<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 the quarterly period ended March 31, 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
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)
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, 5,925,754 shares outstanding at May 13, 1998
---------------------------------------------------------------------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q
MARCH 31, 1998
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three, six and twelve months ended
March 31, 1998 and 1997 I-1
Consolidated Balance Sheets as of
March 31, 1998, March 31, 1997 and
September 30, 1997 I-2
Consolidated Statements of Cash Flows for the
six months ended March 31, 1998 and 1997 I-3
Consolidated Statements of Capitalization as of
March 31, 1998, March 31, 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 4 Submission of Matters to a Vote of
Security Holders II-1
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 MARCH 31
------------------------------
(Unaudited)
---------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS TWELVE MONTHS
------------ ---------- -------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
(thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Energy revenues $ 87,796 $ 79,946 $155,738 $143,984 $232,174 $219,623
Cost of energy 49,123 46,938 89,062 84,218 129,220 125,925
-------- -------- -------- -------- -------- --------
Operating margin 38,673 33,008 66,676 59,766 102,954 93,698
-------- -------- -------- -------- -------- --------
Operating expenses:
Operation and
maintenance 13,746 12,930 25,803 24,304 50,267 48,295
Depreciation and
amortization 3,790 3,297 7,369 6,396 13,847 12,627
Taxes -
State gross earnings 2,221 2,308 4,001 4,084 5,962 6,241
Local property and other 2,305 2,103 4,272 3,865 8,094 7,378
Federal income 5,052 3,588 7,301 5,980 5,929 4,179
-------- -------- -------- -------- -------- --------
Total operating expenses 27,114 24,226 48,746 44,629 84,099 78,720
-------- -------- -------- -------- -------- --------
Operating income 11,559 8,782 17,930 15,137 18,855 14,978
Other, net 168 108 343 61 280 219
-------- -------- -------- -------- -------- --------
Income before
interest expense 11,727 8,890 18,273 15,198 19,135 15,197
-------- -------- -------- -------- -------- --------
Interest expense:
Long-term debt 1,482 1,512 2,972 3,032 5,982 6,084
Other 644 525 1,241 916 2,111 1,520
Interest capitalized (73) (58) (156) (99) (282) (163)
-------- -------- -------- -------- -------- --------
2,053 1,979 4,057 3,849 7,811 7,441
-------- -------- -------- -------- -------- --------
Income from continuing
operations after
interest expense 9,674 6,911 14,216 11,349 11,324 7,756
Preferred dividends of
subsidiary (139) (174) (278) (348) (556) (696)
-------- -------- -------- -------- -------- --------
Net income $ 9,535 $ 6,737 $ 13,938 $ 11,001 $ 10,768 $ 7,060
======== ======== ======== ======== ======== ========
Dividends paid per common
share $ .27 $ .27 $ .54 $ .54 $ 1.08 $ 1.08
======== ======== ======== ======== ======== ========
Per share information:
Net income per common
share - basic $ 1.61 $ 1.17 $ 2.37 $ 1.91 $ 1.84 $ 1.23
======== ======== ======== ======== ======== ========
Net income per common
share - diluted $ 1.61 $ 1.16 $ 2.36 $ 1.91 $ 1.84 $ 1.23
======== ======== ======== ======== ======== ========
Weighted average number of
shares oustanding:
Basic 5,915.3 5,779.2 5,891.9 5,768.5 5,851.8 5,748.4
======== ======== ======== ======== ======== ========
Diluted 5,928.5 5,783.8 5,902.1 5,772.4 5,859.2 5,751.8
======== ======== ======== ======== ======== ========
</TABLE>
I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, March 31, September 30,
1998 1997 1997
-------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $311,090 $288,658 $300,829
Less - Accumulated depreciation and
utility plant acquisition
adjustments 116,655 105,337 110,365
-------- -------- --------
194,435 183,321 190,464
-------- -------- --------
Other property, net 3,380 1,120 1,182
-------- -------- --------
Current assets:
Cash and temporary cash investments 3,390 2,432 1,063
Accounts receivable, less allowance of
$3,142 at 3/31/98, $4,473 at 3/31/97
and $1,886 at 9/30/97 45,636 48,467 14,852
Unbilled revenues 6,323 8,241 2,683
Deferred gas costs - 4,218 7,231
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage, and oil 599 7,664 18,217
Materials and supplies 1,202 1,200 1,287
Prepaid and refundable taxes 2,818 3,119 4,005
Prepayments 795 548 1,039
-------- -------- --------
60,763 75,889 50,377
-------- -------- --------
Deferred charges and other assets 15,885 13,574 13,487
-------- -------- --------
Total assets $274,463 $273,904 $255,510
======== ======== ========
CAPITALIZATION AND LIABILITIES
- -----------------------------------------
Capitalization $175,275 $169,889 $164,433
-------- -------- --------
(See accompanying statement)
Current liabilities:
Notes payable 21,684 33,635 23,675
Current portion of long-term debt 3,825 2,420 3,707
Accounts payable 21,050 18,548 16,755
Accrued taxes 8,558 7,379 2,506
Accrued vacation 1,843 1,942 1,715
Customer deposits 3,269 3,658 3,461
Other 4,888 4,195 5,531
-------- -------- --------
65,117 71,777 57,350
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 21,969 21,149 21,495
Unamortized investment tax credits 2,295 2,454 2,375
Other 9,807 8,635 9,857
-------- -------- --------
34,071 32,238 33,727
-------- -------- --------
Commitments and contingencies - - -
Total capitalization and liabilities $274,463 $273,904 $255,510
======== ======== ========
</TABLE>
I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED MARCH 31
---------------------------------
(Unaudited)
---------
<TABLE>
<CAPTION>
1998 1997
---------------------
(thousands)
<S> <C> <C>
Cash provided by (used for)
Operating Activities:
- --------------------
Income after interest expense $ 14,216 $ 11,349
Items not requiring cash -
Depreciation and amortization -
plant and other property 7,287 6,381
Changes as a result of regulatory actions 1,500 -
Deferred Federal income taxes 473 420
Amortization of investment tax credit (80) (79)
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable (9,985) (33,802)
Unbilled revenues (3,640) (5,884)
Deferred gas costs 80 9,054
Inventories 119 8,418
Prepaid and refundable taxes 1,248 973
Prepayments 258 992
Accounts payable 8,230 1,176
Accrued taxes 6,046 5,399
Accrued vacation, customer deposits
and other (716) (1,262)
Deferred charges and other 241 1,245
-------- ---------
Net cash provided by operations 25,277 4,380
-------- ---------
Investment Activities:
- ------------------------------------------------------
Expenditures for property, plant
and equipment, net (11,088) (8,985)
Expenditures for business acquisitions,
net of cash acquired (2,469) -
-------- --------
Net cash used in investing activities (13,557) (8,985)
-------- --------
Financing Activities:
- ------------------------------------------------------
Proceeds from other long-term debt - 1,345
Issuance of common stock - 44
Redemption of preferred stock (1,600) (1,600)
Payments on long-term debt (2,220) (1,798)
Increase(decrease) in notes payable, net (2,853) 10,365
Cash dividends on common stock (2,442) (2,395)
Cash dividends on preferred stock (278) (348)
-------- --------
Net cash provided (used) by financing
activities (9,393) 5,613
-------- --------
Increase in cash and temporary
cash investments 2,327 1,008
Cash and cash equivalents at beginning
of period 1,063 1,424
-------- --------
Cash and cash equivalents at end of period $ 3,390 $ 2,432
======== ========
Supplemental disclosure of cash-flow information:
Cash paid year to-date for-
Interest (net of amount capitalized) $ 3,992 $ 3,771
Income taxes (net of refunds) $ 1,426 $ 1,076
Schedule of noncash investing and financing
activities:
Capital lease obligation for equipment $ - $ 232
Other long-term debt for equipment $ - $ 495
</TABLE>
I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
---------
<TABLE>
<CAPTION>
(Unaudited)
March 31, March 31, September 30,
1998 1997 1997
-----------------------------------
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 5,926 at 3/31/98
5,791 at 3/31/97
5,832 at 9/30/97 $ 5,926 $ 5,791 $ 5,832
Amount paid in excess of par 58,273 56,062 56,827
Retained earnings 33,771 29,304 23,002
-------- -------- --------
Total common stock equity 97,970 91,157 85,661
-------- -------- --------
Cumulative preferred stock of subsidiary:
Providence Gas Company -
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 48 shares at 3/31/98 and
64 shares as of 3/31/97 and 9/30/97 4,800 6,400 6,400
-------- -------- --------
Long-term debt:
First mortgage bonds 69,600 71,200 71,200
Other long-term debt 5,297 1,840 3,207
Capital leases 1,433 1,712 1,672
-------- -------- --------
Total long-term debt 76,330 74,752 76,079
Less current portion 3,825 2,420 3,707
-------- -------- --------
Long-term debt, net 72,505 72,332 72,372
-------- -------- --------
Total capitalization $175,275 $169,889 $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 RI)
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 RI 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 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 the Registrant.
Energize RI also requires the Registrant 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, 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 RI also calls for the
Registrant 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
the Registrant to provide unbundled service offerings for up to 10 percent per
year of firm system throughput.
As part of Energize RI, 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 RI will also be amortized over a ten year period.
Under Energize RI 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.
The Intergated Resource Plan (IRP) will be terminated as a result of
Energize RI. In addition to the funding for the demand side management
I-5
<PAGE>
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 to record 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 RI, 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. 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 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.
I-6
<PAGE>
At March 31, 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 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 March 31,
1998, 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 for two-thirds of the property. The remediation will begin in May 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 March 31, 1998, 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 March 31, 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 March 31, 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. Accordingly, environmental investigation costs of
approximately $2.1 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
March 31, 1998.
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
I-7
<PAGE>
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 subsidization of the Standard
Offer rate by electric utilities in Rhode Island and Massachusetts has resulted
in a delay in the opening of the retail electricity market. As such, the parties
are assessing how best to move forward.
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 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
I-8
<PAGE>
per share data have been restated to conform to the requirements of SFAS No.
128.
A reconciliation of the weighted average number of shares outstanding used
in the computation of the basic and diluted earnings per share for the periods
presented is as follows:
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
1998 1997 1998 1997 1998 1997
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted average
shares (basic) 5,915.3 5,779.2 5,891.9 5,768.5 5,851.8 5,748.4
Effect of dilutive stock
options 13.2 4.6 10.2 3.9 7.4 3.4
-------- ------- -------- -------- -------- --------
Weighted average
shares (diluted) 5,928.5 5,783.8 5,902.1 5,772.4 5,859.2 5,751.8
======== ======= ======== ======== ======== ========
</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 March 31, 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.
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 energy revenues, operating margin and net income for the
three, six and twelve months ended March 31, 1998 and for comparable periods
ended March 31, 1997 are as follows:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
Ended March 31 Ended March 31 Ended March 31
1998 1997 1998 1997 1998 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Energy revenues $87,796 $79,946 $155,738 $143,984 $232,174 $219,623
======= ======= ======== ======== ======== ========
Operating margin $38,673 $33,008 $ 66,676 $ 59,766 $102,954 $ 93,698
======= ======= ======== ======== ======== ========
Net income $ 9,535 $ 6,737 $ 13,938 $ 11,001 $ 10,768 $ 7,060
======= ======= ======== ======== ======== ========
</TABLE>
Operating Margin
- ----------------
During the latest quarter, the Registrant experienced weather that was 11.0
percent warmer than the same quarter last year. The warmer temperatures resulted
in decreased margin of approximately $3.6 million compared to the same quarter
last year. Offsetting the warmer than normal weather is $5.5 million of margin
generated by Energize RI, which became effective October
I-10
<PAGE>
1, 1997. This additional margin resulted from freezing the GCC mechanism used
previously to adjust for the over or underrecovery of gas costs was
approximately $5.9 million and was offset by the funding of the IRP programs of
approximately $400,000. Also offsetting the warmer than normal weather is the
impact Energize RI has as a result of no longer recording revenues using
seasonal embedded gas cost factors. When compared to the same quarter last year
when seasonal gas cost factors were being used, operating margin has increased
approximately $2.7 million. The effect of this increase, however, will reverse
in subsequent quarters and will have no impact on annual earnings.
The Registrant's acquisition of two oil distribution companies in November
1997 also resulted in additional margin of approximately $1.3 million for the
current quarter compared to the same period last year.
During the current year, weather has been 3.7 percent warmer than the same
period last year. The warmer temperatures resulted in decreased margin of
approximately $2.9 million compared to last year. Offsetting the warmer than
normal weather is $6.3 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 underrecovery of gas costs was approximately $8.7
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 $900,000. When
compared to the same period last year when seasonal gas cost factors were being
used, operating margin has increased approximately $3.1 million. The effect of
this increase, however, will reverse in subsequent quarters and will have no
impact on annual earnings.
Additionally, non-firm margin decreased $1.0 million during the first half
of fiscal year 1998 when compared with the first half 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 Integrated Resource Plan, 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 $1.8 million for the
current six month period when compared to the same period last 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 $800,000
or 6.3 percent for the three months ended March 31, 1998, approximately $1.5
million or 6.2 percent for the six months ended March 31, 1998 and approximately
$2.0 million or 4.1 percent for the twelve months ended March 31, 1998, versus
the same periods last year. The increases are primarily attributable to the
Registrant's acquisition of two oil companies during the current year.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $500,000 or
15.0 percent for the three months ended March 31, 1998, approximately $1.0
million or 15.2 percent for the six months ended March 31, 1998 and
approximately $1.2 million or 9.7 percent for the twelve months ended March
I-11
<PAGE>
31, 1998, 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 increased approximately $1.6 million or 19.7 percent for the three
months ended March 31, 1998, approximately $1.6 million or 11.8 percent for the
six months ended March 31, 1998 and approximately $2.2 million or 12.3 percent
for the twelve months ended March 31, 1998, versus the same periods last year.
The overall increase in taxes is primarily due to increases in Federal income
taxes as a result of higher pretax income this year compared to last year.
Additionally, local property and other taxes have increased as result of capital
spending.
Other, net
- ----------
Other, net has increased for the periods presented primarily as a 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 3.7 percent for the
three months ended March 31, 1998, approximately $200,000 or 5.4 percent for the
six months ended March 31, 1998 and approximately $400,000 or 5.0 percent during
the twelve months ended March 31, 1998, 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.
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.
Despite the increase in earnings for the current quarter and year to date,
the Registrant expects earnings for the year to be significantly less than last
year as a result of extremely warmer temperatures in the region. It is important
to note that due to the Energize RI Plan, quarterly earnings and year to date
earnings for this year versus last year will not be comparable due to the
shifting of gas costs from the first half of this year to the second half and
timing of expenses associated with investments included in the plan. These
factors will result in higher earnings for the first half of the year and lower
earnings for the last half of the year.
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.
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 March
31, 1998, the Registrant had approximately 1,000 firm transportation customers.
Energize RI 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.
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.
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 will market electricity, gas and energy services throughout New
England and will be owned 60 percent by Southern and 40 percent 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. The subsidization of the
Standard Offer rate by electric utilities in Rhode Island and Massachusetts has
resulted in a delay in the opening of the retail electricity market. As such,
the parties are assessing how best to move forward.
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 six month period, the Registrant's cash flow from
operations increased approximately $20.9 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 seasonal short-term borrowings during
the current fiscal year.
Capital expenditures for the year to date period of $11.1 million increased
$2.1 million or 23.4 percent when compared to the $9.0 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
I-13
<PAGE>
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 approximately $22.4 million. Anticipated
capital expenditures during the next three years are expected to total
approximately $81 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.
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-14
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The annual meeting of shareholders was held on January 15, 1998 and the
following nominees to the Registrant's Board of Directors were elected as
Directors for terms expiring at the time of the 2001 annual meeting by the
following vote:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Mrs. M. Anne Szostak 4,517,895 FOR 68,693 WITHHELD
Mr. Gilbert R. Bodell, Jr. 4,512,760 FOR 73,828 WITHHELD
Mr. Paul F. Levy 4,521,998 FOR 64,590 WITHHELD
Mr. W. Edward Wood 4,515,826 FOR 70,762 WITHHELD
</TABLE>
Item 6 (a). Exhibits
- ---------------------
10. Management contract dated March 13, 1998 between James A. Grasso, Vice
President, Public and Government Affairs and the Registrant. (Filed as Exhibit
10 to the report of The Providence Gas Company in Form 10-Q for the quarter
ended March 31, 1998, incorporated herein by this reference.)
27. Financial Data Schedule
Item 6 (b). Reports on Form 8-K
- --------------------------------
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 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: May 13, 1998
------------
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 194,435
<OTHER-PROPERTY-AND-INVEST> 3,380
<TOTAL-CURRENT-ASSETS> 60,763
<TOTAL-DEFERRED-CHARGES> 15,885
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 274,463
<COMMON> 5,926
<CAPITAL-SURPLUS-PAID-IN> 58,273
<RETAINED-EARNINGS> 33,771
<TOTAL-COMMON-STOCKHOLDERS-EQ> 97,970
0
4,800
<LONG-TERM-DEBT-NET> 72,505
<SHORT-TERM-NOTES> 21,684
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,825
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 73,679
<TOT-CAPITALIZATION-AND-LIAB> 274,463
<GROSS-OPERATING-REVENUE> 155,738
<INCOME-TAX-EXPENSE> 15,574
<OTHER-OPERATING-EXPENSES> 33,172
<TOTAL-OPERATING-EXPENSES> 48,746
<OPERATING-INCOME-LOSS> 17,930
<OTHER-INCOME-NET> 343
<INCOME-BEFORE-INTEREST-EXPEN> 18,273
<TOTAL-INTEREST-EXPENSE> 4,057
<NET-INCOME> 14,216
278
<EARNINGS-AVAILABLE-FOR-COMM> 13,938
<COMMON-STOCK-DIVIDENDS> 3,169
<TOTAL-INTEREST-ON-BONDS> 2,972
<CASH-FLOW-OPERATIONS> 25,277
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 2.36
</TABLE>
