<PAGE>
THE PROVIDENCE ENERGY CORPORATION
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------------------------------------
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
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PROVIDENCE ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
Rhode Island 05-0389170
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
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(Address of principal executive offices)
(Zip Code)
401-272-9191
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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, 6,153,242 shares outstanding at July 31, 2000.
--------------------------------------------------------------------------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q
JUNE 30, 2000
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three and nine months ended
June 30, 2000 and 1999 I-1
Consolidated Balance Sheets as of
June 30, 2000, June 30, 1999 and
September 30, 1999 I-2
Consolidated Statements of Cash Flows for the
nine months ended June 30, 2000 and 1999 I-3
Consolidated Statements of Capitalization as of
June 30, 2000, June 30, 1999 and
September 30, 1999 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 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
<PAGE>
PART I. FINANCIAL INFORMATION
------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
------ --------------------
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
THREE MONTHS NINE MONTHS
----------------- ---------------
2000 1999 2000 1999
----------------- ---------------
(thousands, except per share amounts)
Energy revenues $49,542 $39,327 $230,909 $197,762
Cost of energy 28,209 18,910 136,110 105,538
------- ------- -------- --------
Operating margin 21,333 20,417 94,799 92,224
------- ------- -------- --------
Operating expenses:
Operation and maintenance 14,294 11,877 43,236 40,236
Depreciation and amortization 4,817 4,267 14,450 12,995
Taxes:
State gross earnings 1,071 928 5,242 5,080
Local property and other 2,461 2,270 7,342 6,729
------- ------- -------- --------
Total operating expenses 22,643 19,342 70,270 65,040
------- ------- -------- --------
Operating income (loss) (1,310) 1,075 24,529 27,184
------- ------- -------- --------
Other income (loss):
Merger related expenses (1,294) - (3,370) -
Other 431 398 1,098 587
------- -------- ------- -------
Total other income (loss) (863) 398 (2,272) 587
------- -------- ------- -------
Income before interest expense
and preferred dividends of
subsidiary (2,173) 1,473 22,257 27,771
------- -------- ------- -------
Interest expense:
Long-term debt 1,751 1,799 5,271 5,043
Other 1,338 370 3,251 1,553
Interest capitalized (99) (120) (218) (290)
------- -------- ------- -------
2,990 2,049 8,304 6,306
------- -------- ------- -------
Income (loss) before Federal income
taxes (5,163) (576) 13,953 21,465
Provision (benefit) for Federal
income taxes (1,370) (269) 5,479 7,223
------- ------- ------- -------
Income (loss) before preferred
dividends of subsidiary (3,793) (307) 8,474 14,242
Preferred dividends of subsidiary - 69 145 278
------- ------- ------- -------
Net income (loss) $(3,793) $ (376) $ 8,329 $13,964
======= ======= ======= =======
Net income (loss) per
common share - basic $ (.62) $ (.06) $ 1.36 $ 2.33
======= ======= ======= =======
Net income (loss) per
common share - diluted $ (.62) $ (.06) $ 1.34 $ 2.33
======= ======= ======= =======
Weighted average number of shares outstanding:
Basic 6,150.5 6,012.0 6,137.9 5,994.2
======= ======= ======= =======
Diluted 6,150.5 6,012.0 6,202.3 6,005.2
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
I-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(thousands)
(Unaudited)
-----------
June 30, June 30, September 30,
2000 1999 1999
----------------------------------------------
ASSETS
------
Current assets:
Cash and temporary cash investments $ 3,092 $ 3,104 $ 2,804
Accounts receivable, less allowance
of $6,339 at 6/30/00, $4,228 at
6/30/99 and $2,883 at 9/30/99 30,673 22,209 13,684
Unbilled revenues 4,819 2,345 2,821
Inventories, at average cost -
Fuel oil and underground gas
storage 581 490 558
Materials and supplies 1,258 1,506 1,283
Prepaid and refundable taxes 4,864 3,949 4,215
Prepayments 4,166 1,965 2,214
-------- -------- --------
49,453 35,568 27,579
-------- -------- --------
Gas plant, at original cost 353,477 348,393 345,671
Less - Accumulated depreciation
and plant acquisition adjustments 132,124 137,302 127,481
-------- -------- --------
221,353 211,091 218,190
-------- -------- --------
Other Assets:
Other property, net 3,778 2,527 2,628
-------- -------- --------
Investments 4,320 8,775 11,186
-------- -------- --------
Deferred environmental costs 10,868 7,757 9,719
-------- -------- --------
Deferred charges and other assets 31,427 22,935 28,731
-------- -------- --------
Total assets $321,199 $288,653 $298,033
======== ======== ========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization
(See accompanying statement) $186,073 $194,282 $187,628
-------- -------- --------
Current liabilities:
Notes payable 56,950 22,150 38,250
Current portion of long-term debt 3,395 3,137 3,515
Accounts payable 17,410 12,107 12,199
Accrued compensation 1,334 1,764 1,634
Accrued environmental costs 2,681 5,000 6,145
Accrued interest 1,449 1,318 1,647
Accrued taxes 8,215 5,754 3,557
Accrued vacation 2,480 2,048 1,807
Accrued workers compensation 506 563 595
Customer deposits 2,717 2,843 2,973
Other 3,694 5,095 4,352
-------- -------- --------
100,831 61,779 76,674
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 24,585 23,925 24,151
Unamortized investment tax credits 1,941 2,099 2,059
Accrued pension 7,294 6,012 6,982
Other 475 556 539
-------- -------- --------
34,295 32,592 33,731
-------- -------- --------
Commitments and contingencies
Total capitalization and liabilities $321,199 $288,653 $298,033
======== ======== ========
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
---------------------------------
(Unaudited)
-----------
2000 1999
--------------------
(thousands)
Cash provided by Operating Activities:
Income after interest expense $ 8,474 $14,242
Items not requiring cash:
Depreciation and amortization 14,450 12,995
Change as a result of regulatory actions (435) (1,413)
Gain on sale of financial instruments, net (286) (347)
Deferred Federal income taxes 419 1,616
Amortization of investment tax credits (118) (118)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (16,513) (8,142)
Unbilled revenues (1,998) (680)
Inventories 176 93
Prepaid and refundable taxes (649) 1,406
Prepayments (1,952) (112)
Accounts payable 5,183 2,797
Accrued compensation (300) 427
Accrued interest (198) (178)
Accrued taxes 4,685 2,965
Accrued vacation, accrued workers
compensation, customer deposits
and other 82 127
Accrued pension 312 331
Deferred charges and other (30) 729
------- -------
Net cash provided by operating activities 11,302 26,738
------- -------
Investing Activities:
Expenditures for property, plant
and equipment, net (21,558) (28,010)
Expenditures for business acquisitions (4,737) -
Proceeds from (investment in) joint venture 6,917 (6,759)
Proceeds from sale of financial
instruments, net 212 422
------- --------
Net cash used in investing activities (19,166) (34,347)
------- --------
Financing Activities:
Proceeds from exercise of stock options 29 14
Issuance of mortgage bonds - 15,000
Redemption of preferred stock (3,200) (1,600)
Payments on long-term debt (2,741) (2,710)
Increase in notes payable, net 18,382 2,071
Cash dividends on preferred shares (145) (278)
Cash dividends on common shares (4,173) (3,790)
------- -------
Net cash provided by financing activities 8,152 8,707
------- -------
Increase in cash and temporary cash investments 288 1,098
Cash and temporary cash investments at beginning
of period 2,804 2,006
------- --------
Cash and temporary cash investments at end
of period $ 3,092 $ 3,104
======= ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $ 8,282 $ 6,291
Income taxes (net of refunds) $ 5,493 $ 2,521
Schedule of non-cash investing activities:
Capital lease obligations for equipment $ - $ 115
The accompanying notes are an integral part of these consolidated financial
statements.
I-3
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(thousands)
(Unaudited)
-----------
June 30, June 30, September 30,
2000 1999 1999
----------------------------------------
Common stockholders' investment:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 6,153 at 6/30/00,
6,025 at 6/30/99
and 6,102 at
9/30/99 $ 6,153 $ 6,025 $ 6,102
Amount paid in excess of par 63,532 60,227 61,966
Retained earnings 28,365 32,183 25,000
-------- -------- --------
98,050 98,435 93,068
Accumulated other comprehensive
earnings (loss):
Unrealized gain (loss) on
financial instruments 14 (9) 39
-------- -------- --------
Total common equity 98,064 98,426 93,107
-------- -------- --------
Cumulative preferred stock of subsidiary:
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 0 shares as of
6/30/00 and 32 shares
as of 6/30/99 and 9/30/99 - 3,200 3,200
-------- -------- --------
Long-term debt:
First Mortgage Bonds 88,005 90,728 89,819
Other long-term debt 3,135 4,142 4,461
Capital leases 264 923 556
-------- -------- --------
Total long-term debt 91,404 95,793 94,836
Less current portion 3,395 3,137 3,515
-------- -------- --------
Long-term debt, net 88,009 92,656 91,321
-------- -------- --------
Total capitalization $186,073 $194,282 $187,628
======== ======== ========
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 1999 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 (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 4.0 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. 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 $1.0 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 has reclassified and is amortizing
approximately $4.0 million of prior environmental costs. These costs and all
environmental costs incurred during the term of the Plan will be amortized over
a 10-year period, in accordance with the levels authorized in Energize RI.
Under Energize RI, ProvGas may earn up to 10.9 percent, but not less than
7.0 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 the event that ProvGas earns in excess of 10.9 percent or less
than 7.0 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.
I-5
<PAGE>
As part of Energize RI, ProvGas is permitted to file annually with the
Division for the recovery of exogenous changes which may occur during the three-
year term of the Plan. Exogenous 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 exogenous changes are to be resolved
by the RIPUC. The impact of any such exogenous 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. ProvGas believed the causes of these two events were beyond its
reasonable control and thus deemed them to be exogenous changes. In March 1999,
ProvGas reached an agreement with the Division, which allowed for the recovery
of $2.45 million in revenue losses attributable to exogenous changes experienced
by ProvGas in fiscal 1998. The RIPUC reviewed the exogenous changes agreement to
ensure consistency with the terms of Energize RI and affirmed the agreement at
its May 28, 1999 open meeting. During fiscal 1999 and 2000, ProvGas recognized
into revenue $2.0 million and $.4 million, respectively, for the exogenous
changes recovery. The remaining balance will be recognized as revenue in the
fourth quarter of fiscal 2000 in accordance with the terms of Energize RI.
Other exogenous changes related to fiscal 1999 and 2000 are addressed in
the prospective agreement discussed below.
On August 2, 2000 ProvGas, the Division, the Energy Council of Rhode
Island, and the George Wiley Center (Settling Parties) filed a Price
Stabilization Plan (the Agreement) with the RIPUC to become effective October 1,
2000, if approved. The Agreement seeks a 21-month extension of Energize RI with
certain modifications to reflect changes in ProvGas' cost of service and its gas
commodity cost since the commencement of Energize RI in fiscal 1998. The
Agreement provides a level of rate stability for customers, includes incentives
for increased earnings for ProvGas, includes a weather mitigation clause, and
allows ProvGas to continue the infrastructure investment in its distribution
system.
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 commencing October 1, 1997. Under the contract, DETM guarantees to meet
ProvGas' supply requirements; however, ProvGas must purchase all of its gas
supply exclusively from DETM. In addition, under the contract, ProvGas
transferred responsibility for its pipeline capacity resources, storage
contracts, and liquified natural gas (LNG) capacity to DETM. As a result,
ProvGas' gas inventories of approximately $18 million at September 30, 1997 were
sold at book value to DETM on October 1, 1997.
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.
I-6
<PAGE>
Included in the DETM contract are a number of other important features.
ProvGas has retained the right to continue to make gas supply portfolio changes
to reduce supply costs. ProvGas may realize demand cost reductions by
terminating higher-priced contracts. The outsourcing of day-to-day supply
management relieves ProvGas of the need to perform certain upstream supply
management functions. This 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.
In anticipation of the full requirements gas supply contract with DETM
expiring on September 30, 2000, ProvGas has entered into an agreement to extend
the existing gas supply contract, but with significant modifications. Under the
modified agreement DETM will continue to provide asset management for all
pipeline transportation and storage services. Supply purchases will be made at
market prices rather than fully fixed prices or at prices locked in by ProvGas.
The extension agreement is subject to regulatory and management approvals.
On November 10, 1999, ProvGas' LNG service contract with Algonquin Gas
Transmission Company (Algonquin), a subsidiary of Duke Energy Corporation,
became effective. Algonquin 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 began November 10, 1999. Under the terms of the agreement,
Algonquin replaced and expanded the vaporization capability at the tank. ProvGas
has received approximately $2.6 million from Algonquin. Of the $2.6 million,
approximately $.9 million represents reimbursement received by ProvGas in 1999
for costs incurred related to the project including labor, engineering, and
legal expenses. The remaining portion of the payment, or approximately $1.7
million, was received in January 2000 and serves as reimbursement for the
additional costs that DETM will incur as a result of the release of the
Algonquin storage capacity to DETM as provided for in the gas supply asset
management contract described above.
In June 1999, the Federal Energy Regulatory Commission (FERC) issued an
order in Docket Number CP99-113 approving Algonquin's project described above.
In that order FERC also approved the new 10-year contract between Algonquin and
ProvGas for service from the tank and ProvGas' parallel filing, PR99-8,
requesting regulatory authorization to charge Algonquin for displacement of gas
for other Algonquin customers.
As a result of FERC Order 636 and other related orders, pipeline
transportation companies have incurred significant costs, collectively known as
transition costs. The pipeline's customers, including ProvGas, will reimburse
the majority of these costs. ProvGas estimates its transition costs to be
approximately $21.7 million, of which $16.2 million was included in the GCC and
collected from customers through September 30, 1997. As part of the above supply
contract, DETM assumed liability for these transition costs during the
contract's three-year term. At the end of the three-year term of the contract,
ProvGas will assume any remaining liability, which is not expected to be
material.
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, 2000, the Registrant was aware of five sites at which future
costs may be incurred.
I-7
<PAGE>
Plympton Sites (2)
------------------
ProvGas has been designated as a potentially responsible party (PRP) under
the Comprehensive Environmental Response Compensation and Liability Act of 1980
at two C. M. Brackett sites in Plympton, Massachusetts. Disposal contractors
employed in the past, either directly or indirectly by ProvGas and other PRPs,
allegedly deposited waste materials at the C. M. Brackett sites. With respect to
one of the sites, ProvGas has joined with other PRPs in entering into an
Administrative Consent Order with the Massachusetts Department of Environmental
Protection. The same group is currently negotiating a similar agreement for the
second site. The costs to be borne by ProvGas in connection with both Plympton
sites are not anticipated to be material to the financial condition of ProvGas.
Providence Site
---------------
During 1995, ProvGas began a study at its primary gas distribution facility
located at 642 Allens Avenue in Providence, Rhode Island. This facility was also
the site of a former manufactured gas plant operated by ProvGas. Approximately
$3.0 million has been expended on studies and the formulation of the remediation
work plan.
The remediation of the soil in accordance with the work plan began in July
1999 and is scheduled for completion in December 2000. Recent milestones
achieved during the most recent quarter include the issuance of several required
state and local permits as well as the beginning of soil processing.
ProvGas has compiled a preliminary range of costs, based on removal and
off-site disposal of the most contaminated soil, ranging from $7.0 million to in
excess of $9.0 million. As of June 30, 2000, approximately $4.7 million has been
expended on the remediation of this soil.
An investigation of the remaining soil was begun in December 1999 and was
completed in March 2000 at a cost of approximately $1.5 million. Based on the
results of that investigation, ProvGas is going to propose a final remedial
solution that addresses soils over the entire site. As of June 30, 2000 ProvGas
has not begun its groundwater investigation at this site.
Because of the uncertainties associated with the pending investigation and
remedial solutions, ProvGas can not offer any conclusions as to the total future
cost of remediation of the property at this time. Based on the proposals for
remediation work, ProvGas has an accrual balance of $2.7 million at June 30,
2000 for anticipated future remediation and investigation costs at this site.
Westerly Site
-------------
ProvGas acquired the Westerly, Rhode Island operations center in 1990 from
another company. In 1996 an environmental investigation revealed the existence
of coal tar waste on the site. ProvGas never operated a manufactured gas plant
at this location, but the previous owner did. The former manufactured gas plant
is allegedly the source of the coal tar waste. In February 1999, the Rhode
Island Department of Environmental Management (DEM) issued ProvGas and the
previous owner a letter of responsibility for the site. As of June 30, 2000,
ProvGas had removed an underground oil storage tank and regulators containing
mercury from the site, as well as some localized contamination. The costs
associated with the investigation and removal of localized contamination were
shared equally with the former owner of the property.
ProvGas is currently engaged in negotiations to transfer the property back
to the previous owner, who would continue to remediate the site at no cost to
ProvGas. It is anticipated that the parties will sign the purchase and sale
agreement during the current fiscal year, at which time the previous owner will
assume responsibility for removal of coal tar waste. ProvGas has completed the
required cleanup related to any mercury-containing regulators and remains
responsible for cleanup of any mercury released into adjacent water. Costs
incurred by ProvGas to remediate this site were approximately $.1 million.
I-8
<PAGE>
Allens Avenue Site
------------------
In November 1998, ProvGas received a letter of responsibility from DEM
relating to possible contamination on previously owned property at 170 Allens
Avenue in Providence. The current operator of the property has also received a
letter of responsibility. A work plan has been created and approved by DEM. An
investigation has begun to determine the extent of contamination as well as the
extent of ProvGas' responsibility. ProvGas has entered into a cost-sharing
agreement with the current operator of the property, under which ProvGas is
responsible for approximately 20 percent of the costs related to the
investigation. Costs of testing at this site as of June 30, 2000 were
approximately $.3 million. Until the results of the investigation are known,
ProvGas cannot 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 10-year period, in accordance with the levels
authorized in Energize RI. 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, 2000, ProvGas
has incurred environmental assessment and remediation costs of $9.9 million and
has a remaining accrual balance of $2.7 million for future costs.
Management is pursuing discussions with third parties relating to
contributions to defray 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:
Three Months Nine Months
2000 1999 2000 1999
---- ---- ---- ----
Weighted average
shares 6,150.5 6,012.0 6,137.9 5,994.2
Effect of dilutive
stock options - - 64.4 11.0
------- ------- ------- -------
Weighted average
shares diluted 6,150.5 6,012.0 6,202.3 6,005.2
======= ======= ======= =======
The net income used in the calculation for basic and diluted earnings per
share agrees with the net income appearing in the consolidated financial
statements.
Diluted earnings per share are not presented for the three months ended
June 30, 2000 and 1999 because they are anti-dilutive. The number of potentially
dilutive shares excluded from the earnings per share calculation was 71,237 and
11,628 for the three months ended June 30, 2000 and 1999, respectively.
I-9
<PAGE>
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 loss for the nine
months ended June 30:
<TABLE>
<CAPTION>
Unrealized Holding Reclassification
Gains on Adjustments for
Investments Gains Other
Arising During Included in Comprehensive
(thousands of dollars) the Period Net Income Loss
---------------------- ---------- ---------- ----
<S> <C> <C> <C>
2000
Pretax income $ 20 $ (58) $ (38)
Income tax expense 7 (20) (13)
------- -------- --------
Net change $ 13 $ (38) $ (25)
======= ======== ========
</TABLE>
8. Commitments and Contingencies
-----------------------------
The Registrant has employment agreements with 11 officers, which currently
provide for substantial severance payments upon separation from the Registrant
and continuing through the 24 months following the merger of the Registrant with
Southern Union Company. The Registrant's salary severance expense could total
approximately $5.0 million.
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 or contain "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 including without limitation statements regarding the Registrant's
financial position, strategic initiatives, the effect of its proposed merger
with Southern Union Company (Southern Union), and statements 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, the actions taken or decisions
rendered by any regulatory body, and the impact such changes, actions, or
decisions might have on the Registrant; Southern Union's Shareholders' approval
of the proposed merger with the Registrant; competition in the energy services
sector; regional weather conditions; the availability, cost, and heat content 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
ability to attract and retain qualified employees; 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 and nine months ended June 30, 2000 and for comparable periods
ended June 30, 1999 are as follows:
(thousands)
Three Months Nine Months
Ended June 30 Ended June 30
2000 1999 2000 1999
---- ---- ---- ----
Energy revenues $ 49,542 $ 39,327 $230,909 $197,762
======== ======== ======== ========
Operating margin $ 21,333 $ 20,417 $ 94,799 $ 92,224
======== ======== ======== ========
Net income (loss) $ (3,793) $ (376) $ 8,329 $ 13,964
======== ======== ======== ========
Operating Margin
----------------
Operating margin increased approximately $.9 million or 4.5 percent
compared to the same quarter last year. During the latest quarter, ProvGas
experienced weather that was 28 percent colder than the same quarter last year.
This colder weather increased margin by approximately $1.3 million when compared
to the same period last year. Also increasing margin was approximately $.2
million of additional margin as a result of actual rate reductions of pipeline
fixed costs as provided for in the DETM contract. Partially offsetting the
increases in margin for the quarter, was approximately $.9 related to the 1998
exogenous change recovery, which was recognized in fiscal 1999.
I-11
<PAGE>
Non-regulated operating margin for the current quarter increased
approximately $.1 million when compared to the same period last year. The
increase was primarily due to approximately $.5 million in additional margin
generated by new customers obtained through the acquisition of additional oil
companies. However, margin decreased by approximately $.4 million as a result of
the completion of certain energy management projects and the receipt of
developer fees in the third quarter of fiscal 1999.
Operating margin increased approximately $2.6 million or 2.8 percent when
compared to the same nine-month period last year. Weather for the nine-month
period was 3.5 percent colder than last year, which increased margin by
approximately $.9 million. Also contributing to the increase in margin was
approximately $.4 million in non-firm margin primarily due to a more favorable
pricing difference between natural gas and alternate fuels. Also, ProvGas
recognized approximately $.7 million of additional margin as a result of actual
rate reductions of pipeline fixed costs as provided for in the DETM contract.
Partially offsetting these increases was approximately $.6 million related to
the 1998 exogenous recovery, which was recognized in fiscal 1999.
Non-regulated operating margin for the current nine-month period increased
approximately $.5 million when compared to last year. The increase was primarily
attributable to approximately $1.4 million of additional margin generated by new
customers obtained through the acquisition of additional oil companies, offset
by the failure of a major supplier to deliver under a contract for fixed price
oil. Also offsetting the increase was approximately $.7 million related to the
rapid escalation in wholesale energy prices in January 2000, which increased the
costs of natural gas purchased in the open market. The natural gas prices were
substantially higher than those projected in the customer's fixed sales price
level. Additionally, in March 1999, a pipeline refund relating to a prior year
was received. Margin also decreased approximately $.3 million as a result of the
completion of certain energy management projects and the receipt of developer
fees in the third quarter of fiscal 1999.
Operating and Maintenance Expenses
----------------------------------
Overall, operating and maintenance expenses increased approximately $2.4
million or 20.4 percent from the same quarter last year. The three-month
increase was primarily attributable to the receipt of a one-time reimbursement
of expenses under a contract with Algonquin LNG, Inc. in the third quarter of
fiscal 1999. Also contributing to the increase was the incremental operating
expenses associated with expansion of the oil business through the acquisition
of oil companies and an increase in labor as a result of cost of living
increases. Partially offsetting the labor increases, was a temporary decrease in
the number of employees and a decrease in recruiting costs. Operating and
maintenance expenses also decreased due to the end of ProvGas' regulatory phase-
in of costs associated with Statement of Financial Accounting Standards No. 106
in September 1999.
Operating and maintenance expenses increased approximately $3.0 million or
7.5 percent from the same nine-month period last year. The increase was due to
the same factors as the three-month increase, as well as an increase in labor as
a result of the completion of technology projects, for which labor had been
previously capitalized.
The Registrant continually reviews its operating expenses and takes action
to keep expenses as low as possible; however, expenses can vary from year to
year.
Depreciation and Amortization Expenses
--------------------------------------
Depreciation and amortization expense increased approximately $.6 million
or 12.9 percent compared to the same quarter last year and approximately $1.5
million or 11.2 percent when compared to the same nine-month period last year.
This increase is the result of increased capital spending for Energize RI
commitments; technology projects; Year 2000 costs, which were capitalized as
authorized under the provisions of Energize RI; and the amortization of
environmental costs. The Registrant is currently amortizing environmental and
Year 2000 costs over 10-year and 5-year periods, respectively, in accordance
with the levels authorized in Energize RI.
I-12
<PAGE>
Taxes
-----
Taxes for the current quarter versus last year increased approximately $.3
million or 10.4 percent and approximately $.8 million or 6.6 percent when
compared to the same nine-month period last year. The increases are primarily
due to increases in local property taxes as a result of capital spending.
Other Income (Loss)
-------------------
Other income (loss) decreased approximately $1.3 million in the current
quarter versus the same quarter last year and approximately $2.9 million in the
current nine-month period compared to the same nine-month period last year.
Other income for the three-month and nine-month periods decreased
approximately $1.3 million and $3.4 million, respectively, as a result of fees
paid in the current year for investment banking and legal services related to
the Registrant's proposed merger with Southern Union. Additional investment
banking fees and other expenses relating to the proposed merger will be incurred
during the balance of the year. As part of the agreement with the investment
banker, the remainder of its fee of $1.1 million is payable at the closing of
the proposed merger. Partially offsetting the fees for the nine-month period was
approximately $.5 million of increased investment interest income related to the
bridge financing for the Registrant's investment in the Providence Place Mall.
Interest Expense
----------------
Interest expense increased approximately $.9 million or 45.9 percent during
the latest quarter compared to the same quarter last year and approximately $2.0
million or 31.7 percent when compared to the same nine-month period last year.
Short-term interest expense has increased as a result of higher short-term
interest rates and increased notes payable due to the timing of collection of
accounts receivable, as well as capital spending.
FUTURE OUTLOOK
Regulatory
A. Energize RI - 1998 to 2000
-------------------------------
Under the Price Stabilization Plan Settlement Agreement (Energize RI or the
Plan), ProvGas may earn up to 10.9 percent, but not less than 7.0 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 the
event that ProvGas earns in excess of 10.9 percent or less than 7.0 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
Rhode Island Division of Public Utilities and Carriers (Division) for the
recovery of exogenous changes which may occur during the three-year term of the
Plan. Exogenous 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 exogenous changes are to be resolved by the Rhode Island
Public Utilities Commission (RIPUC). The impact of any such exogenous 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-13
<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 deemed them to be exogenous changes. In March 1999,
ProvGas reached an agreement with the Division, which allowed for the recovery
of $2.45 million in revenue losses attributable to exogenous changes experienced
by ProvGas in fiscal 1998. The RIPUC reviewed the exogenous changes agreement to
ensure consistency with the terms of Energize RI and affirmed the agreement at
its May 28, 1999 open meeting. During fiscal 1999 and 2000, ProvGas recognized
into revenue $2.0 million and $.4 million, respectively, for the exogenous
changes recovery. The remaining balance will be recognized as revenue in the
fourth quarter of fiscal 2000 in accordance with the terms of Energize RI.
Other exogenous changes related to fiscal 1999 and 2000 are addressed in
the prospective agreement discussed below. Based on weather experienced and the
level of exogenous dollars available in fiscal 2000, ProvGas does not anticipate
earning a 10.9 percent return on average common equity this year.
B. Price Stabilization Plan
-----------------------------
On August 2, 2000 ProvGas, the Division, the Energy Council of Rhode
Island, and the George Wiley Center (Settling Parties) filed a Price
Stabilization Plan (the Agreement) with the RIPUC to become effective October 1,
2000, if approved. The Agreement seeks a 21-month extension of Energize RI with
certain modifications to reflect changes in ProvGas' cost of service and its gas
commodity cost since the commencement of Energize RI in fiscal 1998. The
Agreement provides a level of rate stability for customers, includes incentives
for increased earnings for ProvGas, includes a weather mitigation clause, and
allows ProvGas to continue the infrastructure investment in its distribution
system.
C. Business Choice
--------------------
On August 31, 1999, ProvGas' settlement agreement for enhancements to its
Business Choice program was approved by the RIPUC in Docket 2902 and became
effective September 1, 1999. Specifically, there is now rolling enrollment for
transportation service, which allows customers to execute transportation
agreements throughout the year, rather than during limited enrollment periods.
The program now has approximately 1,550 firm transportation customers with
annual deliveries of over 5 billion cubic feet per year, which is approximately
25 percent of ProvGas' total annual firm deliveries. There are 12 marketers
serving ProvGas' customers and transporting on the system. Additional
enhancements to the Business Choice program were filed with the RIPUC under a
supplemental settlement agreement in Docket 2902 on October 8, 1999 and were
approved on October 27, 1999. These enhancements do not generate additional
revenue. ProvGas continually evaluates expansion and enhancements to the
Business Choice program.
Business Opportunities
The Registrant's non-regulated operation continues to increase its
contribution to operating margin by adding customers and sales volume, although
it continues to generate a net loss consistent with the expansion of this
business. The Registrant intends to continue to grow its residential oil
customer base through future customer acquisitions to build the operational
scale needed to compete effectively in the marketplace. On January 19, 2000, the
Registrant acquired the assets of Woonsocket Consumers Coal Company (Consumers).
Consumers is a full service oil company in Northern Rhode Island and has
approximately 5,000 residential oil customers. This acquisition, along with the
acquisition of four small oil companies during this fiscal year, is a
significant step forward in the Registrant's strategic plan to expand its retail
oil distribution business and strengthen its position as a leader in the New
England energy industry.
I-14
<PAGE>
Gas Marketer
The Registrant has decided to explore a number of strategic options related
to its gas marketing subsidiary, Providence Energy Services, Inc. (PES),
including the possible sale of the business. The retail natural gas and
electricity markets in New England have developed much more slowly than
expected. The Registrant has determined that it will be better served by
focusing on its core natural gas and oil distribution businesses. The
Registrant's goal is to determine the course of action with respect to PES by
August 31, 2000. In the meantime, PES will continue to operate in the ordinary
course of business.
Merger
A special meeting of the shareholders took place on May 22, 2000. The
purpose of this special meeting was to approve the merger described in the
merger agreement with Southern Union Company (Southern Union). The merger
agreement was included as Annex 1 of the Registrant's proxy statement dated
April 6, 2000. At the meeting, the shareholders approved the terms of the
proposed merger with Southern Union.
On July 24, 2000, the Division issued an order in which it adopted and
approved the settlement agreement dated May 31, 2000 that had been filed by the
Registrant, Southern Union, and certain of their affiliates. In the same order,
the Division approved the January 27, 2000 notification/petition by the
Registrant and Southern Union relating to the merger agreement signed on
November 15, 1999, as amended, between the two parties.
The Division's order remains contingent upon Southern Union obtaining
approval of their shareholders. Southern Union has scheduled a special meeting
of its shareholders on August 29, 2000 for approval of its merger with the
Registrant. It is anticipated that the merger will close late in this fiscal
year.
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $15.4 million for the nine months ended June
30, 2000 compared to the same period last year. The current year cash flow
decreased as a result of a decrease in operating income as discussed above in
the Results of Operations section and an increase in accounts receivable due to
---------------------
increased sales and the timing of receivable collections.
Capital expenditures for the nine months ended June 30, 2000 of
approximately $21.6 million decreased approximately $6.4 million or 23.0 percent
when compared to approximately $28.0 million for the same period last year. This
spending decrease was due primarily to the completion of technology projects
during fiscal 1999. Capital expenditures for the remainder of fiscal year 2000
and for fiscal year 2001 are expected to be approximately $40.3 million in
total.
During the current nine-month period, the Registrant's cash flow from
financing activities decreased approximately $.6 million compared to the same
period last year due primarily to the acceleration of the redemption of ProvGas'
preferred stock.
I-15
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
PART II. OTHER INFORMATION
------- -----------------
Item 6 (b). Reports on Form 8-K
-------------------------------
On July 7, 2000, the Registrant filed a report on Form 8-K regarding the
Registrant's decision to explore a number of strategic options related to its
gas marketing subsidiary, Providence Energy Services, Inc.
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: August 9, 2000
--------------
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