<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 June 30, 1999
-------------------------------------------------
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, 6,085,862 shares outstanding at July 30, 1999.
- -----------------------------------------------------------------------------
This amendment to the quarterly report of Providence Energy Corporation on Form
10-Q for the quarter ended June 30, 1999 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
JUNE 30, 1999
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1999 and 1998 I-1
Consolidated Balance Sheets as of
June 30, 1999, June 30, 1998 and
September 30, 1998 I-2
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1999 and 1998 I-3
Consolidated Statements of Capitalization as of
June 30, 1999, June 30, 1998 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 JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
-------------------- -------------------
1999 1998 1999 1998
-------------------- -------------------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Energy revenues $ 38,714 $ 39,462 $196,989 $195,200
Cost of energy 18,714 20,135 105,210 109,197
--------- -------- -------- --------
Operating margin 20,000 19,327 91,779 86,003
--------- -------- -------- --------
Operating expenses:
Operation and maintenance 11,877 13,193 40,236 38,996
Depreciation and amortization 4,267 3,660 12,995 11,029
Taxes:
State gross earnings 928 1,144 5,080 5,145
Local property and other 2,270 2,163 6,729 6,435
Federal income (393) (946) 7,175 6,355
--------- -------- -------- --------
Total operating expenses 18,949 19,214 72,215 67,960
--------- -------- -------- --------
Operating income 1,051 113 19,564 18,043
Other, net 691 181 984 524
--------- -------- -------- --------
Income before interest expense
and preferred dividends of
subsidiary 1,742 294 20,548 18,567
--------- -------- -------- --------
Interest expense:
Long-term debt 1,799 1,716 5,043 4,688
Other 370 355 1,553 1,596
Interest capitalized (120) (39) (290) (195)
--------- -------- -------- --------
2,049 2,032 6,306 6,089
--------- -------- -------- --------
Income (loss) after interest expense (307) (1,738) 14,242 12,478
Preferred dividends of subsidiary (69) (105) (278) (383)
--------- -------- -------- --------
Net income (loss) $ (376) $ (1,843) $ 13,964 $ 12,095
========= ======== ======== ========
Net income (loss) per
common share - basic $ (.06) $ (.31) $ 2.33 $ 2.05
========= ======== ======== ========
Net income (loss) per
common share - diluted $ (.06) $ (.31) $ 2.33 $ 2.04
========= ======== ======== ========
Weighted average number of
shares outstanding:
Basic 6,012.0 5,935.6 5,994.2 5,906.4
========= ======== ======== ========
Diluted 6,023.6 5,935.6 6,005.2 5,916.8
========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ ---------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
TWELVE MONTHS
------------------------
1999 1998
------------------------
(thousands, except per share amounts)
<S> <C> <C>
Energy revenues $223,095 $228,715
Cost of energy 118,746 126,761
-------- --------
Operating margin 104,349 101,954
-------- --------
Operating expenses:
Operation and maintenance 53,233 51,847
Depreciation and amortization 16,451 14,248
Taxes:
State gross earnings 5,553 6,004
Local property and other 8,657 8,267
Federal income 4,448 4,830
-------- --------
Total operating expenses 88,342 85,196
-------- --------
Operating income 16,007 16,758
Other, net 1,036 509
-------- --------
Income before interest expense
and preferred dividends of
subsidiary 17,043 17,267
-------- --------
Interest expense:
Long-term debt 6,746 6,193
Other 1,955 2,025
Interest capitalized (351) (263)
-------- --------
8,350 7,955
-------- --------
Income (loss) after interest expense 8,693 9,312
Preferred dividends of subsidiary (382) (522)
-------- --------
Net income (loss) $ 8,311 $ 8,790
======== ========
Net income (loss) per
common share - basic $ 1.39 $ 1.49
======== ========
Net income (loss) per
common share - diluted $ 1.39 $ 1.49
======== ========
Weighted average number of
shares outstanding:
Basic 5,985.5 5,885.3
======== ========
Diluted 5,996.4 5,894.4
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-1 (a)
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(thousands)
<TABLE>
<CAPTION>
(Unaudited)
--------
June 30, June 30, September 30,
1999 1998 1998
---------------------------------------
ASSETS
<S> <C> <C> <C>
Gas plant, at original cost $ 348,393 $ 318,369 $ 324,502
Less - Accumulated depreciation
and plant acquisition adjustments 137,302 123,666 125,976
--------- -------- ---------
211,091 194,703 198,526
--------- -------- ---------
Other property, net 2,527 3,485 2,692
--------- -------- ---------
Current assets:
Cash and temporary cash investments 3,104 8,435 2,006
Accounts receivable, less allowance of
$4,457 at 6/30/99, $4,054 at
6/30/98 and $2,720 at 9/30/98 22,209 23,613 14,067
Unbilled revenues 2,345 1,369 1,665
Inventories, at average cost -
Fuel oil and underground gas
storage 490 734 656
Materials and supplies 1,506 1,208 1,433
Prepaid and refundable taxes 3,949 5,024 5,355
Prepayments 1,965 1,841 1,853
-------- -------- ---------
35,568 42,224 27,035
-------- -------- ---------
Investments 8,775 - 2,169
-------- -------- ---------
Deferred charges and other assets 22,935 15,907 18,997
-------- -------- ---------
Deferred environmental costs 7,757 3,844 3,969
-------- -------- ---------
Total assets $288,653 $260,163 $ 253,388
======== ======== =========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
(See accompanying statement) $194,282 $187,022 $ 173,232
-------- -------- ---------
Current liabilities:
Notes payable 22,150 7,836 20,079
Current portion of long-term debt 3,137 3,838 3,233
Accounts payable 12,107 9,433 9,310
Accrued compensation 1,764 1,216 1,337
Accrued environmental expense 5,000 - -
Accrued interest 1,318 1,431 1,496
Accrued taxes 5,754 6,932 2,714
Accrued vacation 2,048 1,951 1,706
Accrued workers compensation 563 502 530
Customer deposits 2,843 3,184 3,034
Deferred revenue (note 3) 1,259 - -
Other 3,836 2,555 4,115
-------- -------- ---------
61,779 38,878 47,554
-------- -------- ---------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 23,925 22,206 22,292
Unamortized investment tax credits 2,099 2,256 2,217
Accrued environmental expense - 1,750 1,750
Accrued pension 5,881 6,612 5,681
Other 687 1,439 662
-------- -------- ---------
32,592 34,263 32,602
-------- -------- ---------
Commitments and contingencies
Total capitalization and liabilities $288,653 $260,163 $ 253,388
======== ======== =========
</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 NINE MONTHS ENDED JUNE 30
---------------------------------
<TABLE>
<CAPTION>
(Unaudited)
-----------
1999 1998
----------------------
(thousands)
<S> <C> <C>
Cash provided by Operating Activities:
Income after interest expense $ 14,242 $ 12,478
Items not requiring cash:
Depreciation and amortization 12,995 10,943
Change as a result of regulatory actions (1,413) 1,500
Gain on sale of financial instruments (347) -
Deferred Federal income taxes 1,616 710
Amortization of investment tax credits (118) (119)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (8,142) 11,950
Unbilled revenues (680) 1,314
Deferred gas costs - 78
Inventories 93 (22)
Prepaid and refundable taxes 1,406 (958)
Prepayments (112) (788)
Accounts payable 2,797 (3,387)
Accrued compensation 427 (728)
Accrued interest (178) 232
Accrued taxes 2,965 4,420
Accrued vacation, accrued workers
compensation, customer deposits
and other 127 614
Accrued pension 200 (21)
Deferred charges and other (1,908) 281
Deferred environmental costs (538) 131
-------- --------
Net cash provided by operating activities 23,432 38,628
-------- --------
Investing Activities:
Expenditures for property, plant
and equipment, net (24,704) (19,004)
Expenditures for business acquisitions - (2,469)
Investment in joint venture (6,759) -
Proceeds from sale of financial
instruments, net 422 -
-------- --------
Net cash used in investing activities (31,041) (21,473)
-------- --------
Financing Activities:
Proceeds from exercise of stock options 14 83
Issuance of mortgage bonds 15,000 15,000
Redemption of preferred stock (1,600) (1,600)
Payments on long-term debt (2,710) (2,554)
Increase (decrease) in notes payable, net 2,071 (16,701)
Cash dividends on preferred shares (278) (383)
Cash dividends on common shares (3,790) (3,628)
-------- --------
Net cash provided by (used in) financing
activities 8,707 (9,783)
-------- --------
Increase in cash and temporary cash investments 1,098 7,372
Cash and temporary cash investments at beginning
of period 2,006 1,063
-------- --------
Cash and temporary cash investments at end $ 3,104 $ 8,435
of period ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $ 6,291 $ 5,652
Income taxes (net of refunds) $ 2,521 $ 1,741
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)
<TABLE>
<CAPTION>
(Unaudited)
-----------
June 30, June 30, September 30,
1999 1998 1998
-------------------------------------
<S> <C> <C> <C>
Common stockholders' investment:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 6,025 at 6/30/99,
5,949 at 6/30/98
and 5,969 at
9/30/98 $ 6,025 $ 5,949 $ 5,969
Amount paid in excess of par 60,227 58,788 59,198
Retained earnings 32,183 30,327 23,067
-------- -------- --------
98,435 95,064 88,234
Accumulated other comprehensive
earnings (loss):
Unrealized gain (loss) on
financial instruments (9) - 43
-------- -------- --------
Total common equity 98,426 95,064 88,277
-------- -------- --------
Cumulative preferred stock of subsidiary:
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 32 shares as of
6/30/99 and 48 shares
as of 6/30/98 and 9/30/98 3,200 4,800 4,800
-------- -------- --------
Long-term debt:
First Mortgage Bonds 90,728 84,600 77,328
Other long-term debt 4,142 5,065 4,890
Capital leases 923 1,331 1,170
-------- -------- --------
Total long-term debt 95,793 90,996 83,388
Less current portion 3,137 3,838 3,233
-------- -------- --------
Long-term debt, net 92,656 87,158 80,155
-------- -------- --------
Total capitalization $194,282 $187,022 $173,232
======== ======== ========
</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
1. 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.
2. Reclassifications
-----------------
Certain prior period amounts have been reclassified for consistent
presentation with the current period.
3. 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 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 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 mechanism has
been suspended for the entire term. Also, in connection with the Plan, ProvGas
wrote off approximately $1.5 million of previously deferred gas costs in October
1997. Energize RI also provides for ProvGas to make significant capital
investments to improve its distribution system and support economic development.
Specific capital improvement projects funded under Energize RI are estimated to
total approximately $26 million over its three-year term. In addition, under
Energize RI, ProvGas provides funding for 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 allowing ProvGas to provide unbundled service offerings for up to
10 percent per year of firm deliveries.
As part of Energize RI, ProvGas will reclassify and amortize approximately
$4.0 million of environmental costs. These costs and all environmental costs
incurred during the term of the Plan will be amortized over a 10-year period.
Under Energize RI, ProvGas may earn up to 10.9 percent annually on its
average common equity, which is capped at $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 annually with the
Division for the recovery 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 between ProvGas and the Division 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 winter weather and the loss of non-firm
margin. Provgas believed the causes of these two events were beyond its
reasonable control and thus considered them as Changes. In March 1999, ProvGas
reached an agreement with the Division, which allowed it to recover $2.45
million in revenue losses attributable to Changes experienced by ProvGas in
fiscal 1998. The RIPUC has reviewed the Changes agreement to ensure consistency
with the terms of Energize RI and affirmed the agreement at its May 28, 1999
open meeting.
During the third quarter of fiscal 1999, ProvGas recognized into revenue
$2.45 million for the Changes recovery, and deferred approximately $1.45 million
of revenue under the provisions of the earnings cap of Energize RI. As of June
30, 1999, the deferred revenue account, substantially relating to the earnings
cap, had a balance of approximately $1.3 million.
4. 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), a joint
venture of Duke Energy Corporation and Mobil Corporation, 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. In
addition, ProvGas transferred responsibility for its pipeline capacity
resources, storage contracts and liquefied natural gas (LNG) capacity to DETM.
In addition to 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.
ProvGas has retained the right to continue to make portfolio changes to reduce
supply costs. To the extent ProvGas makes such changes, ProvGas must keep DETM
whole for the value lost over the remainder of the contract period. The
outsourcing of day-to-day supply management 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 replacing its existing service
contract with Algonquin LNG, Inc. (ALNG), a subsidiary of Duke Energy
Corporation. 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 during the winter period. The service provided for in the
agreement, subject to the successful completion of construction, 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 delivery into
its distribution system. Under the terms of the agreement, ProvGas will receive
approximately $2.6 million from ALNG. Of the $2.6 million, approximately
$900,000 represents reimbursement to ProvGas for costs incurred, as well as
those that will result, related to the project including labor, engineering and
legal expenses. The remaining portion of the payment, or approximately $1.7
million, will be paid to DETM under ProvGas' contract with DETM as reimbursement
for the additional costs that DETM will incur when the ALNG storage capacity is
released to DETM as provided for in the gas supply contract described above.
In June 1999, the Federal Energy Regulatory Commission (FERC) issued an
order in Docket Number CP99-113 approving ALNG's project described above. In
that order FERC also approved the new 10-year contract between ALNG and ProvGas
for service from the tank. Also approved was ProvGas' parallel filing, PR99-8,
requesting regulatory
I-6
<PAGE>
authorization to charge ALNG for transportation of gas vaporized for other ALNG
customers and transported by ProvGas to the Algonquin pipeline on behalf of
those customers.
5. Environmental Matters
---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean
up certain sites. To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.
At June 30, 1999, the Registrant was aware of five sites at which future
costs may be incurred.
Plympton Sites
- --------------
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.
Providence Site
- ---------------
During 1995, the Registrant began a study at its primary gas distribution
facility located in Providence, Rhode Island. This site formerly contained a
manufactured gas plant operated by the Registrant. As of June 30, 1999,
approximately $2.8 million had been spent primarily on studies and the
formulation of remediation work plans at this site. In accordance with state
laws, such a study is monitored by the Rhode Island Department of Environmental
Management (DEM). The purpose of this study was to determine the extent of
environmental contamination at the site. The Registrant has completed the study
which indicates that remediation will be required for two-thirds of the
property. The remediation began in June and will continue for a duration of
approximately six months. During this remediation period, the remaining one-
third of the property will also be investigated and remediated if necessary.
The Registrant has compiled a preliminary range of costs, based on removal
and off-site disposal of contaminated soil, ranging from $5.0 million to $7.0
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 accrued $5.0 million at June 30, 1999 for anticipated future
remediation costs at this site.
Westerly 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 coal tar waste 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 June
30, 1999, the Registrant had removed an underground oil storage tank and
regulators containing mercury disposed of
I-7
<PAGE>
on the site, as well as 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 negotiations to transfer the property back to the previous
owner, who would continue to remediate the site. The purchase and sale agreement
is anticipated to be signed during the current fiscal year, at which time the
previous owner will assume responsibility for removal of coal tar waste on the
site. The Registrant remains responsible for cleanup of any mercury released
into adjacent water. Contamination from scrapped meters and regulators, which
was discovered in 1997, was reported to the DEM and the Rhode Island Department
of Health and the Registrant has completed the necessary remediation. Costs
incurred by the Registrant to remediate this site were approximately $100,000.
Allens Avenue Site
- ------------------
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. Both parties have been designated as PRPs. A work plan has been
created and approved by DEM. An investigation has begun in order to determine
the extent of the problem and the Registrant's responsibility. The Registrant
has entered into a cost sharing agreement with the current operator of the
property, under which the Registrant will be held responsible for approximately
20 percent of the costs related to the investigation. Costs incurred to date by
the Registrant for this investigation have been approximately $100,000. Until
the results of the investigation are known, the Registrant can not offer any
conclusions as to its responsibility.
General
- -------
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 June 30, 1999, ProvGas has incurred environmental
assessment and remediation costs of $3.6 million and has accrued an estimated
$5.0 million in future costs and has amortized $850,000 of these costs.
Management has begun discussions with other parties who may assist ProvGas
in paying the costs associated with the remediation of 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.
6. 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 June 30 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Weighted average
shares, basic 6,012.0 5,935.6 5,994.2 5,906.4 5,985.5 5,885.3
Effect of dilutive
stock options 11.6 - 11.0 10.4 10.9 9.1
------- ------- ------- ------- ------- -------
Weighted average
shares, diluted 6,023.6 5,935.6 6,005.2 5,916.8 5,996.4 5,894.4
======= ======= ======= ======= ======= =======
</TABLE>
I-8
<PAGE>
The net income used in the basic and diluted earnings per share
calculations agrees with the net income appearing in the consolidated financial
statements.
7. Comprehensive Income
--------------------
Effective October 1, 1998, the Registrant adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which 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.
The following is a summary of the reclassification adjustments and the
income tax effects for the components of other comprehensive income (loss) for
the nine months ended June 30:
<TABLE>
<CAPTION>
Unrealized Holding Reclassification
Gains (Losses) on Adjustments for
Investments Gains (Losses) Other
Arising During the Included in Comprehensive
Period Net Income Income (Loss)
(In thousands)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Pretax income (loss) $ 6 $ (84) $ (78)
Income tax (benefit)
expense 2 (28) (26)
------------------ ---------------- -------------
Net change $ 4 $ (56) $ (52)
================== ================ =============
</TABLE>
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
Form 10-Q 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 of 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, operating margin and net income (loss)
for the three, nine and twelve months ended June 30, 1999 and for comparable
periods ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
(thousands)
Three Months Nine Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
1999 1998 1999 1998 1999 1998
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Energy revenues $38,714 $39,462 $196,989 $195,200 $223,095 $228,715
======= ======= ======== ======== ======== ========
Operating margin $20,000 $19,327 $ 91,779 $ 86,003 $104,349 $101,954
======= ======= ======== ======== ======== ========
Net income (loss) $ (376) $(1,843) $ 13,964 $ 12,095 $ 8,311 $ 8,790
======= ======= ======== ======== ======== ========
</TABLE>
Operating Margin
- ----------------
During the latest quarter, operating margin increased approximately
$700,000 or 3.5 percent compared to the same quarter last year.
The Providence Gas Company (ProvGas) experienced weather for the current
quarter that was 5.1 percent warmer than the same quarter last year. The warmer
temperatures resulted in decreased margin of approximately $500,000 compared to
the same quarter last year. Offsetting the warmer than normal weather, ProvGas
was permitted to recover $2.45 million in 1998 revenue losses attributable to
exogenous changes, reduced by approximately $1.4 million of revenues deferred
under the provisions of the earnings cap in the Energize RI program, which has
resulted in approximately $1.0 million of additional margin in the current
quarter. Also, the Registrant recognized $200,000 of additional margin as a
result of actual rate reductions of pipeline fixed costs as provided for in the
pipeline cost tracker feature of the Duke Energy Trading and Marketing, L.L.C.
contract.
I-10
<PAGE>
Nonregulated operating margin decreased approximately $200,000 versus the
same quarter last year. The decrease is attributable to warmer weather which
adversely affected both the sale of home heating oil and third party marketer
sales of natural gas.
During the current nine-month period, weather was 1.4 percent warmer when
compared to the same nine-month period last year. Due to the warmer weather,
ProvGas' margin decreased approximately $400,000. In comparison to the prior
year period, margin increased as a result of a one-time write-off of $1.5
million in fiscal year 1998 of previously deferred gas costs in connection with
Energize RI. Offsetting the warmer weather, for the current nine-month period,
was the $2.45 million of 1998 exogenous changes recovery, which was negotiated
with the Rhode Island Division of Public Utilities and Carriers, reduced by
$1.45 million of deferred revenue, in order to arrive at a net increase in
margin of $1 million. Lastly, ProvGas customer growth has resulted in
approximately $600,000 of additional margin.
Nonregulated operating margin for the nine-month period ended June 30, 1999
has increased $1.7 million. The increase is due primarily to an increase in the
number of customers. In addition, acquisitions made in November 1997 in the oil
industry fully impacted earnings for the current nine-month period.
ProvGas experienced weather that was 1.8 percent warmer for the twelve
months ended June 30, 1999 as compared to the same period last year. The warmer
temperatures decreased margin by $1.3 million compared to the prior year.
Offsetting the warmer than normal weather was approximately $1.0 million of
margin recognized under Energize RI as a net result of recording 1998 exogenous
changes awarded of $2.45 million, reduced by $1.45 million of deferred revenue.
Also offsetting the warmer weather was $600,000 of increased margin due to
customer growth.
Additionally, the last three months of fiscal year 1997 included the impact
on margin resulting from the use of seasonal gas cost factors. As a result of
no longer using these seasonal gas cost factors since October 1, 1997, margin
decreased approximately $1.4 million in total for the twelve-month period.
Nonregulated operating margin increased approximately $2.3 million for the
twelve months ended June 30, 1999 compared to the same period last year.
Increased sales of natural gas volumes and a growing customer base contributed
to increased operating margin. The Registrant's acquisition of oil distribution
companies during November 1997 also contributed to the twelve-month increase.
Despite warmer than normal weather for the twelve-month period, margin
earned increased due to the reasons described above.
Operating and Maintenance Expenses
- ----------------------------------
Overall operating and maintenance expenses decreased approximately $1.3
million or 10.0 percent versus the comparable three-month period ended June 30
last year. The primary contribution to the decrease was the current one-time
reimbursement of previously incurred and anticipated expenses under a newly-
approved contract with Algonquin LNG, Inc.
Operating and maintenance expenses increased approximately $1.2 million or
3.2 percent for the nine-month period ended June 30, 1999 as compared to the
same period last year. During the nine months ended June 30, 1999, the decrease
noted above has been more than offset by increases due to recruiting qualified
employees in a tight labor market and consulting and other costs related to
technology initiatives. Additionally, the Registrant's acquisitions of oil
distribution companies in November 1997 also contributed to the increase, since
the previous period only included 7.5 months of the companies' results.
Operating and maintenance expenses have increased approximately $1.4
million or 2.7 percent for the twelve-month period ended June 30, 1999 as
compared to the twelve-month period ended June 30, 1998. Expenses impacting the
nine-month period were also responsible for the twelve month increase.
I-11
<PAGE>
Depreciation and Amortization Expense
- -------------------------------------
Depreciation and amortization expense increased approximately $600,000 or
16.6 percent for the three months ended June 30, 1999, approximately $2.0
million or 17.8 percent for the nine months ended June 30, 1999 and
approximately $2.2 million or 15.5 percent for the twelve months ended June 30,
1999, versus the same periods last year. These increases are the result of
increased capital spending; technology projects; Year 2000 costs, which were
capitalized under the RIPUC order in accordance with the provisions of Energize
RI; and the amortization of environmental costs.
Taxes
- -----
Taxes increased approximately $400,000 or 18.8 percent for the three months
ended June 30, 1999 and $1.0 million or 5.8 percent for the nine months ended
June 30, 1999. For the twelve months ended June 30, 1999, taxes decreased
approximately $400,000 or 2.3 percent. The changes are primarily due to
fluctuations in Federal income and state gross earnings taxes as a result of
varying levels of pretax income and operating revenues. Additionally, local
property taxes have increased as a result of capital spending.
Interest Expense
- ----------------
Interest expense increased approximately $17,000 or 1.0 percent for the
three months ended June 30, 1999, $200,000 or 3.6 percent for the nine months
ended June 30, 1999 and approximately $400,000 or 5.0 percent during the twelve
months ended June 30, 1999, versus the same periods last year. Long-term
interest expense decreased, as a result of ProvGas' Series S First Mortgage Bond
issuance in April 1998, which refinanced higher cost long-term debt, but this
decrease was more than offset by the Series T First Mortgage Bond issuance in
February 1999, which refinanced short-term borrowings to maintain an appropriate
capitalization ratio.
FUTURE OUTLOOK
- --------------
A) Regulatory
Under Energize RI, ProvGas may earn up to 10.9 percent annually on its
average common equity, which is capped at $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 annually with the
Rhode Island Division of Public Utilities and Carriers (Division) for the
recovery 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 between ProvGas and the Division 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 winter weather and the loss of non-firm margin
resulting from the competitive price of oil in the industrial market. ProvGas
believed the causes of these two events were beyond its reasonable control and
thus considered them as Changes. In March 1999, ProvGas reached an agreement
with the Division which allowed it to recover $2.45 million in revenue losses
attributable to Changes experienced by ProvGas in fiscal 1998. The RIPUC has
reviewed the Changes agreement to ensure consistency with the terms of Energize
RI and affirmed the agreement at its May 28, 1999 open meeting.
I-12
<PAGE>
During the third quarter of fiscal 1999, ProvGas recognized into revenue
$2.45 million for the Changes recovery, and deferred approximately $1.45 million
of revenue under the provisions of the earnings cap of Energize RI. As of June
30, 1999, the deferred revenue account, substantially relating to the earnings
cap, had a balance of approximately $1.3 million.
At the conclusion of the latest transportation service enrollment period on
March 1, 1999, an additional 210 customers had signed up for Business Choice.
The program now has approximately 1,700 firm transportation customers with
annual deliveries of almost 6 billion cubic feet per year which is approximately
25 percent of ProvGas' total annual firm deliveries. There are 14 marketers
serving ProvGas customers and transporting on the system.
On April 1, 1999, ProvGas filed with the RIPUC a proposal for enhancements
to the Business Choice program. The proposed changes do not generate additional
revenue for ProvGas but rather affect the terms and conditions under which
transportation service is offered.
During April and May 1999, the Algonquin LNG tank in Providence was
completely emptied in order to allow access for internal inspection and, if
necessary, repair. As a result, 335,000 million cubic feet of LNG was vaporized
from the tank into the ProvGas distribution system. Since the vaporized gas had
a heat energy content approximately 30 percent higher than the pipeline supplies
normally used, ProvGas' customers' metered volumes were lower because a smaller
volume of gas produced the same energy requirement.
B) Business Opportunities
The Registrant's nonregulated companies have significantly contributed to
operating margin by adding customers and sales volume, although they continue to
generate a net loss as they position themselves to succeed in the rapidly
changing energy marketplace.
By focusing on growing its residential customer base and improving its
profit margins from commercial customers, Super Service Oil Company (Super
Service Oil) expects an improvement in its operating results for fiscal year
1999. For fiscal year 2000, Super Service Oil intends to combine these
initiatives with future customer acquisitions to build the operational scale
needed to compete effectively in the marketplace.
The Registrant's retail energy marketing subsidiary, ProvEnergy Services,
also has substantial growth opportunities. In fiscal year 1999, New England gas
utilities have continued to unbundle the sale of the gas commodity from the
distribution of that gas. This has allowed ProvEnergy Services to add a
significant number of customers in those markets offering opportunities for
unbundled sales of the commodity.
The Registrant's joint venture to provide electricity, heat and air
conditioning (HVAC) and related services for most of the Providence Place Mall
(the Mall) continues to proceed on schedule. Construction of the energy systems
for the Mall began last summer and the Registrant expects the entire energy
project to be operational in advance of the Mall's scheduled mid-August 1999
opening.
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $15.2 million for the nine months ended June
30, 1999 compared to the same period last year. On a comparative basis, the
current year cash flow decreased as a result of the prior year reflecting
receipt of funds in the first quarter of fiscal 1998 from the sale of ProvGas'
working gas in storage to Duke Energy Trading and Marketing, L.L.C. This
decrease in operating cash flow was offset by a temporary increase in accounts
payable this year related to the timing of such gas supply payments.
Capital expenditures for the nine months ended June 30, 1999 of $24.7
million reflected an increase of $5.7 million or 30 percent when compared to
$19.0 million for the same period last year. This spending increase was due
primarily to ProvGas' technology expenditures related to Year 2000 and system
enhancements. Capital expenditures for the remainder of fiscal year 1999 and
fiscal year 2000 are expected to total approximately $40.9 million.
I-13
<PAGE>
During the current nine months, the Registrant's cash provided by financing
activities increased $18.5 million. ProvGas issued $15 million in Series T First
Mortgage Bonds on February 8, 1999. The proceeds 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 (Y2K) 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 has been 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, 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 functions of customer inquiry, service orders and
billing. Migration also includes the replacement of 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. Validation testing of these
systems for Year 2000 readiness has been completed. Both the CIS and ERP
systems have been successfully placed into operation. The Human Resource (HR)
module of the ERP system has not been put into operation. Although the project
is progressing well, full implementation of the HR module is expected on or
about October 1, 1999.
The Registrant completed an inventory and assessment of its existing IT
systems and IT infrastructure in March 1999. The Registrant has completed the
implementation phase to achieve Year 2000 readiness. The Registrant has created
a Year 2000 test lab to test many of its IT systems. All mission critical and
important systems are remediated and tested for Year 2000 readiness, except for
two systems associated with metering and billing for certain commercial
transportation customers. One vendor has indicated that the Y2K-ready release of
the computer applications will not be available until September 1999. The
vendor for the other computer application has delivered Y2K-ready code as of the
date of this report and the application is currently undergoing validation
testing.
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.
The Registrant has successfully completed the assessment, remediation and
testing of all mission critical embedded systems including ProvGas' Supervisory
Control and Data Acquisition gas distribution system.
I-14
<PAGE>
3. Upstream/Downstream
The Registrant has contacted all of its major suppliers and none of them
have indicated concern for potential business disruption.
The Registrant's major suppliers critical to the delivery of natural gas to
its system, including interstate pipelines, Duke Energy Trading and Marketing,
New England Electric System and Bell Atlantic, have indicated that they are
following a comprehensive program on a timely schedule designed to achieve Year
2000 readiness. While the Registrant cannot guarantee Y2K readiness of these
and other suppliers, the information received from them indicates that they
expect to fulfill their obligations to the Registrant on and after January 1,
2000. The Registrant will continue to monitor the status of all critical
suppliers throughout 1999. Any risk areas that surface as a result of these
assessments will be addressed in contingency planning.
The Registrant is actively participating with the Rhode Island Y2K
Association 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 is also communicating its Year 2000 readiness to
customers in bill stuffers, on its website and in state-sponsored "town
meetings" throughout its service territory. On February 17, 1999, ProvGas
provided testimony to the RIPUC regarding ProvGas' Year 2000 readiness.
4. Contingency Planning
The Registrant has contingency plans in place for response to certain
emergency operational situations. In addition, the Registrant has completed
over fifty workshops to develop actionable contingency plans which will
specifically address risks to the top seventy-two business processes related to
the Year 2000 computer problem. Such contingency plans may include using manual
procedures and arranging for alternative suppliers. The Registrant has
developed Year 2000 contingency plans for 96 percent of its critical business
processes. The remaining plans will be completed in the fourth quarter and
there will be continued refinement to the plans throughout 1999.
Year 2000 Costs
The Registrant expects to capitalize Year 2000 costs for ProvGas and
ProvGas will amortize these costs over a five-year amortization period
consistent with the regulatory treatment approved by the RIPUC under the
Energize RI program. Additionally, it is ProvGas' practice to communicate with
the RIPUC on a periodic basis when, in management's opinion, significant amounts
might be expended for Year 2000 costs.
As of June 30, 1999, the Registrant had deferred Year 2000 costs of
approximately $5.0 million. Costs for these activities, together with
previously deferred Year 2000 costs, are expected to range from $5.1 million to
$6.1 million. These estimated costs include external contractors and service
providers and the balance of the unrecovered legacy CIS system that was
replaced, as well as the purchase of computer hardware and software. 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 for the 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.
These cost estimates and the dates on which the Registrant plans to
complete 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.
I-15
<PAGE>
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.
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 ProvGas and ProvEnergy Services 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.
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. Employment agreement dated May 27, 1999 between Susann G. Mark, Vice
President, General Counsel and Corporate Secretary and the Registrant.
10b. Employment agreement date May 2, 1999 between James M. Stephens,
President and Providence Energy Services, Inc.
10c. Change of control agreement dated May 10, 1999 between Kenneth W.
Hogan, Vice President, Chief Financial Officer and Treasurer and the Registrant.
10d. Employment agreement dated October 1, 1998 between Peter J. Gill, Vice
President of Information Technology and The Providence Gas Company.
Item 6 (b). Reports on Form 8-K
- --------------------------------
On June 9, 1999 the Registrant filed a report on Form 8-K regarding an
agreement for recovery of exogenous changes which allowed ProvGas to recover
$2.45 million.
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/ KENNETH W. HOGAN
-------------------
KENNETH W. HOGAN
Vice President, Chief
Financial Officer, and
Treasurer
Dated: December 17, 1999
-----------------
II-2
