was selected as the
exclusive electric, heat and air conditioning (HVAC) and related service
provider for most of the Providence Place Mall (the Mall) for the next thirty
years.
I-9
<PAGE>
DownCity Energy will serve more than three million square feet of retail
stores, common areas, offices and parking facilities in the Mall. Currently,
the Mall's three anchor stores and the cinema are not included in the plan. The
electric demand to be met by DownCity Energy is expected to be 12 megawatts, the
approximate consumption of more than 6,500 households. The system being
developed for the Mall includes three on-site natural gas powered electric
generators.
Under the agreement with Commonwealth Development Group, developers of the
Mall, DownCity Energy will perform the following:
. Own, operate and maintain the HVAC systems.
. Provide electric supply and emergency power.
. Own, operate and maintain a six megawatt on-site generation plant to
provide electric and emergency supply.
. Provide metering services for each of the tenants.
. Manage all energy billing to the tenants and the developer.
Construction of the energy systems began this summer. The entire energy
project will be operational in advance of the scheduled August 1999 opening of
the Mall. DownCity Energy did not have a significant impact on the Registrant's
results of operations in 1998. The projected investment in CCEC is $30 million.
As of September 30, 1998, the Registrant had invested $2 million of its total
projected investment of $15 million. This contract, the largest of its kind in
New England, has the potential to increase the Registrant's earnings by five
percent within five years.
Special Factors Affecting the Natural Gas Industry
- --------------------------------------------------
General
- -------
The natural gas industry is subject to numerous legislative and regulatory
requirements, standards and restrictions that are subject to change and that
affect the Gas Companies to varying degrees. Significant industry factors that
have affected or may affect the Gas Companies from time to time include: lack of
assurance that rate increases can be obtained from regulatory authorities in
adequate amounts on a timely basis; changes in the regulations governing the Gas
Companies' operations; ability to adapt to FERC regulatory changes; reductions
in the prices of oil and propane, which can make those fuels less costly than
natural gas in some markets; and increases in the price of natural gas.
FERC Regulations
- ----------------
In recent years, FERC has been attempting to increase competition with
regard to the transportation and sale of natural gas in interstate commerce.
Beginning in late 1985, FERC began promulgating orders that allow all industry
participants access to pipeline transportation on an open, nondiscriminatory
basis to the extent of available capacity.
Recent FERC orders are in furtherance of its policy to make gas
transportation and alternate supply sources more accessible to all parties,
including local distribution companies and their customers. Such open access
allows the Gas Companies to obtain their supply through a more competitive
national gas pipeline system, where and when capacity is available.
I-10
<PAGE>
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 Gas Companies have negotiated
new pipeline transportation and gas storage contracts.
To meet the requirements of the Orders, the pipelines have incurred
significant costs, collectively known as transition costs. The majority of
these costs will be reimbursed by the pipelines' customers including ProvGas.
ProvGas anticipates its transition costs to be approximately $21.7 million of
which $16.2 million has been included in the GCC and has been collected from
customers through September 30, 1997. At September 30, 1997 the remaining
minimum obligation of $5.5 million has been recorded in the accompanying
Consolidated Balance Sheets (filed herewith as part of Item 8) along with a
regulatory asset anticipating future recovery. As part of the supply contract
with DETM, which was effective October 1, 1997, DETM assumed liability for the
transition costs during the contract's three-year term. At the end of the
three-year term of the contract, ProvGas will assume any remaining liability,
which is not expected to be material.
Environmental Regulations
- -------------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope in recent years. The Registrant cannot predict the future impact of
such standards and requirements, which are subject to change and can take effect
retroactively. The Registrant continues to monitor the status of these laws and
regulations. Such monitoring involves the review of past activities and current
operations, and may include expending funds to investigate or clean up certain
sites. To the best of its knowledge, subject to the following, the Registrant
believes it is in substantial compliance with such laws and regulations.
At September 30, 1998, ProvGas was aware of five sites at which future costs
may be incurred.
ProvGas has been designated as a potentially responsible party (PRP) under
the Comprehensive Environmental Response Compensation and Liability Act of 1980
at two sites in Plympton, Massachusetts on which waste material is alleged to
have been deposited by disposal contractors employed in the past either directly
or indirectly by ProvGas and other PRPs. With respect to one of the Plympton
sites, ProvGas has joined with other PRPs in entering into an Administrative
Consent Order with the Massachusetts Department of Environmental Protection. The
costs to be borne by ProvGas, in connection with both Plympton sites, are not
anticipated to be material to the financial condition of ProvGas.
During 1995, ProvGas began a study at its primary gas distribution facility
located in Providence, Rhode Island. This site formerly contained a
manufactured gas plant operated by ProvGas. As of September 30, 1998,
approximately $2.0 million was spent primarily on studies at this site. In
accordance with state laws, such a 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. ProvGas has
completed the study which indicated that remediation will be required for two-
thirds of the property. The remediation is expected to begin in February 1999
and will continue for a duration of three to six months. During the remediation
process, the remaining one-third of the property will also be investigated and
remediated if necessary.
I-11
<PAGE>
At September 30, 1998, ProvGas compiled a preliminary range of costs, based
on removal and off-site disposal or recycling of contaminated soil, ranging from
$1.8 million to in excess of $5.0 million. However, because of the uncertainties
associated with environmental assessment and remediation activities, the future
cost of remediation could be higher than the range noted. Based on the proposals
for remediation work, ProvGas has accrued $1.8 million at September 30, 1998,
for anticipated future remediation costs at this site.
Tests conducted following the discovery of an abandoned underground oil
storage tank at ProvGas' Westerly, Rhode Island operations center in 1996
confirmed the existence of contaminants at this site. ProvGas is currently
conducting tests at this site, the costs of which are being shared equally with
the prior owner, to determine the nature and extent of the contamination. Due to
the early stages of investigation, management cannot offer any conclusions as to
whether any remediation will be required at this site. In addition, in 1997,
contamination from scrapped meters and regulators was discovered at this site.
ProvGas has reported this to DEM and the Rhode Island Department of Health and
is in the process of remediation. It is anticipated that remediation will cost
approximately $10,000. Accordingly, ProvGas has accrued $10,000 at September 30,
1998 for anticipated future remediation costs.
In November 1998, ProvGas received a letter of responsibility from DEM
relating to possible contamination on previously-owned property on Allens Avenue
in Providence. The current owner of the property has been similarly notified.
The Registrant lacks sufficient information at this time to determine the
validity of the claim, the amount of the clean-up costs or any defenses which
may be available with respect to such claim.
In prior rate cases filed with the RIPUC, ProvGas 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. Due to the magnitude of ProvGas' environmental
investigation and remediation expenditures, ProvGas sought current recovery for
these amounts. As a result, in accordance with the Price Stabilization Plan
Settlement Agreement described in "Rates and Regulation", effective October 1,
1997, all environmental investigation and remediation costs incurred through
September 30, 1997, as well as all costs incurred during the three-year term of
the Plan, will be amortized over a ten-year period. Additionally, it is ProvGas'
practice to consult with the RIPUC on a periodic basis when, in management's
opinion, significant amounts might be expended for environmental-related costs.
As of September 30, 1998, ProvGas charged environmental assessment and
remediation costs of $2.6 million and an estimated $1.8 million to the
accumulated depreciation reserve and has amortized $.4 million of these costs.
Management has begun discussions with other parties who may assist ProvGas
in paying any future costs at the above sites. Management believes that its
program for managing environmental issues, combined with rate recovery and
financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
I-12
<PAGE>
Other Standards
- ---------------
The Gas Companies are also subject to standards prescribed by the Secretary
of Transportation under the Natural Gas Pipeline Safety Act of 1968 with respect
to the design, installation, testing, construction and maintenance of pipeline
facilities. The enforcement of these standards has been delegated to the RIPUC
and MDTE and management believes that the Gas Companies are in substantial
compliance with all present requirements imposed by these agencies.
I-13
<PAGE>
ITEM 2. PROPERTIES
- ------------------
In addition to the Registrant's gas distribution system and storage
facilities, which constitute the principal properties of the Registrant, the
Registrant owns several buildings and other facilities in Newport, Warwick,
Providence, Johnston and Westerly that house its offices and provide floor space
for its energy distribution and maintenance facilities.
Substantially all the foregoing properties are mortgaged as collateral for
the outstanding First Mortgage Bonds of ProvGas.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Registrant is involved in legal and administrative proceedings in the
normal course of business, including certain proceedings involving material
amounts in which claims have been or may be made. However, management believes,
after review of insurance coverage and consultation with legal counsel, that the
ultimate resolution of the legal proceedings to which it is or can at the
present time be reasonably expected to be a party, will not have a materially
adverse effect on the Registrant's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not Applicable
I-14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
- --------------------------------------------------------------------
HOLDERS' MATTERS
----------------
The Registrant's common stock is listed on the New York Stock Exchange and
trades under the symbol "PVY". As of December 2, 1998, there were 5,649
registered holders of record of the Registrant's outstanding common stock.
For the balance of the information called for by this item, reference is
made to the materials under 'Dividends' and 'Common stock information' in
the Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1998, which is filed herewith under Part IV as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
For the information called for by this item, reference is made to page 20
of the Registrant's Annual Report to Shareholders (pages 13 through 14 of
this Form 10-K) for the fiscal year ended September 30, 1998, which is
filed herewith under Part IV as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Regarding the information that relates to this item, reference is made to
pages 12 through 18 of the Registrant's Annual Report to Shareholders
(pages 1 through 10 of this Form 10-K) for the fiscal year ended September
30, 1998, which is filed herewith under Part IV as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
For the information called for by this item, reference is made to pages 21
through 36 of the Registrant's Annual Report to Shareholders (pages 15
through 37 of this Form 10-K) for the fiscal year ended September 30,
1998, which is filed herewith under Part IV as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- -------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
Not applicable
II-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The following information is furnished with respect to the executive
officers of the Registrant:
<TABLE>
<CAPTION>
Year
Office
Name and Age Office First Held
- ------------ ------ ----------
<S> <C> <C> <C>
James H. Dodge (58) Chairman, President and Chief
Executive Officer 1992
James DeMetro (50) Senior Vice President 1996
Gary S. Gillheeney (43) Senior Vice President, Chief
Financial Officer, Treasurer
and Assistant Secretary 1996
Robert W. Owens (50) Senior Vice President 1996
James A. Grasso (44) Vice President, Public and
Government Affairs 1997
Royalynne J. Hourihan (54) Vice President, Human Resources 1998*
Susann G. Mark (51) Vice President, General Counsel
and Secretary 1998
Gerald A. Yurkevicz (41) Vice President, Marketing 1996
Harry J. Bishop (52) Assistant Treasurer 1998**
</TABLE>
Mr. Dodge was elected President and Chief Executive Officer of the
Registrant and ProvGas in August 1990 after the retirement of Louis R. Hampton.
Mr. Dodge subsequently became Chairman of the Board in January 1992. Mr. Dodge
currently serves as a member of the Board of Capital Properties, Inc., a non-
affiliated real estate leasing company.
Mr. DeMetro was elected Senior Vice President of the Registrant and ProvGas
in February 1996. For more than four years prior thereto, Mr. DeMetro served the
Registrant and ProvGas as Vice President, Energy Services.
Mr. Gillheeney was elected Senior Vice President and Chief Financial
Officer of the Registrant and ProvGas in February 1996, and Treasurer and
Assistant Secretary of the Registrant and ProvGas in January 1994. For more than
two years prior to February 1996, Mr. Gillheeney served ProvGas as Vice
President, Financial Information Services. For more than five years prior
thereto, Mr. Gillheeney served ProvGas in various management positions, with his
last position as Assistant Treasurer and Controller.
Mr. Owens was elected Senior Vice President of the Registrant and ProvGas
in February 1996. For more than a year prior thereto, Mr. Owens served the
Registrant and ProvGas as Vice President Operations. For more than five years
prior thereto, Mr. Owens served the Registrant and ProvGas in various management
positions, with his last position as Vice President, Treasurer and Chief
Financial Officer.
III-1
<PAGE>
Mr. Grasso was elected Vice President, Public and Government Affairs in May
1997. For three years prior thereto, Mr. Grasso served as Director of Public and
Government Relations of the Eastern Region of Pan Energy Corporation and Manager
of Public and Government Relations of Algonquin Gas Transmission Company. For
ten years prior thereto, Mr. Grasso served as Manager of Land, Public and
Government Relations of Algonquin Gas Transmission Company.
Mrs. Hourihan was elected Vice President, Human Resources effective
November 1998. For two years prior thereto, Mrs. Hourihan served as the senior
human resources professional of the Boston Public Schools District, Boston,
Massachusetts. For two years prior thereto, Mrs. Hourihan served as Vice
President, Human Resources of the Philadelphia Inquirer & Daily News. For four
---------------------
years prior thereto, Mrs. Hourihan served as Director, Human Resources - Eastern
Region of Wang Laboratories, Inc.
Ms. Mark was elected Vice President, General Counsel and Secretary of the
Registrant in April 1998. For one year prior to that, Ms. Mark was a partner in
the Business Law Group at Brown, Rudnick, Freed & Gesmer and for eight years
prior to that was a partner in the Corporate Law Practice Group at Licht and
Seminoff.
Mr. Yurkevicz was elected Vice President, Marketing of the Registrant in
August 1996. For ten years prior thereto, Mr. Yurkevicz served as Principal in
the Energy Practice at Mercer Management Consulting.
Mr. Bishop was elected Assistant Treasurer effective October 1, 1998. For
four years prior thereto, Mr. Bishop served as Director of Finance and Revenue
Requirements for ProvGas.
* Effective November 30, 1998.
** Effective October 1, 1998.
III-2
<PAGE>
DIRECTORS OF THE REGISTRANT
- ---------------------------
For information called for by this item, reference is made to pages 2
through 6 of the Registrant's proxy statement filed December 16, 1998 with the
Securities and Exchange Commission for the annual meeting of shareholders to be
held January 14, 1999.
III-3
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
For the information called for by this item, reference is made to pages 7
through 14 of the Registrant's proxy statement filed December 16, 1998 with the
Securities and Exchange Commission for the annual meeting of shareholders to be
held January 14, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
For the information called for by this item, reference is made to page 15 of
the Registrant's proxy statement filed December 16, 1998 with the Securities and
Exchange Commission for the annual meeting of shareholders to be held January
14, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
For the information called for by this item, reference is made to page 6 of
the Registrant's proxy statement filed December 16, 1998 with the Securities and
Exchange Commission for the annual meeting of shareholders to be held January
14, 1999.
III-4
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
PROVIDENCE ENERGY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules
----------------------------------
Consolidated Balance Sheets--September 30, 1998 and 1997
Consolidated Statements of Income for the years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Capitalization--September 30, 1998
and 1997
Consolidated Statements of Changes in Common Stockholders' Investment for
the years ended September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Consent of Independent Public Accountants
The financial statements and related notes listed above are incorporated
by reference from Providence Energy Corporation's Annual Report to Shareholders
(see pages 15 through 37 of this Form 10-K) for the year ended September 30,
1998, filed herewith as Exhibit 13.
Schedule II. Reserves for the years ended September 30, 1998, 1997 and 1996.
Schedules I to XIII not listed above are omitted as not applicable or not
required under Regulation S-X.
(b) Reports on Form 8-K
-------------------
On September 16, 1998 the Registrant filed a report on Form 8-K regarding the
Rhode Island Division of Public Utilities and Carrier's rejection of allegations
of preferential treatment received by the Registrant's marketing affiliate.
IV-1
<PAGE>
(c) Exhibits
--------
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 4(e) to the Registration Statement of the Registrant on Form S-
2 (Registration No. 33-24125)).
3.2 Bylaws (incorporated by reference to Exhibit C to the Proxy
Statement/Prospectus forming a part of the Registrant's Registration
Statement on Form S-14 (Registration No. 2-69473), as amended at the
annual meetings of the shareholders held January 14, 1985 and January
14, 1991, the text of such amendments being set forth in each case as
Exhibit A to the proxy statement for such annual meeting, heretofore
filed with the Securities and Exchange Commission and being
incorporated herein by this reference).
4.1 First Mortgage Indenture of The Providence Gas Company dated as of
January 1, 1922, as supplemented by First through Twelfth Supplemental
Indentures (incorporated by reference to Exhibit 10.10 to the
Registration Statement of The Providence Gas Company on Form S-1
(Registration No. 2-72726)).
4.2 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures of The
Providence Gas Company dated as of August 1, 1988, June 1, 1990 and
November 1, 1992, respectively (incorporated by reference to Exhibit 4
to the report of the Registrant to the Securities and Exchange
Commission on Form 10-Q for the quarter ended March 31, 1993).
4.3 Seventeenth Supplemental Indenture of The Providence Gas Company dated
as of November 1, 1993. (Filed as Exhibit 4.5 to the report of the
Registrant on Form 10-K for the year ended September 30, 1993
incorporated herein by this reference.)
4.4 Eighteenth Supplemental Indenture of The Providence Gas Company dated
as of December 1, 1995. (Filed as Exhibit 4.6 to the report of the
Registrant on Form 10-K for the year ended September 30, 1995
incorporated herein by this reference.)
4.5 Nineteenth Supplemental Indenture of The Providence Gas Company dated
as of April 1, 1998. (Filed as Exhibit 4.5 to the report of The
Providence Gas Company on Form 10-K for the year ended September 30,
1998, incorporated herein by this reference.)
4.6 Stock Rights Agreement (Filed as Exhibit 4.1 to the report of the
Registrant on Form 8-K File No. 001-10632 dated July 29, 1998,
incorporated herein by this reference.)
10.1 Material contracts filed as Exhibit 10 (a) through 10 (ff) to
Registration Statement of the Registrant on Form S-2 (Registration No.
33-24125), incorporated herein by this reference.
10.2 Employment Agreement dated October 29, 1997 between James H. Dodge,
Chairman, President and Chief Executive Officer of the Registrant.
(Filed as Exhibit 10.2 to the report of The Registrant in Form 10-K for
the year ended September 30, 1997, incorporated herein by this
reference.)
IV-2
<PAGE>
10.3 Employment Agreement dated October 29, 1997 between James DeMetro,
Senior Vice President of The Registrant. (Filed as Exhibit 10.3 to the
report of The Registrant in Form 10-K for the year ended September 30,
1997, incorporated herein by this reference.)
10.4 Employment Agreement dated October 29, 1997 between Robert W. Owens,
Senior Vice President of the Registrant. (Filed as Exhibit 10.4 to the
report of The Registrant in Form 10-K for the year ended September 30,
1997, incorporated herein by this reference.)
10.5 Employment Agreement dated October 29, 1997 between Gary S. Gillheeney,
Senior Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary of the Registrant. (Filed as Exhibit 10.5 to the report of
The Registrant in Form 10-K for the year ended September 30, 1997,
incorporated herein by this reference.)
10.6 Employment Agreement dated July 23, 1998 between James A. Grasso, Vice
President, Public and Government Affairs and the Registrant.
10.7 Employment agreement dated May 26, 1998 between Susann G. Mark, Vice
President, General Counsel and Secretary and the Registrant. (Filed as
Exhibit 10a to Form 10-Q for the quarter ended June 30, 1998,
incorporated herein by this reference.)
10.8 Employment Agreement dated October 29, 1997 between Gerald A.
Yurkevicz, Vice President, Marketing and the Registrant. (Filed as
Exhibit 10.9 to the report of the Registrant in Form 10-K for the year
ended September 30, 1997, incorporated herein by this reference.)
10.9 Redacted gas supply contract dated October 1, 1997 between Duke Energy
Trading and Marketing, L.L.C. and The Providence Gas Company. (Filed
as Exhibit 10 to the report of The Providence Gas Company on Form 10-Q
for the quarter ended June 30, 1998, incorporated herein by this
reference.)
10.10 1989 Non-Employee Director Stock Option Plan (incorporated by reference
to Exhibit A to the Registrant's proxy statement for the annual meeting
of shareholders held January 9, 1989, heretofore filed with the
Securities and Exchange Commission).
10.11 1989 Stock Option Plan (incorporated by reference to Exhibit B to the
Registrant's proxy statement for the annual meeting of shareholders
held January 9, 1989, heretofore filed with the Securities and Exchange
Commission).
10.12 Non-Employee Director Stock Plan (incorporated by reference to Exhibit
4.3 to Form S-8 (Registration No. 333-25415).
10.13 1998 Performance Share Plan.
13 Portions of the Annual Report to Shareholders for the fiscal year ended
September 30, 1998. (Pages 1 through 37)
21 Subsidiaries of the Registrant.
IV-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Providence Energy Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Providence Energy Corporation's
annual report to shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated November 6, 1998. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the accompanying index to the financial statements is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein, in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
November 6, 1998
IV-4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Providence Energy Corporation:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated November 6, 1998, included in this Form 10-K, into
the Company's previously filed Registration Statements on Forms S-3,
Registration No. 33-62318; S-3, Registration No. 33-70086; S-3, Registration No.
33-31768; S-8, Registration No. 33-31769; S-8, Registration No. 33-31770; S-8,
Registration No. 33-43031; S-8, Registration No. 33-04209; and S-8, Registration
No. 333-25415. It should be noted that we have not audited any financial
statements of the Company subsequent to September 30, 1998, or performed any
audit procedures subsequent to the date of our report.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
December 21, 1998
IV-5
<PAGE>
Supplemental Schedule
PROVIDENCE ENERGY CORPORATION Schedule II
-----------------------------
RESERVES FOR THE YEARS ENDED
-----------------------------
SEPTEMBER 30, 1998, SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
--------------------------------------------------------------
(Thousands of Dollars)
<TABLE>
<CAPTION>
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/97 to Operations Add (Deduct) Created 9/30/98
------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,811 $ 5,063 $ 47 $ 4,317 $ 2,604
Allowance for lease
receivables -
current 27 - - 1 26
other 48 42 - - 90
------- ------- ------- -------- -------
Total $ 1,886 $ 5,105 $ 47 $ 4,318 $ 2,720
======= ======= ======= ======== =======
Allowance for lease
receivables -
long-term $ 401 $ 72 $ - $ 101 $ 372
======= ======= ======= ======== =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $21,495 $ 820 $ (23) $ - 22,292
------- ------- ------- -------- -------
Unamortized investment
tax credit 2,375 - - 158 2,217
------- ------- ------- -------- --------
Other-
Liability and
damage reserve 621 (21) - 121 479
Other 9,236 549 (961)(A) 520 8,304
------- ------- ------- -------- -------
Total other 9,857 528 (961) 641 8,783
------- ------- ------- -------- -------
Total deferred
credits and
reserves $33,727 $ 1,348 $ (984) $ 799 $33,292
======= ======= ======= ======== =======
</TABLE>
IV-6
<PAGE>
Schedule II (cont'd)
<TABLE>
<CAPTION>
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/96 to Operations Add (Deduct) Created 9/30/97
------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful account $ 3,195 $ 5,200 $ - $ 6,584 $ 1,811
Allowance for lease
receivables -
current 27 1 - 1 27
other 9 94 - 55 48
------- ------- ------- ------- -------
Total $ 3,231 $ 5,295 $ - $ 6,640 $ 1,886
======= ======= ======= ======= =======
Allowance for lease
receivables -
long-term $ 403 $ 138 $ - $ 140 $ 401
======= ======= ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $20,713 $ 782 $ - $ - $21,495
------- ------- ------- ------- -------
Unamortized investment
tax credit 2,533 - - 158 2,375
------- ------- ------- ------- -------
Other-
Liability and
damage reserve 561 281 - 221 621
Other 7,583 1,265 925(B) 537 9,236
------- ------- ------- ------- --------
Total other 8,144 1,546 925 758 9,857
------- ------- ------- ------- --------
Total deferred
credits and
reserves $31,390 $ 2,328 $ 925 $ 916 $33,727
======= ======= ======= ======= =======
</TABLE>
IV-7
<PAGE>
Schedule II (cont'd)
<TABLE>
<CAPTION>
Charge
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/95 to Operations Add (Deduct) Created 9/30/96
------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,995 $ 5,078 $ - $3,878 $ 3,195
Allowance for lease
receivables -
current 337 3 - 313 27
other 80 17 - 88 9
-------- ------ -------- ------ --------
Total $ 2,412 $5,098 $ - $4,279 $ 3,231
======== ====== ======== ====== ========
Allowance for lease
receivables -
long-term $ 651 $ 1,179 $ - $1,427 $ 403
======== ======= ======== ====== ========
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes
$ 18,734 $ 1,943 $ 36(C) $ - $20,713
Unamortized investment -------- ------- -------- ------ -------
tax credit 2,691 - - 158 2,533
Other- -------- ------- -------- ------ --------
Liability and
damage reserve
Other 334 520 - 293 561
5,307 1,303 1,742(B) 769 7,583
Total other -------- -------- -------- ------ --------
5,641 1,823 1,742 1,062 8,144
Total deferred -------- -------- -------- ------ --------
credits and
reserves $ 27,066 $ 3,766 $ 1,778 $1,220 $ 31,390
======== ======= ======== ====== ========
</TABLE>
(A) Principally an adjustment to the regulatory pension liability.
(B) Principally an accrual for environmental investigation and remediation
costs in addition to an adjustment to the regulatory pension liability.
(C) Represents adjustments to the regulatory asset and liability for
SFAS No. 109 activity.
IV-8
<PAGE>
INCORPORATION BY REFERENCE INTO REGISTRATION STATEMENTS ON FORM S-8
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
Registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into Part II of Registrant's Registration Statements on Form S-8
Nos. 33-31769, 33-31770, 33-43031, 33-04209, and 333-25415.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the Securities being registered, the Registrant will, unless in
the opinion of its counsel that matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act,
will be governed by the final adjudication of such issue.
IV-9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE ENERGY CORPORATION
By /s/JAMES H. DODGE
----------------------------------------
James H. Dodge, Chairman,
President and CEO
Date December 22, 1998
----------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/JAMES H. DODGE Chairman, President and CEO 12/22/98
- ------------------------ --------
James H. Dodge (Principal Executive Officer)
/s/GARY S. GILLHEENEY Senior Vice President, Chief 12/22/98
- ------------------------ --------
Gary S. Gillheeney Financial Officer, Treasurer
and Assistant Secretary
/s/GILBERT R. BODELL, JR. Director 12/22/98
- ------------------------ --------
Gilbert R. Bodell, Jr.
/s/JOHN H. HOWLAND Director 12/22/98
- ------------------------ --------
John H. Howland
/s/DOUGLAS H. JOHNSON Director 12/22/98
- ------------------------ --------
Douglas H. Johnson
/s/WILLIAM KREYKES Director 12/22/98
- ------------------------ --------
William Kreykes
/s/PAUL F. LEVY Director 12/22/98
- ------------------------ --------
Paul F. Levy
/s/ROMOLO A. MARSELLA Director 12/22/98
- ------------------------ --------
Romolo A. Marsella
/s/M. ANNE SZOSTAK Director 12/22/98
- ------------------------ --------
M. Anne Szostak
/s/KENNETH W. WASHBURN Director 12/22/98
- ------------------------ --------
Kenneth W. Washburn
/s/W. EDWARD WOOD Director 12/22/98
- ------------------------ --------
W. Edward Wood
IV-10
<PAGE>
Exhibit 10.6
CONTENTS
PAGE
- ------------------------------------------------------
Section 1. Term of Employment 1
Section 2. Position and Responsibilities 2
Section 3. Standard of Care 2
Section 4. Compensation 3
Section 5. Expenses 5
Section 6. Employment Terminations 5
Section 7. Change in Control 10
Section 8. Confidentiality and Noncompetition 13
Section 9. Indemnification 14
Section 10. Outplacement Assistance 14
Section 11. Assignment 15
Section 12. Dispute Resolution and Notice 15
Section 13. Miscellaneous 16
Section 14. Governing Law 16
<PAGE>
PROVIDENCE ENERGY CORPORATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of this
23rd day of July, 1998 (hereinafter referred to as the "Effective Date"), by
and between Providence Energy Corporation, together with its subsidiaries and
affiliates (hereinafter referred to as the "Company"), a Rhode Island
corporation having its principal offices at Providence Rhode Island and
JAMES A. GRASSO (hereinafter referred to as the "Executive").
WHEREAS, the Executive is presently employed by the Company in the capacity of
VICE PRESIDENT OF THE COMPANY;
WHEREAS, the Executive possesses considerable experience and an intimate
knowledge of the business and affairs of the Company, its policies, methods,
personnel, and operations; and
WHEREAS, the Company recognizes that the Executive's contribution has been
substantial and meritorious and, as such, the Executive has demonstrated unique
qualifications to act in an executive capacity for the Company; and
WHEREAS, the Company is desirous of assuring the continued employment of the
Executive in the above stated capacity, and Executive is desirous of having such
assurance.
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and
agreements of the parties set forth in this Agreement, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
SECTION 1. TERM OF EMPLOYMENT
The Company hereby agrees to employ the Executive and the Executive hereby
agrees to continue to serve the Company, in accordance with the terms and
conditions set forth herein, for an initial period of one (1) year, commencing
as of the Effective Date of this Agreement, as indicated above; subject,
however, to earlier termination as expressly provided in Section 6 herein.
The initial one (1) year period of employment automatically shall be extended
for one (1) additional year at the end of the initial one (1) year term, and
then again after each successive year thereafter. However, either party may
terminate this Agreement at the end of the initial one (1) year period, or at
the end of any successive year thereafter, by giving the other party written
notice of intent not to renew, delivered at least ninety (90) calendar days
prior to the end of such initial period or successive term.
1
<PAGE>
In the event such notice of intent not to renew is properly delivered by the
Company, this Agreement, along with all corresponding rights, duties, and
covenants, shall automatically expire at the end of the initial period or
successive term then in progress, with the exception of the provisions contained
in Section 8 herein (which shall survive such expiration). However, upon the
effective date of the expiration, the Company shall provide to the Executive a
continuation of his Base Salary (at the rate then in effect, as provided in
Paragraph 4.1 herein) for a period of twelve (12) months, paid in equal monthly
installments in accordance with the normal payroll practices of the Company. The
Company also shall provide to the Executive all benefits to which the Executive
has a vested right to at that time including, but not limited to, the retirement
benefits described in Paragraph 4.4 herein, and the retiree medical insurance
benefits described in Paragraph 4.6 herein.
However, regardless of the above, if at any time during the initial period of
employment, or successive term, a Change in Control of the Company occurs (as
defined in Section 7 herein), then this Agreement shall become immediately
irrevocable for the longer of: (a) one (1) year beyond the month in which the
effective date of such Change in Control occurs; or (b) until all obligations of
the Company hereunder have been fulfilled, and until all benefits provided
hereunder have been paid.
SECTION 2. POSITION AND RESPONSIBILITIES
During the term of this Agreement, the Executive agrees to serve as Vice
President of the Company. In his capacity as Vice President, the Executive shall
maintain the level of duties and responsibilities as in effect as of the
Effective Date, or such higher level of duties and responsibilities as he may be
assigned during the term of this Agreement. The Executive shall have the same
status, privileges, and responsibilities normally inherent in such capacities in
corporations of similar size and character.
SECTION 3. STANDARD OF CARE
During the term of this Agreement, the Executive agrees to devote substantially
his full time, attention, and energies to the Company's business and shall not
be engaged in any other business activity, whether or not such business activity
is pursued for gain, profit, or other pecuniary advantage. However, subject to
Section 8 herein, the Executive may serve as a director of other companies so
long as such service is not injurious to the Company. The Executive covenants,
warrants, and represents that he shall:
(a) Devote his full and best efforts to the fulfillment of his employment
obligations; and
(b) Exercise the highest degree of loyalty and the highest standards of conduct
in the performance of his duties.
2
<PAGE>
This Section 3 shall not be construed as preventing the Executive from investing
assets in such form or manner as will not require his services in the daily
operations of the affairs of the companies in which such investments are made.
SECTION 4. COMPENSATION
As remuneration for all services to be rendered by the Executive during the term
of this Agreement, and as consideration for complying with the covenants herein,
the Company shall pay and provide to the Executive the following:
4.1 BASE SALARY. The Company shall pay the Executive a Base Salary in an amount
which shall be established from time to time by the Board of Directors of the
Company or the Board's designee provided, however, that such Base Salary shall
not be less than $ 134,000.00 per year. This Base Salary shall be paid to the
Executive in equal monthly installments throughout the year, consistent with the
normal payroll practices of the Company.
The annual Base Salary shall be reviewed at least annually following the
Effective Date of this Agreement, while this Agreement is in force, to ascertain
whether, in the judgment of the Board or the Board's designee, such Base Salary
should be increased, based primarily on the performance of the Executive during
the year and on the then current rate of inflation. If so increased, the Base
Salary as stated above shall, likewise, be increased for all purposes of this
Agreement.
4.2 ANNUAL CASH INCENTIVE COMPENSATION. The Company shall provide the Executive
with the opportunity to earn an annual cash incentive compensation payment, at a
level which is in accordance with the provisions of the Performance and Equity
Incentive Plan or any such successor plan, and which is commensurate with the
opportunity typically offered to executives having the same or similar duties
and responsibilities as the Executive at companies similar in size and character
to the Company.
Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing and/or amending the Performance and Equity Incentive Plan
so long as such changes are similarly applicable to all executives generally.
4.3 LONG-TERM INCENTIVES. The Company shall provide the Executive the
opportunity to earn a long-term incentive award, at a level which is in
accordance with the provisions of the Performance and Equity Incentive Plan or
any such successor plan, and which is commensurate with the opportunity
typically offered to executives having the same or similar duties and
responsibilities as the Executive at companies similar in size and in character
to the Company.
3
<PAGE>
Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing,and/or amending the Performance and Equity Incentive Plan,
so long as such changes are similarly applicable to all executives generally.
4.4 RETIREMENT BENEFITS. The Company shall provide to the Executive
participation in all Company qualified defined benefit and defined contribution
retirement plans, subject to the eligibility and participation requirements of
such plans. In addition, the Company shall provide to the Executive
participation in the Supplemental Retirement Plan and all other nonqualified
retirement programs typically offered to executives having the same or similar
duties and responsibilities at the Company.
Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing, and/or amending the nonqualified retirement programs, so
long as such changes are similarly applicable to all executives generally.
4.5 EMPLOYEE BENEFITS. During the term of this Agreement, and as otherwise
provided within the provisions of each of the respective plans, the Company
shall provide to the Executive all benefits to which other executives and
employees of the Company are entitled to receive, as commensurate with the
Executive's position. Such benefits shall include, but not be limited to, group
term life insurance, whole life insurance, comprehensive health and major
medical insurance, dental insurance, vision insurance, and short-term and long-
term disability.
The Executive shall be entitled to paid vacation in accordance with the standard
written policy of the Company with regard to vacations of employees. The
Executive shall likewise participate in any additional benefit as may be
established during the term of this Agreement, by standard written policy of the
Company.
4.6 PERQUISITES. The Company shall provide to the Executive, at the Company's
cost, all perquisites to which other executives of the Company are entitled to
receive and such other perquisites which are suitable to the character of
Executive's position with the Company and adequate for the performance of his
duties hereunder.
4.7 RIGHT TO CHANGE PLANS. By reason of Paragraphs 4.5, and 4.6 herein, the
Company shall not be obligated to institute, maintain, or refrain from changing,
amending, or discontinuing any benefit plan, program, or perquisite, so long as
such changes are similarly applicable to executive employees generally.
4.8 DEFERRALS. The Company may permit the Executive to defer the Executive's
receipt of the payment of up to one hundred (100%) percent of the cash component
of the Executive's Annual Incentive Compensation. If any such deferral election
is permitted, the Company shall, in its sole discretion, establish rules and
procedures for such payment deferrals.
4
<PAGE>
SECTION 5. EXPENSES
The Company shall pay, or reimburse the Executive, for all ordinary and
necessary expenses, in a reasonable amount, which the Executive incurs in
performing his duties under this Agreement including, but not limited to,
travel, entertainment, professional dues and subscriptions, and all dues, fees,
and expenses associated with membership in various professional, business, and
civic associations and societies of which the Executive's participation is in
the best interest of the Company.
SECTION 6. EMPLOYMENT TERMINATIONS
6.1 TERMINATION DUE TO RETIREMENT. In the event the Executive's employment is
terminated, while this Agreement is in force, by reason of Retirement (as
defined under the then established rules of the Company's tax-qualified
retirement plan), the Executive's benefits shall be determined in accordance
with the Company's retirement, survivor's benefits, insurance, and other
applicable programs of the Company then in effect.
Upon the effective date of such termination, the Company's obligation to pay and
provide to the Executive Base Salary, Annual Cash Incentive Compensation and
Long-Term Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3 herein,
respectively), shall immediately expire. However, the Executive shall receive a
pro rata portion of the total annual incentive compensation (both cash and long-
term), calculated at target, to which he would be entitled during the year in
which he retires, and shall receive all rights and benefits that he is vested
in, pursuant to other plans and programs of the Company including, but not
limited to, the retirement benefits as described in Paragraph 4.4 herein.
6.2 TERMINATION DUE TO DEATH. In the event of the death of the Executive during
the term of this Agreement, or during any period of Disability during which he
is receiving compensation pursuant to Paragraph 6.3 herein, the Company shall
pay to the Executive's surviving spouse, or other beneficiary as so designated
by the Executive during his lifetime, or to the Executive's estate, as
appropriate, all benefits to which the Executive had a vested right to pursuant
to this Agreement.
6.3 TERMINATION DUE TO DISABILITY. In the event that the Executive becomes
Disabled during the term of this Agreement and is, therefore, unable to perform
his duties herein for a period of more than ninety (90) calendar days in the
aggregate, during any period of twelve (12) consecutive months, or in the event
of the Board's reasonable expectation that the Executive's Disability will exist
for more than a period of ninety (90) calendar days, the Company shall have the
right to terminate the Executive's active employment as provided in this
Agreement. However, the Board shall deliver written notice to the Executive of
the Company's intent to terminate for Disability at least thirty (30) calendar
days prior to the effective date of such termination.
5
<PAGE>
A termination for Disability shall become effective upon the end of the thirty
(30) day notice period. Upon such effective date, the Company's obligation to
pay and provide to the Executive Base Salary, Annual Bonus, and Long-Term
Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3, respectively), shall
immediately expire. However, the Executive shall receive a pro rata portion of
the total annual incentive compensation (both cash and long-term), calculated at
target, to which he would be entitled during the year in which disability occurs
and shall receive all rights and benefits that he is vested in, pursuant to
other plans and programs of the Company, including, but not limited to, short-
and long-term disability benefits, and retirement benefits as described in
Paragraph 4.4.
The term "Disability" shall mean, for all purposes of this Agreement, the
incapacity of the Executive, due to injury, illness, disease, or bodily or
mental infirmity, to engage in the performance of substantially all of the usual
duties of employment with the Company as contemplated by Section 2 herein, such
Disability to be determined by the Board of Directors of the Company upon
receipt and in reliance on competent medical advice from one or more
individuals, selected by the Board, who are qualified to give such professional
medical advice.
If the Executive and the Company shall not be in agreement as to whether the
Executive has suffered a Disability for the purposes of this Agreement, the
matter shall be referred to a panel of three medical doctors, one of which shall
be selected by the Executive, one of which shall be selected by the Company, and
one of which shall be selected by the two doctors as so selected, and the
decision of a majority of the panel with respect to the question of whether the
Executive has suffered a Disability shall be binding upon the Executive and the
Company. The expenses of any such referral shall be borne by the party against
whom the decision of the panel is rendered. The Executive may be required by the
Company to submit to medical examination at any time during the period of his
employment hereunder, but not more often than quarter-annually, to determine
whether a Disability exists for the purposes of this Agreement.
It is expressly understood that the Disability of the Executive for a period of
ninety (90) calendar days or less in the aggregate during any period of twelve
(12) consecutive months, in the absence of any reasonable expectation that his
Disability will exist for more than such a period of time, shall not constitute
a failure by him to perform his duties hereunder and shall not be deemed a
breach or default and the Executive shall receive full compensation for any such
period of Disability or for any other temporary illness or incapacity during the
term of this Agreement.
6.4 VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may terminate this
Agreement at any time by giving the Board of Directors of the Company written
notice of intent to terminate, delivered at least thirty (30) calendar days
prior to the effective date of such termination (such period not to include
vacation). The termination automatically shall become effective upon the
expiration of the thirty (30) day notice period.
6
<PAGE>
Upon the effective date of such termination, the Company shall pay to the
Executive his full Base Salary, at the rate then in effect as provided in
Paragraph 4.1 herein, through the effective date of termination, plus all other
benefits to which the Executive has a vested right to at that time including,
but not limited to, accrued vacation pay. The Company also shall provide to the
Executive the vested retirement benefits described in Paragraph 4.4 herein. With
the exception of the covenants contained in Sections 8.1, 8.3 and 8.4 herein
(which shall survive such termination), the Company and the Executive thereafter
shall have no further obligations under this Agreement.
6.5 INVOLUNTARY TERMINATION BY THE COMPANY WITHOUT CAUSE. At all times prior to
six (6) full calendar months before the effective date of a Change in Control
(as defined in Section 7.2), or at any time more than two (2) years after the
effective date of a Change in Control (as defined in Section 7.2), the Board may
terminate the Executive's employment, as provided under this Agreement, at any
time, for reasons other than death, Disability, Retirement, or for Cause, by
notifying the Executive in writing of the Company's intent to terminate, at
least thirty (30) calendar days prior to the effective date of such termination.
Upon the effective date of such termination, following the expiration of the
thirty (30) day notice period, the Company shall pay to the Executive in twelve
(12) equal monthly installments an amount equal to the Executive's annual Base
Salary then in effect. Additionally, the Company shall continue to provide the
Executive with health and welfare benefits for the twelve (12) month time
period.
In the event that, during the twelve (12) month period following the effective
date of termination, the Executive becomes employed at the same or greater
annual Base Salary than that which was in effect during the year in which
termination occurred, the Company's obligation to make payments under this
Section will immediately cease upon the date of the Executive's subsequent
employment. In the event that, during the twelve (12) month period following
the effective date of termination, the Executive becomes employed at a lesser
annual Base Salary than that which was in effect during the year in which
termination occurred, then upon the date of the Executive's re-employment, the
Company's obligation to make payments under this section will be limited to a
monthly amount reflecting the difference between the Executive's Base Salary at
the date of re-employment and the Executive's Base Salary during the year in
which termination occurred. The continuation of health and welfare benefits
shall be discontinued prior to the end of the twelve (12) month period in the
event the Executive has available substantially similar benefits from a
subsequent employer.
Further, the Company shall pay the Executive all other benefits to which the
Executive has a vested right at the time, according to the provisions of the
governing plan or program. With the exceptions of the covenants contained in
Section 8 herein (which shall survive such termination) the Company and the
Executive thereafter shall have no further obligations under this Agreement.
7
<PAGE>
If the Executive's employment is terminated for any of the reasons set forth in
Section 7.1 herein, the Executive shall be entitled to receive the benefits
provided in Section 7.1 herein in lieu of the benefits set forth in this Section
6.5.
6.6 TERMINATION FOR CAUSE. Nothing in this Agreement shall be construed to
prevent the Board from terminating the Executive's employment under this
Agreement for "Cause." Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the unanimous
vote of the entire membership of the Board at a meeting of such Board duly
called and held for that purpose (after reasonable notice to the Executive and
an opportunity for the Executive, together with the Executive's counsel, to be
heard by the Board) finding that in the good faith opinion of the Board that the
Executive was guilty of conduct set forth in the second paragraph of this
Section 6.6 and specifying the particulars thereof in detail. In the event the
Board determines that Cause exists, the Board shall deliver written notice to
the Executive of the facts and circumstances leading to the Board's
determination. Upon receipt of this written notification, all provisions of this
Agreement shall terminate, except for the confidentiality and noncompete
provisions of Section 8 herein (which shall survive such termination). The
Company shall pay the Executive his full Base Salary and accrued vacation time
through the date notice of a for Cause termination is delivered to the
Executive, plus all other benefits to which the Executive has a vested right to
at that time. The Company and the Executive thereafter shall have no further
obligations under this Agreement other than the Executive's obligations under
Section 8 hereof.
"Cause" shall be determined by the Board in the exercise of good faith and
reasonable judgment; and shall mean the willful misconduct, fraud, conviction of
a felony, consistent gross neglect of duties, or wanton negligence by the
Executive in the performance of his duties hereunder, or the material breach by
the Executive of the terms of this Agreement.
6.7 TERMINATION FOR GOOD REASON. At any time during the six (6) full calendar
month period prior to the effective date of a Change in Control (as defined in
Section 7.2) or the twenty four (24) month period following the effective date
of a Change in Control (as defined in Section 7.2), the Executive may terminate
this Agreement for Good Reason (as defined below) by giving the Board of
Directors of the Company thirty (30) calendar days written notice of intent to
terminate, which notice sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for such termination.
Upon the expiration of the thirty (30) day notice period, the Good Reason
termination shall become effective, and the Company shall pay and provide to the
Executive the benefits set forth in Section 7.1 herein.
Good Reason shall mean, without the Executive's express written consent, the
occurrence of any one or more of the following:
8
<PAGE>
(a) The assignment of the Executive to duties materially inconsistent with the
Executive's authorities, duties, responsibilities, and status as an officer
of the Company, or a reduction or alteration in the nature or status of the
Executive's authorities, duties, or responsibilities from those in effect
during the immediately preceding fiscal year;
(b) The Company's requiring the Executive to be based at a location which is at
least fifty (50) miles further from the Executive's current primary
residence than is such residence from the Company's current headquarters,
except for required travel on the Company's business to an extent
substantially consistent with the Executive's business obligations as of
the Effective Date;
(c) A reduction by the Company in the Executive's Base Salary as in effect on
the Effective Date, as provided in Section 4.1 herein, or as the same
shall be increased from time to time;
(d) A material reduction in the Executive's level of participation in any of
the Company's short- and/or long-term incentive compensation plans, or
employee benefit or retirement plans, policies, practices, or arrangements
in which the Executive participates as of the Effective Date; provided,
however, that reductions in the levels of participation in any such plans
shall not be deemed to be "Good Reason" if the Executive's reduced level of
participation in each such program remains substantially consistent with
the average level of participation of other executives who have positions
commensurate with the Executive's position; or
(e) The failure of the Company to obtain a satisfactory agreement from any
successor to the Company to assume and agree to perform this Agreement, as
contemplated in Section 11.1 herein.
Upon a termination for Good Reason within the six (6) full calendar month period
prior to the effective date of a Change in Control, or within the twenty-four
(24) months following the effective date of a Change in Control, the Executive
shall be entitled to receive the payments and benefits set forth in Section 7.1
herein.
The Executive's right to terminate employment for Good Reason shall not be
affected by the Executive's incapacity due to physical or mental illness. The
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstance constituting Good Reason herein.
9
<PAGE>
SECTION 7. CHANGE IN CONTROL
7.1 EMPLOYMENT TERMINATIONS IN CONNECTION WITH A CHANGE IN CONTROL. In the
event of a Qualifying Termination (as defined below) within six (6) full
calendar months prior to the effective date of a Change in Control, or within
twenty-four (24) months following the effective date of a Change in Control,
then in lieu of all other benefits provided to the Executive under the
provisions of this Agreement, the Company shall pay to the Executive in a lump
sum payment and provide him with the following severance benefits (hereinafter
referred to as the "Severance Benefits"):
(a) An amount equal to two (2) times the highest rate of the Executive's
annualized Base Salary rate in effect at any time up to and including the
effective date of termination;
(b) An amount equal to two (2) times the Executive's target incentive award
(both cash and long-term) established for the fiscal year in which the
Executive's effective date of termination occurs;
(c) An amount equal to the Executive's unpaid Base Salary and accrued vacation
pay through the effective date of termination;
(d) An amount equal to the Executive's unpaid targeted annual bonus,
established for the plan year in which the Executive's effective date of
termination occurs, multiplied by a fraction, the numerator of which is the
number of completed days in the then-existing fiscal year through the
effective date of termination, and the denominator of which is three
hundred sixty-five (365);
(e) A continuation of the welfare benefits of medical insurance, dental
insurance, and group term life insurance for two (2) full years after the
effective date of termination. These benefits shall be provided to the
Executive at the same premium cost, and at the same coverage level, as in
effect as of the Executive's effective date of termination. However, in the
event the premium cost and/or level of coverage shall change for all
employees of the Company, the cost and/or coverage level, likewise, shall
change for the Executive in a corresponding manner.
The continuation of these welfare benefits shall be discontinued prior to
the end of the two (2) year period in the event the Executive has available
substantially similar benefits from a subsequent employer, as determined by
the Company's Board of Directors or the Board's designee.
10
<PAGE>
(f) A lump-sum cash payment of the actuarial present value equivalent of the
aggregate benefits accrued by the Executive as of the effective date of
termination under the terms of any and all supplemental retirement plans in
which the Executive participates. For purposes of determining "final
average pay" under such programs, the Executive's actual pay history as of
the effective date of termination shall be used.
For purposes of this Section 7, a Qualifying Termination shall mean any
termination of the Executive's employment OTHER THAN: (1) by the Company for
Cause (as provided in Section 6.6 herein); (2) by reason of death, Disability
(as provided in Section 6.2 herein), or Retirement (as such term is then defined
in the Company's tax qualified defined benefit retirement plan; [provided that a
termination which qualifies as a Retirement and which would otherwise qualify as
a termination for Good Reason under Section 6.7 herein will be deemed to be a
Qualifying Termination]).
7.2 DEFINITION OF "CHANGE IN CONTROL." A Change in Control of the Company shall
be deemed to have occurred as of the first day any one or more of the following
conditions shall have been satisfied:
(a) Any individual, corporation (other than the Company), partnership, trust,
association, pool, syndicate, or any other entity or any group of persons
acting in concert becomes the beneficial owner, as that concept is defined
in Rule 13d-3 promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, of securities of the Company
possessing twenty percent (20%) or more of the voting power for the
election of directors of the Company;
(b) There shall be consummated any consolidation, merger, or other business
combination involving the Company or the securities of the Company in which
holders of voting securities of the Company immediately prior to such
consummation own, as a group, immediately after such consummation, voting
securities of the Company (or, if the Company does not survive such
transaction, voting securities of the corporation surviving such
transaction) having less than sixty percent (60%) of the total voting power
in an election of directors of the Company (or such other surviving
corporation);
(c) During any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the directors of the Company cease for
any reason to constitute at least a majority thereof unless the election,
or the nomination for election by the Company's shareholders, of each new
director of the Company was approved by a vote of at least two-thirds (2/3)
of the directors of the Company then still in office who were directors of
the Company at the beginning of any such period; or
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(d) There shall be consummated any sale, lease, exchange, or other transfer (in
one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company (on a consolidated basis)
to a party which is not controlled by or under common control with the
Company.
7.3 EXCISE TAX EQUALIZATION PAYMENT. In the event that the Executive becomes
entitled to Severance Benefits or any other payment or benefit under this Plan,
or under any other agreement with or plan of the Company (in the aggregate, the
"Total Payments"), if any of the Total Payments will be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may
hereafter be imposed), the Company shall pay to the Executive in cash an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the Executive after deduction of any Excise Tax upon the Total Payments and any
Federal, state and local income tax and Excise Tax upon the Gross-Up Payment
provided for by this Section 7.3 (including FICA and FUTA), shall be equal to
the Total Payments. Such payment shall be made by the Company to the Executive
as soon as practical following the effective date of termination, but in no
event beyond thirty (30) days from such date.
7.4 TAX COMPUTATION. For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amounts of such Excise Tax:
(a) Any other payments or benefits received or to be received by the Executive
in connection with a Change in Control of the Company or the Executive's
termination of employment (whether pursuant to the terms of this Plan or
any other plan, arrangement, or agreement with the Company, or with any
person (which shall have the meaning set forth in Section 3(a)(9) of the
Securities Exchange Act of 1934, including a "group" as defined in Section
13(d) therein) whose actions result in a Change in Control of the Company
or any person affiliated with the Company or such persons) shall be treated
as "parachute payments" within the meaning of Section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of Section
280G(b)(1) shall be treated as subject to the Excise Tax, unless in the
opinion of tax counsel as supported by the Company's independent auditors
and acceptable to the Executive, such other payments or benefits (in whole
or in part) do not constitute parachute payments, or unless such excess
parachute payments (in whole or in part) represent reasonable compensation
for services actually rendered within the meaning of Section 280G(b)(4) of
the Code in excess of the base amount within the meaning of Section
280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax;
(b) The amount of the Total Payments which shall be treated as subject to the
Excise Tax shall be equal to the lesser of: (i) the total amount of the
Total Payments; or (ii) the amount of excess parachute payments within the
meaning of Section 280G(b)(1) (after applying clause (a) above); and
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(c) The value of any noncash benefits or any deferred payment or benefit shall
be determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment, the Executive
shall be deemed to pay federal income taxes at the highest marginal rate of
Federal income taxation in the calendar year in which the Gross-Up Payment is to
be made, and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Executive's residence on the effective
date of termination, net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local taxes.
7.5 SUBSEQUENT RECALCULATION. In the event the Internal Revenue Service adjusts
the computation of the Company under Section 7.4 herein so that the Executive
did not receive the greatest net benefit, the Company shall reimburse the
Executive for the full amount necessary to make the Executive whole, plus a
market rate of interest, as determined by the Committee.
7.6 PAYMENT OF LEGAL FEES. To the extent permitted by law, the Company shall
pay all legal fees, costs of litigation, prejudgment interest, and other
expenses incurred in good faith by the Executive as a result of the Company's
refusal to provide the severance benefits under this Section 7 to which the
Executive becomes entitled under this Agreement, or as a result of the Company's
contesting the validity, enforceability, or interpretation of this Agreement, or
as a result of any conflict (including conflicts related to the calculation of
parachute payments) between the parties pertaining to this Agreement.
SECTION 8. CONFIDENTIALITY AND NONCOMPETITION
8.1 CONFIDENTIALITY. During the term of this Agreement and thereafter in
perpetuity, the Executive will not directly or indirectly divulge or appropriate
to his own use, or to the use of any third party, and "trade secrets" (as
defined in Section 8.3), other secret or confidential information, knowledge or
financial information of the Company or any of the Company's subsidiaries or
affiliates (hereinafter, the Company and its subsidiaries and affiliates shall
be collectively referred to as the "Company Group"), except as may be in the
public domain other than by violation of this Agreement.
8.2 NONCOMPETITION. From the date hereof until two (2) years after the
termination of his employment hereunder, the Executive will not (i) directly or
indirectly own any equity or proprietary interest in (except for ownership of
shares in a publicly traded company not exceeding five percent (5%) of any class
of outstanding securities), or be an employee, agent, director, advisor, or
consultant to or for any corporation (other than the Company Group), business
enterprise or any person engaged anywhere in the State of Rhode Island or the
Commonwealth of Massachusetts, whether on his own behalf or on behalf of any
person other than the Company Group, in the manufacture, procuring, sale,
marketing, promotion or
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distribution of any product or product lines functioning competitively with any
product or product lines of the Company Group during the term of this Agreement,
and the Executive will not assist in, manage or supervise any of the foregone
activities; (ii) undertake any action to induce or cause any customer or client
of the Company Group to discontinue any part of its business with the Company
Group; (iii) cause, induce or in any way facilitate the employment by any other
persons or organization of any employee of or consultant to the Company Group,
provided, that this covenant shall become operative only upon the termination of
the Executive's employment; or (iv) take or assist directly or indirectly in the
taking, by acting as consultant to a third party or otherwise of any position on
any matter involving the Company and pending before any state or other public
agency, when such position is adverse to the position being promoted before such
agency at the time by the Company.
8.3 TRADE SECRETS. "Trade Secrets" as used herein means all secret discoveries,
invention, formulae, designs, methods, processes, techniques of production and
know-how relating to the Company Group's business. "Confidential Information" as
used herein means the Company Group's internal policies and procedures,
suppliers, customers, financial information and marketing practices, as well as
secret discoveries, inventions, formulae, designs, techniques of production,
know-how and other information relating to the Company Group's business not
rising to the level of a trade secret under applicable law.
8.4 The breach by the Executive of any of the covenants continued in this
Paragraph 8 shall relieve the company of all further payment obligation under
Paragraph 6 or Paragraph 7.
SECTION 9. INDEMNIFICATION
The Company hereby covenants and agrees to indemnify and hold harmless the
Executive fully, completely, and absolutely against and in respect to any and
all actions, suits, proceedings, claims, demands, judgments, costs, expenses
(including attorney's fees), losses, and damages resulting from the Executive's
good faith performance of his duties and obligations under the terms of this
Agreement.
SECTION 10. OUTPLACEMENT ASSISTANCE
Following a termination of the Executive's employment as described in Sections
6.5, 6.7, or 7.1 herein, the Executive shall be reimbursed by the Company for
the costs of all outplacement services obtained by the Executive within the one
(1) year (for termination pursuant to Section 6.5) and two (2) year (for
terminations pursuant to Section 6.7 or 7.1) periods after the effective date of
termination; provided, however, that the total reimbursement shall be limited to
an amount equal to fifteen percent (15%) of the Executive's Base Salary as of
the effective date of termination.
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SECTION 11. ASSIGNMENT
11.1 ASSIGNMENT BY COMPANY. This Agreement may and shall be assigned or
transferred to, and shall be binding upon and shall inure to the benefit of, any
successor of the Company, and any such successor shall be deemed substituted for
all purposes of the "Company" under the terms of this Agreement. As used in this
Agreement, the term "successor" shall mean any person, firm, corporation, or
business entity which at any time, whether by merger, purchase, or otherwise,
acquires all or essentially all of the assets of business of the Company.
Notwithstanding such assignment, the Company shall remain, with such successor,
jointly and severally liable for all its obligations hereunder.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall immediately
entitle the Executive to compensation from the Company in the same amount and on
the same terms as the Executive would be entitled in the event of an involuntary
termination by the Company, as provided in Paragraph 6.6 herein.
Except as herein provided, this Agreement may not otherwise be assigned by the
Company.
11.2 ASSIGNMENT BY EXECUTIVE. This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives, executors,
and administrators, successors, heirs, distributees, devisees, and legatees. If
the Executive should die while any amounts payable to the Executive hereunder
remain outstanding, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee, or other designee or, in the absence of such designee, to the
Executive's estate.
SECTION 12. DISPUTE RESOLUTION AND NOTICE
12.1 ARBITRATION. Any dispute or controversy arising under or in connection with
this Agreement shall be settled by arbitration, conducted before a panel of
three (3) arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of his employment ith the Company, in
accordance with the rules of the American Arbitration Association then in
effect.
Judgment may be entered on the award of the arbitrator in any court having
proper jurisdiction. All expenses of such arbitration, including the fees and
expenses of the counsel for the Executive, shall be borne by the Company.
12.2 NOTICE. Any notices, requests, demands, or other communications provided
for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing with the Company or, in the case of the Company, at its principal
offices.
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SECTION 13. MISCELLANEOUS
13.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
13.2 ENTIRE AGREEMENT. This Agreement supersedes any prior agreements or
understandings, oral or written, between the parties hereto or between the
Executive and the Company, with respect to the subject matter hereof and
constitutes the entire Agreement of the parties with respect thereto.
13.3 MODIFICATION. This Agreement shall not be varied, altered, modified,
canceled, changed, or in any way amended except by mutual agreement of the
parties in a written instrument executed by the parties hereto or their legal
representatives.
13.4 SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
13.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same Agreement.
13.6 TAX WITHHOLDING. The Company may withhold from any benefits payable under
this Agreement all federal, state, city, or other taxes as may be required
pursuant to any law or governmental regulation or ruling.
13.7 BENEFICIARIES. The Executive may designate one or more persons or
entities as the primary and/or contingent beneficiaries of any amounts to be
received under this Agreement. Such designation must be in the form of a signed
writing acceptable to the Board or the Board's designee. The Executive may make
or change such designation at any time.
SECTION 14. GOVERNING LAW
To the extent not preempted by federal law, the provisions of this Agreement
shall be construed and enforced in accordance with the laws of the state of
Rhode Island.
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IN WITNESS WHEREOF, the Executive and the Company (pursuant to a resolution
adopted at a duly constituted meeting of its Board of Directors) have executed
this Agreement, as of the day and year first above written.
Executive:
/s/ James A. Grasso
------------------------------------
ATTEST Providence Energy Corporation
By: /s/ Susann G. Mark By: /s/ James H. Dodge
------------------- --------------------
Corporate Secretary Chairman, President and CEO
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Exhibit 10.13
CONTENTS
Article 1. Establishment, Objectives, and Duration 1
Article 2. Definitions 1
Article 3. Administration 2
Article 4. Eligibility and Participation 3
Article 5. Performance Shares 3
Article 6. Performance Measures and Goals 3
Article 7. Beneficiary Designation 4
Article 8. Deferrals 4
Article 9. Rights of Employees 4
Article 10. Change in Control 5
Article 11. Amendment, Modification, and Termination 5
Article 12. Withholding 5
Article 13. Indemnification 6
Article 14. Successors 6
Article 15. Legal Construction 6
<PAGE>
PROVIDENCE ENERGY CORPORATION
PERFORMANCE SHARE PLAN
ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND DURATION
1.1. ESTABLISHMENT OF THE PLAN. Providence Energy Corporation (the
"Company") hereby establishes an incentive compensation plan to be known as the
"Providence Energy Corporation Performance Share Plan" (hereinafter referred to
as the "Plan"), as set forth in this document. The Plan permits the grant of
Performance Shares.
The Plan shall become effective as of October 1, 1998 (the "Effective Date")
and shall remain in effect as provided in Section 1.3 hereof.
1.2. OBJECTIVES OF THE PLAN. The objectives of the Plan are to provide a
competitive compensation package to the senior executives of the Company, to
further promote stock ownership among top management, and to align executives
with the interests of shareholders through a direct link to total shareholder
return.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of executives who make
significant contributions to the Company's success and to allow executives to
share in the success of the Company.
1.3. DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as
described in Section 1.1 hereof, and shall remain in effect, subject to the
right of the Committee to amend or terminate the Plan at any time pursuant to
Article 11 hereof, until all Awards subject to it shall have been paid out
according to the Plan's provisions, provided that no Awards shall be granted
after September 30, 2003.
1.4. MAXIMUM NUMBER OF SHARES ISSUABLE. The number of Shares issuable by the
Company in payment of Awards granted under the Plan (excluding Shares purchased
by the Company in open market transactions for such purpose) shall not exceed 1
percent of the Company's issued and outstanding Shares on the Effective Date as
to any single Participant or 5 percent of the Company's issued and outstanding
Shares on the Effective Date as to all Participants.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
2.1. "AWARD" means, individually or collectively, a grant under this Plan of
Performance Shares.
2.2. "AWARD AGREEMENT" means an agreement entered into by the Company and
each Participant setting forth the terms and provisions applicable to
Awards granted under this Plan.
2.3. "COMMITTEE" means the Human Resources and Planning Committee of the
Company's Board of Directors or any other committee appointed by the
Board of Directors to administer the Plan, as specified in Article 3
herein.
2.4. "COMPANY" means Providence Energy Corporation, a Rhode Island
corporation having its principal place of business in Providence, Rhode
Island, and any successor thereto as provided in Article 14 herein.
2.5. "DISABILITY" shall have the meaning ascribed to such term in the
Participant's governing long-term disability plan, or if no such plan
exists, at the discretion of the Committee.
2.6. "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Section 1.1 hereof.
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2.7. "EMPLOYEE" means any full-time, active employee of the Company or its
subsidiaries.
2.8. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
2.9. "FAIR MARKET VALUE" shall be determined on the basis of the average
closing sale price on the principal securities exchange on which the
Shares are traded for the five days prior to the end of the Performance
Period.
2.10. "PARTICIPANT" means an Employee who has been selected to receive an
Award or who has an outstanding Award granted under the Plan.
2.11. "PERFORMANCE GOALS" mean the performance goals established in
accordance with Section 6.3 hereof.
2.12. "PERFORMANCE PERIOD" means the period of time during which the
performance goals must be met.
2.13. "PERFORMANCE SHARE" means an Award granted to a Participant, as
described in Article 5 herein.
2.14. "RELATIVE TSR" shall mean the total shareholder return on a Share
(based on share price and dividends paid) relative to the average total
shareholder return for the E.D. Jones Gas Distribution peer group.
2.15. "RETIREMENT" shall have the meaning ascribed to such term in the
Company's tax-qualified retirement plan.
2.16. "SHARE" shall mean a share of the Company's common stock.
2.17. "SHARE PRICE" shall mean the Fair Market Value of a Share as of the
relevant date.
ARTICLE 3. ADMINISTRATION
3.1. THE COMMITTEE. The Plan shall be administered by the Human Resources
and Planning Committee, or by any other committee of not less than two directors
appointed by the Company's Board of Directors to administer the Plan. The
members of the Committee shall be appointed from time to time by, and shall
serve at the discretion of, the Company's Board of Directors. Unless the
Company's Board of Directors shall determine otherwise, in its sole discretion,
all members of the Committee shall be "nonemployee directors" within the meaning
of Rule 16b-3 under the Exchange Act, as such rule may be amended from time to
time.
3.2. AUTHORITY OF THE COMMITTEE. Except as limited by law or by the
organizational documents of the Company, and subject to the provisions herein,
the Committee shall have full power to select Employees who shall participate in
the Plan; determine the sizes and types of Awards; determine the terms and
conditions of Awards in a manner consistent with the Plan; construe and
interpret the Plan and any agreement or instrument entered into under the Plan;
establish, amend, or waive rules and regulations for the Plan's administration;
and (subject to the provisions of Article 15 herein) amend the terms and
conditions of any outstanding Award to the extent such terms and conditions are
within the discretion of the Committee as provided in the Plan. Further, the
Committee shall make all other determinations which may be necessary or
advisable for the administration of the Plan. As permitted by law, the Committee
may delegate its authority as identified herein.
3.3. DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive and binding on all
persons, including the Company, its shareholders, Employees, Participants, and
their estates and beneficiaries.
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ARTICLE 4. ELIGIBILITY AND PARTICIPATION
4.1. ELIGIBILITY. Persons eligible to participate in this Plan are Employees
comprising the senior management of the Company and/or its subsidiaries.
4.2. ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees, based on
the recommendation of the Company's Chief Executive Officer, those to whom
Awards shall be granted and shall determine the nature and amount of each Award.
ARTICLE 5. PERFORMANCE SHARES
5.1. GRANT OF PERFORMANCE SHARES. Subject to the terms of the Plan,
Performance Shares may be granted to Participants in such amounts and upon such
terms, and at any time and from time to time, as shall be determined by the
Committee.
5.2. VALUE OF PERFORMANCE SHARES. Each Performance Share shall have a value
that is equal to the Fair Market Value of a Share. The Committee shall set
performance goals in its discretion which, depending on the extent to which they
are met, will determine the number of Performance Shares that will be paid out
to the Participant. For purposes of this Article 5, each time period during
which the performance goals must be met shall be called a "Performance Period."
5.3. EARNING OF PERFORMANCE SHARES. Subject to the terms of this Plan, after
the applicable Performance Period has ended, the holder of Performance Shares
shall be entitled to receive payout on the number and value of Performance
Shares earned by the Participant over the Performance Period, to be determined
as a function of the extent to which the Performance Goals established in
Article 6 have been achieved, subject to the threshold performance requirement
set forth in Section 6.4.
5.4. FORM AND TIMING OF PAYMENT OF PERFORMANCE SHARES. Subject to the terms
of the Plan, payment of earned Performance Shares shall be made fifty percent
(50%) in cash and fifty percent (50%) in Shares following the close of the
applicable Performance Period. Subject to the terms of this Plan, the Committee
shall pay out the earned Performance Shares within ninety (90) days of the close
of the applicable Performance Period.
5.5 NO ENTITLEMENT TO DIVIDENDS. An Award shall not entitle the Participant
to receive any dividend payments with respect to any dividends that may be paid
on the Shares.
5.6. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
Unless determined otherwise by the Committee and set forth in the Participant's
Award Agreement, in the event the employment of a Participant is terminated by
reason of death, Disability, or Retirement during a Performance Period, the
Participant shall receive a payout of the Performance Shares which is prorated,
as specified by the Committee in its discretion, such payout to be made at a
time specified by the Committee in its sole discretion and set forth in the
Participant's Award Agreement.
5.7. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a
Participant's employment terminates for any reason other than those reasons set
forth in Section 5.5 herein, all Performance Shares shall be forfeited by the
Participant unless determined otherwise by the Committee, as set forth in the
Participant's Award Agreement.
5.8. NONTRANSFERABILITY. Except as otherwise provided in a Participant's
Award Agreement, Performance Shares may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution.
ARTICLE 6. PERFORMANCE MEASURES AND GOALS
6.1 PERFORMANCE MEASURES. The performance measures to be used for purposes of
determining the number of Performance Shares earned at the end of the
Performance Period shall be Relative TSR and Share Price.
6.2 PERFORMANCE PERIOD. The Performance Period for Awards granted under the
Plan shall be three calendar years from the date of grant.
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6.3 Performance Goals. At the end of the Performance Period, the number of
Performance Shares earned shall be based on both Relative TSR and Share Price,
subject to the threshold performance requirement set forth in Section 6.4. The
Committee shall establish Performance Goals and the percent of target metrics
for Awards. The Relative TSR Performance Goals and Share Price Performance Goals
and the performance metrics shall be set forth in the Award Agreement.
6.4 Determination of Performance Shares Earned. The number of Performance
Shares earned for a Performance Period shall be determined based on both the
Relative TSR and Share Price Performance Goals set forth in the Award Agreement
as of the end of Performance Period, subject to the threshold performance
requirement set forth below.
The Committee shall first determine the percent of target Performance Shares
earned for the Performance Period based on each of the Company's Relative TSR
and Share Price Performance Goals set forth in the Award Agreement. Subject to
the threshold performance requirement, the Participant shall earn the greater of
(i) the percent of target Performance Shares earned under the Relative TSR
Performance Goal; or (ii) the percent of target Performance Shares earned under
the Share Price Performance Goal.
Any pay out of Performance Shares for a Performance Period shall be
contingent on the Company achieving a minimum average annual Total Shareholder
Return over the Performance Period of the total annual return provided on 30-
year United States Treasury Notes over the Performance Period (the "Minimum
Return"). In the event that the Minimum Return is not achieved for the
Performance Period, the percent of target Performance Shares earned for the
Performance Period shall be zero.
ARTICLE 7. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any beneficiary
or beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke all
prior designations by the same Participant, shall be in a form prescribed by the
Company, and will be effective only when filed by the Participant in writing
with the Company during the Participant's lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be paid
to the Participant's estate.
ARTICLE 8. DEFERRALS
The Committee may permit a Participant to defer such Participant's receipt of
the payment of cash that would otherwise be due to such Participant by virtue of
the satisfaction of any requirements or goals with respect to Performance
Shares. If any such deferral election is required or permitted, the Committee
shall, in its sole discretion, establish rules and procedures for such payment
deferrals, which rules and procedures shall, to the extent permitted under the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder, permit deferral of any tax liability for a payment deferral.
ARTICLE 9. RIGHTS OF EMPLOYEES
9.1. EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
9.2. PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
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ARTICLE 10. CHANGE IN CONTROL
10.1 DEFINITION OF "CHANGE IN CONTROL." A Change in Control of the Company
shall be deemed to have occurred as of the first day any one or more of the
following conditions shall have been satisfied:
(a) Any individual, corporation (other than the Company), partnership, trust,
association, pool, syndicate, or any other entity or any group of persons
acting in concert becomes the beneficial owner, as that concept is defined
in Rule 13d-3 promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, of securities of the Company
possessing twenty percent (20%) or more of the voting power for the
election of directors of the Company;
(b) There shall be consummated any consolidation, merger, or other business
combination involving the Company or the securities of the Company in
which holders of voting securities of the Company immediately prior to
such consummation own, as a group, immediately after such consummation,
voting securities of the Company (or, if the Company does not survive such
transaction, voting securities of the corporation surviving such
transaction) having less than sixty percent (60%) of the total voting
power in an election of directors of the Company (or such other surviving
corporation);
(c) During any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the directors of the Company cease for
any reason to constitute at least a majority thereof unless the election,
or the nomination for election by the Company's shareholders, of each new
director of the Company was approved by a vote of at least two-thirds
(2/3) of the directors of the Company then still in office who were
directors of the Company at the beginning of any such period; or
(d) There shall be consummated any sale, lease, exchange, or other transfer (in
one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company (on a consolidated basis)
to a party which is not controlled by or under common control with the
Company.
10.2 TREATMENT OF OUTSTANDING AWARDS UPON A CHANGE IN CONTROL. Upon the
occurrence of a Change in Control, unless otherwise prohibited under applicable
laws, or by the rules and regulations of any governing governmental agencies or
national securities exchanges, the target opportunities under all outstanding
Awards shall be deemed to have been fully earned for the entire Performance
Period(s) as of the effective date of the Change in Control.
10.3 POOLING OF INTERESTS ACCOUNTING. Notwithstanding any other provision of
the Plan to the contrary, in the event that the consummation of a Change in
Control is contingent on using pooling of interests accounting methodology, the
Committee may take any action necessary to preserve the use of pooling of
interests accounting.
ARTICLE 11. AMENDMENT, MODIFICATION, AND TERMINATION
11.1. AMENDMENT, MODIFICATION, AND TERMINATION. Subject to the terms of the
Plan, the Committee may at any time and from time to time, alter, amend, suspend
or terminate the Plan in whole or in part.
11.2. ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events affecting the Company, the financial statements of the
Company, the E.D. Jones Gas Distribution peer group or of changes in applicable
laws, regulations, or accounting principles, whenever the Committee determines
that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan.
11.3. AWARDS PREVIOUSLY GRANTED. Notwithstanding any other provision of the
Plan to the contrary, no termination, amendment, or modification of the Plan
shall adversely affect in any material way any Award previously granted under
the Plan, without the written consent of the Participant holding such Award.
ARTICLE 12. WITHHOLDING
TAX WITHHOLDING. The Company shall have the power and the right to deduct or
withhold, or require a Participant to remit to the Company, an amount sufficient
to satisfy federal, state, and local taxes, domestic or foreign, required by law
or regulation to be withheld with respect to any taxable event arising as a
result of this Plan.
5
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ARTICLE 13. INDEMNIFICATION
Each person who is or shall have been a member of the Committee shall be
indemnified and held harmless by the Company against and from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by him or
her in connection with or resulting from any claim, action, suit, or proceeding
to which he or she may be a party or in which he or she may be involved by
reason of any action taken or failure to act under the Plan and against and from
any and all amounts paid by him or her in settlement thereof, with the Company's
approval, or paid by him or her in satisfaction of any judgement in any such
action, suit, or proceeding against him or her, provided he or she shall give
the Company an opportunity, at its own expense, to handle and defend the same
before he or she undertakes to handle and defend it on his or her own behalf.
The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such persons may be entitled under the
Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise,
or any power that the Company may have to indemnify them or hold them harmless.
ARTICLE 14. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards granted
hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the Shares,
business and/or assets of the Company.
ARTICLE 15. LEGAL CONSTRUCTION
15.1. GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
15.2. SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
15.3. REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies as may be required.
15.4. GOVERNING LAW. To the extent not preempted by federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Rhode Island.
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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Providence Energy Corporation (the Company) and its subsidiaries and their
representatives may from time to time make written or oral statements, including
statements contained in the Company's filings with the Securities and Exchange
Commission (SEC) and in its reports to shareholders, including this annual
report to shareholders, which constitute "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995 or by
the SEC in its rules, regulations and releases.
All statements other than statements of historical facts included in this
annual report regarding the Company's financial position and strategic
initiatives and addressing industry developments, including for example
statements in the President's message (pages 2 to 3), are forward-looking
statements. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The following
are some of the factors which could cause actual results to differ materially
from those anticipated: general economic, financial and business conditions;
changes in government regulations; competition in the energy services sector;
regional weather conditions; the availability and cost of natural gas and oil;
development and operating costs; the success and costs of advertising and
promotional efforts; the availability and terms of capital; the business
abilities and judgment of personnel; the ability of the Company and its
suppliers and customers to modify or redesign their computer systems to work
properly in the year 2000; unanticipated environmental liabilities; the
Company's ability to grow its business through acquisitions and/or significant
customer growth; the costs and effects of unanticipated legal proceedings; the
impacts of unusual items resulting from ongoing evaluations of business
strategies and asset valuations; and changes in business strategy.
SUMMARY
The Company's current energy revenues and operating margin have increased,
while net income has decreased over the comparable periods presented, as shown
in the table below:
<TABLE>
<CAPTION>
(000's)
Percent
1998 1997 Change Change
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Energy Revenues $221,306 $220,420 $ 886 .4
Operating Margin 98,573 96,044 2,529 2.6
Net Income 6,442 7,831 (1,389) (17.7)
</TABLE>
RESULTS OF OPERATIONS - 1998 VERSUS 1997
Operating Margin
During the current year, Providence Gas Company (ProvGas) experienced weather
that was 8.0 percent warmer than last year. The warmer temperatures resulted in
decreased margin of approximately $4.0 million compared to last year.
Offsetting the warmer than normal weather was $7.2 million of margin generated
under the Price Stabilization Plan Settlement Agreement (Energize RI or the
Plan), which became effective October 1, 1997. The components of this
additional margin include $10.4 million associated with adjusting the Gas Charge
Clause (GCC) mechanism, offset by the funding of the Low-Income and Demand Side
Management programs of $1.7 million and the write-off of $1.5 million of
previously deferred gas costs. In the prior year, ProvGas funded the Demand
Side Management and Low-Income Weatherization programs under the Integrated
Resource Plan (IRP) for $.7 million.
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Additionally, non-firm margin decreased $2.2 million when compared with
last year. Prior to Energize RI, ProvGas was allowed to recover approximately
$3.0 million in non-firm margin under the terms of the IRP, subject to ProvGas'
ability to generate sufficient gas cost savings for customers. As a result of
Energize RI, ProvGas retains the actual non-firm margin earned. Due to an
unfavorable pricing difference between natural gas and alternate fuels, ProvGas
experienced a decrease in non-firm sales and transportation margin.
As part of Energize RI, the performance-based ratemaking mechanism
(Mechanism) under the IRP was terminated in September 1997. In 1997, ProvGas
recorded $1.5 million in additional margin as a result of this Mechanism. Thus,
a decrease in margin from 1997 to 1998 occurred because this Mechanism was no
longer available in 1998.
In a decision issued September 1, 1998, the RI Division of Public Utilities
and Carriers (Division) rejected allegations made in a complaint brought by
Aurora Natural Gas that ProvGas provided advance information and undue
preference in pricing to its marketing affiliate, Providence Energy Services,
Inc.(ProvEnergy Services). As part of its investigation, the Division ordered
marketer refunds of approximately $.3 million. The Division ordered this refund
based on its belief that an unfair rate was charged to customers who did not
have operational telemeters in place when they began transporting gas. ProvGas
intends to pursue all available options in order to reverse this decision.
Nonregulated operating margin increased by $3.5 million compared to the
same period last year. The Company's acquisition of oil distribution companies
during 1998 contributed the majority of this increase. However, the margin
earned from oil sales was lower than expected due to warmer than normal weather,
lower than anticipated commercial margins, and costs associated with liquidating
fixed-purchase commitments and option contracts for oil when market prices
dropped significantly. Increased natural gas business volumes at ProvEnergy
Services also contributed to an increase in nonregulated operating margin.
ProvEnergy Services experienced sales volume growth of 150 percent and a
fifteen-fold increase in the number of customers.
Operating and Maintenance Expenses
Overall, operating and maintenance expenses increased approximately $3.2
million or 6.6 percent versus last year. The increase is primarily attributable
to the Company's acquisition of oil companies during the current fiscal year
resulting in a $4.1 million increase. This increase was partially offset by
decreases in ProvGas' expenses, primarily bad debts. The decrease in bad debts
was attributable to improved collection experience and the implementation of new
credit policies, as well as decreased operating revenues from warmer than normal
weather. ProvGas' other operating and maintenance expenses were essentially
flat due to cost management.
The Company continually reviews its operating expenses in order to
keep expenses as low as possible; however, expenses can vary from year to year.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $1.6 million
or 12.5 percent versus last year. This increase is the result of increased
capital spending for Energize RI commitments as well as the amortization of
previously deferred environmental costs. Effective October 1, 1997, ProvGas
began amortizing environmental costs over a ten-year period in accordance with
Energize RI. Due to expected future increases in environmental expenditures,
which were projected under Energize RI, ProvGas will have increased
environmental amortization expense in future years.
Taxes
Taxes decreased approximately $.7 million or 4.0 percent versus last year.
The overall change in taxes is primarily due to a decrease in pretax income this
year compared to last year. Additionally, local property and other taxes have
increased as a result of capital spending.
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Other, net
Other, net has increased approximately $.6 million versus last year. The
majority of the increase consists of approximately $.2 million of fees earned by
the Company for providing energy management services and approximately $.2
million of interest income earned as a result of Federal income tax refunds
resulting from amended tax returns.
Interest Expense
Interest expense increased approximately $.5 million or 7.0 percent versus
last year. ProvGas' interest expense increased by approximately $.3 million as
a result of the Series S First Mortgage Bond issuance in April 1998. The
Company's acquisition of oil distribution companies in November 1997 resulted in
increased interest expense of approximately $.5 million. Offsetting the
increases was a decrease in weighted average short-term borrowings, as a result
of the Series S First Mortgage Bond issuance, which caused short-term interest
expense to decrease.
FUTURE OUTLOOK
A) Regulatory
Under Energize RI, ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999 and 2000, respectively. In addition, ProvGas may not earn
less than a seven percent return on average common equity. In the event that
ProvGas earns in excess of 10.9 percent or less than seven percent, ProvGas will
defer revenues or costs through a deferred revenue account over the term of the
Plan. Any balance in the deferred revenue account at the end of the Plan will
be refunded to or recovered from customers in a manner to be determined by all
parties to the Plan and to be approved by the Rhode Island Public Utilities
Commission (RIPUC).
The implementation of Energize RI this year changed how ProvGas recorded its
gas costs, resulting in higher margin reflected in the first half of the fiscal
year and lower margin in the second half. This change did not impact annual
earnings.
As part of Energize RI, ProvGas is permitted to file with the Division for
the recovery of the impact of exogenous Changes (Changes) which may occur during
the three-year term of the Plan. Changes are defined as "...significant
increases or decreases in ProvGas' costs or revenues which are beyond ProvGas'
reasonable control." Any disputes regarding either the nature or quantification
of the Changes are to be resolved by the RIPUC. The impact of any such Changes
will be debited or credited to a regulatory asset or liability account
throughout the term of Energize RI and will be recovered or refunded at the
expiration of the Plan through a method to be determined.
During 1998, due to the extremely warm temperatures, ProvGas experienced a
margin loss of approximately $4.0 million. ProvGas also experienced a non-firm
margin loss of approximately $2.2 million due to adverse market prices of
natural gas versus alternate fuels. ProvGas believes the causes of these two
events were beyond its control and thus considers them as Changes. In fiscal
1999, ProvGas intends to file with the Division for recovery of a portion of
these losses.
In 1998, ProvGas did not earn its allowed rate of return primarily as a
result of the extremely warm weather and the loss of non-firm margin as
previously discussed in "Operating Margin". Under the Plan's design, which
assumed normal weather, ProvGas should have had earnings in year one of the Plan
in excess of 10.9 percent. The earnings in excess of 10.9 percent were to be
deferred in the deferred revenue account to fund capital investments and other
Plan commitments in the remaining two years of the Plan. Absent favorable
recovery for the Changes as discussed above, and/or other factors such as colder
than normal weather, ProvGas' ability to earn a 10.9 percent return on average
common equity in future Plan years is substantially impaired.
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In May 1996, the RIPUC approved a Rate Design Settlement Agreement
(the Agreement) among ProvGas, the Division, 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 in June 1996. The initial phase of
unbundling was available to approximately 120 of the largest commercial and
industrial customers. In August 1997, the RIPUC approved a plan, called Business
Choice, to further unbundle services to an additional 3,400 medium and large
commercial and industrial customers. ProvGas commenced Business Choice in
December 1997. Energize RI continues the process of unbundling by requiring
ProvGas to provide unbundled service offerings for up to 10 percent per year of
firm deliveries. At the conclusion of the latest enrollment period on October 1,
1998, an additional 530 customers had signed up for Business Choice. The program
now has approximately 1,500 firm transportation customers with annual deliveries
of over 5 billion cubic feet per year which is approximately 25 percent of
ProvGas' total annual firm deliveries. There are 14 different marketers serving
ProvGas' customers and transporting on the system.
In 1998, North Attleboro Gas Company, a small distribution subsidiary with
over 3,500 customers located in Massachusetts, received approval from the
Massachusetts Department of Telecommunications and Energy (MDTE) of a settlement
agreement unbundling its rates. This agreement, which unbundled the cost of gas
from the cost of distribution, was part of a comprehensive statewide unbundling
initiative being directed by the MDTE. In 1999, it is expected that North
Attleboro Gas Company will introduce new unbundled service offerings and make
competitive choice available to all customers, both residential and commercial.
B) Business Opportunities
The Company has significant regulated and nonregulated growth
opportunities as it evolves into a local provider of natural gas, oil,
electricity and energy services for homes and businesses throughout New England.
In addition to funding investments related to system integrity, Energize RI
provides opportunities for ProvGas to expand sales. For example, high pressure
service to Quonset/Davisville Industrial Port & Commerce Park, a key area for
State economic development, provides tremendous opportunities for sales growth
as commercial and industrial businesses locate within the park. In addition,
Demand Side Management, an equipment rebate program, provides opportunities to
expand sales to nontraditional applications, such as air conditioning and fuel
cells. ProvGas has redirected its sales and marketing efforts to leverage
Energize RI, as well as other opportunities to promote sales growth within its
service territory.
In November 1997, as part of the Company's strategic plan to strengthen its
position in the energy industry, the Company purchased two Rhode Island-based
oil distribution companies, Super Service Oil and Mohawk Oil. Together with
three smaller acquisitions that the Company also completed during 1998, the
Company's oil business serves over 4,000 residential customers and a large
commercial base. While these acquisitions further the Company's transition to a
diversified energy provider, the oil business sustained substantial operating
losses in 1998 during the first year of operations. These losses were primarily
due to lost operating margin from warmer than normal weather, lower than
anticipated commercial margins, and the costs associated with liquidating fixed
purchase commitments and option contracts for oil when market prices dropped
significantly.
An increase in sales to customers to be acquired by acquisition, as well as
a planned return to typical profit margins are expected to reduce the loss
sustained in 1998 so that only a small loss is generated in 1999. More favorable
profit margins should be achieved as substantially all sales commitments have
been hedged with financial instruments to protect the business from the impact
of dramatic price movements. Additionally, management is focusing its marketing
efforts on the higher margin residential segment.
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The Company's retail energy marketing subsidiary, ProvEnergy Services, also
has substantial growth opportunities as the New England energy markets
deregulate. ProvEnergy Services experienced natural gas sales volume growth of
150 percent and a fifteen-fold increase in the number of customers in 1998.
ProvEnergy Services expects significant customer growth again in 1999 but
forecasts a small operating loss.
In May 1998, the Company and Southern Energy, Inc. (Southern) agreed to end
their joint efforts to develop a New England retail energy business using
ProvEnergy Services, which was doing business under the name Providence-
Southern. The Company will continue to use ProvEnergy Services as the vehicle
to grow its natural gas, oil and electricity business to retail accounts
throughout New England.
During 1998, ProvEnergy Services made a successful transition from Southern
to other natural gas suppliers, including Duke Energy Trading and Marketing,
L.L.C.(DETM) to provide its wholesale natural gas supply. In the future,
ProvEnergy Services anticipates the continued availability of competitively
priced wholesale energy supplies.
Through May 1998, Southern funded 60 percent of the net retail start-up
operating expenses incurred by ProvEnergy Services. ProvEnergy Services
anticipates growing the business sufficiently to generate only a small operating
loss for 1999.
In July 1998, the Company and ERI Services, Inc. (ERI Services) formed a
joint venture, Capital Center Energy Company, LLC (CCEC). CCEC is owned 50
percent by the Company's subsidiary, ProvEnergy Power Company, LLC, and 50
percent by ERI Services' subsidiary, ERI Providence, LLC. CCEC's wholly-owned
subsidiary, DownCity Energy Company, LLC (DownCity Energy), was selected as the
exclusive electric, heat and air conditioning (HVAC) and related service
provider for most of the Providence Place Mall (the Mall) for the next thirty
years.
DownCity Energy will serve more than three million square feet of retail
stores, common areas, offices and parking facilities in the Mall. Currently,
the Mall's three anchor stores and the cinema are not included in the plan. The
electric demand to be met by DownCity Energy is expected to be 12 megawatts, the
approximate consumption of more than 6,500 households. The system being
developed for the Mall includes three on-site natural gas powered electric
generators.
Under the agreement with Commonwealth Development Group, developers of the
Mall, DownCity Energy will perform the following:
. Own, operate and maintain the HVAC systems.
. Provide electric supply and emergency power.
. Own, operate and maintain a six megawatt on-site generation plant to
provide electric and emergency supply.
. Provide metering services for each of the tenants.
. Manage all energy billing to the tenants and the developer.
Construction of the energy systems began this summer. The entire energy
project will be operational in advance of the scheduled August 1999 opening of
the Mall. DownCity Energy did not have a significant impact on the Company's
results of operations in 1998. The projected investment in CCEC is $30 million.
As of September 30, 1998, the Company had invested $2 million of its total
projected investment of $15 million. This contract, the largest of its kind in
New England, has the potential to increase the Company's earnings by five
percent within five years.
C) New Accounting Pronouncements
Please refer to Footnote 17 of the accompanying Consolidated Financial
Statements.
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RESULTS OF OPERATIONS - 1997 VERSUS 1996
Energy Revenues and Operating Margin
During 1997, the Company experienced normal weather as opposed to colder-than-
normal weather in 1996, which resulted in 1997 temperatures that were 5.2
percent warmer than 1996. The decrease in heating load due to the warmer
temperatures resulted in decreased margin of approximately $1.7 million, which
was offset by increased margin of $.7 million as a result of load growth and an
increase in the average annual number of customers during 1997 over 1996 of
1,707 or one percent. Primarily as a result of the warmer temperatures
experienced in 1997, residential sales decreased 570 million cubic feet (MMcf)
or four percent. The Company's commercial and industrial firm sales decreased
approximately 1,608 MMcf or 16.6 percent as a result of warmer weather and
customer migrations from sales service to transportation service in connection
with unbundling natural gas service in Rhode Island. In 1996, approximately 120
of the largest commercial and industrial customers were eligible for unbundled
service offerings. In December 1997, an additional 3,400 medium and large
commercial and industrial customers were eligible. This migration of customers
to transportation did not have a material effect on margin.
The decrease due to weather was also offset by increases in margin of $.8
million as a result of the rate increase effective December 17, 1995, and $.4
million as the result of an increase in revenues associated with the phase-in of
post-retirement expenses related to Statement of Financial Accounting Standards
No. 106. The remaining increase in margin was primarily due to ProvEnergy
Services, which was doing business as Providence-Southern, and improved
operating efficiencies in the tracking and delivery of gas.
Interruptible and other volumes remained consistent with last year. Operating
margin from interruptible and other sales did not affect the Company's operating
margin or results of operations because the RIPUC required the Company to return
any margins earned from these non-firm customers to firm customers through the
GCC. Beginning October 1, 1997, under Energize RI discussed in Note 9 to the
accompanying Consolidated Financial Statements, the Company will retain all
margins earned from these non-firm sales.
The Company's transportation volumes increased approximately 1,345 MMcf as the
result of the unbundling process described above. As the unbundling process
continues, the Company expects transportation revenues and volumes will continue
to increase as customers migrate from sales to transportation.
Operating and Maintenance Expenses
Overall, operating and maintenance expenses have decreased approximately $.3
million or .5 percent versus 1996. The Company had an $.8 million decrease in
outside services due to expenditures made in the prior year to develop new
energy service offerings as well as expenses related to the IRP. This decrease
was offset by an increase in operating expenses of $.7 million from ProvEnergy
Services. In addition, the Company's labor increased by $.8 million related to
cost of living and negotiated union contract increases. This increase in labor
was offset by an increase in capitalized labor and administrative expenses of
$.7 million. This increase was the result of increased capital projects in 1997
as well as an increase in expenses allocated to capital projects. The Company
also incurred increased post-retirement benefit expenses of $.3 million as the
result of the continued phasing of these expenses into the Company's rates in
1997. The remaining decrease of $.6 million relates primarily to cost
management.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $.9 million or
7.3 percent primarily as the result of increased capital additions, including
technology related assets with shorter depreciable lives, as well as an increase
in depreciation rates that became effective with the rate increase on December
17, 1995.
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Taxes
Taxes increased approximately $.7 million or 3.7 percent primarily as the
result of increased property taxes due to increased capital spending as well as
increased property tax rates in 1997.
Other, net
Other, net decreased approximately $.9 million. This decrease was the result
of increased energy venture costs of approximately $.3 million in 1997. The
remainder of the decrease was primarily due to regulatory adjustments of $.9
million in 1996 as the result of the rate decision effective December 17, 1995.
This was offset by increases in the allowance for funds used during construction
of $.2 million as the result of increased capital spending.
Interest Expense
Interest expense for 1997 was stable when compared to 1996. Interest expense
increased approximately $.1 million primarily as the result of an increase in
interest on long-term debt due to the Series R First Mortgage Bond issuance by
ProvGas in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings.
Management believes its available financings are sufficient to meet these
seasonal needs.
During the current year, the Company's cash flow from operations increased
approximately $13.7 million compared to the same period last year. This
increase was primarily due to the sale of ProvGas' working gas in storage to
Duke Energy Trading and Marketing, L.L.C. as well as the impact of Energize RI
changes.
Capital expenditures for 1998 of $28.6 million increased $7.8 million or 37.2
percent when compared to the $20.9 million last year. As part of Energize RI,
ProvGas' spending increased as a result of making significant capital
improvements to its distribution system. These improvements will expand the
distribution system into economically developing areas of Rhode Island, as well
as accelerate the replacement of older mains and services. Additional
expenditures relating to ProvGas' decision to move to a client server
environment, as well as to computerize existing paper records of its
distribution system, have also contributed to this increase. Anticipated
capital expenditures during the next two fiscal years are expected to total
approximately $58.5 million.
To finance capital expenditures, ProvGas issued $15 million of Series S First
Mortgage Bonds in April 1998 at 6.82 percent. These bonds require semi-annual
interest payments and a lump sum repayment of principal in 20 years.
To reduce its long-term borrowing costs, ProvGas repurchased $6.4 million of
Series M First Mortgage Bonds in September 1998. The cost to repurchase was
comprised of $6.4 million in principal and $1.4 million in premium. ProvGas is
planning to issue $15 million in First Mortgage Bonds to cover the cost of the
repurchase as well as for general corporate purposes. The future bond issuance
is anticipated to be for a 30 year term at an interest rate expected to be less
than 7.0 percent. ProvGas estimates savings of approximately $1.8 million over
the life of the new debt based on a projected interest rate of 6.75 percent.
ProvGas has received an order from the Division which permits the amortization
of the bond premium over the life of the new debt.
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HEDGING
The Company's strategy is to use financial instruments for hedging purposes
to manage the impact of market fluctuations on contractual sales commitments.
Two of the Company's wholly-owned subsidiaries, ProvEnergy Oil Enterprises, Inc.
(ProvEnergy Oil), and Providence Energy Services, use financial instruments to
manage market risks and reduce their exposure to fluctuations in the market
prices of home heating oil, diesel, heavy oil and natural gas.
At September 30, 1998, ProvEnergy Oil held futures and option contracts with
a fair market value of approximately $.2 million. The estimated fair market
value of these contracts is based on quoted market prices. The contracts have
maturities of one year or less. Net unrealized gains related to these
instruments of approximately $.1 million have been deferred on the accompanying
Consolidated Balance Sheets as a component of common stockholders' equity at
September 30, 1998. During 1998, ProvEnergy Oil incurred approximately $.5
million of costs associated with liquidating fixed purchase commitments and
option contracts for oil when market prices dropped.
At September 30, 1998, ProvEnergy Services and ProvEnergy Oil held forward
purchase commitments for their supply needs with a fair market value of
approximately $15.2 million which were acquired at a cost of approximately $15.6
million. The fair market value of these forward contracts is based on quoted
market prices and the contracts have maturities of less than two years.
YEAR 2000 DISCLOSURE
Many companies' software programs and computing infrastructure use two-digit
years to define the applicable year, rather than four-digit years, and have
time-sensitive software that may recognize a date using "00" as the last two
digits of the year 1900, rather than the year 2000. This could result in the
computer or embedded hardware shutting down or performing incorrect
computations. On July 29, 1998, the Securities and Exchange Commission issued an
Interpretation entitled "Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisers, Investment Companies, and Municipal
Securities Issuers," requiring extensive detailed reporting and disclosure of a
company's progress in addressing the Year 2000 impact. Pursuant to this
Interpretation, the Company is providing the following disclosure.
Readiness
The Company recognizes that the products and services that the Company
provides to its customers are essential. The Year 2000 computer problem poses a
significant challenge to the Company's ability to continue to provide these
products and services. Senior management has made Year 2000 readiness a top
priority, and in response to that challenge, has established a Year 2000 Project
Office to ensure the continuity of mission critical business systems and
processes before and beyond the Year 2000. The Company has hired two
international consulting firms to assist the Company in the areas of assessment,
strategy, staffing and the selection and execution of a recognized methodology
to assess Year 2000 readiness. The Project Office oversees work in the
following four areas:
1. Information Technology (IT) Systems
The Company continues to implement its technology plan developed in 1992
which includes the migration from a mainframe centric to a client server centric
environment. The migration includes the replacement of the Customer Information
System (CIS) which supports the business function of customer inquiry, service
orders and billing. It also includes the replacement of its business
applications such as financial, human resources, and procurement with an
Enterprise Resource Planning (ERP) system. These new systems have been
represented by the suppliers to be Year 2000 ready. The migration of CIS and
ERP, including testing of these new systems, is expected to be completed by June
30, 1999.
The Company has completed an inventory of its remaining IT systems and is in
the process of assessing these systems. The Company is preparing procurement
policies as part of its efforts to ensure Year 2000 readiness for any future
changes to its IT systems environment or future acquisitions of IT systems.
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2. Embedded Systems
The Company is working with an international management consulting and
engineering firm with industry-specific experience to address the Year 2000
readiness of embedded microprocessors deployed in its distribution and facility
operations. The distribution area covers, but is not limited to, the
monitoring, storage, measurement and control of the flow of natural gas. The
facility area covers, but is not limited to, back-up power supply, HVAC and
security at the Company's offices.
The Company has completed reviewing 99 percent of its embedded components
inventory. This inventory has been loaded into the Company's database and has
been matched against the consultant's proprietary database to assess which
components are Year 2000 ready. The consultant's proprietary database contains
important information collected by the consultant through its industry network.
To date, the consultant's database immediately identified 69 percent of the
components. Ninety-four percent of the identified components were determined to
be compliant and six percent were determined to be non-compliant. The
components associated with the Company's mission critical systems have been
identified in the database, and many of these components are compliant.
Remediation planning is underway to address the remaining components. The
Company will work closely with the consultants to assess the segment of
components that could not be matched or identified in the consultant's
proprietary database. This work includes direct follow-up with the
manufacturers of those components. This assessment is expected to be completed
by December 1998 at which point the Company can better evaluate the impact of
any system failure. Remediation and testing of mission critical systems is
scheduled to be completed by June 30, 1999 and remediation and testing of all
other embedded systems is planned to be completed by September 30, 1999.
3. Upstream/Downstream
The Company has developed a communication plan to keep shareholders,
customers, employees, and other major constituencies informed about the
Company's plans and the state of readiness concerning the Year 2000 computer
problem. The Company has developed a plan to address the readiness of its major
suppliers which includes a combination of written requests, telephone
interviews, and leveraging of customer groups and site visits. The Company is
actively participating with the Rhode Island Y2K (Year 2000) Group which acts as
a communication forum for key customers as well as the other essential suppliers
of services such as: telecommunications, water and electric. The Company expects
to have its assessment of its supply chain completed by January 31, 1999. The
Company's strategy includes the continual monitoring of any risk areas that
surface as a result of that assessment.
4. Contingency Planning
The Company has contingency plans in place for response to certain emergency
operational situations. The Company also intends to begin developing actionable
contingency plans pertinent to the Year 2000 computer problem following
substantial completion of the assessment of its systems and third party
relationships. Representatives from the Company are participating in industry
consortiums related to contingency planning. The planning will factor the
results of the risk assessments in the three areas mentioned above, taking into
account the major business processes of the Company. The Company expects its
Year 2000 contingency plans to be finalized and in place by June 30, 1999.
YEAR 2000 COSTS
The Company expects to complete its comprehensive budget for all phases of
its Year 2000 effort by January 31, 1999. ProvGas will capitalize Year 2000
costs with a five-year amortization period consistent with the regulatory
treatment approved by the RIPUC under ProvGas' Energize RI program. As of
September 30, 1998, ProvGas has deferred Year 2000 costs of $2.5 million. The
Company estimates the cost of the assessment phase of its Year 2000 effort to be
less than $1 million. The Company does not yet have a cost estimate applicable
to remediation at this time.
Page-9
<PAGE>
POTENTIAL RISKS
The Company must complete its migration to a client server environment and
must complete the implementation of CIS and ERP and the upgrade of its System
Control and Data Acquisition software application. Although the Company expects
to achieve these goals in a timely manner, the Company cannot guarantee these
results. A delay in completing these projects or the inability of any of these
systems to perform their respective fundamental functions would result in the
Company experiencing significant business disruption.
The majority of the Company's natural gas supply is delivered over third-
party interstate transmission lines from the Gulf coast to Rhode Island. These
interstate transmission lines use many compressor stations to move the gas.
These compressor stations are controlled and monitored remotely, each station
using hundreds of embedded components. If these embedded systems reach critical
failure without manual backup, the Company will experience an indeterminate
amount of gas supply loss. Although the Company expects the natural gas
delivery systems to operate in the Year 2000, the Company cannot guarantee this
will occur. If the loss of gas supply exceeds the Company's access to its
reserves in storage and its liquefied natural gas capability, the Company will
not be able to serve certain customer segments. The Company's inability to
serve its customers would result in a loss of revenue and potential claims.
COMMON STOCK INFORMATION
<TABLE>
<CAPTION>
Dividend Paid
Quarter Ended High Low Per Share
- -------------------------- --------- --------- -------------
<S> <C> <C> <C>
September 30, 1998 $ 21 3/8 $ 19 1/4 $.27
June 30, 1998 21 1/4 19 1/2 .27
March 31, 1998 22 1/8 20 5/8 .27
December 31, 1997 22 17 11/16 .27
September 30, 1997 $19 11/16 $ 17 1/4 $.27
June 30, 1997 18 3/8 17 1/8 .27
March 31, 1997 20 1/2 16 1/2 .27
December 31, 1996 18 3/4 16 3/4 .27
</TABLE>
Page-10
<PAGE>
FINANCIAL AND OPERATING STATISTICS - NATURAL GAS DISTRIBUTION
For the Years Ended September 30
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Natural gas distribution revenue
(thousands of dollars):
Residential $126,479 $135,259 $128,875 $106,387 $130,888 $120,997
Commercial/
industrial 47,629 66,352 74,625 61,491 76,174 72,974
Firm transportation 7,682 2,251 330 171 - -
-------- ------- ------- -------- -------- --------
Total firm 181,790 203,862 203,830 168,049 207,062 193,971
Interruptible and other 5,502 10,299 9,882 14,026 14,471 14,336
Non-firm transportation 792 504 411 633 287 54
Other 650 593 623 1,284 958 954
-------- ------- ------- -------- -------- --------
Total natural gas
distribution revenue $188,734 $215,258 $214,746 $183,992 $222,778 $209,315
======== ======== ======== ======== ======== ========
Gas sold and transported (MMcf):
Residential 13,007 13,853 14,423 12,709 14,122 13,783
Commercial/
industrial 5,727 8,086 9,694 8,772 9,360 8,926
Firm transportation 4,223 1,818 379 208 - -
-------- ------- ------- -------- -------- --------
Total firm 22,957 23,757 24,496 21,689 23,482 22,709
Interruptible and other 1,409 2,633 2,610 4,950 4,547 3,985
Non-firm transportation 999 907 1,001 1,473 656 386
Company use and
other 946 871 1,017 919 1,182 1,187
-------- ------- ------- -------- -------- --------
Total gas sold and transported 26,311 28,168 29,124 29,031 29,867 28,267
Less: off-system sales - 280 412 1,682 2,179 501
-------- ------- ------- -------- -------- --------
Total gas delivered 26,311 27,888 28,712 27,349 27,688 27,766
======== ======= ======= ======== ======== ========
Gas purchased, produced and
transported (MMcf):
Pipeline natural
gas-contract 21,008 17,328 17,979 16,591 22,880 18,044
Pipeline natural
gas-spot purchases - 3,271 5,197 7,935 3,533 7,936
Pipeline natural
gas-transportation 5,222 2,725 1,380 1,681 656 386
Underground storage 81 4,163 3,129 2,270 1,697 879
Liquefied natural gas - 681 1,439 554 1,101 1,022
-------- ------- -------- -------- -------- --------
Total gas sold and
transported 26,311 28,168 29,124 29,031 29,867 28,267
======== ======= ====== ======== ======== ========
Average annual number of
gas distribution customers:
Residential 152,837 151,152 149,487 147,935 145,793 143,771
Commercial/
industrial 15,981 16,656 16,645 16,509 16,337 16,264
Firm transportation 884 50 6 1 - -
-------- ------- ------- -------- -------- --------
Total firm 169,702 167,858 166,138 164,445 162,130 160,035
Interruptible and
non-firm transportation 123 125 138 142 141 123
-------- ------- ------- -------- -------- --------
Total 169,825 167,983 166,276 164,587 162,271 160,158
======== ======= ======= ======== ======== ========
</TABLE>
Page-11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total number of gas
distribution customers
at year-end 168,180 166,535 164,312 163,294 159,375 159,135
======= ======= ======= ======= ======= =======
Residential heating:
Average consumption per
customer (Mcf) 101 109 116 103 117 116
Average revenue per
customer $ 957 $ 1,043 $ 1,016 $ 844 $ 1,068 $ 1,008
Average rate per
Mcf $ 9.51 $ 9.55 $ 8.77 $ 8.19 $ 9.10 $ 8.68
Average annual number
of customers 123,023 120,826 118,724 116,826 114,461 112,497
Maximum daily sendout
(MMcf) 181 188 189 202 206 185
Actual calendar degree
days 5,206 5,657 5,967 5,111 5,977 5,718
Normal calendar degree
days 5,652 5,652 5,682 5,709 5,709 5,811
</TABLE>
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet.
Page-12
<PAGE>
SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS
For the Years Ended September 30
(thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Energy revenues $221,306 $220,420 $215,152 $183,992 $222,778 $209,315
Cost of energy 122,733 124,376 120,246 100,944 135,104 126,314
-------- -------- -------- -------- -------- --------
Operating margin 98,573 96,044 94,906 83,048 87,674 83,001
-------- -------- -------- -------- -------- --------
Other operating expenses,
excluding taxes 66,478 61,642 61,030 54,838 55,838 52,921
Taxes, other than income 13,981 13,732 13,007 11,769 12,540 12,597
Federal income taxes 3,628 4,608 4,683 3,104 4,460 3,554
-------- -------- -------- -------- -------- --------
Total operating
expenses 84,087 79,982 78,720 69,711 72,838 69,072
-------- -------- -------- -------- -------- --------
Operating income 14,486 16,062 16,186 13,337 14,836 13,929
Other, net 576 (2) 945 865 196 37
-------- -------- -------- -------- -------- --------
Income before interest
expense and preferred
dividends of subsidiary 15,062 16,060 17,131 14,202 15,032 13,966
Interest expense 8,133 7,603 7,465 7,379 6,247 6,653
-------- -------- -------- -------- -------- --------
Income after interest
expense 6,929 8,457 9,666 6,823 8,785 7,313
Preferred dividends of
subsidiary (487) (626) (696) (696) (696) (696)
-------- -------- -------- -------- -------- --------
Net income 6,442 7,831 8,970 6,127 8,089 6,617
Common dividends 6,377 6,242 6,155 6,062 5,856 4,889
-------- -------- -------- -------- -------- --------
Earnings reinvested in
the corporation $ 65 $ 1,589 $ 2,815 $ 65 $ 2,233 $ 1,728
======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding 5,919.7 5,790.1 5,709.2 5,624.2 5,534.1 4,761.8
======== ======== ======== ======== ======== ========
Net income per
common share - basic $ 1.09 $ 1.35 $ 1.57 $ 1.09 $ 1.46 $ 1.39
======== ======== ======== ======== ======== ========
Net income per
common share - diluted $ 1.09 $ 1.35 $ 1.57 $ 1.09 $ 1.46 $ 1.39
======== ======== ======== ======== ======== ========
Common dividends $ 1.08 $ 1.08 $ 1.08 $ 1.08 $ 1.06 $ 1.02
======== ======== ======== ======== ======== ========
</TABLE>
Page-13
<PAGE>
OTHER FINANCIAL DATA
September 30
(thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total assets $253,410 $255,510 $250,150 $227,127 $233,311 $224,550
Gas plant--at
original cost 324,502 300,829 279,849 262,769 239,830 221,769
Gas plant--net of
depreciation 202,313 190,307 179,473 169,792 159,012 149,272
Capitalization:
Common stockholders'
equity 88,234 85,661 82,565 78,524 77,156 73,368
Redeemable cumulative
preferred stock 4,800 6,400 8,000 8,000 8,000 8,000
Long-term debt 80,155 72,372 72,456 74,482 60,079 62,163
Shares of common stock
at year-end 5,969 5,832 5,748 5,668 5,581 5,486
Book value per share $ 14.78 $ 14.69 $ 14.36 $ 13.85 $ 13.82 $ 13.37
======= ======= ======= ======= ======= =======
</TABLE>
Page-14
<PAGE>
CONSOLIDATED BALANCE SHEETS
September 30
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Gas plant, at original cost (notes 1,4,7, and 9) $324,502 $300,829
Less--Accumulated depreciation and plant
acquisition adjustments (notes 1 and 9) 122,007 110,365
-------- --------
202,495 190,464
-------- --------
Other property, net 2,692 1,182
-------- --------
Current assets:
Cash and temporary cash
investments (notes 1 and 8) 2,006 1,063
Accounts receivable, less allowance of
$2,720 in 1998 and $1,886 in 1997
(notes 1 and 3) 14,067 14,852
Unbilled revenues (note 1) 1,665 2,683
Deferred gas costs (notes 1,7, and 9) - 7,231
Inventories, at average cost-
Liquefied natural gas, propane, and under-
ground storage 656 18,217
Materials and supplies 1,433 1,287
Prepaid and refundable taxes (note 2) 5,377 4,005
Prepayments 1,853 1,039
-------- --------
27,057 50,377
-------- --------
Investments (notes 11 and 13) 2,169 -
Deferred charges and other assets
(notes 1,3,and 6) 18,997 13,487
-------- --------
Total assets $253,410 $255,510
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statement) $173,254 $164,433
-------- --------
Current liabilities:
Notes payable (notes 5 and 8) 20,079 23,675
Current portion of long-term debt (note 4) 3,233 3,707
Accounts payable (notes 6, 7, and 8) 9,325 16,755
Accrued taxes 2,714 2,506
Accrued vacation 1,706 1,715
Customer deposits 3,034 3,461
Other 6,773 5,531
-------- --------
46,864 57,350
-------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 22,292 21,495
Unamortized investment tax credits (note 2) 2,217 2,375
Other (notes 6 and 7) 8,783 9,857
-------- --------
33,292 33,727
-------- --------
Commitments and contingencies (notes 7 and 9) - -
Total capitalization and liabilities $253,410 $255,510
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30
<TABLE>
<CAPTION>
(thousands, except per share amounts) 1998 1997 1996
- --------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Energy revenues $221,306 $220,420 $215,152
Cost of energy 122,733 124,376 120,246
-------- -------- --------
Operating margin 98,573 96,044 94,906
-------- -------- --------
Operating expenses:
Operation and maintenance 51,993 48,768 49,033
Depreciation and amortization 14,485 12,874 11,997
Taxes:
State gross earnings 5,618 6,045 6,063
Local property and other 8,363 7,687 6,944
Federal income (note 2) 3,628 4,608 4,683
-------- -------- --------
Total operating expenses 84,087 79,982 78,720
-------- -------- --------
Operating income 14,486 16,062 16,186
Other, net (note 1, 2, and 16) 576 (2) 945
-------- -------- --------
Income before interest expense and
preferred dividends of subsidiary 15,062 16,060 17,131
-------- -------- --------
Interest expense:
Long-term debt 6,391 6,042 5,889
Other 1,998 1,786 1,682
Interest capitalized (256) (225) (106)
-------- -------- --------
8,133 7,603 7,465
-------- -------- --------
Income after interest expense 6,929 8,457 9,666
Preferred dividends of subsidiary
(note 4) (487) (626) (696)
-------- -------- --------
Net income $ 6,442 $ 7,831 $ 8,970
======== ======== ========
Net income per common
share - basic $ 1.09 $ 1.35 $ 1.57
======== ======== ========
Net income per common
share - diluted $ 1.09 $ 1.35 $ 1.57
======== ======== ========
Weighted average common
shares outstanding (note 12):
Basic 5,919.7 5,790.1 5,709.2
======== ======== ========
Diluted 5,929.7 5,794.3 5,712.0
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996
- ---------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash provided by -
Operating Activities:
Income after interest expense $ 6,929 $ 8,457 $ 9,666
Items not requiring cash:
Depreciation and amortization 14,294 12,846 12,012
Changes as a result of regulatory action 1,500 - (1,453)
Deferred Federal income taxes 1,131 703 1,943
Loss/(gain) on sale of other property (note 16) 37 - (699)
Write-down of other property (note 16) - - 714
Amortization of investment tax credits (158) (158) (158)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 21,504 (187) (634)
Unbilled revenues 1,018 (326) 298
Deferred gas costs 78 6,041 (12,079)
Inventories (169) (2,222) (5,626)
Prepaid and refundable taxes (1,646) 14 1,857
Prepayments (800) 501 (174)
Accounts payable (3,495) (617) 3,270
Accrued taxes 202 526 (21)
Accrued vacation, customer deposits,
and other 796 (388) 1,462
Deferred charges and other 383 2,697 1,307
-------- -------- --------
Net cash provided by operating activities 41,604 27,887 11,685
-------- -------- --------
Investment Activities:
Expenditures for property, plant
and equipment, net (28,632) (20,875) (20,781)
Expenditures for business acquistions (note 14) (2,744) - -
Investment in joint venture (note 13) (2,000) - -
Proceeds from sale of other property (note 16) 698 - 725
Cash paid for financial instruments (104) - -
-------- -------- --------
Net cash used in investing activities (32,782) (20,875) (20,056)
-------- -------- --------
Financing Activities:
Issuance of common stock - 44 31
Proceeds from exercise of stock options 115 34 -
Issuance of mortgage bonds 15,000 - 15,000
Repurchase of mortgage bonds (6,363) - -
Premium payment on bonds (1,392) - -
Redemption of preferred stock (1,600) (1,600) -
Issuance of long-term debt - 1,345 -
Payments on long-term debt (3,799) (2,164) (1,954)
Increase (decrease) in notes payable (4,462) 405 933
Cash dividends on preferred shares (note 4) (487) (626) (696)
Cash dividends on common shares (4,891) (4,811) (4,797)
-------- -------- --------
Net cash provided (used) by financing
activities (7,879) (7,373) 8,517
-------- -------- --------
Increase (decrease) in cash 943 (361) 146
Cash and temporary cash investments at beginning
of year 1,063 1,424 1,278
-------- -------- --------
Cash and temporary cash investments at the end
of year $ 2,006 $ 1,063 $ 1,424
======== ======== ========
</TABLE>
Page-17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30 (continued)
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for-
Interest (net of amount capitalized) $ 7,606 $ 7,476 $ 6,738
Income taxes (net of refunds) $ 3,750 $ 2,036 $ 2,851
Schedule of non-cash investing activities:
Capital lease obligations for equipment $ - $ 437 $ -
Other long-term debt for equipment $ - $ 1,983 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-18
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30
<TABLE>
<CAPTION>
(thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Common stockholders' investment (notes 4, 6, and 10):
Common stock, $1 Par, Authorized - 20,000 shares
Outstanding - 5,969 shares in 1998 and 5,832 shares
in 1997 $ 5,969 $ 5,832
Amount paid in excess of par 59,198 56,827
Retained earnings 23,067 23,002
-------- --------
Common equity 88,234 85,661
-------- --------
Unrealized gain on financial instruments (note 11) 65 -
-------- --------
Cumulative preferred stock of subsidiary (notes 4 and 8):
Redeemable 8.7% Series, $100 Par
Authorized - 80 shares
Outstanding - 48 shares as of 1998 and
64 shares as of 1997 4,800 6,400
-------- --------
Long-term debt (notes 4, 7, and 8):
First Mortgage Bonds, secured by property
Series M, 10.25%, due July 31, 2008 2,728 10,000
Series N, 9.63%, due May 30, 2020 10,000 10,000
Series O, 8.46%, due September 30, 2022 12,500 12,500
Series P, 8.09%, due September 30, 2022 12,500 12,500
Series Q, 5.62%, due November 30, 2003 9,600 11,200
Series R, 7.50%, due December 30, 2025 15,000 15,000
Series S, 6.82%, due April 1, 2018 15,000 -
Other long-term debt 4,890 3,207
Capital leases 1,170 1,672
-------- --------
83,388 76,079
Less-current portion 3,233 3,707
-------- --------
80,155 72,372
-------- --------
Total capitalization $173,254 $164,433
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-19
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' INVESTMENT
For the Three Years Ended September 30
<TABLE>
<CAPTION>
Shares Amount Paid Unrealized Gain
Issued and Outstanding In Excess Retained on
----------------------
(thousands) Number Amount of Par Earnings Financial instruments
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 5,668 $5,668 $54,258 $18,598 $ -
Add (deduct):
Net income - - - 8,970 -
Dividends ($1.08 per share) - - - (6,155) -
Dividend reinvestment, cash
stock purchase plan, and employee
benefit plans 80 80 1,309 - -
Accrual for stock compensation
plans - - (227) - -
Amortization of deferred
compensation for stock
compensation plans - - 64 - -
----- -------- -------- -------- -------
Balance, September 30, 1996 5,748 5,748 55,404 21,413 -
Add (deduct):
Net income - - - 7,831 -
Dividends ($1.08 per share) - - - (6,242) -
Dividend reinvestment, cash
stock purchase plan, and employee
benefit plans 82 82 1,392 - -
Exercise of stock options 2 2 32 - -
Accrual for stock compensation
plan - - (110) - -
Amortization of deferred
compensation for stock
compensation plans - - 109 - -
----- -------- -------- -------- -------
Balance, September 30, 1997 5,832 5,832 56,827 23,002 -
Add (deduct):
Net income - - - 6,442 -
Dividends ($1.08 per share) - - - (6,377) -
Dividend reinvestment, cash
stock purchase plan, and employee
benefit plans 76 76 1,410 - -
Exercise of stock options 7 7 108 - -
Accrual for stock compensation
plan - - (266) - -
Amortization of deferred
compensation for stock
compensation plans - - 163 - -
Unrealized gain on
financial instruments - - - - 65
Shares issued for acquisition 54 54 956 - -
----- -------- -------- -------- -------
Balance, September 30, 1998 5,969 $ 5,969 $ 59,198 $ 23,067 $ 65
===== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Providence
Energy Corporation and its wholly-owned subsidiaries (the Company). Energy
revenues from natural gas sales and distribution as well as oil businesses are
reflected in the accompanying Consolidated Statements of Income to arrive at
operating income. Revenues and expenses of other operations include sales and
rentals of appliances as well as real estate rentals and are presented after
operating income in the accompanying Consolidated Statements of Income. All
significant intercompany transactions have been eliminated in consolidation. The
Company accounts for its investment in the Capital Center Energy Company, LLC
joint venture under the equity method of accounting.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REGULATION
The Providence Gas Company (ProvGas) is subject to regulation by the Rhode
Island Public Utilities Commission (RIPUC). North Attleboro Gas Company (North
Attleboro Gas) is subject to regulation by the Massachusetts Department of
Telecommunications and Energy (MDTE). The accounting policies of ProvGas and
North Attleboro Gas conform to GAAP as applied in the case of regulated public
utilities and are in accordance with the regulators' accounting requirements and
rate-making practices.
ENERGY REVENUES
Energy revenues are generated principally from natural gas and oil
activities. The natural gas distribution companies record accrued natural gas
distribution revenues based on estimates of gas volumes delivered but not billed
at the end of an accounting period in order to match revenues with related
costs.
HEDGING
Two of the Company's wholly-owned subsidiaries, Providence Energy Oil
Enterprises, Inc. (ProvEnergy Oil) and Providence Energy Services, Inc.
(ProvEnergy Services), use financial instruments to manage market risks and
reduce their exposure to fluctuations in the market prices of home heating oil,
diesel, heavy oil and natural gas. The Company's policy is not to hold or issue
financial instruments for trading purposes but to utilize such instruments to
hedge the impact of market price fluctuations.
ProvEnergy Oil's and ProvEnergy Services' financial instruments qualify for
hedge accounting. Hedge accounting is used in non-trading activities when there
is a high degree of correlation between price movements in the instrument and
the item designated as being hedged. Under hedge accounting, financial
instruments with third parties are carried at market value with related
unrealized gains and losses recorded as adjustments to equity in the
Consolidated Statements of Capitalization. Realized gains and losses are
recognized in the Consolidated Statements of Income when the hedge transaction
occurs.
LEASE ACCOUNTING
Previously, the Company leased water heaters and other appliances to
customers under finance leases. These leases are recorded on the accompanying
Consolidated Balance Sheets at the gross investment in the leases less unearned
income. Unearned income is recognized in such a manner as to produce a constant
periodic rate of return on the net investment in the finance leases.
GAS PLANT
Gas plant is stated at the original cost of construction. In accordance
with the uniform system of accounts prescribed by the RIPUC, the difference
between the original cost of gas plant acquired and the cost to ProvGas is
recorded as a Plant Acquisition Adjustment and is being amortized over
periods ranging from 1 to 24 years.
The Company capitalizes the costs of all technology investments with the
exception of system maintenance costs unless deferral is approved by regulators.
Page-21
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which became effective for the Company in 1997, established accounting standards
for the impairment of long-lived assets. SFAS No. 121 also required that
regulatory assets which are no longer probable of recovery through future
revenues be charged to earnings. SFAS No. 121 did not have an impact on the
Company's financial position or results of operations.
DEPRECIATION
Depreciation is provided on the straight-line basis at rates approved by
the RIPUC and the MDTE which are designed to amortize the cost of depreciable
plant over its estimated useful life. The composite depreciation rate expressed
as a percentage of the average depreciable gas plant in service was
approximately 3.85 percent for 1998, 1997 and 1996.
The Company retires property units by charging original cost, cost of
removal, including environmental investigation and remediation costs, and
salvage value to accumulated depreciation.
GAS CHARGE CLAUSES
In May 1996, the RIPUC approved a Rate Design Settlement Agreement (the
Agreement). The Agreement included changes to ProvGas' gas cost recovery
mechanism. Specifically, the Agreement replaced the previous Cost of Gas
Adjustment Clause (CGA) with Gas Charge Clauses (GCC) effective June 2, 1996. In
addition to the commodity and related pipeline transportation costs historically
included in the CGA, the GCC provided for the recovery of: (1) inventory
financing costs; (2) working capital associated with gas supply purchases; (3)
bad debt expenses associated with the gas revenue portion of customer bills; and
(4) a substantial portion of liquefied natural gas operating and maintenance
expenses, all of which were previously recovered in base rates. Similar to the
former CGA, the GCC provided for reconciliation of total gas costs billed with
the actual cost of gas incurred. Any excess or deficiency in amounts billed as
compared to costs incurred was deferred and either refunded to, or recovered
from, customers over a subsequent period. As a result of the Price Stabilization
Plan Settlement Agreement described in Note 9, the GCC will be suspended for the
period from October 1, 1997 through September 30, 2000. Any excess or deficiency
in amounts billed as compared to costs incurred will be retained or borne by
ProvGas during this period.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The Company capitalizes interest and an allowance for equity funds in
accordance with established policies of the RIPUC and MDTE. The rates used are
based on the actual cost of debt and the allowed equity return. Interest
capitalized is shown as a reduction of interest expense and the equity allowance
is included in Other, net in the accompanying Consolidated Statements of Income.
DEFERRED CHARGES AND OTHER ASSETS
The Company defers and amortizes certain costs in a manner consistent with
authorized or probable rate-making treatment.
Deferred financing costs are amortized over the life of the related
security while the remaining deferred regulatory charges and other assets are
amortized over a recovery period specified by the respective regulatory
commissions.
Deferred Charges and Other Assets include the following:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997
- -------------------------------------------------------
<S> <C> <C>
Pension costs $ 6,401 $ 7,379
Unamortized debt expense 3,204 1,901
Goodwill, net 2,839 106
Year 2000 costs 2,518 -
Cost of fuel assistance program 895 808
Post-retirement benefits 346 691
Deferred rate case expense (note 9) 183 164
Deferred costs related to
phase-in plan 75 272
Other deferred charges 2,536 2,166
------- -------
Total $18,997 $13,487
======= =======
</TABLE>
Page-22
<PAGE>
TEMPORARY CASH INVESTMENTS
Temporary cash investments are short-term, highly liquid investments
with original maturities to the Company of not more than 90 days.
STOCK-BASED COMPENSATION
Compensation expense associated with awards of stock or options to
employees is measured using the intrinsic value method of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (See Note 10).
INTANGIBLES
All intangible assets are amortized on a straight-line basis over their
estimated useful lives. The goodwill and customer list amortization periods
associated with the recent oil acquisitions are 25 years and 10 years,
respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified for consistent
presentation with the current year.
2. FEDERAL INCOME TAXES
The Company records income taxes in accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires deferred taxes to be provided for all temporary differences.
The following is a summary of the provision for Federal income taxes for
the three years in the period ended September 30:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Current $2,526 $3,688 $2,989
Deferred 1,131 703 1,943
------ ------ ------
Total Federal income tax
provision $3,657 $4,391 $4,932
====== ====== ======
Income tax is charged (credited)
to the following:
Charged to operating
expenses $3,628 $4,608 $4,683
Included in other, net 29 (217) 249
------ ------ ------
Total Federal income tax
provision $3,657 $4,391 $4,932
====== ====== ======
</TABLE>
The effective Federal income tax rates and the reasons for their
differences from the statutory Federal income tax rates are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income
tax rates 34.0% 34.0% 34.0%
Reversing temporary differences (.1) (.3) .5
Charitable contribution - - (.4)
Amortization of
investment tax credits (.5) (.4) (.4)
Non-deductible goodwill .3 - -
Other .8 .9 .1
---- ---- ----
Effective Federal income
tax rate 34.5% 34.2% 33.8%
==== ==== ====
</TABLE>
Page-23
<PAGE>
The Company's deferred tax assets and liabilities for each of the two years
in the period ended September 30 are the result of the following temporary
differences:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
LONG-TERM DEFERRED TAXES
- ------------------------
Tax assets
Unamortized ITC $ 773 $ 828
Other 413 305
Tax liabilities
Property related (22,730) (21,828)
Pension costs (237) (222)
Deferred charges (511) (578)
-------- --------
Net deferred tax liability included in
in accompanying Consolidated Balance Sheets $(22,292) $(21,495)
======== ========
Prepaid taxes
- -------------
Tax assets
Accounts receivable reserves $ 970 $ 458
Property tax reserves (136) (229)
Alternative minimum tax - 703
Other 949 1,229
Tax liabilities
Employee severance 56 56
Other (109) (111)
-------- --------
Net prepaid taxes 1,730 2,106
Prepaid gross earnings tax
and other 3,647 1,899
-------- --------
Net prepaid and refundable taxes
included in accompanying
Consolidated Balance Sheets $ 5,377 $ 4,005
======== ========
</TABLE>
Investment tax credits are amortized through credits to other, net over the
estimated lives of related property.
3. LEASE RECEIVABLES
Previously, the Company financed the installation of water heaters and
other appliances for its customers under one to three-year finance agreements.
Additionally, the Company leased water heaters and appliances to customers under
10-year sales-type leases.
<TABLE>
<CAPTION>
Future minimum lease payments to be received are:
(thousands of dollars)
- -------------------------------------------------
<S> <C>
1999 $ 450
2000 450
2001 340
------
1,240
Amount representing interest 197
------
Amount representing principal $1,043
======
</TABLE>
4. CAPITALIZATION
A. FIRST MORTGAGE BONDS
In December 1995, ProvGas issued $15 million of Series R First Mortgage
Bonds. These First Mortgage Bonds bear interest at the rate of 7.5 percent and
mature in December 2025. The net proceeds provided by this indebtedness were
used to pay down ProvGas' short-term debt.
Page-24
<PAGE>
In April 1998, ProvGas issued $15 million of Series S First Mortgage Bonds.
These First Mortgage Bonds bear interest at the rate of 6.82 percent and mature
in April 2018. The net proceeds provided by this indebtedness were used to
finance capital expenditures and pay down short-term debt.
ProvGas' First Mortgage Bonds are secured by a lien on substantially all of
the tangible and real property.
As of September 30, 1998, the annual sinking fund requirements and
maturities of long-term debt for each of the next five fiscal years are
$1,873,000.
In September 1998, ProvGas repurchased $6.4 million of Series M First
Mortgage Bonds. The cost of repurchase was comprised of $6.4 million in
principal and $1.4 million in premium. The premium will be amortized over the
life of new debt which ProvGas expects to issue in fiscal 1999. ProvGas has
received an order from the RI Division of Public Utilities and Carriers
(Division) which permits the amortization of the bond premium over the life of
the new debt.
The Company's ability to pay dividends is largely dependent on the
continuing operations of ProvGas. Approximately $15 million of ProvGas' retained
earnings is available for dividends under the most restrictive terms of ProvGas'
First Mortgage Bond Indenture.
B. OTHER LONG-TERM DEBT
During 1997, the Company financed equipment purchases of approximately
$3,328,000 through the issuance of long-term notes to IBM Credit Corporation.
The notes have five-year terms and interest rates ranging from 4.9 to 7.5
percent. As of September 30, 1998, the maturities of these long-term notes over
the next five years are $632,000 in 1999, $670,000 in 2000, $708,000 in 2001,
$485,000 in 2002, and $74,000 in 2003.
C. REDEEMABLE PREFERRED STOCK
ProvGas' preferred stock, which consists of 80,000 shares of $100 par
value, has an 8.7 percent cumulative annual dividend rate payable on a quarterly
basis, and has no voting power or privileges. The stock is subject to a
cumulative annual sinking fund requirement of 16,000 shares per year at par
($1,600,000) plus accrued or unpaid dividends which commenced in February 1997.
Accordingly, 16,000 shares were redeemed by ProvGas at par value in February
1998 and 1997, respectively.
5. NOTES PAYABLE
The Company meets seasonal cash requirements and finances capital
expenditures on an interim basis through short-term bank borrowings. As of
September 30, 1998, the Company had lines of credit totaling $68,950,000 with
borrowings outstanding of $20,079,000. The Company pays a fee for its lines of
credit rather than maintaining compensating balances. The weighted average
short-term interest rate for borrowings outstanding at the end of the year was
5.86 percent in 1998, 5.79 percent in 1997, and 5.65 percent in 1996.
6. EMPLOYEE BENEFITS
A. RETIREMENT PLANS
The Company has two pension plans providing retirement benefits for
substantially all of its employees. The benefits under the plans are based on
years of service and the employee's final average compensation. It is the
Company's policy to fund at least the minimum required contribution.
The following table sets forth the funding status of the pension plans and
amounts recognized in the Company's Consolidated Balance Sheets at September 30,
1998 and 1997:
Page-25
<PAGE>
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation,
including vested benefit obligation
of $(46,175) as of September 30,
1998 and $(38,094)
as of September 30, 1997 $ (54,986) $ (45,022)
========= =========
Projected benefit obligation for
service rendered to date $ (71,540) $ (60,323)
Plan assets at fair value (primarily
listed stocks, corporate bonds, and
U.S. bonds) 74,862 76,479
--------- ---------
Excess of plan assets over
projected benefit obligation 3,322 16,156
Unrecognized (gain) (9,872) (23,813)
Unrecognized prior service cost 2,559 2,842
Unrecognized net transition asset
being recognized over 15 years
from October 1, 1985 (272) (408)
--------- ---------
Net accrued pension cost included
in other deferred credits and
accounts payable at September 30,
1998 and 1997 $ (4,263) $ (5,223)
========= =========
</TABLE>
Net pension cost for fiscal years 1998, 1997, and 1996 included the following
components:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,989 $ 1,824 $ 1,709
Interest cost on benefit obligations 4,904 4,583 4,262
Actual return on plan assets (1,338) (16,458) (7,481)
Net amortization and deferral (6,515) 10,526 2,091
------- -------- --------
Net periodic pension cost (960) 475 581
Adjustments due to regulatory
action 960 (475) (442)
------- -------- --------
Net periodic pension cost recognized
in earnings $ - $ - $ 139
======= ======== ========
</TABLE>
In 1998, the discount rate and rate of increase in future compensation levels
used in determining the projected benefit obligation were 6.75 percent and
5 percent, respectively. The expected long-term rate of return on assets was
9 percent in 1998.
In 1997 and 1996, the discount rate and rate of increase in future
compensation levels used in determining the projected benefit obligation were
8 percent and 6 percent, respectively. The expected long-term rate of return on
assets was 9 percent in 1997 and 1996.
ProvGas recovers pension costs in rates when such costs are funded.
Therefore, the amount by which funding differs from pension expense, determined
in accordance with GAAP, is deferred and recorded as a regulatory asset or
liability.
B. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
ProvGas currently offers retirees who have attained age 55 and worked five
years for ProvGas, healthcare and life insurance benefits during retirement (the
Benefit Plan). These benefits are similar to the benefits offered to active
employees. Although retirees are not required to make contributions to the
Benefit Plan currently, future contributions may be required if the cost of the
Benefit Plan exceeds certain limits.
Since 1993, post-retirement benefit costs for active employees are recorded
by ProvGas on an accrual basis, ratably over their service periods. Benefits of
$10,526,000 earned prior to 1993 have been deferred as an unrecognized
transition obligation, which ProvGas will amortize over a 20-year period.
ProvGas funds its post-retirement benefit obligation by contributions to a
Voluntary Employee Benefit Association (VEBA) Trust. Total contributions of
$1,308,000 in 1998, $1,372,000 in 1997, and $1,454,000 in 1996, were made to the
VEBA Trust.
Page-26
<PAGE>
ProvGas recovers its post-retirement benefit obligation in rates to the
extent allowed by the RIPUC. The RIPUC generally allows such costs to be
recovered if amounts are funded into tax favored investment funds, such as the
VEBA Trust. Accordingly, ProvGas fully recovered its 1998, 1997, and 1996 post-
retirement obligations because such obligations were funded through the VEBA
Trust. In addition, in September 1996, the RIPUC approved a ratable recovery of
the cumulative unrecovered difference of $1,041,000 during 1997, 1998, and 1999.
Of the total post-retirement benefit obligations, $1,654,000, $1,718,000, and
$1,454,000 were included in rates during 1998, 1997, and 1996, respectively.
The Benefit Plan's costs and accumulated post-retirement benefit obligation
for 1998, 1997 and 1996 are calculated by ProvGas' actuaries using assumptions
and estimates which include:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Healthcare cost annual growth rate 9.0% 10.2% 11.4%
Healthcare cost annual growth rate - long-term 6.0 6.0 6.0
Expected long-term rate of return (union) 8.5 8.5 8.5
Expected long-term rate of return (non-union) 5.5 5.5 5.5
Discount rate 6.75 8.0 8.0
</TABLE>
The healthcare cost annual growth rate significantly impacts the estimated
Benefit Plan obligation and annual expense. For example, in 1998, a one
percent change in the above rates would change the obligation by $773,000 and
would change the annual expense by $86,000.
The obligations and assets of the Benefit Plan at September 30, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement
benefit obligation:
Current retirees $ (6,444) $ (6,626)
Active employees-eligible for
benefits (1,469) (1,361)
Active employees (4,973) (3,761)
------- -------
Total post-retirement benefit
obligation (12,886) (11,748)
Plan assets at fair value 5,684 4,704
------- -------
Unfunded post-retirement benefit
obligation (7,202) (7,044)
Unrecognized transition obligation 7,895 8,421
Unrecognized net (gain) or loss (693) (1,360)
------- -------
Prepaid post-retirement
benefit obligation included
in the accompanying Consolidated
Balance Sheets $ - $ 17
======= =======
</TABLE>
ProvGas' actuarially determined Benefit Plan costs for 1998, 1997, and 1996
include the following:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 243 $ 228 $ 222
Interest cost 945 896 896
Actual return on plan assets (406) (278) (98)
Amortization and deferral 526 526 434
-------- -------- ------
Total annual plan costs $ 1,308 $ 1,372 $1,454
======== ======== ======
</TABLE>
C. SUPPLEMENTAL RETIREMENT PLANS
ProvGas provides certain supplemental retirement plans for key employees.
The projected benefit obligation is approximately $1,837,000 which is being
accrued over the service period of these key employees. The supplemental
retirement plans are unfunded. ProvGas accrued and expensed $61,000, $612,000,
and $310,000 related to these benefits in 1998, 1997, and 1996, respectively.
Page-27
<PAGE>
D. PERFORMANCE AND EQUITY INCENTIVE PLAN
The Providence Energy Corporation Performance and Equity Incentive Plan (the
Plan) provides that up to 225,000 shares of common stock, as well as cash
awards, may be granted to key employees, including employees of ProvGas, at no
cost to the employees. Key employees who received common shares are entitled to
receive dividends, but full beneficial ownership vests on the fifth anniversary
of the date of the grant provided the participant is still employed by the
Company. Vesting may be accelerated under certain circumstances. The Plan also
provides for cash compensation to key employees.
The executive compensation incentive awards totaled approximately $459,000
for 1998, $439,000 for 1997, and $381,000 for 1996. Amounts paid in cash are
charged to expense when earned. However, amounts paid in restricted stock are
deferred and amortized to expense over the five-year vesting period.
Of the $459,000 1998 award, $310,000 will be paid in cash during 1999.
Of the $439,000 1997 award, $297,000 was paid in cash during 1998. Of the
$381,000 1996 award, $269,000 was paid in cash during 1997. Grant shares
totaling 7,230, 5,989, and 4,491 were purchased by the Company and reissued to
key employees during 1998, 1997, and 1996, respectively.
E. RESTRICTED STOCK INCENTIVE PLAN
The Restricted Stock Incentive Plan provides that up to 60,000 shares of
common stock may be granted to employees of the Company with at least three
months of service, who are not officers or covered by a collective bargaining
agreement, at no cost to the employee. All participants are entitled to receive
dividends; however, full beneficial ownership vests on the third anniversary of
the date of the grant provided that the participant is still employed by the
Company. Vesting may be accelerated under certain circumstances.
Awards under the Restricted Stock Incentive Plan totaled approximately
$90,000 in 1998 consisting of 4,230 shares and approximately $146,000 in 1996
consisting of 7,954 shares. There were no awards under the Restricted Stock
Incentive Plan in 1997. All amounts awarded under the Restricted Stock
Incentive Plan are deferred and amortized to expense over a three-year period.
F. 1998 PERFORMANCE SHARE PLAN
Effective October 1, 1998, the Board of Directors adopted a Performance Share
Plan to encourage executives' interest in longer-term performance by keying
incentive payouts to the total return performance of the Company's common stock
in relation to that of other companies in the E.D. Jones gas distribution group
of approximately 30 companies and to the change in the Company's stock price
over three-year performance periods. The number of shares earned will range
from 50 percent to 150 percent of awarded shares, if based on the relative total
shareholder return method, and 50 percent to 100 percent, if based on the
increase in the Company's stock price during the three-year period. These
levels were developed to bring total compensation levels at the Company more in
line with survey data for the relevant labor market. No shares will be earned
unless shareholders have earned a minimum annual return over the three-year
period equal to the total annual return for thirty-year Treasury notes during
such period. Dividends will not be paid on the shares until they are earned.
Awards will be paid half in cash and half in stock.
7. COMMITMENTS AND CONTINGENCIES
A. LEGAL PROCEEDINGS
The Company is involved in legal and administrative proceedings in the normal
course of business, including certain proceedings involving material amounts in
which claims have been or may be made. However, management believes, after
review of insurance coverage and consultation with legal counsel, that the
ultimate resolution of the legal proceedings to which it is or can at the
present time be reasonably expected to be a party, will not have a materially
adverse effect on the Company's results of operations or financial condition.
B. CAPITAL LEASES
ProvGas has a capital lease with Algonquin Gas Transmission Company
(Algonquin) for storage space in a liquefied natural gas (LNG) tank. The
capital lease arrangement also provides that Algonquin lease from ProvGas, for a
corresponding term at an annual amount of $150,000, the land on which the tank
is situated. ProvGas also leases certain information systems and other
equipment under capital leases.
Page-28
<PAGE>
Property under Capital Leases:
- -----------------------------
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Gas Plant $ 6,116 $ 6,116
Computer and other equipment 1,988 1,988
Accumulated depreciation (6,937) (6,484)
------- -------
$ 1,167 $ 1,620
======= =======
<CAPTION>
Commitments for Capital Leases are:
- ----------------------------------
LNG Computer
(thousands of dollars) Storage Equipment Total
- ----------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 136 $ 484 $ 620
2000 136 297 433
2001 135 111 246
2002 - 35 35
------ ------- -------
$ 407 $ 927 $ 1,334
====== ======= =======
</TABLE>
C. OPERATING LEASES
The Company also leases facilities and equipment under operating leases with
a total future obligation of approximately $578,000 as of September 30, 1998.
D. GAS SUPPLY
As part of the Price Stabilization Plan Settlement Agreement described in
Note 9, the Company's largest subsidiary, ProvGas, entered into a full
requirements gas supply contract with Duke Energy Trading and Marketing, L.L.C.
(DETM) for a term of three years. Under the contract, DETM guarantees to meet
ProvGas' supply requirements; however, ProvGas must purchase all of its gas
supply exclusively from DETM. Under the contract, ProvGas transferred
responsibility for its pipeline capacity resources, storage contracts, and LNG
capacity to DETM. As a result, ProvGas' gas inventories of approximately $18
million at September 30, 1997 were sold at book value to DETM on October 1,
1997.
As a result of Federal Energy Regulatory Commission (FERC) Order 636 and
other related orders (the Orders), pipeline transportation companies have
incurred significant costs, collectively known as transition costs. The
majority of these costs will be reimbursed by the pipeline's customers,
including ProvGas. ProvGas estimates its transition costs to be approximately
$21.7 million, of which $16.2 million has been included in the GCC and collected
from customers through September 30, 1997. At September 30, 1997, the remaining
minimum obligation of $5.5 million has been recorded in the accompanying
Consolidated Balance Sheets along with a regulatory asset anticipating future
recovery. As part of the above supply contract, DETM assumed liability for these
transition costs during the contract's three-year term. At the end of the three-
year term of the contract, the Company will assume any remaining liability,
which is not expected to be material.
E. ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Company cannot predict the future impact of
such standards and requirements, which are subject to change and can take effect
retroactively. The Company continues to monitor the status of these laws and
regulations. Such monitoring involves the review of past activities and current
operations, and may include expending funds to investigate or clean up certain
sites. To the best of its knowledge, subject to the following, the Company
believes it is in substantial compliance with such laws and regulations.
At September 30, 1998, the Company was aware of five sites at which future
costs may be incurred.
Page-29
<PAGE>
The Company has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites in Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Company and other PRPs. With respect to one of the
Plympton sites, the Company has joined with other PRPs in entering into an
Administrative Consent Order with the Massachusetts Department of Environmental
Protection. The costs to be borne by the Company, in connection with both
Plympton sites, are not anticipated to be material to the financial condition of
the Company.
During 1995, the Company began a study at its primary gas distribution
facility located in Providence, Rhode Island. This site formerly contained a
manufactured gas plant operated by the Company. As of September 30, 1998,
approximately $2.0 million had been spent primarily on studies at this site. In
accordance with state laws, such a study is monitored by the Rhode Island
Department of Environmental Management (DEM). The purpose of this study was to
determine the extent of environmental contamination at the site. The Company has
completed the study which indicated that remediation will be required for two-
thirds of the property. The remediation is expected to begin in February 1999
and will continue for a duration of three to six months. During the remediation
process, the remaining one-third of the property will also be investigated and
remediated if necessary.
At September 30, 1998, the Company compiled a preliminary range of costs,
based on removal and off-site disposal or recycling of contaminated soil,
ranging from $1.8 million to in excess of $5.0 million. However, because of the
uncertainties associated with environmental assessment and remediation
activities, the future cost of remediation could be higher than the range noted.
Based on the proposals for remediation work, the Company has accrued $1.8
million at September 30, 1998, for anticipated future remediation costs at this
site.
Tests conducted following the discovery of an abandoned underground oil
storage tank at the Company's Westerly, Rhode Island operations center in 1996
confirmed the existence of contaminants at this site. The Company is currently
conducting tests at this site, the costs of which are being shared equally with
the prior owner, to determine the nature and extent of the contamination. Due
to the early stages of investigation, management cannot offer any conclusions as
to whether any remediation will be required at this site. In addition, in 1997,
contamination from scrapped meters and regulators was discovered at this site.
The Company has reported this to DEM and the Rhode Island Department of Health
and is in the process of remediation. It is anticipated that remediation will
cost approximately $10,000. Accordingly, the Company has accrued $10,000 at
September 30, 1998 for anticipated future remediation costs.
In November 1998, the Company received a letter of responsibility from DEM
relating to possible contamination on previously-owned property on Allens Avenue
in Providence. The current owner of the property has been similarly notified.
The Company lacks sufficient information at this time to determine the validity
of the claim, the amount of the clean-up costs or any defenses which may be
available with respect to such claim.
In prior rate cases filed with the RIPUC, ProvGas 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. Due to the magnitude of ProvGas' environmental
investigation and remediation expenditures, ProvGas sought current recovery for
these amounts. As a result, in accordance with the Price Stabilization Plan
Settlement Agreement described in Note 9, effective October 1,
1997, all environmental investigation and remediation costs incurred through
September 30, 1997, as well as all costs incurred during the three-year term of
the Plan, will be amortized over a ten-year period. Additionally, it is ProvGas'
practice to consult with the RIPUC on a periodic basis when, in management's
opinion, significant amounts might be expended for environmental-related costs.
As of September 30, 1998, ProvGas has charged environmental assessment and
remediation costs of $2.6 million and an estimated $1.8 million to the
accumulated depreciation reserve and has amortized $.4 million of these costs.
Management has begun discussions with other parties who may assist ProvGas in
paying any future costs at the above sites. Management believes that its program
for managing environmental issues, combined with rate recovery and financial
contributions from others, will likely avoid any material adverse effect on its
results of operations or its financial condition as a result of the ultimate
resolution of the above sites.
Page-30
<PAGE>
F. PURCHASE COMMITMENTS
At September 30, 1998, ProvEnergy Services and ProvEnergy Oil have forward
purchase commitments for their supply needs with a market value of approximately
$15.2 million. These contracts were acquired at a cost of approximately $15.6
million and have maturities of less than two years. All financial instruments
held by the Company qualify as hedges due to either anticipated sales contracts
or firm sales commitments.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for the following financial instruments:
Cash, Cash Equivalents, Accounts Payable and Short-term Debt
- ------------------------------------------------------------
The carrying amount approximates fair value due to the short-term maturity of
these instruments.
Financial Instruments for Hedging
- ---------------------------------
The fair value of financial instruments for hedging are the same as the
carrying amount as these instruments were marked to market at September 30,
1998.
Long-term Debt and Preferred Stock
- ----------------------------------
The fair value of long-term debt and preferred stock is estimated based on
currently quoted market prices for similar types of issues.
The carrying amounts and estimated fair values of the Company's financial
instruments at September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -------------------
Carrying Fair Carrying Fair
(thousands of dollars) Amount Value Amount Value
- -------------------------------------------- -------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,006 $ 2,006 $ 1,063 $ 1,063
financial instruments
for hedging 169 169 - -
Accounts payable 9,325 9,325 16,755 16,755
Short-term debt 20,079 20,079 23,675 23,675
Long-term debt 83,388 96,024 76,079 84,039
Preferred stock 4,800 5,040 6,400 7,030
</TABLE>
The difference between the carrying amount and the fair value of ProvGas'
preferred stock and long-term debt, if they were settled at amounts reflected
above, would likely be recovered in ProvGas' rates over a prescribed
amortization period. Accordingly, any settlement should not result in a
material impact on ProvGas' financial position or results of operations.
9. RATE CHANGES
A. PRICE STABILIZATION PLAN SETTLEMENT AGREEMENT
In August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement (Energize RI or the Plan) among ProvGas, the Division, the Energy
Council of Rhode Island, and the George Wiley Center. Effective for the period
from October 1, 1997 to September 30, 2000, Energize RI provides customers with
a price decrease of approximately four percent in addition to a three-year price
freeze. Under Energize RI, the GCC will be suspended for the entire term.
Energize RI also requires ProvGas to make significant capital investments to
improve its distribution system. Capital investments required by Energize RI
are estimated to total approximately $26 million over its three-year term. In
addition, Energize RI requires ProvGas to fund the Low-Income Assistance Program
at an annual level of $1 million, the Demand Side Management Rebate Program at
an annual level of $.5 million and the Low-Income Weatherization Program at an
annual level of $.2 million. Energize RI also continues the process of
unbundling by requiring ProvGas to provide unbundled service offerings up to 10
percent per year of firm deliveries.
Page-31
<PAGE>
As part of Energize RI, ProvGas will amortize approximately $4.0 million
of environmental costs previously charged to the accumulated depreciation
reserve. These costs and all environmental costs incurred during the term of the
Plan will be amortized over a 10-year period. Also, in connection with the Plan,
ProvGas wrote-off approximately $1.5 million of previously deferred gas costs in
October 1997.
Under Energize RI, ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999, and 2000, respectively. In addition, ProvGas may not earn
less than a seven percent return on average common equity. In the event that
ProvGas earns in excess of 10.9 percent or less than seven percent, ProvGas will
defer revenues or costs through a deferred revenue account over the term of the
Plan. Any balance in the deferred revenue account at the end of the Plan will be
refunded to or recovered from customers in a manner to be determined by all
parties to the Plan and approved by the RIPUC.
As part of Energize RI, ProvGas is permitted to file with the Division
for the recovery of the impact of exogenous Changes (Changes) which may occur
during the three-year term of the Plan. Changes are defined as "...significant
increases or decreases in ProvGas' costs or revenues which are beyond ProvGas'
reasonable control." Any disputes regarding either the nature or quantification
of the Changes are to be resolved by the RIPUC. The impact of any such Changes
will be debited or credited to a regulatory asset or liability account
throughout the term of Energize RI and will be recovered or refunded at the
expiration of the Plan through a method to be determined.
During 1998, due to the extremely warm temperatures, ProvGas experienced
a margin loss of approximately $4.0 million. ProvGas also experienced a non-firm
margin loss of approximately $2.2 million due to adverse market prices of
natural gas versus alternate fuels. ProvGas believes the causes of these two
events were beyond its control and thus considers them as Changes. In fiscal
1999, ProvGas intends to file with the Division for recovery of a portion of
these losses.
In 1998, ProvGas did not earn its allowed rate of return primarily as a
result of the extremely warm weather and the loss of non-firm margin as
previously discussed in "Operating Margin" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations. Under the Plan's
design, which assumed normal weather, ProvGas should have had earnings in year
one of the Plan in excess of 10.9 percent. The earnings in excess of 10.9
percent were to be deferred in the deferred revenue account to fund capital
investments and other Plan commitments in the remaining two years of the Plan.
Absent favorable recovery for the Changes as discussed above and/or other
factors such as colder than normal weather, ProvGas' ability to earn a 10.9
percent return on average common equity in future years of the Plan is
substantially impaired.
B. NORTH ATTLEBORO GAS RATE INCREASE
In October 1991, the MDTE released its settlement order in regards to a
rate request which included a qualified phase-in plan.
The rate settlement required North Attleboro Gas to classify $545,000 of
gas plant as plant held for future use. This plant will be included in future
rates if North Attleboro Gas meets certain growth requirements by the year 2000.
North Attleboro Gas capitalized AFUDC and other costs of approximately $18,000
in 1998, $37,000 in 1997, and $61,000 in 1996 that related primarily to the gas
plant not yet phased into North Attleboro Gas' rates under the plan. North
Attleboro Gas amortized $214,000 in 1998, $214,000 in 1997, and $212,000 in 1996
of amounts previously deferred.
10. STOCK RIGHTS AND OPTIONS
Currently, one common stock purchase Right (Right) is attached to each
outstanding share of common stock. Each Right entitles the holder to purchase
one share of common stock at a price of $70 per share, subject to adjustment. In
the event that certain transactions as defined in the Rights Agreement occur,
each Right will become exercisable for that number of shares of common stock of
the acquiring company (or of the Company in certain circumstances) which at the
time of the transaction has a market value of two times the exercisable price.
These Rights expire on August 17, 2008 and may be redeemed by a vote of the
directors at a redemption price of $.01 per Right. Due to the antidilutive
characteristics of these Rights, there is no assumed impact on earnings per
share.
Page-32
<PAGE>
The Company offers two stock option plans for officers, directors, and key
employees covering 250,000 shares of the Company's common stock. Options under
the plans are granted at an exercise price equal to fair market value at the
date of grant. The options expire 10 years from the date of grant and in the
case of options granted to the directors, the options become exercisable after
the first anniversary of the date of such grant.
Pursuant to the provisions of the plans, each plan terminated on November 3,
1998 which was 10 years from the effective date of the plan. Any options
outstanding under either of the plans shall remain in effect according to the
plans' terms and conditions.
Under the stock option plans, stock appreciation rights may be granted in
conjunction with all or part of any stock option grants to employees. Such
Rights offer optionees the alternative of electing not to exercise the related
stock option, but to receive instead an amount in cash, stock or a combination
of cash and stock equivalents for the difference between the option price and
the fair market value of the share.
In connection with the purchase of the oil distribution companies, the
Company issued an option to purchase 100,000 shares of its common stock to a
former owner.
Stock option data are summarized as follows for the years ended September
30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
- --------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, September 30, 1995 54,789 $16.74
Granted 7,449 17.00
Exercised - -
Expired - -
-------- ------
Outstanding, September 30, 1996 62,238 16.77
Granted 9,319 17.50
Exercised (2,130) 16.11
Expired (10,009) 17.71
-------- ------
Outstanding, September 30, 1997 59,418 16.75
Granted 100,000 23.00
Exercised (6,852) 16.79
Expired - -
-------- ------
Outstanding, September 30, 1998 152,566 $20.85
======== ======
</TABLE>
The following table sets forth information regarding options outstanding at
September 30, 1998:
<TABLE>
<S> <C>
Number of Options 152,566
Range of Exercise Prices $13.875 - $23
Number Currently Exercisable 152,566
Weighted Average Exercise Price $20.85
Weighted Average Remaining Life 4.20 years
Weighted Average Exercise Price for
Currently Exercisable $20.85
</TABLE>
At September 30, 1997 and 1996, 50,927 and 54,789 were currently exercisable,
respectively.
As described in Note 1, the Company uses the intrinsic method to measure
compensation expense associated with grants of stock options or awards to
employees. Had the Company used the fair value method to measure compensation,
reported net income would have been $6,396,000 in 1998 and $7,822,000 in 1997.
Earnings per share for fiscal year 1998 would have been $1.08. Earnings per
share for fiscal 1997 would not have been affected.
Page-33
<PAGE>
For purposes of determining the above disclosure required by Statement of
Financial Accounting Standards No. 123, the fair value of options on their grant
date was measured using the Black-Scholes option pricing model. Key assumptions
used to apply this pricing model were as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Risk-free interest rate 5.01% 5.43%
Expected life of option grants (years) 4.0 7.0
Expected volatility of underlying stock 15% 15%
</TABLE>
The pro-forma presentation only includes the effects of grants made subsequent
to October 1, 1996. The estimated fair value of option grants made during 1998
and 1997 was $.70 and $1.41, respectively, per option.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
In January 1997, the shareholders of the Company adopted the Non-Employee
Director Stock Plan, which provides that up to 50,000 shares of common stock may
be granted to non-employee directors. The shares are granted, at no cost to the
director, on the first day of each fiscal year based on each director's
aggregate fees earned in the prior fiscal year. All participants are entitled to
vote the grant shares and receive dividends on the grant share, however, full
beneficial ownership vests on the third anniversary of the grant date provided
the participant is still a director of the Company. Vesting may be accelerated
under certain circumstances. The Company issued 2,131 shares under the Non-
Employee Director Stock Plan in 1998.
11. HEDGING
The Company's strategy is to use financial instruments for hedging purposes
to manage the impact of market fluctuations on contractual sales commitments.
Two of the Company's wholly-owned subsidiaries, ProvEnergy Services and
ProvEnergy Oil, use financial instruments to manage market risks and reduce
their exposure to fluctuations in the market prices of home heating oil, diesel,
kerosene and natural gas.
The futures and option contracts had net unrealized gains of approximately
$.1 million which have been deferred on the accompanying Consolidated Balance
Sheets at September 30, 1998.
At September 30, 1998, the estimated fair market value of the forward
contracts totaled approximately $15.2 million and were acquired at a cost of
approximately $15.6 million. The fair market value of these forward contracts is
based on quoted market prices and the contracts have maturities of less than two
years.
12. NET INCOME PER COMMON SHARE
During 1998, the Company adopted the provisions of SFAS No. 128 "Earnings
Per Share". Under the provisions of SFAS 128, basic earnings per share replaces
primary earnings per share and the dilutive effect of stock options are excluded
from the calculation. Fully diluted earnings per share are replaced by diluted
earnings per share and include the dilutive effect of stock options and
warrants, using the treasury stock method. All prior period earnings per share
data have been restated to conform to the requirements of SFAS No. 128.
A reconciliation of the weighted average number of shares outstanding used
in the computation of basic and diluted earnings per share for the three years
ended September 30, 1998 is as follows:
Page-34
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average
shares 5,919,699 5,790,087 5,709,198
Effect of dilutive stock
options 9,963 4,260 2,773
--------- --------- ---------
Weighted average
shares diluted 5,929,662 5,794,347 5,711,971
========= ========= =========
</TABLE>
The net income used in the calculation for basic and diluted earnings per
share calculations agrees with the net income appearing in the consolidated
financial statements.
13. INVESTMENTS
In July 1998, the Company and ERI Services, Inc agreed to form Capital Center
Energy Company, LLC (CCEC). The joint venture is owned 50 percent by the
Company's subsidiary, ProvEnergy Power Company, LLC and 50 percent by ERI
Services' subsidiary, ERI Providence, LLC. CCEC's wholly-owned subsidiary
DownCity Energy Company, LLC, was selected as the exclusive electric, heat, air
conditioning and related service provider for most of the Providence Place Mall
for the next thirty years. The Company had invested $2 million of its total
projected investment of $15 million at September 30, 1998.
14. ACQUISITIONS
In November 1997, the Company acquired all of the outstanding capital stock
of the Super Service Companies. These companies provide a full service
distribution of oil products, selling fuel oil, diesel, gasoline and lubricants.
Also, in November 1997, the Company acquired all of the assets of the Mohawk
Companies. Mohawk Oil Company is a full service oil company. In addition to
its oil business, Mohawk installs and services air conditioning and heating
equipment through its affiliate, Mohawk Environmental Technologies.
The amounts related to the purchases of these companies are not material to
the financial position of the Company. These acquisitions have been accounted
for as purchases and, accordingly, operating results of these businesses
subsequent to the date of acquisition have been consolidated in the financial
statements of the Company. Pro-forma results of operations, which include the
operating results of these acquisitions, are not materially different than the
operating results presented.
During 1998, the Company purchased the customer lists of three small oil
companies servicing the greater Providence area. Together, these acquisitions
are part of the Company's vision to be the "First Choice" energy provider. The
Company believes these acquisitions will offer a valuable entry into the
heating-oil business market.
The Company continues to assess the energy market for potential acquisitions
to fulfill its vision.
15. SEGMENTS OF BUSINESS
Information about the Company's operations in different industry segments is
presented below:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
ENERGY REVENUES
- ---------------
Natural gas distribution $188,734 $215,258 $214,745
Energy services 32,572 5,162 407
-------- -------- --------
Total $221,306 $220,420 $215,152
======== ======== ========
OPERATING INCOME (LOSS)
- -----------------------
Natural gas distribution $ 16,060 $ 16,336 $ 16,212
Energy services (1,574) (274) (26)
-------- -------- --------
Total $ 14,486 $ 16,062 $ 16,186
======== ======== ========
</TABLE>
Page-35
<PAGE>
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
- -------------------
Natural gas distribution $238,515 $251,759 $247,026
Energy services 13,148 2,879 1,981
General corporate 1,747 872 1,143
-------- -------- --------
Total $253,410 $255,510 $250,150
======== ======== ========
ADDITIONS TO PROPERTY, PLANT
- ----------------------------
& EQUIPMENT, NET
- ----------------
Natural gas distribution $ 28,265 $ 20,785 $ 20,781
Energy services 367 90 -
-------- -------- --------
Total $ 28,632 $ 20,875 $ 20,781
======== ======== ========
DEPRECIATION AND AMORTIZATION
- -----------------------------
Natural gas distribution $ 13,962 $ 12,869 $ 11,997
Energy services 523 5 -
-------- -------- --------
Total $ 14,485 $ 12,874 $ 11,997
======== ======== ========
</TABLE>
Natural gas distribution consists primarily of natural gas sales and
distribution to residential, commercial and industrial customers. Energy
services consists of heating oil, motor oil, and gas commodity sales to
residential, commercial and industrial customers.
Total energy revenues by industry segment consist of unaffiliated customers,
as reported in the Company's Statements of Consolidated Income.
Operating income is total revenues less operating expenses and Federal income
taxes, as shown on the Statements of Consolidated Income. Included in operating
income is $.5 million of costs associated with liquidating fixed purchase
commitments and option contracts for oil when market prices dropped
significantly.
Identifiable assets are those assets that are used in each segment of the
Company's operations. Corporate assets consists primarily of the Company's
equity investment in CCEC (See Note 13).
16. OTHER PROPERTY
During 1996, the Company sold land which was previously being rented to a
third party for use as a parking lot. The land was sold for $.7 million
generating a gain, net of taxes, of $.5 million. Additionally, in accordance
with SFAS No. 5, "Accounting for Contingencies", the Company performed an
economic analysis of the value of its significant real estate in 1996. Based on
the results of that analysis, the Company wrote down the carrying value of its
real estate by $.5 million, net of taxes, due to a decline in real estate
prices.
17. NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 1997, the Company adopted the provisions of Statement of
Position (SOP) 96-1, "Environmental Remediation Liabilities". This Statement
provides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
The Company has recorded environmental remediation liabilities of approximately
$1.8 million at September 30, 1998. SOP 96-1 did not have an impact on the
Company's financial position or results of operations upon adoption. Also see
Note 7E "Environmental Matters".
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 130, which is
effective for the Company's fiscal year ending September 30, 1999, requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No.
131, which is effective for the Company's fiscal year ending September 30, 1999,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. These statements require
additional disclosure only and will not affect the financial position or results
of operations of the Company.
Page-36
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for the Company's fiscal year ending September 30,
2000. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at a company's election,
before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of adoption
of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". It applies to all nongovernmental entities and is effective
for the Company's financial statements for fiscal year ending September 30,
2000. The provisions of this SOP should be applied to internal-use software
costs incurred in fiscal years subsequent to December 15, 1998 for all projects,
including those projects in progress upon initial application of the SOP.
The SOP establishes accounting standards for the determination of
capital or expense treatment of expenditures for computer software developed or
obtained for internal use based upon the stage of development. The SOP defines
three stages as (1) Preliminary Project, (2) Application Development and (3)
Post-Implementation/Operation. As a general rule, the Preliminary Project and
Post-Implementation/Operation phase expenditures are expensed and Application
Development expenditures are capitalized.
The Company will adopt the SOP upon the effective date and assess its
impact at that time.
18. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited quarterly financial information for the two
years ended September 30, 1998 and 1997. Quarterly variations between periods
are caused primarily by the seasonal nature of energy sales and the availability
of energy products.
<TABLE>
<CAPTION>
(thousands, except Quarter Ended
per share amounts) Dec. 31 Mar. 31 June 30 Sept. 30
------------------------------------------
<S>
Fiscal 1998
- ---------------------------------------------------------------------
<C> <C> <C> <C>
Energy revenues $67,942 $87,796 $39,462 $26,106
Operating income (loss) 6,371 11,559 113 (3,557)
Net income (loss) 4,403 9,535 (1,843) (5,653)
Net income (loss)
per share* .75 1.61 (.31) (.96)
Fiscal 1997
- ---------------------------------------------------------------------
Energy revenues $64,038 $79,946 $42,921 $33,515
Operating income (loss) 6,355 8,782 2,210 (1,285)
Net income (loss) 4,264 6,737 135 (3,305)
Net income (loss)
per share* .74 1.17 .02 (.58)
</TABLE>
* Calculated on the basis of the weighted average shares outstanding during the
quarter.
Page-37
<PAGE>
EXHIBIT 21
Exhibit 21. SUBSIDIARIES OF THE REGISTRANT
- -------------------------------------------
The Providence Gas Company - Incorporated under the laws of Rhode Island.
Newport America Corporation - Incorporated under the laws of Rhode Island.
Providence Energy Services, Inc. - Incorporated under the laws of Rhode Island.
North Attleboro Gas Company - Incorporated under the laws of Massachusetts.
Providence Energy Oil Enterprises, Inc. - Incorporated under the laws of Rhode
Island.
ProvEnergy Power Company, LLC - Organized under the laws of Rhode Island.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 202,495
<OTHER-PROPERTY-AND-INVEST> 2,692
<TOTAL-CURRENT-ASSETS> 27,057
<TOTAL-DEFERRED-CHARGES> 18,997
<OTHER-ASSETS> 2,169
<TOTAL-ASSETS> 253,410
<COMMON> 5,969
<CAPITAL-SURPLUS-PAID-IN> 59,198
<RETAINED-EARNINGS> 23,067
<TOTAL-COMMON-STOCKHOLDERS-EQ> 88,234
0
4,800
<LONG-TERM-DEBT-NET> 80,155
<SHORT-TERM-NOTES> 20,079
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,233
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 56,909
<TOT-CAPITALIZATION-AND-LIAB> 253,410
<GROSS-OPERATING-REVENUE> 221,306
<INCOME-TAX-EXPENSE> 3,628
<OTHER-OPERATING-EXPENSES> 203,192
<TOTAL-OPERATING-EXPENSES> 206,820
<OPERATING-INCOME-LOSS> 14,486
<OTHER-INCOME-NET> 576
<INCOME-BEFORE-INTEREST-EXPEN> 15,062
<TOTAL-INTEREST-EXPENSE> 8,133
<NET-INCOME> 6,929
487
<EARNINGS-AVAILABLE-FOR-COMM> 6,442
<COMMON-STOCK-DIVIDENDS> 6,377
<TOTAL-INTEREST-ON-BONDS> 6,391
<CASH-FLOW-OPERATIONS> 41,604
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
