<PAGE>
THE PROVIDENCE ENERGY CORPORATION
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1997
-------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ____________________ to _____________________
Commission file number 1-10032
---------------------------------------------------------
PROVIDENCE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
401-272-9191
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common stock, $1.00 par value, 5,904,978 shares outstanding at
- ---------------------------------------------------------------
February 12, 1998.
- ------------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q/A
DECEMBER 31, 1997
As a result of a printer's error, the Form 10-Q filing of the Registrant for
the quarter ended December 31, 1997, included only the financial information of
the Registrant's principal subsidiary, The Providence Gas Company. The financial
information contained in this Form 10-Q/A properly reflects the financial
information and other information of the Registrant for the quarter ended
December 31, 1997.
PAGE
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
three and twelve months ended
December 31, 1997 and 1996 I-1
Consolidated Balance Sheets as of
December 31, 1997, December 31, 1996 and
September 30, 1997 I-2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1997 and 1996 I-3
Consolidated Statements of Capitalization as of
December 31, 1997, December 31, 1996 and
September 30, 1997 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-10
PART II: OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------
FOR THE PERIODS ENDED DECEMBER 31
--------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Energy revenues $ 67,942 $ 64,038 $224,324 $220,784
Cost of energy 39,939 37,280 127,035 126,005
-------- -------- -------- --------
Operating Margin 28,003 26,758 97,289 94,779
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 12,057 11,374 49,451 48,675
Depreciation and amortization 3,579 3,099 13,354 12,213
Taxes -
State gross earnings 1,780 1,776 6,049 6,228
Local property and other 1,967 1,762 7,892 7,038
Federal income 2,249 2,392 4,465 4,650
-------- -------- -------- --------
Total operating expenses 21,632 20,403 81,211 78,804
-------- -------- -------- --------
Operating income 6,371 6,355 16,078 15,975
Other, net 175 (47) 220 259
-------- -------- -------- --------
Income before interest expense 6,546 6,308 16,298 16,234
-------- -------- -------- --------
Interest expense:
Long-term debt 1,490 1,520 6,012 6,096
Other 597 391 1,992 1,465
Interest capitalized (83) (41) (267) (134)
-------- -------- -------- --------
2,004 1,870 7,737 7,427
-------- -------- -------- --------
Income from continuing
operations
after interest expense 4,542 4,438 8,561 8,807
Preferred dividends of
subsidiary (139) (174) (591) (696)
-------- -------- -------- --------
Net income $ 4,403 $ 4,264 $ 7,970 $ 8,111
======== ======== ======== ========
Earnings per common share $ .75 $ .74 $ 1.37 $ 1.42
======== ======== ======== ========
Dividends paid per common share $ .27 $ .27 $ 1.08 $ 1.08
======== ======== ======== ========
Weighted average common shares
outstanding 5,868.4 5,757.8 5,817.7 5,728.6
======== ======== ======== ========
</TABLE>
I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
-----------
(thousands)
-----------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1996 1997
--------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $306,323 $285,047 $300,829
Less - Accumulated depreciation and
utility plant acquisition
adjustments 113,585 103,034 110,365
-------- -------- --------
192,738 182,013 190,464
-------- -------- --------
Other property, net 3,428 1,130 1,182
-------- -------- --------
Current assets:
Cash and temporary cash investments 4,690 3,054 1,063
Accounts receivable, less allowance of
$2,178 at 12/31/97, $3,138 at
12/31/96 and $1,886 at 9/30/97 45,953 32,841 14,852
Unbilled revenues 10,978 10,469 2,683
Deferred gas costs - 15,797 7,231
Inventories, at average cost -
Liquefied natural gas, propane,
underground storage and oil 446 14,896 18,217
Materials and supplies 1,321 1,198 1,287
Prepaid and refundable taxes 2,719 3,023 4,005
Prepayments 738 805 1,039
-------- -------- --------
66,845 82,083 50,377
-------- -------- --------
Deferred charges and other assets 14,995 14,162 13,487
-------- -------- --------
Total assets $278,006 $279,388 $255,510
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
(See accompanying statement) $168,919 $164,413 $164,433
-------- -------- --------
Current liabilities:
Notes payable 38,170 40,965 23,675
Current portion of long-term debt 3,724 2,029 3,707
Accounts payable 18,359 25,397 16,755
Accrued taxes 5,096 4,848 2,506
Accrued vacation 1,620 1,687 1,715
Customer deposits 3,441 3,957 3,461
Other 4,775 4,379 5,531
-------- -------- --------
75,185 83,262 57,350
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 21,733 20,939 21,495
Unamortized investment tax credits 2,334 2,493 2,375
Other 9,835 8,281 9,857
-------- -------- --------
33,902 31,713 33,727
-------- -------- --------
Commitments and contingencies - - -
Total capitalization and liabilities $278,006 $279,388 $255,510
======== ======== ========
</TABLE>
I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE MONTHS ENDED DECEMBER 31
--------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
-----------
1997 1996
--------------------
(thousands)
<S> <C> <C>
Cash provided by (used for) Operating Activities:
Income after interest expense $ 4,542 $ 4,438
Items not requiring cash:
Depreciation and amortization-
plant and other property 3,600 3,125
Changes as a result of regulatory actions 1,500 -
Deferred Federal income taxes 237 226
Amortization of investment tax credits (41) (40)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (10,239) (18,176)
Unbilled revenues (8,295) (8,112)
Deferred gas costs 231 (2,525)
Inventories 157 1,188
Prepaid and refundable taxes 1,347 1,053
Prepayments 304 735
Accounts payable 5,573 8,025
Accrued taxes 2,594 2,868
Accrued vacation, customer deposits
and other (894) (996)
Deferred charges and other (287) 791
-------- --------
Net cash provided by (used for)
operations 329 (7,400)
-------- --------
Investing Activities:
Expenditures for property, plant
and equipment, net (5,861) (5,596)
Expenditures for business acquisitions,
net of cash acquired (982) -
-------- --------
Net cash used in investing activities (6,843) (5,596)
-------- --------
Financing Activities:
Payments on long-term debt (1,948) (1,697)
Increase in notes payable, net 13,436 17,695
Cash dividends on preferred shares (139) (174)
Cash dividends on common shares (1,208) (1,198)
-------- --------
Net cash provided by financing activities 10,141 14,626
-------- --------
Increase in cash and cash equivalents 3,627 1,630
Cash and temporary cash investments at beginning
of period 1,063 1,424
-------- --------
Cash and temporary cash investments at end $ 4,690 $ 3,054
of period ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for-
Interest (net of amount capitalized) $ 1,763 $ 1,757
Income taxes (net of refunds) $ - $ 13
</TABLE>
I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(Unaudited)
-----------
(Thousands)
-----------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1996 1997
------------------------------------------
<S> <C> <C> <C>
Common stockholders' investment:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 5,905 at 12/31/97,
5,768 at 12/31/96
and 5,832 at
9/30/97 $ 5,905 $ 5,768 $ 5,832
Amount paid in excess of par 57,896 55,768 56,827
Retained earnings 25,831 24,125 23,002
-------- -------- --------
Total common equity 89,632 85,661 85,661
-------- -------- --------
Cumulative preferred stock of subsidiary:
Providence Gas Company -
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 64 shares as of
12/31/97 and 9/30/97 and 80
shares as of 12/31/96 6,400 8,000 6,400
-------- -------- --------
Long-term debt:
First Mortgage Bonds 69,600 71,200 71,200
Other long-term debt 5,451 - 3,207
Capital Leases 1,560 1,581 1,672
-------- -------- --------
Total long-term debt 76,611 72,781 76,079
Less current portion 3,724 2,029 3,707
-------- -------- --------
Long-term debt, net 72,887 70,752 72,372
-------- -------- --------
Total capitalization $168,919 $164,413 $164,433
======== ======== ========
</TABLE>
I-4
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein when read
with the annual report for 1997 filed on Form 10-K are adequate to make the
information presented not misleading.
Rates and Regulation
- --------------------
The Registrant is subject to the regulatory jurisdiction of the Rhode Island
Public Utilities Commission (RIPUC) 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, (the Plan or Energize R.I.)
among the Registrant, the Rhode Island Division of Public Utilities and Carriers
(the Division), The Energy Council of Rhode Island, and the George Wiley Center.
Effective October 1, 1997 through September 30, 2000, Energize R.I. provides
customers with an initial price decrease of approximately four percent and a
three-year price freeze. In connection with the price decrease, the Registrant
will write-off and not recover $1.5 million of previously deferred gas costs.
Under Energize R.I., the Gas Charge Clause (GCC) will be suspended for the
entire three-year term of the Plan. Any excess or deficiency between amounts
billed and actual incurred gas costs will be retained or borne by the
Registrant. Energize R.I. also requires the Registrant to make significant
capital investments to improve its distribution system. Capital investments
required by Energize R.I. are estimated to total approximately $26 million over
its three-year term. In addition, the Registrant is required to fund the Demand
Side Management Rebate Assistance Program and the Low Income Weatherization
Program at annual levels of $.5 million and $.2 million, respectively. Energize
R.I. also calls for the Registrant to fund the Low Income Assistance Program at
an annual level of $1.0 million. Finally, Energize R.I. continues the process of
unbundling by requiring the Registrant to provide unbundled service offerings
for up to 10 percent per year of firm system throughput.
As part of Energize R.I., the Registrant will amortize over a ten year period
approximately $4.0 million of environmental costs previously charged to the
accumulated depreciation reserve. All environmental costs incurred during the
term of Energize R.I. will also be amortized over a ten year period.
Under Energize R.I. the Registrant 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, the Registrant may not
earn less than a 7 percent return on average common equity under the Plan. In
the event that the Registrant earns in excess of 10.9 percent or less than 7
percent, the Registrant will defer revenues or costs through a deferred revenue
account over the term of the Plan. Any balance in the deferred revenue account
at the end of the Plan will be refunded to or recovered from customers in a
manner determined by all parties and approved by the RIPUC.
I-5
<PAGE>
The Intergated Resource Plan (IRP) will be terminated as a result of Energize
R.I. In addition to the funding for the demand side management program and low
income weatherization and assistance programs, the IRP provided for a
performance-based ratemaking mechanism. The Registrant was able to record its
annual share of the performance-based ratemaking mechanism in both 1997 and
1996, which resulted in a $1.5 million increase to operating margin in each of
those years. As part of the performance-based ratemaking mechanism, the
Registrant was allowed a credit of approximately $3.0 million in non-firm
margin, subject to the Registrant's ability to generate sufficient gas cost
savings for customers. In both fiscal 1997 and 1996, the Registrant achieved
enough savings to earn $3.0 million in non-firm margin in each of those years.
As a result of Energize R.I., the Registrant will only retain the actual margin
earned from non-firm customers.
Gas Supply
- ----------
The Registrant has entered into a full requirements contract with Duke Energy
Trading and Marketing, LLC (DETM) to provide all of its gas supply needs
beginning October 1, 1997 and continuing through September 30, 2000. DETM will
provide all gas supplies required by the Registrant, while the Registrant is
committed to purchase all supplies exclusively from DETM. Supplies required by
the Registrant's firm sales customers will be purchased at a single, fixed
commodity price for the entire contract period. In order to provide this
service, DETM, for the contract period, will take responsibility for the
Registrant's pipeline capacity resources not previously released, all storage
contracts and all LNG capacity. Under the contract, DETM has purchased all
working gas in storage including both LNG and contract storage as of October 1,
1997. Gas inventories purchased were valued at approximately $18 million, of
which $9 million has been collected from DETM. The remaining $9 million is
included in the accounts receivable balance in the accompanying consolidated
balance sheet. All supply resources assigned to DETM will revert back to the
Registrant on October 1, 2000. The contract was entered into following a
competitive bidding process.
As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover the Registrant's non-firm sales customer's
needs and to make up the supply imbalances of transportation customers. DETM
will also provide various other services to the Registrant's transportation
service customers including enhanced balancing, standby and the storage and
peaking services available under the Registrant's recently approved FT-2 storage
service effective December 1, 1997. DETM will receive the supply related
revenues from these services in exchange for providing the supply management
inherent in these services.
Included in the DETM contract are a number of other important features. The
Registrant has retained the right to continue to make portfolio changes to
reduce supply costs. To the extent the Registrant makes such changes the
Registrant must keep DETM whole for the value lost over the remainder of the
contract period. The contract relieves the Registrant of the need to perform
certain upstream supply management functions which will make it possible for the
Registrant to take on the additional supply management workload required by the
further unbundling of firm sales customers without major staffing additions.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The
I-6
<PAGE>
Registrant continues to monitor the status of these laws and regulations. Such
monitoring involves the review of past activities and current operations, and
may include expending funds to investigate or clean-up certain sites. To the
best of its knowledge, subject to the following, the Registrant believes it is
in substantial compliance with such laws and regulations.
At December 31, 1997, the Registrant was aware of four sites at which future
costs may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRP's. With respect to one
of the Plympton sites, the Registrant has joined with other PRP's in entering
into an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of December
31, 1997, approximately $1.9 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by the
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at the site.
The Registrant has completed the study which indicates that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the best
alternative. At December 31, 1997, the Registrant has compiled a preliminary
range of costs based on remediation alternatives, ranging from $1.7 million to
in excess of $5.0 million. However, because of the uncertainties associated
with environmental assessment and remediation activities, the future cost of
remediation could be higher than the alternatives noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at
December 31, 1997, for anticipated future remediation costs at this site.
Tests conducted following the discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center in
1996 confirmed the existence of contaminants at this site. The Registrant is
currently conducting tests at this site, the costs of which are being shared
equally with the prior owner, to determine the nature and extent of the
contamination. Due to the early stages of investigation, management cannot
offer any conclusions as to whether any remediation will be required at this
site. In addition, in 1997, contamination from scrapped meters and regulators
was discovered at this site. The Registrant has reported this to the DEM and the
Rhode Island Department of Health and is in the process of remediation. It is
anticipated that remediation will cost between $50,000 and $100,000.
Accordingly, the Registrant has accrued $50,000 at December 31, 1997 for
anticipated future remediation costs.
In prior rate cases filed, the Registrant requested that environmental
investigation and remediation costs be recovered by inclusion in its
depreciation factors consistent with the rate recovery treatment for all types
of cost of removal. Accordingly, environmental investigation costs of
approximately $2.4 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
December 31, 1997.
I-7
<PAGE>
Due to the magnitude of the Registrant's environmental investigation and
remediation expenditures, the Registrant sought current recovery for these
amounts. As a result, in accordance with the Price Stabilization Plan
Settlement Agreement described in "Rates and Regulation", which is effective
--------------------
October 1, 1997, all environmental investigation and remediation costs incurred
through September 30, 1997, as well as all costs incurred during the three-year
term of the Plan, will be amortized over a ten-year period. Additionally, it is
the Registrant's practice to consult with the RIPUC on a periodic basis when, in
management's opinion, significant amounts might be expended for environmental-
related costs.
Management has begun discussions with other parties who may assist the
Registrant in paying any future costs at the above sites. Management believes
that its program for managing environmental issues, combined with rate recovery
and financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
Joint Venture
- -------------
In January 1997, the Registrant agreed to form a new limited liability
company, Providence-Southern, LLC (the Joint Venture), together with an
affiliate of Southern Company (Southern). The Joint Venture will market retail
electricity, gas and energy services in New England. The Joint Venture will be
owned 60% by Southern and 40% by the Registrant. The Joint Venture will focus
on tailoring its services to the individual needs of the residential,
commercial, and industrial customers as consumers are given more choices in a
competitive energy market. In addition to meeting the electricity and gas
commodity needs of customers, the Joint Venture will also serve as a marketing
platform for other areas of expertise of the Registrant and Southern, including
energy consulting and energy use analysis, home and business energy services,
and unified billing. The business operations of Providence Energy Services,
Inc., a subsidiary of the Registrant, will be contributed to the Joint Venture,
which will be headquartered in Providence, Rhode Island. The capital
contributions to the Joint Venture from each party will be determined over the
next several months.
Acquisitions
- ------------
In November 1997, the Registrant 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 Registrant 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 Registrant. 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 Registrant. Pro forma results of operations, which include the operating
results of these acquisitions, are not materially different than the operating
results presented.
These acquisitions are part of the Registrant's vision to be the "First
Choice" energy provider and will offer a valuable entry into the heating-oil
business segment.
I-8
<PAGE>
New Accounting Pronouncements
- -----------------------------
In October 1997, the Registrant adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share", which is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
replaces the presentation of primary earnings per share with the presentation of
basic earnings per share on the face of the income statement. Basic earnings per
share excludes dilution and is calculated by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Basic earnings per share and diluted earnings per share are the same for
all periods presented. Earnings per share for the prior periods presented have
been unchanged when calculated under SFAS No. 128.
Effective October 1, 1997, the Registrant 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 Registrant has recorded environmental remediation liabilities of
approximately $1.7 million at December 31, 1997. SOP 96-1 did not have an
impact on the Registrant's financial position or results of operations upon
adoption. Also see "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 fiscal years beginning after December 15, 1997, requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No.
131, which is effective for fiscal years beginning after December 15, 1997,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. These statements require
additional disclosure only and will not affect the financial position or results
of operations of the Registrant.
I-9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Providence Energy Corporation (the Registrant) and its subsidiaries and their
representatives may from time to time make written or oral statements, including
statements contained in the Registrant's filings with the Securities and
Exchange Commission (SEC) and in its reports to shareholders, including this
quarterly report, 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
quarterly report regarding the Registrant's financial position and strategic
initiatives and addressing industry developments are forward-looking statements.
Where, in any forward-looking statement, the Registrant, or its management,
expresses an expectation or belief as to future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished. Factors which could cause actual results
to differ materially from those anticipated include, but are not limited to:
general economic, financial and business conditions; changes in, or the failure
to comply with, government regulations; competition in the energy services
sector; regional weather conditions; the availability and cost of natural gas;
development and operating costs; the success and costs of advertising and
promotional efforts; the availability and terms of capital; the business
abilities and judgment of personnel; the ability of the Registrant to acquire
and implement computer software that will be Year 2000 compliant; unanticipated
environmental liabilities; ability of the Registrant to form alliances and
establish joint ventures outside of the traditional utility business and the
success of any alliances or joint ventures; the costs and effects of
unanticipated legal proceedings; the impacts of unusual items resulting from
ongoing evaluations of business strategies and asset valuations; and changes in
business strategy.
RESULTS OF OPERATIONS
The Registrant's operating revenues, operating margin and net income for the
three and twelve months ended December 31, 1997 and for comparable periods ended
December 31, 1996 are as follows:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31 Ended December 31
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $67,942 $64,038 $224,324 $220,784
======= ======= ======== ========
Operating margin $28,003 $26,758 $ 97,289 $ 94,779
======= ======= ======== ========
Net income $ 4,403 $ 4,264 $ 7,970 $ 8,111
======= ======= ======== ========
</TABLE>
Operating Revenues and Operating Margin
- ---------------------------------------
During the latest quarter, the Registrant experienced weather that was 6.4
percent colder than the same quarter last year. This increase in colder weather
resulted in increased margin of approximately $800,000. Additionally, Energize
R.I., which became effective October 1, 1997, provided additional net margin of
approximately $600,000 during the current quarter. The additional net margin
which resulted from freezing the GCC mechanism used previously to adjust for the
over or underrecovery of gas costs was approximately $2.8 million. This $2.8
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<PAGE>
million of margin was offset by the write-off of $1.5 million of previously
deferred gas costs, funding of the IRP programs of approximately $400,000 and a
deferred revenue adjustment of approximately $300,000. The above margin
increases were offset by a decrease in non-firm margin of approximately
$400,000.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased approximately $700,000 or
6.0 percent from the same quarter last year and approximately $800,000 or 1.6
percent for the twelve months ended December 31, 1997 when compared to the same
twelve month period last year. The increase is primarily attributable to the
Registrant's acquisition of two oil companies during the current quarter.
Additionally, the increase is attributable to higher uncollectible revenues
resulting from a decrease in collections as well as an increase in employee
benefit expense due to a rise in health insurance premiums.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $500,000 or 15.5
percent compared to the same quarter last year and approximately $1.1 million or
9.3 percent for the twelve months ended December 31, 1997 versus the same period
last year. This increase is the result of capital spending during the past year
and the amortization of previously deferred environmental costs. Effective
October 1, 1997, the Registrant began amortizing environmental costs over a ten-
year period in accordance with Energize, R.I.
Taxes
- -----
Taxes for the current quarter versus last year increased approximately $100,000
or 1.1 percent and increased approximately $500,000 or 2.7 percent for the
current twelve month period versus last year. The increase in taxes, mainly
local property and other, was the result of capital spending during the last
twelve months. This increase was offset by a slight decrease in federal income
tax expense as a result of slightly lower pretax earnings.
Other, net
- ----------
Other, net increased approximately $222,000 in the current quarter versus the
same quarter during the prior year. The increase is primarily the result of fees
earned by the Registrant for providing energy management services to Salve
Regina University during the quarter ended December 31, 1997.
Interest Expense
- ----------------
Interest expense increased approximately $100,000 or 7.2 percent during the
latest quarter compared to the same quarter last year and approximately $300,000
or 4.2 percent during the latest twelve months compared to the same twelve
months last year. During the prior year, interest expense was offset by accrued
interest on the underrecovery of gas costs that was due from ratepayers.
Effective October 1, 1997, the Registrant froze the GCC mechanism in connection
with Energize R.I. During the three-year term of the Plan, the Registrant will
no longer accrue interest on the over or under collection of gas costs from
ratepayers.
Future Outlook
- --------------
A) Regulatory
Under Energize R.I. the Providence Gas Company (ProvGas), a wholly-owned
subsidiary of the Registrant, 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, the
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<PAGE>
Registrant will defer revenues or costs through a deferred revenue account. Any
balance in the deferred revenue account at the end of the Plan will be refunded
to or recovered from customers in a manner to be approved by the RIPUC.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, 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 step was available to approximately 120 of the largest
commercial and industrial customers. In August 1997, the RIPUC approved a plan,
called "Business Choice", to further unbundle services to an additional 3,400
medium and large commercial and industrial customers. The Registrant commenced
Business Choice in December 1997. At December 31, 1997, the Registrant had
approximately 1,000 firm transportation customers.
In 1998, North Attleboro Gas Company, a small distribution company with over
3,500 customers located in Massachusetts that is owned and operated by the
Registrant, expects to file plans with the Massachusetts Department of Public
Utilities for a comprehensive unbundling of rates in collaboration with other
local distribution companies. Additionally, the Registrant is evaluating
whether or not to file plans for a base rate increase for this company.
B) Business Opportunities
There are virtually unlimited opportunities to unbundle services, form
alliances, custom-tailor services for customers, and compete with other energy
suppliers. To facilitate the transition to a diversified energy marketer and
service provider, the Registrant is planning to form business alliances outside
of its traditional utility business. The Registrant is also seeking investment
opportunities in non-regulated energy ventures.
In November 1997, as part of the Registrant's strategic plan to strengthen its
position in the energy industry, the Registrant purchased two Rhode Island -
based oil distribution companies, which together serve over 4,000 customers.
These acquisitions continue the Registrant's transition to a diversified energy
marketer.
Additionally, in January 1997, the Registrant agreed to form a new limited
liability company, Providence - Southern, LLC together with an affiliate of the
Southern Company (Southern), the largest producer of electricity in the United
States. The LLC was formed to market electricity, gas and energy services
throughout New England and will be owned 60 percent by Southern and 40% by the
Registrant. As part of the joint venture described above, the operations of
Providence Energy Services, Inc. (PES), a wholly-owned subsidiary of the
Registrant, will be contributed to the venture. PES was incorporated in August
1996 to market natural gas and energy services.
Liquidity and Capital Resources
- -------------------------------
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the latest quarter, the Registrant's cash flow from changes in
accounts receivable and unbilled revenue decreased approximately $18.5 million.
These fluctuations are the result of higher monthly sales during the latest
quarter and a moratorium on residential shut-offs during the heating season.
Because of these increases, which negatively impact cash flow, the Registrant
must borrow to maintain an appropriate level of liquidity. Management believes
its available financings are sufficient to meet these seasonal needs.
Capital expenditures for the latest quarter of $5.9 million were fairly stable
when compared to the $5.6 million last year. As a result of Energize R.I., the
Registrant is committed to making significant capital improvements to its
distribution system during the Plan's three-year term. These improvements will
expand the distribution system into economically developing areas of Rhode
Island as well as accelerate the replacement of mains and services. Capital
expenditures for the remainder of the fiscal year are expected to be
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<PAGE>
approximately $23.7 million. Anticipated capital expenditures during the next
three years are expected to total approximately $74 million.
During the current year, the Registrant intends to make a debt offering of $15
million to finance its capital expenditures.
During the next two years, the Registrant plans to upgrade significant portions
of its computer software in connection with its decision to move towards a
client server environment. The replacement of the software will provide the
additional functionality necessary as the Registrant's business environment
continues to change. The new software will also be Year 2000 compliant. The
Registrant is continuing to assess its remaining computer applications for Year
2000 compliance and is currently unable to assess what impact future
modifications, if any, will have on the Registrant's results of operations.
I-13
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
II-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of results
for the periods reported, but such results are not necessarily indicative of
results to be expected for the year due to the seasonal nature of the
Registrant's operations. All accounting policies and practices have been
applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providence Energy Corporation
(Registrant)
BY: /s/ Gary S. Gillheeney
-----------------------
GARY S. GILLHEENEY
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant
Secretary
Dated: February 13, 1998
-----------------
II-2
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