<PAGE>
THE PROVIDENCE ENERGY CORPORATION
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___.
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common stock, $1.00 par value, 5,982,604 shares outstanding at February 12,
- ---------------------------------------------------------------------------
1999.
- -----
This amendment to the quarterly report of Providence Energy Corporation on Form
10-Q for the quarter ended December 31, 1998 is made in order reflect the
appropriate average revenue rate for unbilled volumes at the end of the period.
Restatements in Part I for Item 1 and Item 2 were required.
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q/A
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
three and twelve months ended
December 31, 1998 and 1997 I-1
Consolidated Balance Sheets as of
December 31, 1998, December 31, 1997 and
September 30, 1998 I-2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1998 and 1997 I-3
Consolidated Statements of Capitalization as of
December 31, 1998, December 31, 1997 and
September 30, 1998 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
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED DECEMBER 31
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Energy revenues $ 64,585 $ 67,942 $217,949 $224,324
Cost of energy 34,889 39,939 117,683 127,035
-------- -------- -------- --------
Operating margin 29,696 28,003 100,266 97,289
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 13,500 12,057 53,436 49,451
Depreciation and amortization 4,355 3,579 15,261 13,354
Taxes:
State gross earnings 1,681 1,780 5,519 6,049
Local property and other 2,055 1,967 8,451 7,892
Federal income 2,160 2,249 3,539 4,465
-------- -------- -------- --------
Total operating expenses 23,751 21,632 86,206 81,211
-------- -------- -------- --------
Operating income 5,945 6,371 14,060 16,078
Other, net 118 175 519 220
-------- -------- -------- --------
Income before interest expense
and preferred dividends of
subsidiary 6,063 6,546 14,579 16,298
-------- -------- -------- --------
Interest expense:
Long-term debt 1,552 1,490 6,453 6,012
Other 516 597 1,917 1,992
Interest capitalized (76) (83) (249) (267)
-------- -------- -------- --------
1,992 2,004 8,121 7,737
-------- -------- -------- --------
Income after interest expense 4,071 4,542 6,458 8,561
Preferred dividends of subsidiary (104) (139) (452) (591)
-------- -------- -------- --------
Net income $ 3,967 $ 4,403 $ 6,006 $ 7,970
======== ======== ======== ========
Net income per
common share - basic $ .66 $ .75 $ 1.01 $ 1.37
======== ======== ======== ========
Net income per
common share - diluted $ .66 $ .75 $ 1.01 $ 1.37
======== ======== ======== ========
Weighted average number of
shares outstanding:
Basic 5,974.0 5,868.4 5,946.1 5,817.7
======== ======== ======== ========
Diluted 5,985.0 5,875.8 5,956.6 5,823.0
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(thousands)
(Unaudited)
-----------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1998 1997 1998
---------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $332,181 $306,323 $324,502
Less - Accumulated depreciation
and plant acquisition adjustments 124,130 113,585 122,007
-------- -------- --------
208,051 192,738 202,495
-------- -------- --------
Other property, net 2,610 3,428 2,692
-------- -------- --------
Current assets:
Cash and temporary cash investments 2,580 4,690 2,006
Accounts receivable, less allowance of
$3,076 at 12/31/98, $2,178 at
12/31/97 and $2,720 at 9/30/98 28,794 45,953 14,067
Unbilled revenues 11,345 10,978 1,665
Inventories, at average cost -
Liquefied natural gas, propane,
and underground storage 517 446 656
Materials and supplies 1,246 1,321 1,433
Prepaid and refundable taxes 2,817 2,719 5,377
Prepayments 1,874 738 1,853
-------- -------- --------
49,173 66,845 27,057
-------- -------- --------
Investments 3,143 - 2,169
-------- -------- --------
Deferred charges and other assets 18,771 14,995 18,997
-------- -------- --------
Total assets $281,748 $278,006 $253,410
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
(See accompanying statement) $174,066 $168,919 $173,254
-------- -------- --------
Current liabilities:
Notes payable 27,159 38,170 20,079
Current portion of long-term debt 3,337 3,724 3,233
Accounts payable 27,568 18,359 9,325
Accrued taxes 3,463 5,096 2,714
Accrued vacation 1,687 1,620 1,706
Customer deposits 3,022 3,441 3,034
Other 5,606 4,775 6,773
-------- -------- --------
71,842 75,185 46,864
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 22,836 21,733 22,292
Unamortized investment tax credits 2,178 2,334 2,217
Other 10,826 9,835 8,783
-------- -------- --------
35,840 33,902 33,292
-------- -------- --------
Commitments and contingencies
Total capitalization and liabilities $281,748 $278,006 $253,410
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-2
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE MONTHS ENDED DECEMBER 31
--------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
-----------
1998 1997
------------------------
(thousands)
<S> <C> <C>
Cash provided by Operating Activities:
Income after interest expense $ 4,071 $ 4,542
Items not requiring cash:
Depreciation and amortization 4,142 3,600
Change as a result of regulatory actions 1,500
Gain on sale of financial instruments (216) -
Deferred Federal income taxes 539 237
Amortization of investment tax credits (39) (41)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (14,727) (10,239)
Unbilled revenues (9,680) (8,295)
Deferred gas costs - 231
Inventories 326 157
Prepaid and refundable taxes 2,560 1,347
Prepayments (21) 304
Accounts payable 17,543 5,573
Accrued taxes 754 2,594
Accrued vacation, customer deposits
and other (1,198) (894)
Deferred charges and other 1,267 (287)
-------- --------
Net cash provided by operating activities 5,321 329
-------- --------
Investing Activities:
Expenditures for property, plant
and equipment, net (7,851) (5,861)
Expenditures for business acquisitions - (982)
Investment in joint venture (947) -
Proceeds from sale of financial
instruments, net 162 -
-------- --------
Net cash used in investing activities (8,636) (6,843)
-------- --------
Financing Activities:
Proceeds from exercise of stock options 14 -
Payments on long-term debt (1,842) (1,948)
Increase in notes payable, net 7,080 13,436
Cash dividends on preferred shares (104) (139)
Cash dividends on common shares (1,259) (1,208)
-------- --------
Net cash provided by financing activities 3,889 10,141
-------- --------
Increase in cash and temporary cash investments 574 3,627
Cash and temporary cash investments at beginning
of period 2,006 1,063
-------- --------
Cash and temporary cash investments at end $ 2,580 $ 4,690
of period ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for-
Interest (net of amount capitalized) $ 2,115 $ 1,763
Income taxes (net of refunds) $ 19 $ -
Schedule of non-cash investing activities
Capital lease obligations for equipment $ 115 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(thousands)
(Unaudited)
-----------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1998 1997 1998
---------------------------------------------
<S> <C> <C> <C>
Common stockholders' investment:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 5,983 at 12/31/98,
5,905 at 12/31/97
and 5,969 at
9/30/98 $ 5,983 $ 5,905 $ 5,969
Amount paid in excess of par 59,498 57,896 59,198
Retained earnings 25,423 25,831 23,067
-------- -------- --------
Total Common equity 90,904 89,632 88,234
-------- -------- --------
Unrealized gain on financial
instruments 38 - 65
-------- -------- --------
Cumulative preferred stock of subsidiary:
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 48 shares as of
12/31/98 and 9/30/98 and 64
shares as of 12/31/97 4,800 6,400 4,800
-------- -------- --------
Long-term debt:
First Mortgage Bonds 75,728 69,600 77,328
Other long-term debt 4,750 5,451 4,890
Capital leases 1,183 1,560 1,170
-------- -------- --------
Total long-term debt 81,661 76,611 83,388
Less current portion 3,337 3,724 3,233
-------- -------- --------
Long-term debt, net 78,324 72,887 80,155
-------- -------- --------
Total capitalization $174,066 $168,919 $173,254
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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 1998 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 (Energize RI or the Plan) among
ProvGas, the RI Division of Public Utilities and Carriers (Division), the Energy
Council of Rhode Island, and the George Wiley Center. Effective for the period
from October 1, 1997 to September 30, 2000, Energize RI provides firm customers
with a price decrease of approximately four percent in addition to a three-year
price freeze. Under Energize RI, the Gas Charge Clause (GCC) mechanism has been
suspended for the entire term. Energize RI also requires ProvGas to make
significant capital investments to improve its distribution system. Capital
investments required by Energize RI are estimated to total approximately $26
million over its three-year term. In addition, Energize RI requires ProvGas to
fund the Low-Income Assistance Program at an annual level of $1 million, the
Demand Side Management Rebate Program at an annual level of $.5 million and the
Low-Income Weatherization Program at an annual level of $.2 million. Energize
RI also continues the process of unbundling by requiring ProvGas to provide
unbundled service offerings up to 10 percent per year of firm deliveries.
As part of Energize RI, ProvGas will amortize approximately $4.0 million of
environmental costs previously charged to the accumulated depreciation reserve.
These costs and all environmental costs incurred during the term of the Plan
will be amortized over a 10-year period. Also, in connection with the Plan,
ProvGas wrote-off approximately $1.5 million of previously deferred gas costs in
October 1997.
Under Energize RI, ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999, and 2000, respectively. In addition, ProvGas may not earn
less than a seven percent return on average common equity. In the event that
ProvGas earns in excess of 10.9 percent or less than seven percent, ProvGas will
defer revenues or costs through a deferred revenue account over the term of the
Plan. Any balance in the deferred revenue account at the end of the Plan will
be refunded to or recovered from customers in a manner to be determined by all
parties to the Plan and approved by the RIPUC.
As part of Energize RI, ProvGas is permitted to file with the Division for
the recovery of the impact of exogenous changes (Changes) which may occur during
the three-year term of the Plan. Changes are defined as "...significant
increases or decreases in ProvGas' costs or revenues which are beyond ProvGas'
reasonable control." Any disputes regarding either the nature or quantification
of the Changes are to be resolved by the RIPUC. The impact of any such Changes
will be debited or credited to a regulatory asset or liability account
throughout the term of Energize RI and will be recovered or refunded at the
expiration of the Plan through a method to be determined.
I-5
<PAGE>
In fiscal 1998, ProvGas did not earn its allowed rate of return primarily
as a result of the extremely warm weather and the loss of non-firm margin.
ProvGas believes the causes of these two events were beyond its control and thus
considers them as Changes. In fiscal 1999, ProvGas intends to file with the
Division for recovery of a portion of these losses. These factors continue to
adversely affect ProvGas in fiscal 1999. Under the Plan's design, which assumed
normal weather, ProvGas should have had earnings in year one of the Plan in
excess of 10.9 percent. The earnings in excess of 10.9 percent were to be
deferred in the deferred revenue account to fund capital investments and other
Plan commitments in the remaining two years of the Plan. Absent favorable
recovery for the Changes and/or other factors such as colder than normal
weather, ProvGas' ability to earn a 10.9 percent return on average common equity
during the remainder of Energize RI is substantially impaired.
Gas Supply
- ----------
As part of the Price Stabilization Plan Settlement Agreement described
above in Rates and Regulations, ProvGas entered into a full requirements gas
---------------------
supply contract with Duke Energy Trading and Marketing, L.L.C. (DETM) for a term
of three years. Under the contract, DETM guarantees to meet ProvGas' supply
requirements; however, ProvGas must purchase all of its gas supply exclusively
from DETM. Under the contract, ProvGas transferred responsibility for its
pipeline capacity resources, storage contracts, and Liquefied Natural Gas (LNG)
capacity to DETM. As a result, ProvGas' gas inventories of approximately $18
million at September 30, 1997 were sold at book value to DETM on October 1,
1997.
As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover ProvGas' non-firm sales customers' 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' approved Firm Transportation (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. This
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.
ProvGas has entered into an agreement to amend its existing service
contract with Algonquin LNG, Inc. (ALNG), a subsidiary of Duke Energy. ALNG is
the owner and operator of a LNG tank located in Providence, Rhode Island.
ProvGas relies upon this service to provide gas supply into its distribution
system. The agreement, subject to regulatory approvals, is expected to begin on
November 1, 1999. Under the terms of the agreement, ALNG will replace and expand
the vaporization capability at the tank and make other necessary improvements to
modernize the tank and ensure its reliable operation in the future. ProvGas will
receive enhanced gas supply capability and will no longer be responsible for
compressing boil-off from the LNG tank before delivering that form of gas supply
into its distribution system. ProvGas will receive $2.6 million from ALNG as
reimbursement for costs associated with the project including labor, engineering
and legal expenses that will result as part of this arrangement.
I-6
<PAGE>
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact of
such standards and requirements, which are subject to change and can take effect
retroactively. The Registrant continues to monitor the status of these laws and
regulations. Such monitoring involves the review of past activities and current
operations, and may include expending funds to investigate or clean up certain
sites. To the best of its knowledge, subject to the following, the Registrant
believes it is in substantial compliance with such laws and regulations.
At December 31, 1998, the Registrant was aware of five 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 in Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRPs. With respect to one of
the Plympton sites, the Registrant has joined with other PRPs in entering into
an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the 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 December 31, 1998,
approximately $2.2 million had been spent primarily on studies at this site. In
accordance with state laws, such a study is monitored by the Rhode Island
Department of Environmental Management (DEM). The purpose of this study was to
determine the extent of environmental contamination at the site. The Registrant
has completed the study which indicated that remediation will be required for
two-thirds of the property. The remediation is expected to begin in April 1999
and will continue for a duration of three to six months. During the remediation
process, the remaining one-third of the property will also be investigated and
remediated if necessary.
At December 31, 1998, the Registrant compiled a preliminary range of costs,
based on removal and off-site disposal of contaminated soil, ranging from $3.4
million to in excess of $5.0 million. However, because of the uncertainties
associated with environmental assessment and remediation activities, the future
cost of remediation could be higher than the range noted. Based on the proposals
for remediation work, the Registrant has accrued $3.4 million at December 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. As a result, the
Registrant completed a site characterization test. Based on the findings of that
test, the Registrant concluded that remediation would be required. As of
December 31, 1998, the Registrant has extracted the underground oil storage tank
and has removed some localized contamination. The costs associated with the site
characterization test and partial removal of soil contaminants were shared
equally with the former owner of the property. The Registrant is currently
engaged in preliminary negotiations to sell the property back to the previous
owner, who would continue to remediate the site. In addition, in 1997,
contamination from scrapped meters and regulators was discovered at this site.
The Registrant reported this to the DEM and the Rhode Island Department of
Health and has completed the necessary remediation. Costs incurred by the
Registrant to remediate this site were approximately $.1 million.
I-7
<PAGE>
In November 1998, the Registrant received a letter of responsibility from
DEM relating to possible contamination on previously-owned property on Allens
Avenue in Providence. The current operator of the property has been similarly
notified. The current operator conducted tests that support a finding that the
Registrant may be partially responsible for some of the contamination.
Additional investigation is underway to determine the extent of the problem and
the Registrant's responsibility.
In prior rate cases filed with the RIPUC, ProvGas requested that
environmental investigation and remediation costs be recovered by inclusion in
its depreciation factors consistent with the rate recovery treatment for all
types of cost of removal. Due to the magnitude of ProvGas' environmental
investigation and remediation expenditures, ProvGas sought current recovery for
these amounts. As a result, in accordance with the Price Stabilization Plan
Settlement Agreement described in, Rates and Regulations, effective October 1,
---------------------
1997, all environmental investigation and remediation costs incurred through
September 30, 1997, as well as all costs incurred during the three-year term of
the Plan, will be amortized over a ten-year period. Additionally, it is ProvGas'
practice to consult with the RIPUC on a periodic basis when, in management's
opinion, significant amounts might be expended for environmental-related costs.
As of December 31, 1998, ProvGas has charged environmental assessment and
remediation costs of $2.7 million and an estimated $3.4 million in future costs
to the accumulated depreciation reserve and has amortized $.6 million of these
costs.
Management has begun discussions with other parties who may assist ProvGas
in paying any future costs at the above sites. Management believes that its
program for managing environmental issues, combined with rate recovery and
financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
Net Income per Common Share
- ---------------------------
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 December 31 is as follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average
shares 5,974.0 5,868.4 5,946.1 5,817.7
Effect of dilutive
stock options 11.0 7.4 10.5 5.3
------- ------- ------- -------
Weighted average
shares diluted 5,985.0 5,875.8 5,956.6 5,823.0
======= ======= ======= =======
</TABLE>
The net income used in the calculation for basic and diluted earnings per
share calculations agrees with the net income appearing in the consolidated
financial statements.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS)No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131, which is
effective for the Registrant's fiscal year ending September 30, 1999, requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. This statement requires additional
disclosure only and will not affect the financial position or results of
operations of the Registrant.
I-8
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for the Registrant's fiscal year ending September
30, 2000. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at a company's election, before January
1, 1998).
The 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.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." It applies to all
nongovernmental entities and is effective for the Registrant's financial
statements for fiscal year ending September 30, 2000. The provisions of this SOP
should be applied to internal-use software costs incurred in fiscal years
subsequent to December 15, 1998 for all projects, including those projects in
progress upon initial application of the SOP.
The SOP establishes accounting standards for the determination of capital
or expense treatment of expenditures for computer software developed or obtained
for internal use based upon the stage of development. The SOP defines three
stages as (1) Preliminary Project, (2) Application Development and (3) Post-
Implementation/Operation. As a general rule, the Preliminary Project and Post-
Implementation/Operation phase expenditures are expensed and Application
Development expenditures are capitalized.
The Registrant will adopt the SOP upon the effective date and assess its
impact at that time.
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, which
constitute "forward-looking" statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations
and releases.
All statements other than statements of historical facts included in this
annual report regarding the Registrant's financial position and strategic
initiatives and addressing industry developments, are forward-looking
statements. Where, in any forward-looking statement, the Registrant or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The following
are some of the factors which could cause actual results to differ materially
from those anticipated: general economic, financial and business conditions;
changes in government regulations; competition in the energy services sector;
regional weather conditions; the availability and cost of natural gas and oil;
development and operating costs; the success and costs of advertising and
promotional efforts; the availability and terms of capital; the business
abilities and judgment of personnel; the ability of the Registrant and its
suppliers and customers to modify or redesign their computer systems to work
properly in the year 2000; unanticipated environmental liabilities; the
Registrant's ability to grow its business through acquisitions and/or
significant customer growth; the costs and effects of unanticipated legal
proceedings; the impacts of unusual items resulting from ongoing evaluations of
business strategies and asset valuations; and changes in business strategy.
RESULTS OF OPERATIONS
The Registrant's energy revenues and net income have decreased while
operating margin has increased for the comparable periods presented as shown in
the table below:
(000's)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31 Ended December 31
Percent Percent
1998 1997 Change Change 1998 1997 Change Change
---- ---- ------ ------ ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Energy revenues $64,585 $67,942 $(3,357) (4.9) $217,949 $224,324 $ (6,375) (2.8)
======= ======= ======= ===== ======== ======== ======== ======
Operating margin $29,696 $28,003 $ 1,693 6.0 $100,266 $ 97,289 $ 2,977 3.1
======= ======= ======= ===== ======== ======== ======== ======
Net income $ 3,967 $4,403 $ (436) (9.9) $ 6,006 $ 7,970 $ (1,964) (24.6)
======= ======= ======= ===== ======== ======== ======== ======
</TABLE>
I-10
<PAGE>
Operating Margin
- ----------------
During the latest quarter, the Registrant experienced weather that was 14
percent warmer than the same quarter last year. This warmer weather resulted in
decreased margin of approximately $2.5 million. This decrease was more than
offset by the write-off of $1.5 million of previously deferred gas costs in the
first quarter of fiscal 1998 in connection with Energize RI.
The Registrant experienced weather that was 15 percent warmer for the
twelve months ended December 31, 1998 versus the same period last year. The
warmer temperatures resulted in ProvGas realizing decreased margin of
approximately $7.4 million compared to last year. Offsetting the warmer than
normal weather was $9.4 million of margin generated under Energize RI which
became effective October 1, 1997. This additional margin includes $9.1 million
associated with adjusting the Gas Charge Clause (GCC) mechanism.
Additionally ProvGas', non-firm margin decreased $1.6 million when compared
with the twelve months ended last year. Prior to Energize RI, ProvGas was
allowed to recover approximately $3.0 million in non-firm margin under the terms
of the Integrated Resource Plan (IRP), subject to ProvGas' ability to generate
sufficient gas cost savings for customers. As a result of Energize RI, ProvGas
retains the actual non-firm margin earned. Due to an unfavorable pricing
difference between natural gas and alternative fuels, ProvGas experienced a
decrease in non-firm sales and transportation margin.
As part of Energize RI, the performance-based ratemaking mechanism
(Mechanism) under the IRP was terminated in September 1997. During the previous
twelve month period ProvGas recorded $1.5 million in additional margin as a
result of this Mechanism. Thus, a decrease in margin from the twelve months
ended this year to the same period last year occurred because this Mechanism was
no longer available.
Non-regulated operating margins increased by approximately $1.0 million
during the latest quarter compared to the same quarter last year and $4.1
million for the twelve months ended December 31, 1998 versus the same period
last year. The Registrant's acquisition of two oil distribution companies in
November 1997 contributed approximately $.5 million for the three months ended
December 31,1998 and $2.7 million for the twelve months ended December 31, 1998
versus the same periods last year. However, the margin earned from oil sales
was lower than expected due to warmer weather.
An increase in the number of customers and sales volumes at ProvEnergy
Services contributed to an increase of non-regulated operating margin of $.5
million for the three months ended December 31,1998 and $1.4 million for the
twelve months ended December 31, 1998 versus the same periods last year.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased approximately $1.4
million or 12.0 percent from the same quarter last year and approximately $4.0
million or 8.1 percent for the twelve months ended December 31, 1998 when
compared to the same twelve month period last year. Approximately $.6 million
of the increase for the three-month period was attributable to the Registrant's
acquisition of two oil distribution companies in November 1997. Additionally,
the Registrant recognized income in the first quarter of fiscal 1998 as a result
of the Registrant's joint efforts with Southern Energy, Inc. to conduct a retail
energy distribution business under the name Providence-Southern. These joint
efforts ended in May 1998. ProvEnergy Services continued this business venture.
ProvGas' operating and maintenance expenses increased primarily due to
normal recurring pay increases.
I-11
<PAGE>
The Registrant's twelve-month increase in operating and maintenance
expenses was primarily attributable to the Registrant's acquisition of two oil
companies during November 1997. This increase was partially offset by decreases
in ProvGas' expenses, primarily bad debts. The decrease in bad debts was
attributable to improved collection experience and the implementation of new
credit policies, as well as decreased operating revenues from warmer than normal
weather.
The Registrant continually reviews its operating expenses in order to keep
expenses as low as possible; however, expenses can vary from year to year.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $.8 million
or 21.7 percent compared to the same quarter last year and approximately $1.9
million or 14.3 percent for the twelve months ended December 31, 1998 versus the
same period last year. This increase was the result of increased capital
spending for Energize RI commitments including technology projects as well as
the amortization of previously deferred environmental costs incurred by ProvGas.
Effective October 1, 1997, ProvGas began amortizing environmental costs over a
ten-year period in accordance with Energize RI.
Taxes
- -----
Taxes for the current quarter versus last year decreased approximately $.1
million or 1.7 percent and decreased approximately $.9 million or 4.9 percent
for the current twelve-month period versus last year. The decrease in taxes,
mainly State gross earnings and Federal income, was the result of lower
operating revenues and lower pretax earnings.
Other, net
- ----------
Other, net decreased approximately $.1 million in the current quarter
versus the same quarter during the prior year. The decrease is primarily the
result of a reduction in fees earned by the Registrant for providing energy
management services to Salve Regina University during the quarter ended December
31, 1998 as compared to the same quarter last year.
Other, net increased approximately $.3 million for the twelve months ended
December 31, 1998. The majority of the increase consists of fees earned by the
Registrant for providing energy management services and interest income earned
as a result of Federal income tax refunds from amending prior year tax returns.
Interest Expense
- ----------------
Interest expense remained flat during the latest quarter compared to the
same quarter last year and increased approximately $.4 million or 5.0 percent
during the latest twelve months compared to the same twelve months last year.
The Registrant's acquisition of two oil distribution companies in November 1997
and the issuance by ProvGas of the Series S First Mortgage Bonds in April 1998
were the primary reasons for the twelve-month increase. Offsetting the increase
was a decrease in short-term borrowings, as a result of the Series S First
Mortgage Bond issuance, which caused short-term interest expense to decrease.
I-12
<PAGE>
FUTURE OUTLOOK
Regulatory
Under Energize RI, ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999 and 2000, respectively. In addition, ProvGas may not earn
less than a seven percent return on average common equity. In the event that
ProvGas earns in excess of 10.9 percent or less than seven percent, ProvGas will
defer revenues or costs through a deferred revenue account over the term of the
Plan. Any balance in the deferred revenue account at the end of the Plan will
be refunded to or recovered from customers in a manner to be determined by all
parties to the Plan and approved by the Rhode Island Public Utilities Commission
(RIPUC).
As part of Energize RI, ProvGas is permitted to file with the RI Division
of Public Utilities and Carriers (Division) for the recovery of the impact of
exogenous changes (Changes) which may occur during the three-year term of the
Plan. Changes are defined as "...significant increases or decreases in ProvGas'
costs or revenues which are beyond ProvGas' reasonable control." Any disputes
regarding either the nature or quantification of the Changes are to be resolved
by the RIPUC. The impact of any Changes will be debited or credited to a
regulatory asset or liability account throughout the term of Energize RI and
will be recovered or refunded at the expiration of the Plan through a method to
be determined.
In fiscal 1998, ProvGas did not earn its allowed rate of return primarily
as a result of the extremely warm weather and the loss of non-firm margin.
ProvGas believes the causes of these two events were beyond its control and thus
considers them as Changes. In fiscal 1999, ProvGas intends to file with the
Division for recovery of a portion of these losses. These factors continue to
adversely affect ProvGas in fiscal 1999. Under the Plan's design, which assumed
normal weather, ProvGas should have had earnings in year one of the Plan in
excess of 10.9 percent. The earnings in excess of 10.9 percent were to be
deferred in the deferred revenue account to fund capital investments and other
Plan commitments in the remaining two years of the Plan. Absent favorable
recovery for the Changes and/or other factors such as colder than normal
weather, ProvGas' ability to earn a 10.9 percent return on average common equity
during the remainder of Energize RI is substantially impaired.
In 1998, North Attleboro Gas Company, a small natural gas distribution
subsidiary with over 3,500 customers located in Massachusetts, received approval
from the Massachusetts Department of Telecommunications and Energy (MDTE) of a
settlement agreement unbundling its rates. This agreement, which unbundled the
cost of gas from the cost of distribution, was part of a comprehensive statewide
unbundling initiative being directed by the MDTE. During the first quarter of
fiscal 1999 certain large commercial customers have been given the opportunity
to select unbundled service. In fiscal 2000, it is expected that North
Attleboro Gas Company will further introduce unbundled service offerings and
make competitive choice available to all customers, both residential and
commercial.
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.
The Registrant's cash flow from operating activities increased
approximately $5.0 million for the quarter ended December 31, 1998 compared to
the same period last year. This increase was primarily due to a temporary
increase in ProvGas' accounts payable for gas supply due to the timing of
payments made to Duke Energy Trading and Marketing, L.L.C. (DETM). Offsetting
this increase was the prior year receipt of funds in the first quarter of fiscal
1998 in relation to the sale of ProvGas' working gas in storage to DETM.
I-13
<PAGE>
Capital expenditures for the quarter ended December 31, 1998 of $7.8
million increased $2.0 million or 34 percent when compared to $5.9 million for
the same period last year. This spending increase was due primarily to ProvGas'
continuing efforts to move its information technology systems from a mainframe
to a client server environment. Anticipated capital expenditures for the
remainder of fiscal 1999 and 2000 are expected to total approximately $52.7
million.
During the current quarter, the Registrant's cash flow from financing
activities decreased $6.3 million due primarily to a reduction in short-term
borrowings. This reduction is primarily due to the increase in cash flow from
operating activities as discussed above. In September 1998, ProvGas repurchased
$6.4 million of Series M First Mortgage Bonds. ProvGas issued $15 million in
Series T First Mortgage Bonds on February 8, 1999, the proceeds of which were
used to reduce borrowings under its lines of credit as well as for general
corporate purposes. The Series T bonds are for a 30 year term at an interest
rate of 6.5 percent. ProvGas estimates savings of approximately $1.8 million
over the life of the new debt. ProvGas has received an order from the Division
which permits the amortization of the Series M bond repurchase premium over the
life of the Series T bonds.
YEAR 2000 UPDATE
The Registrant's company-wide Year 2000 Project is proceeding on schedule.
The Project addresses the problem arising from the use in software programs and
computing infrastructure of two-digit years to define the applicable year,
rather than four-digit years, and from time-sensitive software that may
recognize a date using "00" as the last two digits of the year 1900, rather than
the year 2000.
Readiness
The Registrant recognizes that the products and services that the
Registrant provides to its customers are essential, and senior management has
made Year 2000 readiness a top priority. The Registrant's Year 2000 Project
Office is working with two international consulting firms to ensure the
continuity of mission critical business systems and processes before and beyond
the Year 2000. The Registrant has organized the Project around the following
four major areas:
1. Information Technology (IT) Systems
The Registrant continues to implement its technology plan developed in 1992
which includes the migration from a mainframe centric to a client server centric
environment. The migration includes the replacement of the Customer Information
System (CIS) which supports the business function of customer inquiry, service
orders and billing. It also includes the replacement of its business
applications such as financial, human resources, and procurement with an
Enterprise Resource Planning (ERP) system. These new business applications have
been represented to be Year 2000 ready by their respective vendors. This
migration is expected to be completed by June 30, 1999.
The Registrant has completed an inventory and assessment of its remaining
IT systems and IT infrastructure. All mission critical systems are expected to
be remediated, upgraded or replaced and tested by June 30, 1999.
The Registrant has implemented procurement policies as part of its efforts
to ensure Year 2000 readiness. These policies address any future changes to the
Registrant's IT systems environment and its future acquisitions of IT systems.
2. Embedded Systems
Embedded microprocessors are found in equipment deployed in the
Registrant's distribution and facility operations. The distribution area
includes, but is not limited to, the monitoring, storage, measurement and
control of the flow of natural gas. The facility area includes, but is not
limited to, back-up power supply, HVAC and security at the Registrant's offices.
I-14
<PAGE>
The Registrant has completed the assessment of its embedded components.
Many of the components associated with the Registrant's mission critical systems
have been identified as Year 2000 ready. A remediation plan for mission
critical embedded systems has been completed and implementation of this plan is
underway. Remediation and testing of mission critical embedded systems is
scheduled to be completed by June 30, 1999. Remediation and testing of all
other embedded systems is planned to be completed by September 30, 1999.
3. Upstream/Downstream
The Registrant has developed a plan to identify its major suppliers and
customers and will evaluate their Year 2000 readiness through a combination of
correspondence, telephone interviews, and site visits. The Registrant is
actively participating with the Rhode Island Y2K (Year 2000) Group which acts as
a communication forum for key customers as well as the other essential suppliers
of services such as telecommunications, water and electric.
The Registrant has contacted its major suppliers critical to the delivery
of natural gas to ProvGas' system, including interstate pipelines, DETM, New
England Electric System and Bell Atlantic. All suppliers have indicated that
they are following a comprehensive program on a timely schedule designed to (1)
inventory and identify equipment and systems that are date sensitive; (2)
assess, test, remediate, and/or replace such equipment and/or systems; (3)
maintain continuity of service through preparation and implementation of an
appropriate contingency plan; and (4) assess the Y2K program and compatibility
of important upstream suppliers. While the Registrant cannot guarantee Y2K
readiness of these and other suppliers, information received from them indicates
that they expect to fulfill their obligations to the Registrant on and after
January 1, 2000. The Registrant's plan to address the assessment of third
parties provides for contacting all other critical suppliers by March 31, 1999.
The assessment of all other suppliers will continue throughout 1999. Any risk
areas that surface as a result of these assessments will be addressed in
contingency planning.
4. Contingency Planning
The Registrant has contingency plans in place for response to certain
emergency operational situations. The Registrant has begun conducting workshops
to develop actionable contingency plans which will address risks to its major
business processes due to the Year 2000 computer problem. Such contingency
plans may include using manual procedures and arranging for alternative
suppliers. The Registrant expects its Year 2000 contingency plans to be in
place by June 30, 1999, with continued refinement throughout 1999.
Year 2000 Costs
The Registrant has developed a preliminary comprehensive budget for all
phases of its Year 2000 effort. The Registrant expects to capitalize Year 2000
costs incurred on behalf of ProvGas with a five-year amortization period
consistent with the regulatory treatment approved by the RIPUC under ProvGas'
Energize RI program. 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 Year 2000 costs.
As of December 31, 1998, ProvGas had deferred Year 2000 costs of
approximately $3.2 million which includes $.7 million for the assessment phase
of the Year 2000 effort. Remaining activities include project management and
consulting for the Year 2000 Project Office, contingency planning and testing of
the IT infrastructure and IT business systems. Costs for these activities,
together with previously deferred Year 2000 costs, are expected to range from $8
million to $11 million. These estimated costs include external contractors and
service providers, as well as the purchase of computer hardware and software.
I-15
<PAGE>
These estimates do not include Year 2000 costs which may be incurred by
joint ventures or partnerships for which the Registrant does not have primary
operating responsibility or costs of implementing the new CIS and ERP systems
pursuant to ProvGas' ongoing technology plan. Additionally, the Registrant does
not separately track the internal costs incurred for the Year 2000 project.
Such costs are principally the related payroll costs for the information systems
group. Substantially all of these costs are currently included in the rates
being charged to ProvGas' customers under Energize RI, and therefore are being
expensed as they are incurred.
These cost estimates and the dates on which the Registrant plans to
complete Year 2000 modification and testing processes and contingency planning
are based on management's current best estimates which were derived utilizing
numerous assumptions of future events, including the continued availability of
technological and certain other resources, the accuracy of third party
assurances and other factors. There can be no guarantee that these estimates
will be achieved, and actual results may differ from those discussed above.
Risk Assessment
No amount of preparation and testing can guarantee Year 2000 readiness.
However, the Registrant believes that it has taken and will take appropriate
preventative measures designed to minimize disruption before, during and after
January 1, 2000.
The successful implementation by ProvGas of its CIS and ERP systems and the
upgrade of its Supervisory Control and Data Acquisition software applications
prior to January 1, 2000 are critical to enable the Registrant to avoid
significant business disruption in Year 2000. In addition, a disruption in the
extraction or processing, transmission or storage of gas or its distribution due
to Year 2000 problems experienced by the Registrant's gas suppliers could
prevent those suppliers from delivering a sufficient amount of gas to enable the
Registrant to serve certain customer segments. Even if the flow of gas is not
disrupted, customers may not be able to receive gas if electrical service is
disrupted.
In the event Super Service Oil Company is unable to obtain supplies of oil
from third parties, its customers may not be able to receive oil necessary to
heat their facilities or residences.
Because of the difficulty of assessing Year 2000 readiness of these
suppliers and others outside the control of the Registrant, the Registrant
considers potential disruptions by these third parties to present the
"reasonably likely worst case scenario." The Registrant's inability to serve
its customers could result in increased costs, loss of revenue and potential
claims.
The Rhode Island Public Utilities Commission has opened a generic docket to
investigate the readiness of regulated utilities for the millennium. Hearings
are scheduled for February 17 and 18, 1999. ProvGas has been requested to
present information regarding its Year 2000 readiness.
This Year 2000 update contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements are subject to risks and uncertainties, and actual results
may differ materially from those described herein.
I-16
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6 (a). Exhibits
- --------------------
10a. Performance Share Award Agreement dated January 1, 1999 between James H.
Dodge, Chairman, President, and Chief Executive Officer and the Registrant.
10b. Performance Share Award Agreement dated January 1, 1999 between James
Demetro, Senior Vice President and the Registrant.
10c. Performance Share Award Agreement dated January 1, 1999 between Gary S.
Gillheeney, Senior Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary and the Registrant.
10d. Performance Share Award Agreement dated January 1, 1999 between Robert
W. Owens, Senior Vice President and the Registrant.
10e. Performance Share Award Agreement dated January 1, 1999 between Susann
G. Mark, Vice President, General Counsel and Secretary and the Registrant.
10f. Liquefied Natural Gas Service Precedent Agreement dated December 11,
1998 between Algonquin LNG, Inc. and the Registrant. (Filed as exhibit 10a to
the report of The Providence Gas Company in Form 10-Q for the quarter ended
December 31, 1998, incorporated herein by this reference.)
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
II-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
It is the opinion of management that the financial information contained in this
report reflects all adjustments necessary for a fair statement of results for
the periods reported, but such results are not necessarily indicative of results
to be expected for the year due to the seasonal nature of the Registrant's
operations. All accounting policies and practices have been applied in a manner
consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providence Energy Corporation
(Registrant)
BY:/s/ KENNETH W. HOGAN
-------------------------------------
KENNETH W. HOGAN
Vice President, Chief Financial
Officer, and Treasurer
Dated: December 17, 1999
-----------------
II-2
