<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 March 31, 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
------------------------------------------------------
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)
401-272-5040
- ----------------------------------------------------------------------------
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, 6,147,625 shares outstanding at May 5, 2000.
- ----------------------------------------------------------------------------
<PAGE>
PROVIDENCE ENERGY CORPORATION
FORM 10-Q
MARCH 31, 2000
<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, 2000 and 1999 I-1
Consolidated Balance Sheets as of
March 31, 2000, March 31, 1999 and
September 30, 1999 I-2
Consolidated Statements of Cash Flows for the
six months ended March 31, 2000 and 1999 I-3
Consolidated Statements of Capitalization as of
March 31, 2000, March 31, 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 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)
---------
THREE MONTHS SIX MONTHS
-------------------- --------------------
2000 1999 2000 1999
-------------------- --------------------
(thousands, except per share amounts)
Energy revenues $ 110,586 $ 93,713 $ 181,367 $ 158,435
Cost of energy 67,290 51,618 107,901 86,628
--------- -------- --------- ---------
Operating margin 43,296 42,095 73,466 71,807
--------- -------- --------- ---------
Operating expenses:
Operation and maintenance 15,734 14,859 28,942 28,359
Depreciation and amortization 4,892 4,373 9,633 8,728
Taxes:
State gross earnings 2,489 2,471 4,171 4,152
Local property and other 2,652 2,404 4,881 4,459
--------- -------- --------- ---------
Total operating expenses 25,767 24,107 47,627 45,698
--------- -------- --------- ---------
Operating income 17,529 17,988 25,839 26,109
--------- -------- --------- ---------
Other income (loss):
Merger related expenses (992) - (2,076) -
Other 335 169 667 189
--------- -------- --------- ---------
Total other income (loss) (657) 169 (1,409) 189
--------- -------- --------- ---------
Income before interest expense
and preferred dividends of
subsidiary 16,872 18,157 24,430 26,298
--------- -------- --------- ---------
Interest expense:
Long-term debt 1,752 1,692 3,520 3,244
Other 1,083 667 1,913 1,183
Interest capitalized (60) (94) (119) (170)
--------- -------- --------- ---------
2,775 2,265 5,314 4,257
--------- -------- --------- ---------
Income before Federal income
taxes 14,097 15,892 19,116 22,041
Provision for Federal income
taxes 5,114 5,414 6,849 7,492
--------- -------- --------- ---------
Income before preferred
dividends of subsidiary 8,983 10,478 12,267 14,549
Preferred dividends of
subsidiary 75 105 145 209
--------- -------- --------- ---------
Net income $ 8,908 $ 10,373 $ 12,122 $ 14,340
========= ======== ========= =========
Net income per
common share - basic $ 1.45 $ 1.73 1.98 $ 2.40
========= ======== ========= =========
Net income per
common share - diluted $ 1.43 $ 1.73 $ 1.96 $ 2.39
========= ======== ========= =========
Weighted average number of
shares outstanding:
Basic 6,144.6 5,996.5 6,131.7 5,985.3
========= ======== ======== ========
Diluted 6,209.3 6,006.9 6,192.7 5,996.0
========= ======== ======== ========
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)
---------
TWELVE MONTHS
-------------
2000 1999
-------------
(thousands, except per share amounts)
Energy revenues $ 247,961 $ 224,809
Cost of energy 140,316 120,557
--------- ---------
Operating margin 107,645 104,252
--------- ---------
Operating expenses:
Operation and maintenance 53,630 54,549
Depreciation and amortization 18,401 15,844
Taxes:
State gross earnings 5,692 5,769
Local property and other 9,302 8,550
--------- ---------
Total operating expenses 87,025 84,712
--------- ---------
Operating income 20,620 19,540
--------- ---------
Other income (loss):
Merger related expenses (2,076) -
Other 1,601 (104)
--------- ---------
Total other income (loss) (475) (104)
--------- ---------
Income before interest expense
and preferred dividends of
subsidiary 20,145 19,436
--------- ---------
Interest expense:
Long-term debt 7,103 6,663
Other 2,992 1,940
Interest capitalized (338) (270)
--------- ---------
9,757 8,333
--------- ---------
Income before Federal income
taxes 10,388 11,103
Provision for Federal income taxes 3,897 3,841
--------- ---------
Income before preferred dividend
of subsidiary 6,491 7,262
Preferred dividends of subsidiary 284 418
--------- ---------
Net income $ 6,207 $ 6,844
========= =========
Net income per
common share - basic $ 1.02 $ 1.15
========= =========
Net income per
common share - diluted $ 1.01 $ 1.15
========= =========
Weighted average number of
shares outstanding:
Basic 6,088.9 5,966.4
========= =========
Diluted 6,132.5 5,976.6
========= =========
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)
(Unaudited)
-------------
March 31, March 31, September 30,
2000 1999 1999
----------------------------------------
ASSETS
- ------
Current assets:
Cash and temporary cash investments $ 4,067 $ 6,364 $ 2,804
Accounts receivable, less allowance
of $6,580 at 3/31/00, $4,885 at
3/31/99 and $2,883 at 9/30/99 55,046 45,401 13,684
Unbilled revenues 10,981 8,055 2,821
Inventories, at average cost -
Fuel oil and underground gas
storage 484 403 558
Materials and supplies 1,358 1,428 1,283
Prepaid and refundable taxes 2,875 2,026 4,215
Prepayments 1,100 1,782 2,214
-------- -------- --------
75,911 65,459 27,579
-------- -------- --------
Gas plant, at original cost 347,969 340,048 345,671
Less - Accumulated depreciation
and plant acquisition adjustments 128,546 133,610 127,481
-------- -------- --------
219,423 206,438 218,190
-------- -------- --------
Other assets:
Other property, net 3,669 2,517 2,628
Investments 13,568 5,021 11,186
Deferred environmental costs 10,996 5,881 9,719
Deferred charges and other assets 31,144 20,244 28,731
-------- -------- --------
59,377 33,663 52,264
-------- -------- --------
Total assets $354,711 $305,560 $298,033
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
(See accompanying statement) $191,690 $196,291 $187,628
-------- -------- --------
Current liabilities:
Notes payable 64,596 17,146 38,250
Current portion of long-term debt 3,384 3,313 3,515
Accounts payable 32,031 33,119 12,199
Accrued compensation 1,295 1,558 1,634
Accrued environmental costs 4,165 3,400 6,145
Accrued interest 1,755 1,584 1,647
Accrued taxes 10,651 8,325 3,557
Accrued vacation 2,177 1,992 1,807
Accrued workers compensation 707 596 595
Customer deposits 3,150 3,010 2,973
Other 4,044 3,324 4,352
-------- -------- --------
127,955 77,367 76,674
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 24,440 23,380 24,151
Unamortized investment tax credits 1,980 2,138 2,059
Accrued pension 7,190 5,946 6,982
Other 1,456 438 539
-------- -------- --------
35,066 31,902 33,731
-------- -------- --------
Commitments and contingencies
Total capitalization and liabilities $354,711 $305,560 $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 SIX MONTHS ENDED MARCH 31
---------------------------------
(Unaudited)
---------
2000 1999
--------------------
(thousands)
Cash provided by Operating Activities:
Income after interest expense $ 12,267 $ 14,549
Items not requiring cash:
Depreciation and amortization 9,633 8,728
Change as a result of regulatory actions (344) -
Gain on sale of financial instruments (242) (357)
Deferred Federal income taxes 279 1,077
Amortization of investment tax credits (79) (79)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (41,004) (31,334)
Unbilled revenues (8,160) (6,390)
Inventories 163 258
Prepaid and refundable taxes 1,340 3,367
Prepayments 1,114 71
Accounts payable 19,874 23,794
Accrued compensation (339) 221
Accrued interest 108 103
Accrued taxes 7,119 5,504
Accrued vacation, accrued workers
compensation, customer deposits
and other 678 (463)
Accrued pension 208 134
Deferred charges and other 738 (128)
-------- --------
Net cash provided by operating activities 3,353 19,055
-------- --------
Investing Activities:
Expenditures for property, plant
and equipment, net (13,525) (17,709)
Expenditures for business acquisitions (4,170) -
Investment in joint venture (2,464) (3,032)
Proceeds from sale of financial
instruments, net 286 426
-------- --------
Net cash used in investing activities (19,873) (20,315)
-------- --------
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 (2,309) (2,129)
Increase (decrease) in notes payable, net 26,146 (2,933)
Cash dividends on preferred shares (145) (209)
Cash dividends on common shares (2,738) (2,525)
-------- --------
Net cash provided by financing
activities 17,783 5,618
-------- --------
Increase in cash and temporary cash investments 1,263 4,358
Cash and temporary cash investments at beginning
of period 2,804 2,006
-------- --------
Cash and temporary cash investments at end $ 4,067 $ 6,364
======== ========
of period
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $ 5,061 $ 4,085
Income taxes (net of refunds) $ 2,312 $ 511
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)
--------------
March 31, March 31, September 30,
2000 1999 1999
------------------------------------------
Common stockholders' investment:
Common stock, $1 par
Authorized - 20,000 shares
Outstanding - 6,148 at 3/31/00,
6,007 at 3/31/99
and 6,102 at
9/30/99 $ 6,148 $ 6,007 $ 6,102
Amount paid in excess of par 63,264 59,873 61,966
Retained earnings 33,818 34,180 25,000
-------- -------- --------
103,230 100,060 93,068
Accumulated other comprehensive
earnings (loss):
Unrealized gain (loss) on
financial instruments 8 (30) 39
-------- -------- --------
Total common equity 103,238 100,030 93,107
-------- -------- --------
Cumulative preferred stock of
subsidiary:
Redeemable 8.7% Series, $100 par
Authorized - 80 shares
Outstanding - 0 shares as of
3/31/00 and 32 shares
as of 3/31/99 and 9/30/99 - 3,200 3,200
-------- -------- --------
Long-term debt:
First Mortgage Bonds 88,219 90,728 89,819
Other long-term debt 3,323 4,597 4,461
Capital leases 294 1,049 556
-------- -------- --------
Total long-term debt 91,836 96,374 94,836
Less current portion 3,384 3,313 3,515
-------- -------- --------
Long-term debt, net 88,452 93,061 91,321
-------- -------- --------
Total capitalization $191,690 $196,291 $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, ProvGas recognized into revenue $2.45 million for the
exogenous changes recovery, and has a remaining deferred balance as of March 31,
2000 of approximately $.1 million of revenue under the provisions of the
earnings cap of Energize RI.
ProvGas intends to file for recovery of exogenous changes experienced in
1999 which resulted from factors similar to those experienced in 1998. Absent
further exogenous recovery and/or other factors such as colder than normal
weather, ProvGas' ability to earn a 10.9 percent return on average common equity
this year, the final year of Energize RI, is substantially impaired.
As Energize RI is due to expire on September 30, 2000, several alternatives
are available to ProvGas to address the expiration of this program including the
possible extension or replication of Energize RI or filing a rate case. On
January 31, 2000, ProvGas filed for a two-month extension of Energize RI to
allow time for ProvGas to discuss its options with the appropriate parties. At
an open meeting on February 22, 2000 the two-month extension was approved. On
April 7, 2000 ProvGas filed for an additional two-month extension, which was
subsequently approved at the April 13, 2000 open meeting.
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.
ProvGas has entered into an agreement replacing its existing LNG service
contract with Algonquin Gas Transmission Company (Algonquin), a subsidiary of
Duke Energy Corporation. 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 majority of these costs will be reimbursed by the
pipeline's customers, including ProvGas. ProvGas estimates its transition costs
to be approximately $21.7 million, of which $16.2 million has been 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 March 31, 2000, the Registrant was aware of five sites at which future
costs may be incurred.
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.
I-7
<PAGE>
Providence Site
- ---------------
During 1995, ProvGas began a study at its primary gas distribution facility
located at 642 Allens Avenue in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by ProvGas. As of March 31, 2000,
approximately $3.0 million had been spent primarily on studies and the
formulation of remediation work plans under Rhode Island Department of
Environmental Management (DEM) supervision.
ProvGas has completed the initial investigation to determine the extent of
environmental contamination for the most contaminated portions of the property.
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 March 31, 2000, approximately $3.7 million had been spent
on the remediation of this soil. The remediation of the most contaminated
portions of the property is scheduled to be completed approximately six months
after DEM issues the final air quality permit for the project.
An investigation of the remaining soil was begun in December 1999 and was
completed in March 2000. The total cost of this soil characterization was
approximately $1.5 million. In addition, as of March 31, 2000 ProvGas has not
begun its groundwater investigation at this site. The results of the additional
investigation will be included in the determination of the final remedial
solution.
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 $4.2 million at March 31,
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, DEM issued
ProvGas and the previous owner a letter of responsibility for the site. As of
March 31, 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. 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. 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 March 31, 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 March 31, 2000, ProvGas
has incurred environmental assessment and remediation costs of $8.3 million and
has an accrual balance of $4.2 million for future costs.
Management has begun discussions with other parties who may assist ProvGas
in paying the costs associated with the remediation of the above sites.
Management believes that its program for managing environmental issues, combined
with rate recovery and financial contributions from others, will likely avoid
any material adverse effect on its results of operations or its financial
condition as a result of the ultimate resolution of the above sites.
6. Net Income per Common Share
---------------------------
A reconciliation of the weighted average number of shares outstanding used
in the computation of the basic and diluted earnings per share for each of the
periods ended March 31 is as follows:
Three Months Six Months Twelve Months
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Weighted average
shares 6,144.6 5,996.5 6,131.7 5,985.3 6,088.9 5,966.4
Effect of dilutive
stock options 64.7 10.4 61.0 10.7 43.6 10.2
------- ------- ------- ------- ------- -------
Weighted average
shares diluted 6,209.3 6,006.9 6,192.7 5,996.0 6,132.5 5,976.6
======= ======= ======= ======= ======= =======
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.
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 six
months ended March 31:
Unrealized Holding Reclassification
Gains on Adjustments for
Investments Gains Other
Arising During Included in Comprehensive
(thousands of dollars) the Period Net Income Loss
- ------------------------ ---------- ---------- ----
2000
Pretax income $ 11 $ (58) $ (47)
Income tax expense 4 (20) (16)
---------- ---------- ------
Net change $ 7 $ (38) $ (31)
========== ========== ======
8. Commitments and Contingencies
-----------------------------
The Registrant has employment agreements with 11 officers. Upon a change in
control of the Registrant, potential severance expense will substantially
increase. 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, including the regulatory approvals or
the timeliness of such approvals of the Registrant's proposed merger with
Southern Union; 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 for the
three, six, and twelve months ended March 31, 2000 and for comparable periods
ended March 31, 1999 are as follows:
(thousands)
Three Months Six Months Twelve Months
Ended March 31 Ended March 31 Ended March 31
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Energy revenues $110,586 $ 93,713 $181,367 $158,435 $247,961 $224,809
======== ======= ======== ======== ======== ========
Operating margin $ 43,296 $ 42,095 $ 73,466 $ 71,807 $107,645 $104,252
======== ======== ======== ======== ======== ========
Net income $ 8,908 $ 10,373 $ 12,122 $ 14,340 $ 6,207 $ 6,844
======== ======== ======== ======== ======== ========
Operating Margin
- ----------------
Operating margin increased approximately $1.2 million or 2.9 percent
compared to the same quarter last year. The margin increase was due to
approximately $.3 million related to the 1998 exogenous change recovery and
approximately $.7 million in non-firm margin due to a more favorable pricing
difference between natural gas and alternate fuels. During the latest quarter,
the Registrant experienced weather that was .6 percent colder than the same
quarter last year. This colder weather did not affect margin when compared to
the same quarter last year.
I-11
<PAGE>
Non-regulated operating margin for the current quarter increased
approximately $.2 million when compared to the same period last year. The
increase was primarily due to margin generated by new customers obtained through
the acquisition of additional oil companies, as well as increased natural gas
sales volumes. The increased natural gas sales volumes were primarily due to
dual fuel sales, which resulted from available capacity on the system due to the
warmer weather experienced and the more favorable pricing difference of natural
gas to the customers' alternative fuels. These increases were partially offset
by the failure of a major suppler to deliver under a contract for fixed price
oil, and 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.
Operating margin increased approximately $1.7 million or 2.3 percent when
compared to the same six-month period last year. Factors that contributed to the
increase in margin were approximately $.3 million related to the 1998 exogenous
change recovery and $.5 million in non-firm margin primarily due to a more
favorable pricing difference between natural gas and alternate fuels. Also, the
Registrant recognized approximately $.5 million of additional margin as a result
of actual rate reductions of pipeline fixed costs as provided for in the Duke
Energy Trading and Marketing, L.L.C. contract. Weather for the six-month period
was 8.1 percent warmer than normal. During the period, weather was essentially
the same as last year.
Non-regulated operating margin for the current six-month period increased
approximately $.6 million when compared to last year. This increase was
attributable to the same factors as the quarter increase.
Operating margin increased approximately $3.4 million or 3.3 percent for
the twelve months ended March 31, 2000 versus the same period last year. Factors
that contributed to the increase were $2.2 million related to the 1998 exogenous
change recovery and $.8 million in non-firm margin. Also, the Registrant
recognized approximately $.4 million of additional margin as a result of actual
rate reductions of pipeline fixed costs as provided for in the Duke Energy
Trading and Marketing, L.L.C. contract. Partially offsetting the increases, the
Registrant experienced weather that was .5 percent warmer for the twelve months
ended March 31, 2000 versus the same period last year. The warmer temperatures
resulted in decreased margin of approximately $.7 million compared to last year.
For the current twelve-month period, non-regulated operating margin
increased approximately $1.1 million. This increase was attributable to the same
factors as the quarter and six-month increases.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased approximately $.9
million or 5.9 percent from the same quarter last year and approximately $.6
million or 2.1 percent when compared to the same six-month period last year.
This increase was partially attributable to the incremental operating expenses
associated with expansion of the oil business through the acquisition of oil
companies. Also contributing to the increase in operating and maintenance
expenses was an increase in labor. The labor increase was attributable to cost
of living increases, as well as the completion of technology projects, for which
labor had previously been capitalized. Partially offsetting the labor increases
was a decrease in severance expense, a temporary decrease in the number of
employees, and a decrease in employee recruiting costs. The overall increase was
partially offset by decreases in ProvGas' expenses due to the end of the
regulatory phase-in of Statement of Financial Accounting Standards No. 106 costs
in September 1999 and a reduction in the regulatory expenses assessed by the
Division. Also decreasing expenses were cost control measures that were
implemented in response to the warmer weather.
I-12
<PAGE>
Operating and maintenance expenses decreased approximately $.9 million or
1.7 percent for the twelve months ended March 31, 2000 when compared to the same
twelve month period last year. The twelve-month decrease was primarily
attributable to a one-time reimbursement of approximately $.9 million for costs
incurred under a FERC-approved contract with Algonquin Gas Transmission Company.
In addition, the factors discussed above affecting the three and six-month
periods also impacted the twelve-month period.
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 $.5 million
or 11.9 percent compared to the same quarter last year, approximately $.9
million or 10.4 percent when compared to the same six-month period last year,
and approximately $2.6 million or 16.1 percent for the twelve months ended March
31, 2000 versus the same 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
amortizing environmental and Year 2000 costs over 10-year and 5-year periods,
respectively, in accordance with the levels authorized in Energize RI. The
Registrant anticipates increased environmental amortization expense in future
years pursuant to its planned environmental remediation program. Also,
amortization expense for Year 2000 costs will be higher in the future than
originally anticipated.
Taxes
- -----
Taxes for the current quarter versus last year increased approximately $.3
million or 5.5 percent, approximately $.4 million or 5.1 percent when compared
to the same six-month period last year, and approximately $.7 million or 4.7
percent for the current twelve-month period versus 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 $.8 million in the current
quarter versus the same quarter last year, approximately $1.6 million compared
to the same six-month period last year, and approximately $.4 million in the
current twelve-month period compared to last year.
Other income for the three-month and six-month periods decreased
approximately $1.0 million and $2.1 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 the fee is payable in two installments of $1.1 million
each upon the occurrence of the following two events: (a) upon the Registrant's
shareholders' approval of the proposed merger and (b) at the closing of the
proposed merger. Partially offsetting the fees for the six-month period was
approximately $.3 million of increased investment interest income.
The merger related fees of $2.1 million decreased other income for the
twelve-month period. This decrease was offset by an increase of approximately
$.5 million resulting from the reversal of a reserve established in 1998. The
Registrant had established the reserve for a refund under an order by the
Division which was subsequently vacated in 1999, at which time the original
reserve was reversed. Also offsetting the decrease to other income was $.6
million of increased investment interest income, offset by decreased advertising
expense of approximately $.2 million.
I-13
<PAGE>
Interest Expense
- ----------------
Interest expense increased approximately $.5 million or 22.5 percent during
the latest quarter compared to the same quarter last year, approximately $1.1
million or 24.8 percent when compared to the same six-month period last year,
and approximately $1.4 million or 17.1 percent during the latest twelve months
compared to the same twelve months last year. Long-term interest expense
increased as a result of ProvGas' Series T First Mortgage Bond issuance in
February 1999, which refinanced short-term borrowings. The Series T issuance
enabled the Company to secure a favorable long-term financing rate.
Additionally, short-term interest expense has increased as a result of higher
interest rates and increased notes payable, the proceeds of which are being used
primarily as bridge financing for the Registrant's investment in the Providence
Place Mall.
FUTURE OUTLOOK
Regulatory
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.
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, ProvGas recognized into revenue $2.45 million for the
exogenous changes recovery, and has a remaining deferred balance as of March 31,
2000 of approximately $.1 million of revenue under the provisions of the
earnings cap of Energize RI.
ProvGas intends to file for recovery of exogenous changes experienced in
1999 which resulted from factors similar to those experienced in 1998. Absent
further exogenous recovery and/or other factors such as colder than normal
weather, ProvGas' ability to earn a 10.9 percent return on average common equity
this year, the final year of Energize RI, is substantially impaired.
As Energize RI is due to expire on September 30, 2000, several alternatives
are available to ProvGas to address the expiration of this program including the
possible extension or replication of Energize RI or filing a rate case. On
January 31, 2000, ProvGas filed for a two-month extension of Energize RI to
allow time for the Registrant to discuss its options with the appropriate
parties. At an open meeting on February 22, 2000 the two-month extension was
approved. On April 7, 2000 ProvGas filed for an additional two-month extension,
which was subsequently approved at the April 13, 2000 open meeting.
I-14
<PAGE>
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 will now be rolling enrollment
for transportation service, which will allow customers to execute transportation
agreements throughout the year, rather than during limited enrollment periods.
The program now has approximately 1,700 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 14 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.
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 our
businesses. 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 full service oil business assets of the 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 a small Massachusetts oil company that was acquired
in April 2000, is a significant step 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.
Merger
A special meeting of the shareholders has been scheduled for May 22, 2000.
The purpose of this special meeting is to approve the merger described in the
merger agreement with Southern Union Company. The merger agreement was included
as Annex 1 of the Registrant's proxy statement dated April 6, 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $15.7 million for the six-months ended March
31, 2000 compared to the same period last year. On a comparative basis, the
current year cash flow decreased as a result of the timing of gas supply
payments. Also decreasing the current year cash flow was an increase in accounts
receivable due to increased sales related to the acquisition of oil companies
and a temporary billing delay as a result of the timing of the receipt of
information needed for billing purposes as a result of the extreme weather
conditions experienced during the current quarter.
Capital expenditures for the six-months ended March 31, 2000 of $13.5
million decreased $4.2 million or 23.6 percent when compared to $17.7 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 $42.6 million in total.
During the current quarter, the Registrant's cash flow from financing
activities increased $12.2 million due primarily to a temporary increase in
short-term borrowings, which are being used primarily as bridge financing for
the Registrant's investment in the Mall. The Registrant has obtained a
commitment from an institutional lender for permanent financing (the Mall
Financing) to replace its bridge financing for the Mall, which loan is expected
to close during the third quarter of fiscal 2000. The Mall Financing loan
provides for a 15-year non-recourse project financing, secured by the equipment
assets of the 6.6 megawatt generating plant located at the Mall. Upon execution
of the Mall Financing agreement, ProvEnergy will receive 50 percent of the loan
proceeds (estimated to be between $11.0 million and $12.5 million) at which
time, the Registrant's equity investment in the Mall project will be
approximately $3.0 to $3.5 million.
I-15
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6 (b). Reports on Form 8-K
- -------------------------------
On April 3, 2000, the Registrant filed a report on Form 8-K regarding the
Registrant consenting to Southern Union Company purchasing up to 4.9 percent of
the outstanding shares of common stock of the Registrant through open market
purchases or in privately negotiated transactions.
II-1
<PAGE>
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
It is the opinion of management that the financial information contained in this
report reflects all adjustments necessary for a fair statement of results for
the periods reported, but such results are not necessarily indicative of results
to be expected for the year due to the seasonal nature of the Registrant's
operations. All accounting policies and practices have been applied in a manner
consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providence Energy Corporation
(Registrant)
BY: /s/ KENNETH W. HOGAN
-------------------------------------
KENNETH W. HOGAN
Vice President, Chief Financial
Officer, and Treasurer
Dated: May 9, 2000
-----------
II-2
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