<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 March 31, 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, 6,003,732 shares outstanding at May 13, 1999.
- ----------------------------------------------------------------------------
This amendment to the quarterly report of Providence Energy Corporation on Form
10-Q for the quarter ended March 31, 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
MARCH 31, 1999
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 Financial Statements
Consolidated Statements of Income for the
three, six and twelve months ended
March 31, 1999 and 1998 I-1
Consolidated Balance Sheets as of
March 31, 1999, March 31, 1998 and
September 30, 1998 I-2
Consolidated Statements of Cash Flows for the
six months ended March 31, 1999 and 1998 I-3
Consolidated Statements of Capitalization as of
March 31, 1999, March 31, 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-11
PART II: OTHER INFORMATION
Item 5 Other Information II-1
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 MARCH 31
------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------------- -------------------
1999 1998 1999 1998
------------------- -------------------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Energy revenues $ 93,690 $ 87,796 $158,275 $155,738
Cost of energy 51,607 49,123 86,496 89,062
-------- -------- -------- --------
Operating margin 42,083 38,673 71,779 66,676
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 14,859 13,746 28,359 25,803
Depreciation and amortization 4,373 3,790 8,728 7,369
Taxes:
State gross earnings 2,471 2,221 4,152 4,001
Local property and other 2,404 2,305 4,459 4,272
Federal income 5,408 5,052 7,568 7,301
-------- -------- -------- --------
Total operating expenses 29,515 27,114 53,266 48,746
-------- -------- -------- --------
Operating income 12,568 11,559 18,513 17,930
Other, net 175 168 293 343
-------- -------- -------- --------
Income before interest expense
and preferred dividends of subsidiary 12,743 11,727 18,806 18,273
-------- -------- -------- --------
Interest expense:
Long-term debt 1,692 1,482 3,244 2,972
Other 667 644 1,183 1,241
Interest capitalized (94) (73) (170) (156)
-------- -------- -------- --------
2,265 2,053 4,257 4,057
-------- -------- -------- --------
Income after interest expense 10,478 9,674 14,549 14,216
Preferred dividends of subsidiary (105) (139) (209) (278)
-------- -------- -------- --------
Net income $ 10,373 $ 9,535 $ 14,340 $ 13,938
======== ======== ======== ========
Net income per
common share - basic $ 1.73 $ 1.61 $ 2.40 $ 2.37
======== ======== ======== ========
Net income per
common share - diluted $ 1.73 $ 1.61 $ 2.39 $ 2.36
======== ======== ======== ========
Weighted average number of
shares outstanding:
Basic 5,996.5 5,915.3 5,985.3 5,891.9
======== ======== ======== ========
Diluted 6,006.9 5,928.5 5,996.0 5,902.1
======== ======== ======== ========
</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 MARCH 31
------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
TWELVE MONTHS
-------------------------
1999 1998
--------- ---------
(thousands, except per share amounts)
<S> <C> <C>
Energy revenues $ 223,843 $ 232,174
Cost of energy 120,167 129,220
--------- ---------
Operating margin 103,676 102,954
--------- ---------
Operating expenses:
Operation and maintenance 54,549 50,267
Depreciation and amortization 15,844 13,847
Taxes:
State gross earnings 5,769 5,962
Local property and other 8,550 8,094
Federal income 3,895 5,929
--------- ---------
Total operating expenses 88,607 84,099
--------- ---------
Operating income 15,069 18,855
Other, net 526 280
--------- ---------
Income before interest expense
and preferred dividends of subsidiary 15,595 19,135
--------- ---------
Interest expense:
Long-term debt 6,663 5,982
Other 1,940 2,111
Interest capitalized (270) (282)
--------- ---------
8,333 7,811
--------- ---------
Income after interest expense 7,262 11,324
Preferred dividends of subsidiary (418) (556)
--------- ---------
Net income $ 6,844 $ 10,768
========= =========
Net income per
common share - basic $ 1.15 $ 1.84
========= =========
Net income per
common share - diluted $ 1.14 $ 1.84
========= =========
Weighted average number of
shares outstanding:
Basic 5,966.4 5,851.8
========= =========
Diluted 5,977.7 5,859.2
========= =========
</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)
-----------
March 31, March 31, September 30,
1999 1998 1998
--------------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $ 340,048 $ 311,090 $ 324,502
Less - Accumulated depreciation
and plant acquisition adjustments 127,729 116,655 122,007
----------- ----------- -----------
212,319 194,435 202,495
----------- ----------- -----------
Other property, net 2,517 3,380 2,692
----------- ----------- -----------
Current assets:
Cash and temporary cash investments 6,364 3,390 2,006
Accounts receivable, less allowance of
$4,885 at 3/31/99, $3,142 at
3/31/98 and $2,720 at 9/30/98 45,401 45,636 14,067
Unbilled revenues 8,055 6,323 1,665
Inventories, at average cost -
Liquefied natural gas, propane,
and underground storage 403 599 656
Materials and supplies 1,428 1,202 1,433
Prepaid and refundable taxes 2,026 2,818 5,355
Prepayments 1,782 795 1,853
----------- ----------- -----------
65,459 60,763 27,035
----------- ----------- -----------
Investments 5,021 - 2,169
----------- ----------- -----------
Deferred charges and other assets 20,244 15,885 18,997
----------- ----------- -----------
Total assets $ 305,560 $ 274,463 $ 253,388
=========== =========== ===========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
(See accompanying statement) $ 196,291 $ 175,275 $ 173,232
----------- ----------- -----------
Current liabilities:
Notes payable 17,146 21,684 20,079
Current portion of long-term debt 3,313 3,825 3,233
Accounts payable 33,119 21,050 9,325
Accrued taxes 8,325 8,558 2,714
Accrued vacation 1,992 1,843 1,706
Customer deposits 3,010 3,269 3,034
Accrued environmental expense 3,400 - -
Accrued interest 1,584 1,114 1,481
Accrued workers compensation 596 487 530
Accrued compensation 1,558 1,052 1,337
Other 3,324 2,911 4,115
----------- ----------- -----------
77,367 65,793 47,554
----------- ----------- -----------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 23,380 21,969 22,292
Unamortized investment tax credits 2,138 2,295 2,217
Accrued environmental expense - 1,750 1,750
Other 6,384 7,381 6,343
----------- ----------- -----------
31,902 33,395 32,602
----------- ----------- -----------
Commitments and contingencies
Total capitalization and liabilities $ 305,560 $ 274,463 $ 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 SIX MONTHS ENDED MARCH 31
---------------------------------
<TABLE>
<CAPTION>
(Unaudited)
-----------
1999 1998
-----------------------------
(thousands)
<S> <C> <C>
Cash provided by Operating Activities:
Income after interest expense $ 14,549 $ 14,216
Items not requiring cash:
Depreciation and amortization 8,728 7,369
Change as a result of regulatory actions - 1,500
Gain on sale of financial instruments (357) -
Deferred Federal income taxes 1,077 473
Amortization of investment tax credits (79) (80)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (31,334) (9,985)
Unbilled revenues (6,390) (3,640)
Deferred gas costs - 80
Inventories 258 119
Prepaid and refundable taxes 3,367 1,248
Prepayments 71 258
Accounts payable 23,794 8,230
Accrued taxes 5,504 6,046
Accrued interest 103 (85)
Accrued compensation 221 (891)
Accrued vacation, accrued workers
compensation, customer deposits
and other (463) 248
Deferred charges and other (1,550) 171
---------- ----------
Net cash provided by operating activities 17,499 25,277
---------- ----------
Investing Activities:
Expenditures for property, plant
and equipment, net (16,153) (11,088)
Expenditures for business acquisitions - (2,469)
Investment in joint venture (3,032) -
Proceeds from sale of financial
instruments, net 426 -
---------- ----------
Net cash used in investing activities (18,759) (13,557)
---------- ----------
Financing Activities:
Proceeds from exercise of stock options 14 -
Issuance of mortgage bonds 15,000 -
Redemption of preferred stock (1,600) (1,600)
Payments on long-term debt (2,129) (2,220)
Decrease in notes payable, net (2,933) (2,853)
Cash dividends on preferred shares (209) (278)
Cash dividends on common shares (2,525) (2,442)
---------- ----------
Net cash provided (used) by financing
activities 5,618 (9,393)
---------- ----------
Increase in cash and temporary cash investments 4,358 2,327
Cash and temporary cash investments at beginning
of period 2,006 1,063
---------- ----------
Cash and temporary cash investments at end $ 6,364 $ 3,390
of period ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $ 4,085 $ 3,992
Income taxes (net of refunds) $ 511 $ 1,426
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)
-----------
March 31, March 31, September 30,
1999 1998 1998
----------------------------------------------
<S> <C> <C> <C>
Common stockholders' investment:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 6,007 at 3/31/99,
5,926 at 3/31/98
and 5,969 at
9/30/98 $ 6,007 $ 5,926 $ 5,969
Amount paid in excess of par 59,873 58,273 59,198
Retained earnings 34,180 33,771 23,067
----------- ----------- -----------
100,060 97,970 88,234
Accumulated other comprehensive
earnings (loss):
Unrealized gain (loss) on
financial instruments (30) - 43
----------- ----------- -----------
Total Common equity 100,030 97,970 88,277
----------- ----------- -----------
Cumulative preferred stock of subsidiary:
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 32 shares as of
3/31/99 and 48 shares
as of 3/31/98 and 9/30/98 3,200 4,800 4,800
----------- ----------- -----------
Long-term debt:
First Mortgage Bonds 90,728 69,600 77,328
Other long-term debt 4,597 5,297 4,890
Capital leases 1,049 1,433 1,170
----------- ----------- -----------
Total long-term debt 96,374 76,330 83,388
Less current portion 3,313 3,825 3,233
----------- ----------- -----------
Long-term debt, net 93,061 72,505 80,155
----------- ----------- -----------
Total capitalization $ 196,291 $ 175,275 $ 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 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 for 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 of March 31, 1999, no
deferred revenue has been recorded by ProvGas.
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
I-5
<PAGE>
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.
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 reasonable control and
thus considers them as Changes. In March 1999, ProvGas reached an agreement
with the Division for exogenous changes of $2.45 million. Currently the RIPUC
is reviewing the exogenous change agreement to ensure consistency with the terms
of Energize RI. Absent favorable recovery for the Changes and/or other factors
such as colder than normal weather, the Registrant's ability to earn a 10.9
percent return on average common equity during the final year of Energize RI is
substantially impaired.
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) 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 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.
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. 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. Under the terms of the agreement, ProvGas will
receive approximately $2.6 million. Of the $2.6 million, approximately $900,000
represents reimbursement for costs previously incurred by ProvGas related to the
project including labor, engineering and legal expenses that will result as part
of this arrangement. 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 incremental futute costs that DETM will incur on ProvGas'
behalf under the ALNG agreement.
I-6
<PAGE>
In April 1999 ProvGas was notified by ALNG that under the terms of its
existing lease arrangement the LNG tank must be emptied and repaired before the
replacement, expansion and modernization described above can occur. At this
time, it is too early to assess what impact, if any, these repairs will have on
the expected commencement date of November 1, 1999.
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 March 31, 1999, 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 March 31, 1999,
approximately $2.6 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 indicated that remediation will be required for two-thirds of the
property. The remediation is expected to begin this fiscal year and will
continue for a duration of three to 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 $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 accrued $3.4 million at March 31, 1999 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 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 March
31, 1999, the Registrant had removed an underground oil storage tank and
regulators containing mercury disposed of 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
I-7
<PAGE>
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 were discovered in 1997, were 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 $.1 million.
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. Currently, a work plan is
being created, which will be presented to DEM for approval. Once approved, an
investigation will begin 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 less than $100,000.
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 March 31, 1999, ProvGas has charged environmental
assessment and remediation costs of $3.2 million and an estimated $3.4 million
in future costs to the accumulated depreciation reserve and has amortized $.7
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.
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 March 31 is as follows:
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Weighted average
shares, basic 5,996.5 5,915.3 5,985.3 5,891.9 5,966.4 5,851.8
Effect of dilutive
stock options 10.4 13.2 10.7 10.2 11.3 7.4
------- ------- ------- ------- ------- -------
Weighted average
shares, diluted 6,006.9 5,928.5 5,996.0 5,902.1 5,977.7 5,859.2
======= ======= ======= ======= ======= =======
</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 six months ended March 31:
<TABLE>
<CAPTION>
Unrealized Holding
Gains (Losses) on Reclassification
Investments Adjustments for Other
Arising During the Gains Included in Comprehensive
Period Net Income Income (Loss)
(In thousands)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Pretax (loss) $ (25) $ (86) $ (111)
Income tax benefit (9) (29) (38)
---------- ---------- ----------
Net change $ (16) $ (57) $ (73)
========== ========== ==========
</TABLE>
8. New Accounting Pronouncements
-----------------------------
n June 1997, the Financial Accounting Standards Board (FASB) issued 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.
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).
I-9
<PAGE>
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-10
<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 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, operating margin and net income for the
three, six and twelve months ended March 31, 1999 and for comparable periods
ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
(thousands)
Three Months Six Months Twelve Months
Ended March 31 Ended March 31 Ended March 31
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Energy revenues $93,690 $87,796 $158,275 $155,738 $223,843 $232,174
======= ======= ======== ======== ======== ========
Operating margin $42,083 $38,673 $ 71,779 $ 66,676 $103,676 $102,954
======= ======= ======== ======== ======== ========
Net income $10,373 $ 9,535 $ 14,340 $ 13,938 $ 6,844 $ 10,768
======= ======= ======== ======== ======== ========
</TABLE>
Operating Margin
- ----------------
During the latest quarter, operating margin increased $3.4 million or 8.8
percent compared to the same quarter last year.
The Providence Gas Company (ProvGas) experienced weather that was 10.3
percent colder than the same quarter last year. The colder temperatures resulted
in increased margin of approximately $2.6 million compared to the same quarter
last year. Additionally, customer growth resulted in additional margin of
approximately $500,000 during the current quarter.
I-11
<PAGE>
Nonregulated operating margin increased approximately $900,000 versus the
same quarter last year. The additional margin is attributable to an increase in
the number of customers and sales volumes.
During the current six month period, weather has been similar in comparison
to the same six month period last year. Customer growth has resulted in
approximately $600,000 in additional margin for the six-month period this year
in comparison to last year. Margin also increased this year over last year 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.
Nonregulated operating margin for the six-month period ended March 31, 1999
has increased $1.9 million. As in the three-month period this increase is due
primarily to an increase in the number of customers and sales volumes.
ProvGas experienced weather that was 6 percent warmer for the twelve months
ended March 31, 1999 as compared to the same period last year. The warmer
temperatures resulted in the Registrant recognizing decreased margin of $1.3
million compared to last year. Offsetting the warmer than normal weather was
$2.5 million of margin generated under Energize RI as a result of adjusting the
Gas Charge Clause mechanism on October 1, 1997.
ProvGas' non-firm margin decreased $1.2 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.
Additionally, the last six 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 $3.1 million in total for the twelve-month period.
Customer growth contributed approximately $600,000 of additional margin for the
twelve-month period ended March 31, 1999 compared to the same period last year.
Nonregulated operating margin increased approximately $4 million 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.
I-12
<PAGE>
Operating and Maintenance Expenses
- ----------------------------------
Overall operating and maintenance expenses increased approximately $1.1
million or 8.1 percent and $2.6 million or 9.9 percent versus the comparable
three and six-month periods ended March 31 last year.
The Registrant's operating and maintenance expenses have increased as a
result of normal pay increases, severance pay and employee recruiting fees.
Providence Energy Services, Inc. (ProvEnergy Services) received expense
reimbursements during the first six months of fiscal 1998, as a result of its
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 venture's business.
Operating and maintenance expenses have increased approximately $4.3 million
or 8.5 percent for the twelve-month period ended March 31, 1999 as compared to
the twelve-month period ended March 31, 1998. In addition to the reasons stated
above, the increase is also due to the acquisition of oil companies in November
1997. These increases were partially offset by a decrease in ProvGas' bad debt
expense. 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.
Depreciation and Amortization Expense
- -------------------------------------
Depreciation and amortization expense increased approximately $600,000 or
15.4 percent for the three months ended March 31, 1999, approximately $1.4
million or 18.4 percent for the six months ended March 31, 1999 and
approximately $2.0 million or 14.4 percent for the twelve months ended March 31,
1999, versus the same periods last year. These increases are the result of
increased capital spending for Energize RI commitments, technology projects,
Year 2000 costs, as well as the amortization of environmental costs.
Taxes
- -----
Taxes increased approximately $.7 million or 7.4 percent for the three
months ended March 31, 1999 and $.6 million or 3.9 percent for the six months
ended March 31, 1999. For the twelve months ended March 31, 1999, taxes
decreased approximately $1.8 million or 8.9 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 increased as a result of capital spending.
Interest Expense
- ----------------
Interest expense increased approximately $200,000 or 10.3 percent for the
three months ended March 31, 1999, $200,000 or 4.9 percent for the six months
ended March 31, 1999 and approximately $500,000 or 6.7 percent during the twelve
months ended March 31, 1999, versus the same periods last year. Long-term
interest expense has increased a result of ProvGas' Series S First Mortgage Bond
issuance in April 1998 and the Series T First Mortgage Bond issuance in February
1999.
FUTURE OUTLOOK
- --------------
A) 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
I-13
<PAGE>
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 year 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
reasonable control and thus considers them as Changes. In March 1999, ProvGas
reached an agreement with the Division for exogenous changes of $2.45 million.
Currently, the RIPUC is reviewing the exogenous change agreement to ensure
consistency with the terms of Energize RI. Absent favorable recovery for the
Changes and/or other factors such as colder than normal weather, the
Registrant's ability to earn a 10.9 percent return on average common equity
during the final year of Energize RI is substantially impaired.
At the conclusion of the latest 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 28 percent of
ProvGas' total annual firm deliveries. There are 14 different 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 new
revenues for ProvGas but rather affect the terms and conditions under which
transportation service is offered.
B) Business Opportunities
The Registrant's nonregulated companies have significantly contributed to
operating margin by adding customers and sales volume and appear to be well
positioned to succeed in the rapidly deregulating 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 a substantial improvement in its operating results for
fiscal year 1999. For fiscal year 2000, Super Service Oil expects to combine
these initiatives with increased 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 gas 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 gas.
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 August 1999
opening.
I-14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $7.8 million for the six months ended March
31, 1999 compared to the same period last year. The decrease was primarily due
to 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 Duke Energy Trading
and Marketing, L.L.C. The decrease was offset by a temporary increase in
accounts payable related to the timing of gas supply payments.
Capital expenditures for the six months ended March 31, 1999 of $16.2
million increased $5.1 million or 45.6 percent when compared to $11.1 million
for the same period last year. This spending increase was due primarily to
ProvGas' continued efforts to move its information technology systems from a
mainframe to a client server environment. Capital expenditures for the remainder
of fiscal year 1999 and fiscal year 2000 are expected to total approximately
$44.5 million.
During the current six months, the Registrant's cash provided by financing
activities increased $15 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 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, 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 is expected to be completed by June 30, 1999.
The Registrant completed an inventory and assessment of its existing IT
systems and IT infrastructure in March 1999. The Registrant is currently
engaged in 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 systems are expected to be remediated and tested for Year 2000
readiness by June 30, 1999.
I-15
<PAGE>
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 completed the assessment of its embedded components in March
1999. Many of the components associated with the Registrant's mission critical
systems have been identified as Year 2000 ready. Remediation and testing of
mission critical embedded systems including ProvGas' Supervisory Control and
Data Acquisition gas distribution system was completed this quarter.
Remediation and testing of all other embedded systems is planned to be completed
by September 30, 1999.
3. Upstream/Downstream
The Registrant has identified its major suppliers and will continue to
evaluate their Year 2000 readiness through a combination of correspondence,
telephone interviews, and site visits. The Company has had correspondence with
all of its major suppliers and none of the correspondence indicated concern for
potential business disruption. 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 has contacted its 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. 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 assessment of all suppliers
will continue throughout 1999. Any risk areas that surface as a result of these
assessments will be addressed in contingency planning. The Registrant is
communicating its Year 2000 readiness to customers in bill stuffers, on its
website and in state-sponsored "town meetings" throughout its service territory.
The town meetings provide for updates from all the major utilities. They are
being held in different locations during April and May. Previously, 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 thirty workshops to develop actionable contingency plans which will address
risks to the top fifty business processes specifically related 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.
I-16
<PAGE>
Year 2000 Costs
The Registrant has developed a comprehensive budget for all phases of its
Year 2000 effort. 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 March 31, 1999, the Registrant had deferred Year 2000 costs of
approximately $4.4 million which includes $.8 million for the assessment phase
of its 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
$6.2 million to $9.4 million. These estimated costs include external contractors
and service providers and the balance of the unrecovered legacy CIS system that
is being 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 Year 2000 modification and testing procedures 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 prior
to January 1, 2000 is critical to enable ProvGas 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 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.
I-17
<PAGE>
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-18
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 5 Other Information
- ------------------------
On April 26, 1999 the Directors of the Registrant elected Kenneth W. Hogan
as Vice President, Chief Financial Officer and Treasurer.
Item 6 (b). Reports on Form 8-K
- --------------------------------
On March 25, 1999 the Registrant filed a report on Form 8-K regarding an
agreement for recovery of exogenous changes which allows 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
