<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission file number 1-10032
----------------------------------------------
PROVIDENCE ENERGY CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
- ---------------------------------------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
- ---------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
401-272-9191
- ---------------------------------------------------------------------
(Registrant's telephone number, including area code)
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No ___.
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1.00 par value; 5,950,700 shares outstanding at August 12, 1998.
- ------------------------------------------------------------------------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q
JUNE 30, 1998
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1998 and 1997 I-1
Consolidated Balance Sheets as of June 30, 1998,
June 30, 1997 and September 30, 1997 I-2
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1998
and 1997 I-3
Consolidated Statements of Capitalization
as of June 30, 1998, June 30, 1997 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 I. FINANCIAL STATEMENTS
- -----------------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
------------
(thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
--------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Energy revenues $ 39,462 $ 42,921 $ 195,200 $ 186,905 $ 228,715 $ 219,271
Cost of energy 20,135 22,594 109,197 106,812 126,761 124,529
-------- -------- --------- --------- --------- ---------
Operating margin 19,327 20,327 86,003 80,093 101,954 94,742
-------- -------- --------- --------- --------- ---------
Operating expenses:
Operation and
maintenance 13,193 11,613 38,996 35,917 51,847 47,180
Depreciation and
amortization 3,660 3,259 11,029 9,655 14,248 12,729
Taxes -
State gross earnings 1,144 1,102 5,145 5,186 6,004 6,096
Local property and
other 2,163 1,990 6,435 5,855 8,267 7,676
Federal income (946) 153 6,355 6,133 4,830 4,779
-------- -------- --------- --------- --------- ---------
Total operating
expenses 19,214 18,117 67,960 62,746 85,196 78,460
-------- -------- --------- --------- --------- ---------
Operating income 113 2,210 18,043 17,347 16,758 16,282
Other, net 181 (48) 524 13 509 (26)
-------- -------- --------- --------- --------- ---------
Income before interest
expense 294 2,162 18,567 17,360 17,267 16,256
-------- -------- --------- --------- --------- ---------
Interest expense:
Long-term debt 1,716 1,505 4,688 4,537 6,193 6,064
Other 355 441 1,596 1,357 2,025 1,615
Interest capitalized (39) (58) (195) (157) (263) (188)
-------- -------- --------- --------- --------- ---------
2,032 1,888 6,089 5,737 7,955 7,491
-------- -------- --------- --------- --------- ---------
Income (loss) from
continuing operations
after interest expense (1,738) 274 12,478 11,623 9,312 8,765
Preferred dividends of
subsidiary (105) (139) (383) (487) (522) (661)
-------- -------- --------- --------- --------- ---------
Net income (loss) $ (1,843) $ 135 $ 12,095 $ 11,136 $ 8,790 $ 8,104
======== ======== ========= ========= ========= =========
Dividends paid per
common share $ .27 $ .27 $ .81 $ .81 $ 1.08 $ 1.08
======== ======== ========= ========= ========= =========
Net income (loss) per
common share - basic $ (.31) $ .02 $ 2.05 $ 1.93 $ 1.49 $ 1.40
======== ======== ========= ========= ========= =========
Net income (loss) per
common share - diluted $ (.31) $ .02 $ 2.04 $ 1.93 $ 1.49 $ 1.40
======== ======== ========= ========= ========= =========
Weighted average number
of shares outstanding:
Basic 5,935.6 5,801.4 5,906.4 5,779.5 5,885.3 5,769.2
======== ======== ========= ========= ========= =========
Diluted 5,935.6 5,805.2 5,916.8 5,783.3 5,894.4 5,772.9
======== ======== ========= ========= ========= =========
</TABLE>
I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands)
-----------
<TABLE>
<CAPTION>
(Unaudited)
-----------
June 30, June 30, September 30,
1998 1997 1997
--------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $318,369 $293,432 $300,829
Less - accumulated depreciation and
utility plant acquisition
adjustments 119,822 108,498 110,365
-------- -------- --------
198,547 184,934 190,464
-------- -------- --------
Other property, net 3,485 1,179 1,182
-------- -------- --------
Current assets:
Cash and temporary cash investments 8,435 1,625 1,063
Accounts receivable
less allowance of $4,054 at 6/30/98,
$3,474 at 6/30/97, and $1,886 at 9/30/97 23,613 29,318 14,852
Unbilled revenues 1,369 690 2,683
Deferred gas costs -- 1,447 7,231
Inventories, at average cost -
Liquefied natural gas, propane and under-
ground storage, and oil 734 11,623 18,217
Materials and supplies 1,208 1,224 1,287
Prepaid and refundable taxes 5,024 5,245 4,005
Prepayments 1,841 1,228 1,039
-------- -------- --------
42,224 52,400 50,377
-------- -------- --------
Deferred charges and other assets 15,907 12,962 13,487
-------- -------- --------
Total assets $260,163 $251,475 $255,510
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
(See accompanying statement) $187,022 $169,361 $164,433
-------- -------- --------
Current liabilities:
Notes payable 7,836 12,890 23,675
Current portion of long-term debt 3,838 2,649 3,707
Accounts payable 9,433 17,740 16,755
Accrued taxes 6,932 6,049 2,506
Accrued vacation 1,951 1,978 1,715
Customer deposits 3,184 3,463 3,461
Other 5,704 5,204 5,531
-------- -------- --------
38,878 49,973 57,350
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes 22,206 20,912 21,495
Unamortized investment tax credits 2,256 2,415 2,375
Other 9,801 8,814 9,857
-------- -------- --------
34,263 32,141 33,727
-------- -------- --------
Commitments and contingencies -- -- --
Total capitalization and liabilities $260,163 $251,475 $255,510
======== ======== ========
</TABLE>
PAGE I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1998 1997
---------------------
(thousands)
<S> <C> <C>
Cash provided by (used for)
Operating Activities:
- ---------------------
Income after interest expense $ 12,478 $ 11,623
Items not requiring cash -
Depreciation and amortization-plant
and other property 10,943 9,633
Changes as a result of regulatory action 1,500 --
Deferred Federal income taxes 710 183
Amortization of investment tax credits (119) (118)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 11,950 (14,653)
Unbilled revenues 1,314 1,667
Deferred gas costs 78 11,825
Inventories (22) 4,435
Prepaid and refundable taxes (958) (1,153)
Prepayments (788) 312
Accounts payable (3,387) 368
Accrued taxes 4,420 4,069
Accrued vacation, customer deposits and other 118 (399)
Deferred charges and other 260 2,063
-------- --------
Net cash provided by operations 38,497 29,855
-------- --------
Investing Activities:
- ---------------------
Expenditures for property, plant
and equipment, net (18,873) (13,087)
Expenditures for business acquisitions
net of cash acquired (2,469) --
-------- --------
Net cash used in investing activities (21,342) (13,087)
-------- --------
Financing Activities:
- ---------------------
Issuance of common stock -- 44
Proceeds from exercise of stock options 83 35
Issuance of mortgage bonds 15,000 --
Redemption of preferred stock (1,600) (1,600)
Proceeds from other long-term debt -- 1,345
Payments on long-term debt (2,554) (1,924)
Decrease in notes payable, net (16,701) (10,380)
Cash dividends on preferred stock (383) (487)
Cash dividends on common stock (3,628) (3,600)
-------- --------
Net cash used by financing activities (9,783) (16,567)
-------- --------
Increase in cash and temporary cash investments 7,372 201
Cash and temporary cash investments at beginning
of period 1,063 1,424
-------- --------
Cash and temporary cash investments at end of period $ 8,435 $ 1,625
======== ========
Supplemental disclosures of cash flow information:
Cash paid year-to-date for -
Interest (net of amount capitalized) $ 5,652 $ 5,617
Income taxes (net of refunds) $ 1,741 $ 2,033
Schedule of noncash investing and financing
activities:
Capital lease obligations for equipment $ -- $ 232
Other long-term debt for equipment $ -- $ 1,330
</TABLE>
PAGE I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
<TABLE>
<CAPTION>
(Unaudited)
-----------
June 30, June 30, September 30,
1998 1997 1997
---------------------------------
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 5,949 at 6/30/98
5,812 at 6/30/97
5,832 at 9/30/97 $ 5,949 $ 5,812 $ 5,832
Amount paid in excess of par 58,788 56,461 56,827
Retained earnings 30,327 27,876 23,002
-------- -------- --------
Total common stock equity 95,064 90,149 85,661
-------- -------- --------
Cumulative preferred stock of subsidiary:
The Providence Gas Company -
Redeemable 8.7% Series, $100 par
Authorized -80 shares
Outstanding - 48 shares at 6/30/98
and 64 shares at
6/30/97 and 9/30/97 4,800 6,400 6,400
-------- -------- --------
Long-term debt:
First mortgage bonds 84,600 71,200 71,200
Other long-term debt 5,065 2,675 3,207
Capital leases 1,331 1,586 1,672
-------- -------- --------
Total long-term debt 90,996 75,461 76,079
Less current portion 3,838 2,649 3,707
-------- -------- --------
Long-term debt, net 87,158 72,812 72,372
-------- -------- --------
Total capitalization $187,022 $169,361 $164,433
======== ======== ========
</TABLE>
PAGE I-4
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein when read
with the annual report for 1997 filed on Form 10-K are adequate to make the
information presented not misleading.
Rates and Regulation
- --------------------
The Providence Gas Company (ProvGas), a wholly owned subsidiary of 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 RI) among
ProvGas, the Rhode Island Division of Public Utilities and Carriers (the
Division), The Energy Council of Rhode Island, and the George Wiley Center.
Effective October 1, 1997 through September 30, 2000, Energize RI provides
customers with an initial price decrease of approximately four percent and a
three-year price freeze. In connection with the price decrease, ProvGas will
write-off and not recover $1.5 million of previously deferred gas costs. Under
Energize RI, 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 gas costs incurred will be retained or borne by ProvGas. 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,
ProvGas 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 RI also calls for ProvGas to fund the Low
Income Assistance Program at an annual level of $1.0 million. Finally, Energize
RI continues the process of unbundling by requiring ProvGas to provide unbundled
service offerings for up to 10 percent per year of firm system throughput.
As part of Energize RI, ProvGas 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 RI will also be amortized over a ten year period.
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 under the Plan.
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 determined by all parties and approved by the RIPUC.
The Integrated Resource Plan (IRP) was terminated as a result of Energize RI.
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. ProvGas was able to record its annual share of the
performance-based ratemaking mechanism in both 1997 and 1996, which resulted
in a
I-5
<PAGE>
$1.5 million increase to operating margin in each of those years. As part of the
performance-based ratemaking mechanism, ProvGas was allowed to record
approximately $3.0 million in non-firm margin, subject to ProvGas' ability to
generate sufficient gas cost savings for customers. In both fiscal 1997 and
1996, ProvGas achieved enough savings to earn $3.0 million in non-firm margin in
each of those years. As a result of Energize RI, ProvGas will only retain the
actual margin earned from non-firm customers.
Gas Supply
- ----------
ProvGas has entered into a full requirements contract with Duke Energy
Trading and Marketing, LLC (DETM) to provide all of its gas supply needs
beginning October 1, 1997 and continuing through September 30, 2000. DETM will
provide all gas supplies required by ProvGas, while ProvGas is committed to
purchase all supplies exclusively from DETM. Supplies required by ProvGas' firm
sales customers will be purchased at a single, fixed commodity price for the
entire contract period. In order to provide this service, DETM, for the contract
period, will take responsibility for ProvGas' pipeline capacity resources not
previously released, all storage contracts and all LNG capacity. Under the
contract, DETM 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. All supply resources assigned to DETM will revert
back to ProvGas on October 1, 2000. The contract was entered into following a
competitive bidding process.
As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover ProvGas' non-firm sales customer's
needs and to make up the supply imbalances of transportation customers. DETM
will also provide various other services to ProvGas' transportation
service customers including enhanced balancing, standby and the storage and
peaking services available under ProvGas' recently approved FT-2 storage
service effective December 1, 1997. DETM will receive the supply related
revenues from these services in exchange for providing the supply management
inherent in these services.
Included in the DETM contract are a number of other important features. The
Registrant 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 will make it possible for ProvGas to take on the
additional supply management workload required by the further unbundling of firm
sales customers without major staffing additions.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean-
up certain sites. To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.
At June 30, 1998, 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
I-6
<PAGE>
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 began a study at its primary gas distribution
facility located in Providence, Rhode Island. This site formerly contained a
manufactured gas plant operated by the Registrant. As of June 30, 1998,
approximately $2.0 million has 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 Registrant
has completed the study which indicates that remediation will be required for
two-thirds of the property. The remediation will begin in August of 1998 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 June 30, 1998, the Registrant has compiled a
preliminary range of costs based on a thermal desorption remediation process,
ranging from $1.7 million to $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 above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at
June 30, 1998, 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 $50,000. Accordingly, the Registrant
has accrued $50,000 at June 30, 1998 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. 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. As of June 30, 1998, the
Registrant has charged environmental remediation costs of $2.4 million and an
estimated $1.7 million to the accumulated depreciation reserve and has amortized
$.3 million of these 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 Ventures
- --------------
In May 1998, the Registrant and Southern Company mutually agreed to end their
joint efforts to develop a New England retail energy business (Providence-
Southern, LLC) due to different strategic goals. The Registrant will continue to
use its wholly-owned retail energy marketing company, Providence Energy
Services, Inc. ("ProvEnergy Services") as the vehicle to grow its natural gas
and electricity business to retail accounts in New England.
I-7
<PAGE>
To strengthen its position in the evolving energy market, the Registrant is
negotiating with Duke Energy Trading and Marketing, LLC for DETM to provide
wholesale natural gas and electricity to support ProvEnergy Services' retail
marketing efforts.
In July 1998, the Registrant and ERI Services, Inc. ("ERI Services") agreed to
form a joint venture, Capital Center Energy Company, LLC ("CCEC"). The Joint
venture will be owned 50% by the Registrant and 50% by ERI Services. CCEC's
wholly-owned subsidiary, DownCity Energy Company, LLC was selected as the
exclusive electric, heat, air conditioning ("HVAC") and related services
provider for most of the Providence Place Mall (the "Mall") for the next thirty
years.
DownCity will serve more than 3,000,000 square feet of retail stores, common
areas, offices and parking facilities. Currently, the three anchor stores and
the cinema are not included in the plan. The electric demand to be met by
DownCity 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 (developers of the Mall),
DownCity 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 is expected to begin this summer. The
entire energy project will be operational in advance of the scheduled August,
1999, opening of the Mall. DownCity will not have a significant impact on the
Registrant's results of operations in fiscal 1998.
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. The Registrant believes these acquisitions will offer a
valuable entry into the heating-oil business segment.
The Registrant continues to assess the energy market for potential
acquisitions to fulfill this vision.
New Accounting Pronouncements
- -----------------------------
In October 1997 the Registrant adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Under the
provisions of SFAS No. 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.
I-8
<PAGE>
A reconciliation of the weighted average number of shares outstanding used in
the computation of the basic and diluted earnings per share for each of the
periods ended June 30 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average
shares (basic) 5,935.6 5,801.4 5,906.4 5,779.5 5,885.3 5,769.2
Effect of dilutive stock
options -- 3.8 10.4 3.8 9.1 3.7
------- ------- ------- ------- ------- -------
Weighted average
shares (diluted) 5,935.6 5,805.2 5,916.8 5,783.3 5,894.4 5,772.9
======= ======= ======= ======= ======= =======
</TABLE>
The net income used in the calculation for basic and diluted earnings per
share calculations agrees with the net income appearing in the financial
statements.
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 June 30, 1998. 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.
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 in 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 fiscal years beginning after June 15, 1999. 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 the company's election, before January
1, 1998).
The Registrant 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.
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 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 capable as well as Year 2000 readiness by key
customers, vendors and service providers; 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 energy revenues, operating margin and net income for the
three, nine and twelve months ended June 30, 1998 and for comparable periods
ended June 30, 1997 are as follows:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Energy revenues $39,462 $42,921 $195,200 $186,905 $228,715 $219,271
======= ======= ======== ======== ======== ========
Operating margin $19,327 $20,327 $ 86,003 $ 80,093 $101,954 $ 94,742
======= ======= ======== ======== ======== ========
Net income (loss) $(1,843) $ 135 $ 12,095 $ 11,136 $ 8,790 $ 8,104
======= ======= ======== ======== ======== ========
</TABLE>
Operating Margin
- ----------------
During the latest quarter, the Registrant experienced weather that was 26.0
percent warmer than the same quarter last year. The warmer temperatures resulted
in decreased margin of approximately $1.1 million compared to the same quarter
last year. Offsetting the warmer than normal weather is $1.9 million of margin
generated by Energize RI, which became effective October 1, 1997. This
additional margin resulted from freezing the Gas Charge Clause ("GCC") mechanism
used previously to adjust for the over or underrecovery of gas costs which was
approximately $2.3 million and was offset by the funding of the Integrated
Resource Plan ("IRP") programs of approximately $400,000. The implementation
I-10
<PAGE>
this year of Energize RI changed how the Registrant records its gas costs
resulting in higher margin reflected in the first half of the fiscal year and
lower margin in the second half. While this change does not impact annual
earnings it reduced margin in the quarter by $1.3 million compared to the same
period last year. An additional $1.5 million decrease in margin in the current
quarter in comparison to the same quarter last year is a result of not
recording the performance-based ratemaking mechanism under the IRP which was
terminated in September 1997 as a result of Energize RI.
Additionally, non-firm margin decreased $0.6 million during the current
quarter of fiscal year 1998 when compared with the same quarter of fiscal 1997.
Prior to Energize RI, the Registrant was allowed to record approximately $3.0
million in non-firm margin under the terms of the IRP, subject to the
Registrant's ability to generate sufficient gas cost savings for customers. As
a result of Energize RI, the Registrant retains the actual non-firm margin
earned. Due to an unfavorable pricing difference between natural gas and
alternate fuels, the Registrant experienced a decrease in non-firm sales and
transportation margin. This decrease is expected to continue during the
remainder of the fiscal year.
The Registrant's acquisition of two oil distribution companies in November
1997 also resulted in additional margin of approximately $.7 million for the
current quarter compared to the same period last year.
An increase in the natural gas business volume of Providence Energy Services,
Inc. from approximately 40 customers in fiscal year 1997 to approximately 1,000
in fiscal year 1998 contributed $.7 million for the current quarter compared to
the same period last year.
During the current fiscal year, weather has been 7.4 percent warmer than the
same period last year. The warmer temperatures resulted in decreased margin of
approximately $3.7 million compared to last year. Offsetting the warmer than
normal weather is $8.2 million of margin generated by Energize RI. The
additional margin which resulted from freezing the GCC mechanism used previously
to adjust for the over or unerrecovery of gas costs was approximately $10.9
million and was offset by the write-off of $1.5 million of previously deferred
gas costs and funding of the IRP programs of approximately $1.2 million. When
compared to the same period last year when seasonal gas cost factors were being
used, operating margin has increased approximately $1.8 million. The effect of
this increase, however, will reverse in the subsequent quarter and will have no
impact on annual earnings.
Additionally, non-firm margin decreased $1.7 million during the current
fiscal year when compared with the prior year as explained above.
An additional $1.5 million decrease in margin during the current year in
comparison to the prior year is a result of not recording the performance-based
ratemaking mechanism under the IRP which was terminated in September 1997 as a
result of Energize RI.
The Registrant's acquisition of two oil distribution companies in November
1997 also resulted in additional margin of approximately $2.5 million for the
current year when compared to the prior year.
The increase in operating margin for the twelve month periods presented is
primarily due to the reasons stated above.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased approximately $1.6
million or 13.6 percent for the three months, approximately $3.1 million or 8.6
percent for the nine months and approximately $4.7 million or 9.9 percent for
the twelve months ended June 30, 1998, respectively, versus the same periods
last year. The Registrant's natural gas distribution expenses were stable for
the periods presented. The increases are primarily attributable to the
Registrant's acquisition of two oil companies during the current fiscal year.
I-11
<PAGE>
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $.4 million or
12.3 percent for the three months, approximately $1.4 million or 14.2 percent
for the nine months and approximately $1.5 million or 11.9 percent for the
twelve months ended June 30, 1998, respectively, versus the same periods last
year. This increase is the result of capital spending 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 RI.
Taxes
- -----
Taxes decreased approximately $900,000 or 27.2 percent for the three months
ended, increased approximately $800,000 or 4.4 percent for the nine months ended
and approximately $600,000 or 3.0 percent for the twelve months ended June 30,
1998, respectively, versus the same periods last year. The overall change in
taxes is primarily due to changes in Federal income taxes as a result of the
changes in pretax income this year compared to last year. Additionally, local
property and other taxes have increased as a result of capital spending.
Other, net
- ----------
Other, net has increased approximately $500,000 for the nine months ended and
twelve months ended June 30, 1998 versus the same periods last year. The
increase is primarily the result of fees earned by the Registrant for providing
energy management services to Salve Regina University.
Interest Expense
- ----------------
Interest expense increased approximately $100,000 or 7.6 percent for the
three months ended, approximately $400,000 or 6.1 percent for the nine months
ended and approximately $500,000 or 6.2 percent for the twelve months ended June
30, 1998, respectively, versus the same periods last year. During the prior
year, interest expense was impacted by accrued interest on the over or under
recovery of gas costs that was due to or from ratepayers. Effective October 1,
1997, the Registrant froze the GCC mechanism in connection with Energize RI.
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. The
Registrant's acquisition of two oil distribution companies in November, 1997
also resulted in additional interest expense of approximately $129,000 and
$280,000 for the three and nine months ended June 30, 1998, respectively.
Future Outlook
- --------------
A) Regulatory
Under Energize RI, 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
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.
The implementation this year of Energize RI changed how ProvGas
records its gas costs, resulting in higher margin reflected in the first half of
the fiscal year and lower margin in the second half. While this change does not
impact annual earnings, it reduced margin in the third quarter by $1.3 million
compared to last year's third quarter.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among
ProvGas, the Division, TEC-RI, and a consortium of oil heat organizations.
The Agreement began a process of unbundling natural gas service in Rhode Island,
enabling customers to choose their gas suppliers.
I-12
<PAGE>
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 June 30, 1998, the Registrant had approximately 1,000 firm transportation
customers.
Energize RI continues the process of unbundling by requiring ProvGas
to provide unbundled service offerings for up to 10 percent per year of firm
system throughput.
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.
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.
In May 1998, the Registrant and Southern mutually agreed to end their joint
efforts to develop a New England retail energy business under the name
Providence-Southern, LLC due to different strategic goals. The Registrant will
continue to use its wholly-owned retail energy marketing company Providence
Energy Services, Inc. ("ProvEnergy Services") as the vehicle to grow its natural
gas and electricity business to retail accounts in New England. To strengthen
its position in the evolving energy market, the Registrant is negotiating with
Duke Energy Trading and Marketing, LLC for DETM to provide wholesale natural gas
and electricity to support ProvEnergy Services' retail marketing efforts.
In July 1998, the Registrant and ERI Services, Inc. ("ERI Services") agreed
to form a joint venture, Capital Center Energy Company, LLC ("CCEC"). The Joint
venture will be owned 50% by the Registrant and 50% by ERI Services. CCEC's
wholly-owned subsidiary DownCity Energy Company, LLC ("DownCity")was selected as
the exclusive electric, heat, air conditioning ("HVAC") and related services
provider for most of the Providence Place Mall (the "Mall") for the next thirty
years.
DownCity will serve more than 3,000,000 square feet of retail stores, common
areas, offices and parking facilities. Currently, the three anchor stores and
the cinema are not included in the plan. The electric demand to be met by
DownCity 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(developers of the Mall),
Downcity 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
I-13
<PAGE>
Construction of the energy systems is expected to begin this summer. The
entire energy project will be operational in advance of the scheduled August,
1999, opening of the Mall. DownCity will not have a significant impact on the
Registrant's results of operations in fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
The Registrant 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 nine month period, the Registrant's cash flow from
operations increased approximately $8.6 million compared to the same period last
year. This increase is primarily due to the sale of the Registrant's working
gas in storage to Duke Energy Trading and Marketing as well as additional margin
generated by Energize RI. The additional cash flows resulting from Energize RI
have enabled the Registrant to avoid its pattern of traditional seasonal short-
term borrowings during the current fiscal year.
Capital expenditures for the year to date period of $18.9 million increased
$5.8 million or 44.2 percent when compared to the $13.1 million last year. As a
result of Energize RI, 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 older mains and
services. Additionally, technology expenditures relating to the Registrant's
decision to move to a client server environment have also contributed to this
increase. Capital expenditures for the remainder of the fiscal year are expected
to be approximately $9.7 million. Anticipated capital expenditures during this
and the next two fiscal years are expected to total approximately $83.2 million.
To finance capital expenditures, the Registrant issued $15 million in 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.
The Registrant continues to focus on addressing Year 2000 implications in its
technology systems, embedded technologies, and with its significant suppliers
and key customers.
Year 2000 readiness will in large part be achieved in the course of the
Registrant's implementation of its long range technology plan to migrate from a
mainframe environment to a client server environment. Pursuant to this plan
significant portions of the Registrant's software, including its customer
billing and financial reporting systems, are currently being replaced. The new
client server systems will lower operating costs, increase functionality and
provide flexibility, as well as be Year 2000 ready. The implementation date for
these systems is scheduled for the first quarter in calendar 1999.
The Registrant has partnered with a major engineering and consulting firm to
address embedded technology. The system identification phase of this assessment
is expected to be completed by September 1998.
Also, the Registrant will commence its assessment of Year 2000 readiness of
its significant suppliers and key customers no later than the end of calendar
1998 and will continue this assessment on an ongoing basis.
Failure of the Registrant or any of its significant vendors to complete any
necessary modifications and conversions in a timely manner could have a material
adverse impact on the operations of the Registrant.
I-14
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6 (a). Exhibits
- ---------------------
10a. Management contract dated May 26, 1998 between Susann G. Mark, Vice
President, General Counsel and Corporate Secretary and the Registrant.
10b. Redacted gas supply contract dated October 1, 1997 between Duke Energy
Trading and Marketing, LLC and the Registrant. (Filed as exibit 10 to the report
of The Providence Gas Company in Form 10-Q for the quarter ended June 30, 1998,
incorporated herein by this reference.)
27. Financial Data Schedule
Item 6 (b). Reports on Form 8-K
- --------------------------------
On May 22, 1998 the Registrant filed a report on Form 8-K regarding
termination of the Registrant's joint venture agreement with Southern Energy,
Inc.
On July 29, 1998 the Registrant filed a report on Form 8-K regarding a new
common stock rights agreement.
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 period reported, but such results are not necessarily indicative of
results to be expected for the year due to the seasonal nature of the
Registrant's gas operations. All accounting policies and practices have been
applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Providence Energy Corporation
(Registrant)
BY:/s/ Gary S. Gillheeney
-----------------------------
Gary S. Gillheeney
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant
Secretary
Dated: August 14, 1998
---------------
II-2
<PAGE>
Exhibit 10a
PROVIDENCE ENERGY CORPORATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of this
26th day of May, 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 SUSANN
G. MARK (hereinafter referred to as the "Executive").
WHEREAS, the Executive has been offered employment by the Company in the
capacity of VICE PRESIDENT OF THE COMPANY;
WHEREAS, the Executive possesses considerable experience and knowledge of
business affairs and operations and, as such, the Executive has unique
qualifications to act in an executive capacity for the Company; and
WHEREAS, the Company is desirous of encouraging the full attention by the
Executive to her duties in her capacity aforesaid and wishes to make provisions
for certain protections of the Executive in the event of the termination of her
employment under specified conditions.
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 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 2.2) or the twenty four (24) month period following the
effective date of a Change in Control (as defined in Section 2.2), 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 2.1 herein.
Good Reason shall mean, without the Executive's express written consent, the
occurrence of any one or more of the following:
1
<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, which Base Salary is One Hundred Twenty-Five
Thousand Dollars ($125,000.00) as of the Effective Date, or a reduction
from any subsequent increase to the Base Salary as of the Effective
Date;
(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 5.1 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 2.1
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.
2
<PAGE>
SECTION 2
CHANGE IN CONTROL
2.1 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 her 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.
3
<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 2, a Qualifying Termination shall mean any
termination of the Executive's employment OTHER THAN: (1) by the Company for
Cause ; (2) by reason of death, Disability, 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 1 herein will
be deemed to be a Qualifying Termination)].
2.2 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
4
<PAGE>
(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.
2.3 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.
2.4 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
5
<PAGE>
(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.
2.5 SUBSEQUENT RECALCULATION. In the event the Internal Revenue Service adjusts
the computation of the Company under Section 2.4 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.
2.6 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 2 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 their Agreement.
SECTION 3. 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 her duties and obligations under the terms of this
Agreement.
SECTION 4. OUTPLACEMENT ASSISTANCE
Following a termination of the Executive's employment as described in Sections 1
or 2 herein, the Executive shall be reimbursed by the Company for the costs of
all outplacement services obtained by the Executive within the six (6) months
prior and two (2) year 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.
6
<PAGE>
SECTION 5. ASSIGNMENT
5.1 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 a termination
by the Company, as provided in Section 2.1 herein.
Except as herein provided, this Agreement may not otherwise be assigned by the
Company.
5.2 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 6. DISPUTE RESOLUTION AND NOTICE
6.1 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 her employment with the Company, in
accordance with the rules of the American Arbitration Association then in
effect.
Judgment may be entered on the award of the arbitrator in any court having
proper jurisdiction. All expenses of such arbitration, including the fees and
expenses of the counsel for the Executive, shall be borne by the Company.
6.2 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 she has filed
in writing with the Company or, in the case of the Company, at its principal
offices.
7
<PAGE>
SECTION 7. MISCELLANEOUS
7.1 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.
7.2 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.
7.3 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.
7.4 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.
7.5 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 govern-mental regulation or ruling.
7.6 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 8. 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.
8
<PAGE>
IN WITNESS WHEREOF, the Executive and the Company (pursuant to a resolution
adopted at a duly constituted meeting of its Board of Directors) have executed
this Agreement, as of the day and year first above written.
Executive:
_____________________________________
ATTEST Providence Energy Corporation
By:______________________ By:__________________________________
Corporate Secretary Chairman, President and CEO
9
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