FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1995
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 0-1160
THE PROVIDENCE GAS COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 401-272-5040
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by checkmark 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant, as of December 26, 1995: $0
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock, $1.00 Par Value: 1,243,598 shares outstanding at
December 26, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
TABLE OF CONTENTS
PART I PAGE
Item 1 - Business
General I-1
Gas Supply I-1
Rates and Regulations I-2
Competition and Marketing I-3
Employees I-4
Storage Facilities I-5
Special Factors Affecting the Gas Industry I-5
Environmental Regulations I-6
Other Standards I-6
Item 2 - Properties I-7
Item 3 - Legal Proceedings I-7
Item 4 - Submission of Matters to a Vote of Security Holders I-7
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholders' Matters II-1
Item 6 - Selected Financial Data II-2
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations II-3
Item 8 - Financial Statements and Supplementary Data II-7
Report of Independent Public Accountants II-24
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-25
PART III
Item 10 - Directors and Executive Officers of the Registrant III-1
Item 11 - Executive Compensation III-3
Item 12 - Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 - Certain Relationships and Related Transactions III-3
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Supplemental Schedule IV-3
Signatures IV-5
PART I
ITEM 1. BUSINESS
General
The Providence Gas Company (Registrant or ProvGas), a Rhode Island
corporation, was organized in 1847 and became a wholly-owned subsidiary of
Providence Energy Corporation (Providence Energy) through a reorganization
on February 1, 1981. The outstanding shares of common stock of Providence
Energy are presently listed on the American Stock Exchange.
The executive offices of the Registrant are located at 100 Weybosset
Street, Providence, Rhode Island 02903, telephone (401) 272-5040.
The Registrant is engaged in natural gas distribution, serving
approximately 161,000 customers in Providence and Newport, Rhode Island,
and in 23 other cities and towns in Rhode Island. The service territory
encompasses approximately 370 square miles and has a population of
approximately 818,000. For the year ended September 30, 1995, residential
sales accounted for approximately 48 percent of total company sales, with
commercial and industrial sales representing, in the aggregate,
approximately 52 percent. For the years ended September 30, 1994 and 1993,
residential sales represented approximately 50 percent and 59 percent,
respectively, of the total sales, with commercial and industrial sales
representing, in the aggregate, approximately 50 percent and 41 percent,
respectively, of sales.
The Registrant's gas distribution system consists of approximately 2,300
miles of gas mains ranging in size from 2 to 36 inches in diameter,
approximately 138,000 services (a service is a pipe connecting a gas main
with piping on a customer's premises), approximately 158,000 gas meters,
and the necessary pressure regulators. The Registrant has regulating and
metering facilities at eight points of delivery from Algonquin Gas
Transmission Company and one from Tennessee Gas Transmission Company, which
the Registrant believes to be adequate for receiving gas into its
distribution system.
The natural gas industry is subject to numerous challenges, many of which
affect the Registrant in varying degrees. Significant industry challenges
affecting the Registrant include: the ability to adapt to the regulatory
changes occurring at the national level under the framework of the Federal
Energy Regulatory Commission (FERC) Order 636 and the ability to gain local
approval through the Rhode Island Public Utilities Commission (RIPUC) for
new rates tailored to customers' specific needs and market availability.
Gas Supply During 1995, the Registrant purchased 93% of its gas supply in
the production area with transportation to market and storage provided by
firm pipeline contracts. Liquefied natural gas (LNG) provided 2% of
supply. The remaining 5% was purchased in the market area, generally on
an interruptible basis. The Registrant maintains contracts sufficient to
meet 100% of its firm winter demand using firm storage and firm pipeline
transportation.
When not using capacity for its own sales, the Registrant released the
capacity or used it to make off-system sales. In fiscal 1995, the
Registrant received $5.1 million in revenue from released capacity, a 148%
increase over the $2.1 million received in fiscal 1994. The revenues
reduce the firm customer's gas cost and makes the Registrant more
competitive.
In addition to managing its pipeline capacity, the Registrant has focused
its attention on restructuring its supply portfolio to closely match its
market requirements. A sophisticated planning model is used to support all
major supply decisions and to identify specific areas in the supply and
transportation portfolio where savings can be gained without jeopardizing
its obligation to serve its firm customers. During fiscal 1995, a number
of supply contracts were put out for bid, renegotiated or terminated. For
example, the Company restructured one of its major supply contracts from
a 365 day supply contract to a 151 day winter-only contract resulting in
significant savings. Over the next several years, the Registrant plans to
restructure other contracts as their terms expire.
I-1
Although the Registrant has significantly increased its storage
capacities since the FERC Order 636 implementation, it continues to explore
opportunities to add additional storage to its portfolio as a replacement
for higher cost supplies as contracts expire. New storage will enhance the
Registrant's ability to provide the flexibility needed to meet rapid shifts
in temperature, manage market swings and stay competitive in the post FERC
Order 636 environment.
Rates and Regulation. The Registrant is subject to the regulatory
jurisdiction of the Rhode Island Public Utilities Commission with respect
to rates and charges, standards of service, accounting and other matters.
The standards set by this regulatory body affect all aspects of the
Registrant's business, including its ability to market to new customers and
to meet competition from other fuel suppliers -- see Competition and
Marketing.
In July 1994, the Registrant filed an Integrated Resource Plan (IRP) with
the RIPUC. The purpose of the IRP is to optimize the utilization of
production transmission and distribution resources such that customers
receive high quality services at the lowest possible costs.
Subsequent to year-end, the Registrant filed a three-year Settlement
Agreement between itself and the Division of Public Utilities and Carriers
regarding the IRP. The Settlement Agreement provides for: (1) funding
associated with Demand Side Management programs, which are designed to
provide equipment rebates for specific load building programs; (2) funding
associated with a low income weatherization program, which is designed to
assist low income customers through the installation of conservation
measures; and (3) a performance-based ratemaking mechanism.
In addition, the Settlement Agreement contains a general agreement that
the Registrant's strategy and steps prepared in its supply plan are
reasonable. The status of the Settlement Agreement is currently pending.
In February 1995, ProvGas filed for rate relief requesting an approximate
8 percent general rate increase. The major factors contributing to the
rate request were an increase in depreciation due to capital spending, an
increase in working capital needs, and an increase in capital expenditures.
On November 17, 1995, the RIPUC issued its decision on the rate request
made by ProvGas. In its decision, the RIPUC authorized ProvGas to increase
its rates to recover additional annual revenues in the amount of
$3,990,000. Subsequent to the issuance of the rate decision, the RIPUC
approved the Registrant's motion to reconsider a revenue adjustment of
$171,572. That approval increases the overall rate increase to $4,161,572.
Additionally, as a result of the order, ProvGas will record several
adjustments to its first quarter 1996 financial statements. Specifically:
a) ProvGas will begin calculating property tax expense for rate purposes
based on the current year's expense plus an estimate of one year's increase
in expense. Previously, ProvGas was required to estimate two year's
increase in expense. As a result, ProvGas will reduce its regulatory
liability for one year's property tax expense resulting in a one time gain
of approximately $3,900,000 before tax.
b) ProvGas will write-off and not recover the $1,600,000, before tax, of
restructuring costs previously deferred. (See Footnote 8 to the Notes to
the Consolidated Financial Statements filed herewith as Item 8.) The RIPUC
had previously allowed ProvGas recovery of similar costs, but determined
that the costs of the 1994 reorganization should not be recovered in rates.
c) ProvGas will write-off approximately $400,000, before tax, of previously
deferred rate case expenses. (See Footnote 8 to the Notes to the
Consolidated Financial Statements filed herewith as Item 8.)
d) ProvGas will write-off approximately $461,000, before tax, of
construction expenditures previously capitalized. These costs were
capitalized in accordance with generally accepted accounting principles and
were based on Federal Energy Regulatory Commission guidance on accounting
for such costs. The RIPUC agreed that such costs could be capitalized
beginning in 1996, but did not allow recovery of previously capitalized
costs.
I - 2
The net effect of the above adjustments will be recorded in ProvGas' first
quarter financial statements and based on management's current estimates,
will not have a material impact.
The following table sets forth the results of ProvGas' applications
before the RIPUC for revenue increases since 1981:
Annualized Annualized Authorized
Date of Revenue Increase Date Rates Revenue Increases Return on
Application Requested Effective Allowed (*) Common Equity
5/17/90 $15,800,000 03/15/91 $9,176,000 12.8%
1/15/93 9,100,000 (**) 11/14/93 694,000 11.2
2/16/95 14,880,000 (***)12/17/95 4,161,572(****) 10.9
(*) Although the RIPUC reviews and approves all changes in gas costs
billed to customers through the Cost of Gas Adjustment (CGA) clause, such
changes are not part of the general rate filings described above. See
Footnotes 1 and 9 in Notes to the Consolidated Financial Statements filed
herewith as Exhibit 8.
(**) Rate increase requested on January 15, 1993 of $9.1 million was
recalculated to $6,970,000 on September 14, 1993 due to cost of service
adjustments reflecting cost savings.
(***) Rate increase requested on February 16, 1995 of $14.9 million was
revised to $13,222,000 on July 19, 1995 due to lower projected costs.
(****) The allowed annualized revenue increase of $4,161,572 is comprised
of an initial award of $3,990,000 plus a revenue adjustment of $171,572
due, to a reconsideration motion.
In May 1995, ProvGas filed a request for a new rate design with the
RIPUC. The new request continues the movement towards equalized rates of
return for each of the customer classes as well as allowing for the
unbundling of certain services to ProvGas' largest customers. The rate
design request is revenue neutral. A major focus of the rate design
request is to improve the economic development climate and prospects for
job creation in Rhode Island. This request is currently pending.
ProvGas' cost of gas adjustment (CGA) clause contains a provision that
enables it to retain margins associated with non-firm sales and
transportation. Specifically, non-firm margins above a threshold are
shared at the ratio of 66 2/3% to firm customers and 33 1/3% to ProvGas.
The non-firm margin threshold is calculated annually based on the average
of non-firm sales and transportation margins for the preceding three years.
For fiscal 1995, the Company retained non-firm sales and transportation
margins of approximately $200,000 based on realized margins of $3.0 million
and a threshold of $2.4 million.
Competition and Marketing. The Registrant experienced moderate
growth in both residential and commercial/industrial markets. In all, the
average annual number of customers rose to 161,000.
About half the residential homes on or near the Registrant's distribution
lines use an alternate fuel for heating. In addition, there are about
28,000 housing units in the service territory that heat with high cost
electricity, making them excellent potential conversion customers. In
1995, residential heating conversions increased to 765 homes.
I - 3
In 1996, the Registrant's core marketing efforts will focus on building
loyalty with existing customers by offering incentives to encourage the
addition of gas appliances and energy related services. The Registrant
will continue joint marketing with the local network of heating contractors
to promote heating conversions of customers on existing gas mains.
The Registrant is working closely with the RIPUC to develop a new rate
structure that will allow the Registrant to more effectively compete with
alternate fuel providers. In addition, the Registrant has proposed to
offer unbundled services designed to respond to the needs of its largest
customers, such that those customers would have the option to purchase
natural gas directly from suppliers and use ProvGas to transport the gas.
This proposal will foster a more competitive and flexible gas market in
Rhode Island. To remain competitive, the Registrant must be able to offer
commercial/industrial businesses value-added services at competitive
prices.
For example, in 1995, the Registrant negotiated and received RIPUC
approval for five special agreements that allowed the Registrant to offer
unbundled services to several large manufacturing companies. Without this
customized approach, these companies would have utilized other fuel and
delivery alternatives, resulting in an annualized loss of operating margin
of approximately $600,000.
Emerging markets provide significant long-term opportunities for growth.
The Registrant expects strong growth in natural gas internal combustion
engines. These engines, used in large-scale air conditioning, industrial
water pumps, and air compressors--are significantly less expensive to
operate than comparable electric motors.
The Registrant continues to be a leader in the promotion of natural gas
vehicles. The Registrant opened the first public fueling station in New
England and has 15 local companies and state agencies using the station.
Natural gas fuel cell technology holds great promise for the future.
These fuel cells convert natural gas into electricity through an
electrochemical process, dramatically reducing emissions and noise normally
associated with power generating equipment. In 1995, the Registrant helped
the Newport Naval Education and Training Center become the third military
facility in the country to operate this new technology and is now selling
about 15 million cubic feet (MMcf) of natural gas annually to the center.
The Registrant believes this extraordinarily efficient technology will
become more common.
The Registrant helped The Providence Housing Authority convert to gas
fired hot water heaters by using the substantial annual savings from the
conversion to pay off loans the Registrant provided. In 1995, the
Registrant expanded this program in cooperation with the Federal Department
of Housing and Urban Development to include federally subsidized housing
in other areas of the state.
Employees
As of September 30, 1995, the Registrant had 539 full-time employees.
Approximately 275 distribution and customer service employees are covered
by a collective bargaining agreement with Local 12431 of the United
Steelworkers of America. Negotiations held subsequent to year-end have
resulted in a new five year agreement to become effective in January 1996.
The agreement may be opened by either party in year three or four, with a
sixty day prior notice. The agreement calls for a general wage increase
of 3.5 percent in 1996 and 3.25 percent each year from 1997 to 2000.
Additionally, during 1995, a new bargaining unit, Local 12431 A of the
United Steelworkers of America was established to represent 98 office and
clerical employees. Negotiations for a first labor agreement covering
these employees will commence in early 1996.
I - 4
Storage Facilities
The Registrant has contracts with a number of interstate pipelines for
rights to store natural gas in underground storage facilities located on
or near its systems. These contracts enable the Registrant to store up to
2,652 MMcf, which is available for firm delivery. Also, additional storage
capabilities of 585 MMcf are available on an interruptible basis.
The Registrant has an agreement with Algonquin for the storage of up to
the equivalent of 1,300 MMcf of vaporized LNG in a tank owned by Algonquin
and located on land leased to Algonquin by the Registrant. The agreement
expires in September 2001, but the Registrant has an option to extend the
agreement for an additional thirty years. The Registrant owns and operates
an LNG storage and vaporization facility which has the capacity to store
the equivalent of 200 MMcf of vaporized LNG.
Special Factors Affecting the Natural Gas Industry
General. The natural gas industry is subject to numerous legislative and
regulatory requirements, standards and restrictions that are subject to
change and that affect the Registrant to varying degrees. Significant
industry factors that have affected or may affect the Registrant from time
to time include: lack of assurance that rate increases can be obtained
from regulatory authorities in adequate amounts on a timely basis; changes
in the regulations governing the Registrant's operations; reductions in the
prices of oil and propane, which can make those fuels less costly than
natural gas in some markets; increases in the price of natural gas; and
competition with other gas sources for industrial customers, including
potential attempts to bypass the Registrant's facilities.
FERC Regulations. In recent years FERC has been attempting to increase
competition with regard to the transportation and sale of natural gas in
interstate commerce. Beginning in late 1985, FERC began promulgating
orders allowing all industry participants access to pipeline transportation
on an open, nondiscriminatory basis to the extent of available capacity.
Recent FERC orders are in furtherance of its policy to make gas
transportation and alternate supply sources more accessible to all parties,
including local distribution companies and their customers. Such open
access allows the Registrant to obtain its supply through a more
competitive national gas pipeline system, where and when capacity is
available.
FERC Order 636 and other related orders (the Orders) have significantly
changed the structure and types of services offered by pipeline
transportation companies. The most significant components of the
restructuring occurred in November 1993. In response to these changes, the
Registrant has successfully negotiated new pipeline transportation and gas
storage contracts.
At the same time, a number of contracts with gas suppliers have been
negotiated to complement the transportation and storage contracts. The
portfolio of supply contracts is designed to be market responsive and is
diversified with respect to contract lengths, source location, and other
contract terms. On a periodic basis, the Registrant reviews all of its
contracts to ensure a diverse, secure, flexible and economical supply
portfolio is maintained.
To meet the requirements of the Orders, the pipelines have incurred
significant costs, collectively known as transition costs. The majority
of these costs will be reimbursed by the pipelines' customers including the
Registrant. Based upon current information, the Registrant anticipates
transition costs to net between $17 million and $19 million of which $12.6
million has been included in the CGA and is currently being collected from
customers. The remaining minimum obligation of $4.4 million has been
recorded in the accompanying consolidated balance sheets (filed herewith
as Item 8) along with a regulatory asset anticipating future recovery
through the CGA.
The Registrant's ultimate liability may differ from the above estimates
based on FERC settlements with the Registrant's pipeline transportation
I - 5
suppliers. FERC has approved settlements with three of its pipelines,
which account for the bulk of the Registrant's transition costs.
Negotiations are continuing on one additional pipeline, but recent
favorable developments have considerably reduced the uncertainty previously
disclosed. Therefore, the Registrant believes that its current range for
transition costs is reasonable.
Environmental Regulations
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 September 30, 1995, the Registrant was aware of three sites at which
future costs may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability
Act of 1980 at two sites at Plympton, Massachusetts on which waste material
is alleged to have been deposited by disposal contractors employed in the
past either directly or indirectly by the Registrant and other PRPs. With
respect to one of the Plympton sites, the Registrant has joined with other
PRPs in entering into an Administrative Consent Order with the
Massachusetts Department of Environmental Protection. The costs to be
borne by the Registrant, in connection with both Plympton sites, are not
anticipated to be material to the financial condition of the Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence. In accordance with state
laws, such a voluntary study is monitored by the Rhode Island Department
of Environmental Management. The purpose of this study is to determine the
extent of environmental contamination at the site, if any. The study is
continuing, and although results are not conclusive, preliminary findings
indicate that clean-up may be required. The level of clean-up is likely
to vary significantly depending upon the proposed future use of the site.
In fact, if the site remains in its present use, only minimal clean-up may
be required. As of September 30, 1995, the Registrant cannot estimate the
future cost of investigation and clean-up as a result of the uncertainties
discussed. As of September 30, 1995, approximately $590,000 had been spent
on studies at this site.
In its rate case filed in February 1995, the Registrant 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. Accordingly, environmental investigation
costs of approximately $841,000 have been charged to the accumulated
depreciation reserve at September 30, 1995. Management believes that this
rate recovery mechanism is appropriate for recovery of future costs.
Should future developments warrant additional rate recovery mechanisms,
management will seek such recovery.
In addition to rate recovery, management has a program to ascertain the
possibility of recovery under prior insurance coverage. Also, management
has begun discussions with other parties who may assist the Registrant in
paying future costs at the above sites. Management believes that its
program for managing environmental issues combined with rate recovery,
possible insurance 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
three sites.
Other Standards. The Registrant is also subject to standards prescribed
by the Secretary of Transportation under the Natural Gas Pipeline Safety
Act of 1968 with respect to the design, installation, testing, construction
and maintenance of pipeline facilities. The enforcement of these standards
I - 6
has been delegated to the RIPUC and management believes that the Registrant
is in substantial compliance with all present requirements imposed by such
agency.
ITEM 2. PROPERTIES
In addition to the Registrant's gas distribution system and storage
facilities, which constitute the principal properties of the Registrant,
the Registrant owns several buildings and other facilities in Newport,
Providence and Westerly which house its offices and provide floor space for
its distribution and maintenance facilities.
Substantially all the foregoing properties are mortgaged as collateral
for the outstanding First Mortgage bonds of the Registrant.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is involved in legal and administrative proceedings in the
normal course of business, including certain proceedings involving material
amounts in which claims have been or may be made. However, management
believes, after review of insurance coverage and consultation with legal
counsel, that the ultimate resolution of the legal proceedings to which it
is or can at the present time be reasonably expected to be a party, will
not have a materially adverse effect on the Registrant's results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
I - 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS
Not applicable. The Registrant is a wholly-owned subsidiary of
Providence Energy Corporation.
II-1<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
THE PROVIDENCE GAS COMPANY
SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30
1995 1994 1993 1992 1991
(Thousands, except per share amounts)
Operating revenues $180,043 $219,143 $206,050 $187,705 $166,738
Cost of gas sold 98,985 133,315 124,677 110,161 100,316
Operating margin 81,058 85,828 81,373 77,544 66,422
Operating expenses,
excluding taxes 53,536 54,588 51,754 51,103 45,873
Taxes, other than income 11,597 12,413 12,468 11,439 10,918
Federal income taxes 3,027 4,369 3,507 2,787 772
Total operating expenses 68,160 71,370 67,729 65,329 57,563
Operating income 12,898 14,458 13,644 12,215 8,859
Other income, (loss) net 798 409 (3) 514 964
Income before interest
expense 13,696 14,867 13,641 12,729 9,823
Interest expense 7,181 6,121 6,546 6,615 6,854
Net income 6,515 8,746 7,095 6,114 2,969
Dividends on preferred stock (696) (696) (696) (696) (280)
Net income applicable to
common stock 5,819 8,050 6,399 5,418 2,689
Common dividends 4,577 4,501 4,427 4,726 5,622
Income (loss) charged to
retained earnings $ 1,242 $ 3,549 $ 1,972 $ 692 $ (2,933)
======== ======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ========
Earnings per common share $ 4.68 $ 6.47 $ 5.15 $ 4.36 $ 2.16
======== ======== ======== ======== ========
Common dividends $ 3.68 $ 3.62 $ 3.56 $ 3.80 $ 4.52
======== ======== ======== ======== ========
OTHER FINANCIAL DATA
SEPTEMBER 30
1995 1994 1993 1992 1991
(Thousands, except per share amounts)
Gas plant-at original cost $247,933 $230,926 $213,218 $202,019 $191,693
Gas plant-net of depreciation 161,956 151,394 141,929 137,791 133,188
Total assets 214,727 221,177 141,868 184,651 174,686
Capitalization:
Long-term debt 74,482 60,078 62,163 60,958 42,818
Redeemable cumulative preferred
stock 8,000 8,000 8,000 8,000 8,000
Common Stockholder's
investment 71,020 69,841 64,861 46,403 45,722
Shares of common stock at year-
end 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
Book value per share $ 57.11 $ 56.16 $ 52.16 $ 37.31 $ 36.77
======== ======== ======== ======== ========
II-2<PAGE>
Item 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
The Registrant's 1995 operating revenues, operating margin and net
income applicable to common stock have all decreased over the comparable
periods presented, as shown in the table below:
(000's)
Percent
1995 1994 Change Change
Operating revenues $180,043 $219,143 $(39,100) (17.8)
Operating margin 81,058 85,828 (4,770) (5.6)
Net income applicable
to common stock 5,819 8,050 (2,231) (27.7)
RESULTS OF OPERATIONS - 1995 VS 1994
Operating Revenues and Operating Margin
The Registrant experienced the second warmest heating season in 42 years
with temperatures averaging 10.5 percent warmer-than-normal. Overall, 1995
was 14.5 percent warmer than 1994, thereby decreasing operating margin by
almost $5 million.
As a result of the severe warmer-than-normal temperatures experienced
during 1995, residential sales, which provide the Registrant with its
greatest source of revenue, decreased 1.4 billion cubic feet (Bcf) or 10
percent from 1994. Offsetting this decrease was a net increase in the
average annual number of customers during 1995 over 1994 of approximately
2,200 or 1.4 percent. The moderate increase was the result of new housing
construction and conversions from other energy sources offset by shut-offs
for non-payment and housing vacancies due to the stagnant economy.
Non-firm sales volumes increased approximately 400 million cubic feet
(MMcf) or 9 percent. The increase in non-firm sales of approximately 1,000
MMcf was offset by a decrease in sales of gas for resale purposes of
approximately 600 MMcf. The increase in non-firm sales generated
approximately $200,000 in additional operating margin as a result of the
Registrant's non-firm margin sharing agreement. The decrease in sales of
gas for resale purposes did not have an impact on the Registrant's
operating margin because the Rhode Island Public Utilities Commission
(RIPUC) requires any margin earned from the sale of gas for resale purposes
be returned to firm customers through the Cost of Gas Adjustment Clause
(CGA).
Continuing efforts to be customer focused and to meet customer expectations
resulted in the Registrant negotiating and receiving regulatory approval
for five special agreements that allowed us to offer unbundled service to
several large manufacturing companies. Without these agreements, these
companies would have utilized other fuel and delivery alternatives,
resulting in an annualized loss of operating margin of approximately
$600,000.
Operating and Maintenance Expenses
Operating and maintenance expenses have decreased $1.8 million or 3.9
percent over the last fiscal year. This decrease is due to a lower
uncollectible revenue provision resulting from the decrease in operating
revenue and a slight improvement in the Registrant's collection of accounts
receivable. The remainder of the decrease is primarily attributable to a
reduction in labor and related expenses. The restructuring initiative that
occurred at the Registrant in June 1994 and the impact of efficiency
reviews as part of the continuous improvement programs has also contributed
to the reduction in labor expenses. The Registrant continually reviews its
operating expenses in order to keep expenses as low as possible. However,
II - 3
the Registrant's expenses can vary based on weather and other factors. As
a result, the 3.9 percent decrease in expenses experienced in 1995 will not
necessarily reoccur in future years.
Taxes
Taxes have decreased $2.1 million or 12.9 percent during the last year.
This was mainly due to a reduction in Federal income taxes as a result of
lower pre-tax income and a reduction in the state gross earnings tax as a
result of lower operating revenues due to warmer-than-normal weather.
Other Income
Other income increased by approximately $389,000 over 1994. This was
attributed to decreases in expenses related to our customer equipment
leasing program along with decreases in promotional advertising.
Interest Expense
Interest expense increased approximately $1.1 million or 17.3 percent as
compared to 1994. A significant increase in short-term interest rates plus
a slight increase in overall weighted average short-term borrowings caused
the increase in interest expense.
Future Outlook
The Financial Accounting Standards Board (FASB) recently released Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", which will be effective for the Registrant in fiscal 1997.
Based on a preliminary review of this Statement, management does not
believe SFAS No. 121 will have an impact on the Registrant's results of
operations or financial position. The FASB has also released statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-based Compensation". Although this Statement will increase footnote
disclosures regarding the Registrant's stock plans, management does not
believes SFAS No. 123 will have an impact on the Registrant's results of
operations or financial position.
RESULTS OF OPERATIONS - 1994 VS 1993
Operating Revenues and Operating Margin
On October 14, 1993, the RIPUC approved the Registrant's request to adopt
a new rate design, including a declining block rate structure, seasonal gas
cost accounting and higher customer charges, effective November 14, 1993.
The declining block rate structure allows the Registrant to recover more
fixed costs through rates immediately when a customer begins using natural
gas. Also, the new block rate structure will help balance customer bills
during the year and will help protect the Registrant and its customers
during periods of extreme weather conditions in the winter months. This
new block rate structure should result in a stabilization of earnings from
year to year. In addition to the improved stability in earnings, the new
rates are designed to increase annual operating margin by approximately
$700,000. Other components of the rate award included an allowed return
on equity of 11.2 percent. In 1994, for accounting and gas cost recovery
purposes, the Registrant recorded the embedded cost of gas using seasonal
gas cost factors of $4.26 per thousand cubic feet (Mcf) during November
1993 through April 1994 and $2.77 per Mcf during May 1994 through September
1994. The ultimate effect of the seasonal gas cost accounting will be that
quarterly operating margin will decrease in the winter months and increase
in the summer months when compared to the previous method. Assuming normal
weather, annual earnings should not be affected by this change.
Another significant attribute of the new rate design structure as compared
to the previous method is a higher customer charge. The average monthly
customer charge has been increased to recognize that a portion of the
Registrant's costs are relatively fixed and should be recovered from
customers regardless of gas consumption. The Registrant's volumetric
charge has decreased in order to offset the increased customer charge.
II - 4
For the first time in twelve years, the Company experienced a colder-than-
normal heating season. During 1994, temperatures averaged 4.7 percent
colder-than-normal. In addition, 1994 weather was also 4.5 percent colder
than 1993, thereby increasing operating margin by approximately $700,000.
As a result of the colder temperatures experienced during 1994, residential
sales, which provide the Registrant with its greatest source of revenues,
increased 331 MMcf or 2.4 percent over 1993. Also affecting the increase
was a net increase in the average annual number of customers during 1994
over 1993 of approximately 2,000 or 1.3 percent. The moderate increase was
the result of new housing construction and conversions from other energy
sources offset by shut-offs for non-payment and housing vacancies due to
the stagnant economy.
Non-firm sales volumes increased approximately 1,000 MMcf or 28 percent
reflecting an increase in sales to other natural gas utilities. Offsetting
the above was a small decrease in off-system cogeneration sales
(approximately 300 MMcf) due to the expiration of a short-term contract
with a cogeneration customer located outside the Registrant's service
territory. Both of these items, however, did not have a material impact
on the Company's operating margin or results of operations because the
RIPUC limits the amount of margin the Registrant can retain. Any margin
earned, which is greater than or less than the RIPUC limits, is returned
to or collected from customers through the CGA.
Operating and Maintenance Expenses
Overall, other operation and maintenance expenses increased approximately
$2.4 million or 5.6 percent during 1994 as compared to 1993. The increase
was the result of a higher uncollectible revenue provision, normal wage
increases granted due to negotiated union contract terms, employee merit
raises and expected one-time legal and related expenses associated with
compliance with FERC Order 636. Additionally, the Registrant implemented
a new accounting standard for accounting for post-retirement healthcare
benefits which increased the annual expense by $167,000. This increase was
fully recovered in rates. See Footnote 5 to the Notes to the Consolidated
Financial Statements filed herewith as Item 8. Furthermore, maintenance
expenses increased, reflecting a higher level of service and system repair
work, caused primarily by the colder-than-normal weather experienced during
the peak heating season.
Offsetting the above increases was a restructuring initiative that occurred
at the Registrant in June 1994. The intent of the restructuring was to
significantly improve the Registrant's customer services, lower operating
expenses and increase operating efficiencies. The Registrant, during 1994,
realized approximately $200,000 in savings as a result of the
restructuring. For more information on the restructuring see Footnote 8
to the Notes to the Consolidated Financial Statements filed herewith as
Item 8.
Taxes
Taxes have increased approximately $800,000 or 5.1 percent during 1994.
The increase in taxes, mainly Federal income and state gross receipts, were
the result of higher pretax income and higher operating revenues,
respectively. Offsetting the above increase was a decrease in property
taxes resulting from an aggressive program over prior years to work with
the local cities and towns to reduce the assessment on which the Registrant
pays taxes.
During 1994, the Registrant adopted Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes", which
requires an asset and liability approach to account for income taxes.
There were significant adjustments incorporated into the consolidated
balance sheet. However, there was no income statement impact as a result
of the adoption of SFAS No. 109. For a more detailed explanation, see
Footnote 2 to the Notes to the Consolidated Financial Statements filed
herewith as Item 8.
II - 5
Interest Expense
Interest expense for 1994 decreased approximately $400,000 or 6.5 percent
as compared to 1993. A small increase in short-term interest rates offset
by a decline in weighted average borrowings caused a decrease in short-term
interest expense. Long-term interest expense decreased as a result of the
refinancing of higher cost debt and sinking fund payments.
Liquidity and Capital Resources
During 1995, the Registrant experienced a $12.7 million increase in its net
cash provided by operations. Increases in non-cash expenses, such as
deferred taxes and depreciation, and the collection of gas costs from the
under-collection that existed in 1994, provided the major reasons for the
increase in net cash provided by operations.
In December 1995, the Registrant issued $15 million of First Mortgage Bonds
bearing an interest rate of 7.5 percent. These First Mortgage Bonds are
designated as Series R and will mature in December 2025. The net proceeds
received were used to paydown the Registrant's short-term debt. See
Footnote 3 to the Notes to the Consolidated Financial Statements filed
herewith as Item 8.
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings.
As of September 30, 1995, the Registrant had lines of credit totaling
$58,000,000 ($40,500,000 committed) with borrowings outstanding of
$19,337,000.
The Registrant's parent company's ability to pay dividends is largely
dependent upon receipt of dividends from the Registrant. Approximately $14
million of the Registrant's retained earnings were available for dividends
at the end of fiscal 1995 under the most restrictive terms of the
Registrant's First Mortgage Bond indenture.
Capital expenditures for 1995 of $19.1 million were stable when compared
to $19.4 million in 1994. Total anticipated capital expenditures for the
next three years are expected to total between $50 million to $60 million.
In February 1995, the Registrant filed for rate relief requesting an
approximate 8 percent general rate increase. In November 1995, the RIPUC
authorized the Registrant to increase its rates to recover additional
annual revenues in the amount of $3,990,000. Subsequent to the issuance
of the rate decision, the RIPUC approved the Registrant's motion to
reconsider a revenue adjustment of $171,572. That approval increases the
overall rate increase to $4,161,572. As part of this award, the Registrant
is allowed to earn a 10.9% return on common equity. The major factors
contributing to the rate request were an increase in depreciation due to
capital spending, an increase in working capital needs and an increase in
capital expenditures. Please see Footnote 10 to the Notes to the
Consolidated Financial Statements filed herewith as Item 8.
II-6
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE PROVIDENCE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30
1995 1994
(Thousands of Dollars)
ASSETS
Gas plant, at original cost (notes 1, 3, 6, and 10) $247,933 $230,926
Less - Accumulated depreciation and
utility plant acquisition adjustments 85,867 79,447
162,066 151,479
Current assets:
Cash and temporary cash investments (notes 1 and 7) 791 844
Accounts receivable, less allowance of
$2,309 in 1995 and $3,033 in 1994 (notes 1 and 6) 13,733 17,511
Receivables from affiliated companies 74 153
Unbilled revenues (note 1) 2,637 2,877
Deferred gas costs (notes 1 and 6) 1,196 15,349
Inventories, at average cost -
Liquefied natural gas, propane and underground
storage 9,976 11,123
Materials and supplies 1,427 1,590
Prepaid and refundable taxes (note 2) 5,272 3,507
Prepayments 1,328 1,458
36,434 54,412
Deferred charges and other assets
(notes 1, 5, 6, 8 and 10) 16,227 15,286
Total assets $214,727 $221,177
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statement) $153,502 $137,919
Current liabilities:
Notes payable (notes 4 and 7) 4,337 24,700
Current portion of long-term debt (note 3) 1,950 2,085
Accounts payable (notes 5 and 6) 13,896 18,039
Accrued taxes (note 10) 5,863 6,057
Accrued vacation 1,634 1,543
Customer deposits 3,937 3,520
Other 2,798 2,779
34,415 58,723
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 17,892 14,786
Unamortized investment tax credits (note 2) 2,668 2,826
Other (notes 5 and 8) 6,250 6,923
26,810 24,535
Commitments and contingencies (note 6) - -
Total capitalization and liabilities $214,727 $221,177
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
II-7<PAGE>
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30
1995 1994 1993
(Thousands, except per share amounts)
Operating revenues $180,043 $219,143 $206,050
Cost of gas sold 98,985 133,315 124,677
Operating margin 81,058 85,828 81,373
Operating expenses:
Operation and maintenance 43,486 45,243 42,842
Depreciation and amortization 10,050 9,345 8,912
Taxes -
State gross receipts 5,005 6,326 5,752
Local property and other (note 10) 6,592 6,087 6,716
Federal income (note 2) 3,027 4,369 3,507
68,160 71,370 67,729
Operating income 12,898 14,458 13,644
Other income, net (note 1) 798 409 (3)
Income before interest expense 13,696 14,867 13,641
Interest expense:
Long-term debt 5,086 4,987 5,170
Other 2,197 1,241 1,455
Interest capitalized (102) (107) (79)
7,181 6,121 6,546
Net income 6,515 8,746 7,095
Preferred dividends (note 3) (696) (696) (696)
Net income applicable to
common stock $ 5,819 $ 8,050 $ 6,399
======== ======== ========
Earnings per common share (note 11) $ 4.68 $ 6.47 $ 5.15
======== ======== ========
Weighted average common
shares outstanding (note 11) 1,243.6 1,243.6 1,243.6
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
II-8
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30
1995 1994 1993
(Thousands of Dollars)
Cash provided by (used for)
Operating Activities:
Net income $ 6,515 $ 8,746 $ 7,095
Items not requiring cash:
Depreciation and amortization 10,026 9,321 9,055
Deferred Federal income taxes 2,010 1,109 315
Amortization of investment tax credits (158) (158) (156)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 3,857 (724) (2,585)
Unbilled revenues 240 (90) 564
Deferred gas costs 14,153 2,120 (9,769)
Inventories 1,310 413 (4,084)
Deferred capacity charges - - 1,343
Prepaid and refundable taxes (869) 1,929 296
Prepayments 130 (621) 342
Accounts payable (4,143) (1,524) 1,658
Accrued taxes (194) (156) 174
Refundable gas costs - - (1,767)
Accrued vacation, customer
deposits and other 560 328 551
Net cash provided by operations 33,437 20,693 3,032
Investment activities:
Expenditures for property, plant and
equipment, net (19,124) (19,408) (13,263)
Deferred charges and other (1,649) (775) (967)
Total (20,773) (20,183) (14,230)
Financing activities:
Equity infusion from parent - 1,500 16,500
Issuance of mortgage bonds - 16,000 25,000
Payments on long-term debt (2,081) (466) (16,193)
Decrease in notes payable, net (5,363) (12,100) (8,610)
Cash dividends on preferred shares (note 3) (696) (696) (696)
Cash dividends on common shares (4,577) (4,501) (4,427)
Total (12,717) (263) 11,574
Increase (decrease) in cash and
cash equivalents (53) 247 376
Cash and cash equivalents at beginning
of year 844 597 221
Cash and cash equivalents at end of year $ 791 $ 844 $ 597
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for -
Interest (net of amount capitalized) $ 6,456 $ 5,965 $ 6,883
Income taxes (net of refunds) $ 1,414 $ 1,205 $ 2,300
The accompanying notes are an integral part of these consolidated
financial statements.
II-9
<PAGE>
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
SEPTEMBER 30
1995 1994
(Thousands)
Stockholder's investment (notes 3, 5 and 10):
Common stock, $1 Par, Authorized - 2,500,000 shares
Outstanding - 1,243,598 shares in 1995 and 1994 $ 1,244 $ 1,244
Amount paid in excess of par 37,820 37,883
Retained earnings 31,956 30,714
71,020 69,841
Cumulative preferred stock (notes 3 and 7):
Redeemable 8.7% series, $100 par
Authorized - 80,000 shares
Outstanding - 80,000 shares as of 1995 and 1994 8,000 8,000
Long-term debt (notes 3, 6 and 7):
First Mortgage Bonds, secured by utility property -
Series M, 10 1/4%, due July 31, 2008 10,000 10,000
Series N, 9.63%, due May 30, 2020 10,000 10,000
Series O, 8.46%, due September 30, 2022 12,500 12,500
Series P, 8.09%, due September 30, 2022 12,500 12,500
Series Q, 5.62%, due November 30, 2003 14,400 16,000
Debt refinanced subsequent to year-end (note 3) 15,000 --
Capital Leases 2,032 1,163
76,432 62,163
Less-current portion 1,950 2,085
74,482 60,078
Total capitalization $153,502 $137,919
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
II-10<PAGE>
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON STOCKHOLDER'S INVESTMENT
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1995
Amount
Shares Paid in
Issued and Outstanding Excess Retained
Number Amount of Par Earnings
(Thousands)
Balance, September 30, 1992 1,244 $1,244 $19,966 $25,193
Add (deduct):
Net income - - - 7,095
Cash dividends on common shares
($3.56 per share) - - - (4,427)
Cash dividends on preferred
shares ($8.70 per share) - - - (696)
Equity infusion - - 16,486 -
Balance, September 30, 1993 1,244 1,244 36,452 27,165
Add (deduct):
Net income - - - 8,746
Cash dividends on common shares
($3.62 per share) - - - (4,501)
Cash dividends on preferred
shares ($8.70 per share) - - - (696)
Equity infusion - - 1,500 -
Accrual for Executive
Stock Compensation Plan - - (69) -
Balance, September 30, 1994 1,244 1,244 37,883 30,714
Add (deduct):
Net income - - - 6,515
Cash dividends on common shares
($3.62 per share) - - - (4,577)
Cash dividends on preferred
shares ($8.70 per share) - - - (696)
Accrual for Executive
Stock Compensation Plan - - (63) -
Balance, September 30, 1995 1,244 $1,244 $37,820 $31,956
======= ====== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
II-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the
accounts of The Providence Gas Company and its wholly-owned subsidiary
(the Registrant or ProvGas). Revenues from the natural gas
distribution business are reflected in the accompanying consolidated
statements of income to arrive at operating income. Results of
nonutility operations are presented after operating income in the
accompanying consolidated statements of income. All significant
intercompany transactions have been eliminated in consolidation.
Regulation. The Registrant is subject to regulation by the Rhode
Island Public Utilities Commission (RIPUC). The accounting policies
of ProvGas conform to generally accepted accounting principles as
applied in the case of regulated public utilities and are in
accordance with the regulators' accounting requirements and
rate-making practices.
Operating Revenues. Operating revenues consist principally of gas
sales. The gas company records accrued utility revenues based on
estimates of gas volumes consumed and not billed at the end of an
accounting period in order to match revenues with related costs.
Lease Accounting. The Registrant leases water heaters and other
appliances to customers under finance leases. The Registrant
recognizes the profits associated with these leases when the sale is
made, after providing reserves for unearned income, doubtful accounts
and warranty repairs.
Gas Plant. Gas plant is stated at the original cost of
construction. In accordance with the uniform system of accounts
prescribed by the RIPUC, the difference between the original cost of
gas plant acquired and the cost to ProvGas is recorded as a Utility
Plant Acquisition Adjustment and is being amortized over periods
ranging from 1-24 years.
Depreciation. Depreciation is provided on the straight-line basis
at rates designed to amortize the cost of depreciable plant over its
estimated useful life. The composite depreciation rate expressed as
a percentage of the average depreciable gas plant in service was
approximately 3.75 percent for all years presented.
The Company retires property units by charging original cost, cost
of removal; including environmental investigation and remediation
costs; and salvage value to accumulated depreciation.
Cost of Gas Adjustment. The Registrant has a Cost of Gas Adjustment
(CGA) clause which allows for the adjustment of rates charged to
customers in order to recover actual gas costs incurred, including
demand and commodity charges. The CGA provides for reconciliation of
total gas costs billed with the actual cost of gas recorded. Any
excess or deficiency in amounts billed as compared to costs is
deferred and either refunded to, or recovered from, the customers over
a subsequent period.
Allowance for funds used during construction. The Registrant
capitalizes interest and an allowance for equity funds in accordance
with established policies of the RIPUC. The rates used are based on
the actual cost of debt and the allowed equity return. Interest
capitalized is shown as a reduction of interest expense and the equity
allowance is included in other income.
Deferred charges and other assets. The Registrant defers and
amortizes certain costs in a manner consistent with authorized or
probable rate making treatment. Deferred financing costs are
amortized over the life of the security while the remaining deferred
charges and other assets are amortized over a recovery period
specified by the RIPUC.
II-12
Deferred Charges Include the following:
1995 1994
Cost of fuel assistance program $ 1,836 $ 1,885
Restructuring program 1,600 1,600
Pension costs 6,279 5,890
Unamortized debt expense 2,217 2,422
Post retirement benefits 1,041 708
Deferred rate case expense 798 368
Pipeline interconnection costs 625 921
Other deferred charges 1,831 1,492
Total $ 16,227 $ 15,286
======== ========
Temporary Cash Investments. Temporary cash investments are short-
term, highly liquid investments with a maturity to the Registrant of
not more than 90 days.
Reclassifications. Certain prior year amounts have been
reclassified for consistent presentation with the current year.
2.FEDERAL INCOME TAXES
In 1994, the Registrant adopted the Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes", which
requires an asset and a liability approach to accounting for income
taxes. Under the provisions of SFAS No. 109, deferred taxes are
provided for all temporary differences.
When implementing SFAS No. 109, the Registrant reduced deferred taxes
that were previously provided at rates higher than the current 34
percent tax rate. Additional deferred taxes and prepaid taxes were
also provided for certain temporary differences previously not
provided. These adjustments to deferred taxes will be returned to or
collected from customers in the future. Accordingly, the Registrant
has recorded a net regulatory liability corresponding to the tax
adjustments. The implementation of SFAS No. 109 has had no impact on
the Registrant's results of operations or cash flows.
The following is a summary of the provision for Federal income taxes
for the three years ended September 30:
(thousands of dollars) 1995 1994 1993
Current $ 1,288 $ 3,333 $ 2,772
Deferred 2,010 1,109 866
Total Federal income tax
provision $ 3,298 $ 4,442 $ 3,638
======= ======= =======
Income tax is charged to the following:
Charged to operating
expenses $ 3,027 $ 4,369 $ 3,507
Included in other
income, net 271 73 131
Total Federal income tax
provision $ 3,298 $ 4,442 $ 3,638
======= ======= =======
The effective Federal income tax rates and the reasons for their
differences from the statutory Federal income tax rates are as
follows:
II-13
1995 1994 1993
Statutory Federal income tax
rates 34.0% 34.0% 34.0%
Effect of change of
statutory rate to
35% - .3 -
Reversing temporary differences (.1) (.4) (.4)
Impact of equity allowance-
AFUDC - - .2
Amortization of investment
tax credits (.6) (.4) (.5)
Other .3 .1 .6
Effective Federal income tax
rate 33.6% 33.6% 33.9%
==== ==== ====
The Registrant's deferred tax assets and liabilities for each of
the two years in the period ended September 30 are the result of the
following temporary differences:
1995 1994
(thousands of dollars)
Long-term deferred taxes
Tax Assets
Unamortized ITC $ 934 $ 989
Other 453 820
Tax Liabilities
Property related (17,183) (14,868)
Pension costs (614) (659)
Deferred charges (1,482) (1,068)
Net deferred tax liability included in
accompanying consolidated balance
sheets $(17,892) $(14,786)
======== ========
Prepaid Taxes
Tax assets
Accounts receivable reserves $ 785 $ 913
Property tax reserves 1,091 985
Alternative minimum tax - 138
Other 803 752
Tax liabilities
Employee severance (541) (409)
Other (121) (86)
Net prepaid taxes 2,017 2,293
Prepaid gross receipts
tax and other 3,255 1,214
Net prepaid and refundable taxes
included in accompanying consolidated
balance sheets $ 5,272 $ 3,507
======= =======
During 1994, the Registrant received permission from the Internal
Revenue Service to change its tax year to a fiscal year ended
September 30. Previously, the Registrant was a calendar year tax
payer.
Investment tax credits are amortized through credits to other
income over the estimated lives of related property.
II-14
3. CAPITALIZATION
A. Long-term Debt
In December 1995, the Registrant issued $15 million of First Mortgage
Bonds. These First Mortgage Bonds are designated as Series R (7.5%)
and will mature in December 2025. The net proceeds provided by this
indebtedness were used to paydown the Registrant's short-term debt.
The accompanying consolidated balance sheets, statements of
capitalization and related disclosures have been prepared to reflect
the issuance of this debt and the subsequent retirement of the note
payable.
The terms of the various indentures, as supplemented, under which the
First Mortgage Bonds were issued, contain restrictions which provide
that dividends may not be paid on common stock of the Registrant under
certain conditions. Approximately $14 million of the Registrant's
retained earnings were available for dividends under the most
restrictive terms of the First Mortgage Bond indenture.
The Registrant's First Mortgage Bonds are secured by a lien on both
tangible and real property.
As of September 30, 1995, the annual sinking fund requirements and
maturities of long-term debt for the next five fiscal years are
$1,600,000 in 1996, $1,600,000 in 1997, $2,509,000 in 1998, $2,509,000
in 1999, and $2,509,000 in 2000.
B. Redeemable Preferred Stock
The Registrant's preferred stock, which consists of 80,000 shares of
$100 par value, has an 8.7 percent cumulative annual dividend rate
payable on a quarterly basis, and has no voting power or privileges
unless a default in the payment of dividends or sinking fund
obligations occurs. The stock is subject to a cumulative annual
sinking fund requirement of 16,000 shares per year at par ($1,600,000)
plus accrued or unpaid dividends commencing at the end of 1997.
4.NOTES PAYABLE
The Registrant meets seasonal cash requirements and finances its
construction program on an interim basis through short-term bank
borrowings. As of September 30, 1995, the Company had lines of credit
totaling $58,000,000 ($40,500,000 committed) with borrowings
outstanding of $19,337,000. The accompanying consolidated balance
sheets reflect an adjusted note payable balance of $4,337,000
reflecting the paydown of short-term borrowings with proceeds from a
First Mortgage Bond issuance as discussed in Footnote 3. The
Registrant pays a fee for its committed lines of credit rather than
maintaining compensating balances. The weighted average interest rate
for borrowings outstanding at the end of the years was 5.98% in 1995,
3.83% in 1994 and 3.51% in 1993.
5.EMPLOYEE BENEFITS
A. Retirement Plans
The Registrant has two pension plans providing retirement benefits for
substantially all of its employees. The benefits under the plans are
based on years of service and the employee's final average
compensation. It is the Registrant's policy to fund at least the
minimum required contribution.
The following table sets forth the funding status of the pension plans
and amounts recognized in the Registrant's consolidated balance sheets
at September 30, 1995 and 1994:
II-15
(In Thousands) 1995 1994
Accumulated benefit obligation, including
vested benefit obligation of $(36,887) as
of September 30, 1995 and $(35,693) as
of September 30, 1994 $(38,352) $(37,076)
======== ========
Projected benefit obligation for service
rendered to date $(50,515) $(49,684)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 58,003 50,840
Projected benefit obligation less than
plan assets 7,488 1,156
Unrecognized net (gain) loss (12,593) (5,426)
Unrecognized prior service cost 1,164 1,271
Unrecognized net transition asset
being recognized over 15 years
from October 1, 1985 (681) (817)
Net accrued pension cost included in other
deferred credits and accounts payable at
September 30, 1995 and 1994 $ (4,622) $ (3,816)
======== ========
Net pension cost for fiscal years 1995, 1994 and 1993 included the
following components (in thousands):
1995 1994 1993
Service cost $ 1,535 $ 1,582 $ 1,494
Interest cost on benefit obligations 3,857 3,800 3,661
Annual return on plan assets (10,293) 994 (8,885)
Net amortization and deferral 5,708 (6,227) 4,447
Net periodic pension cost 807 149 717
Adjustments due to regulatory
action (408) (126) (637)
Net periodic pension cost recognized $ 399 $ 23 $ 80
======= ======= =======
The discount rate and rate of increase in future compensation levels
used for all years presented in determining the projected benefit
obligation were 8 percent and 6 percent, respectively. The expected
long-term rate of return on assets was 9 percent.
The Registrant recovers pension costs in rates when such costs are
funded. Therefore, the amount by which funding differs from pension
expense, determined in accordance with generally accepted accounting
principles, is deferred and recorded as a regulatory asset or
liability.
B. Post-retirement Benefits Other Than Pensions
The Registrant currently offers retirees who have attained age 55 and
worked 5 years for the Registrant healthcare and life insurance
benefits during retirement (The Plan). These benefits are similar to
the benefits offered to active employees. Although retirees are not
required to make contributions to the Plan currently, future
contributions may be required if the cost of the Plan exceeds certain
limits.
On October 1, 1993, the Registrant adopted the provisions of the
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions" (SFAS No.
106). SFAS No. 106 requires that these benefits be accrued over the
service life of covered employees. Prior to the adoption of SFAS No.
106, the Registrant accounted for these costs when paid. These costs
were $604,000 in 1993.
Upon adoption of SFAS No. 106, the Registrant calculated an
unrecognized transition obligation of $10,526,000, which the
Registrant will recognize over a 20-year amortization period.
II-16
The Registrant funds its SFAS No. 106 expense to a Voluntary Employee
Benefit Association (VEBA) Trust. Contributions to the VEBA Trust
were approximately $1,561,000 in 1995 and $1,566,000 in 1994,
respectively.
The Registrant recovers its SFAS No. 106 costs in rates to the extent
allowed by the RIPUC. The RIPUC generally allows such costs to be
recovered if amounts are funded into tax favored investment funds,
such as the VEBA Trust. Accordingly, the Registrant will fully
recover its 1995 and 1994 SFAS No. 106 expense of $1,561,000 and
$1,566,000 because such amounts were funded into the VEBA Trust. Of
the total SFAS No. 106 costs, $1,231,000 and $855,000 were recovered
in rates during 1995 and 1994, respectively. The cumulative
unrecovered difference of $1,041,000 has been deferred and will be
recovered in future years.
The Plan's costs and accumulated post-retirement benefit obligation
for 1995 are calculated by the Registrant's actuaries using
assumptions and estimates which include:
Percent
Healthcare cost annual growth rate 12.6
Healthcare cost annual growth rate - long-term 6.0
Expected long-term rate of return (union) 5.5
Expected long-term rate of return (non-union) 8.5
Discount rate 8.0
The healthcare cost annual growth rate significantly impacts the
estimated Plan obligation and annual expense. For example, in 1995,
a 1 percent change in the above rates would change the obligation by
$838,000 and would change the annual expense by $91,000.
The obligations and assets of the Plan at September 30, 1995 and 1994
are:
1995 1994
Accumulated post-retirement
benefit obligation:
Current retirees $ (7,425,800) $ (6,518,300)
Active employees-eligible for
benefits (844,700) (795,100)
Active employees (3,694,600) (3,618,700)
Total post-retirement benefit
obligation (11,965,100) (10,932,100)
Plan assets at fair value 2,080,300 856,400
Unfunded post-retirement benefit
obligation (9,884,800) (10,075,700)
Unrecognized transition
obligation 9,473,600 9,999,900
Unrecognized net (gain) or loss 402,300 75,800
Accrued post-retirement
benefit obligations included
in the accompanying consolidated
balance sheet $ (8,900) $ --
=========== ============
The Registrant's actuarial determined Plan costs for 1995 and 1994
include:
1995 1994
Service cost $ 229,400 $ 238,400
Interest cost 909,200 834,500
Actual return on plan assets (28,300) (36,600)
Amortization and deferral 450,200 529,700
Total annual plan costs $ 1,560,500 $1,566,000
=========== ==========
II-17
C. Supplemental Retirement Plans
The Registrant provides certain supplemental retirement plans for key
employees. The projected benefit obligation is approximately $688,000
which is being accrued over the service period of these key employees.
The key employee supplemental retirement plans are unfunded. The
Registrant expensed $150,000, $44,000 and $39,000 related to these
benefits in 1995, 1994 and 1993, respectively.
D. Performance and Equity Incentive Plan
During 1993, the Board of Directors, with subsequent approval of
Providence Energy's common shareholders, adopted the Providence Energy
Corporation Performance and Equity Incentive Plan (the Plan). The
Plan provides that up to 225,000 shares of common stock may be granted
to key employees, including employees of the Registrant, at no cost
to the employees. Key employees, who received common shares, are
entitled to receive dividends, but assumption of full beneficial
ownership is contingent upon future service of the employee. The Plan
also provides for cash compensation to key employees.
The executive compensation incentive awards paid by the Registrant
under this Plan totaled approximately $248,000 for 1995, $240,000 for
1994 and $260,000 for 1993. Amounts paid in cash are charged to
expense when earned, however, amounts paid in restricted stock are
deferred and amortized to expense over a five-year period.
Of the $260,000 1993 award, $177,000 was paid in cash during fiscal
1994. Of the $240,000 1994 award, $153,000 was paid in cash during
fiscal 1995. The Registrant estimates $167,000 of the 1995 award will
be paid in cash during 1996. Grant shares totaling 5,371 and 4,902
were purchased by the Registrant for key employees during 1995 and
1994, respectively.
6.COMMITMENTS AND CONTINGENCIES
A. Legal Proceedings
The Registrant is involved in legal and administrative proceedings in
the normal course of business, including certain proceedings involving
material amounts in which claims have been or may be made. However,
management believes, after review of insurance coverage and
consultation with legal counsel, that the ultimate resolution of the
legal proceedings to which it is or can at the present time be
reasonably expected to be a party, will not have a materially adverse
effect on the Registrant's results of operations or financial
condition.
B. Leases
The Registrant has a capital lease with Algonquin Gas Transmission
Company (Algonquin) for storage space in a liquefied natural gas (LNG)
tank. The capital lease arrangement also provides that Algonquin
lease from the Registrant, for a corresponding term at an annual
amount of $150,000, the land on which the tank is situated. The
Registrant also leases certain information systems equipment under
capital leases.
Property under Capital Leases:
(thousands of dollars) 1995 1994
Gas plant $6,116 $ 6,116
Information systems 1,551 --
Accumulated depreciation 5,659 5,256
$2,008 $ 860
====== =======
II-18
Commitments for Capital Leases:
LNG Computer
(thousands of dollars) Storage Equipment Total
1996 $ 155 $ 373 $ 528
1997 134 373 507
1998 136 373 509
1999 136 373 509
2000 136 186 322
2001-2005 430 - 430
$1,127 $1,678 2,805
====== ======
Amounts representing interest 773
Amounts representing principal $2,032
======
C. OPERATING LEASES
The Registrant also leases facilities and equipment under operating
leases with a total future obligation of $530,000 as of September 30,
1995.
D. GAS SUPPLY RESTRUCTURING
Federal Energy Regulatory Commission (FERC) Order 636 and other
related orders (the Orders) have significantly changed the structure
and types of services offered by pipeline transportation companies.
The most significant components of the restructuring occurred in
November 1993. In response to these changes, the Registrant has
successfully negotiated new pipeline transportation and gas storage
contracts.
At the same time, a number of contracts with gas suppliers have been
negotiated to complement the transportation and storage contracts.
The portfolio of supply contracts is designed to be market responsive
and is diversified with respect to contract lengths, source location
and other contract terms. On a periodic basis, the Registrant reviews
all of its contracts to ensure a diverse, secure, flexible and
economical supply portfolio is maintained.
To meet the requirements of the Orders, the pipelines have incurred
significant costs, collectively known as transition costs. The
majority of these costs will be reimbursed by the pipeline's customers
including the Registrant. Based upon current information, the
Registrant anticipates the Registrant's transition costs to net
between $17 million and $19 million of which $12.6 million has been
included in the CGA and is currently being collected from customers.
The remaining minimum obligation of $4.4 million has been recorded in
the accompanying consolidated balance sheet along with a regulatory
asset anticipating future recovery through the CGA.
The Registrant's ultimate liability may differ from the above
estimates based on FERC settlements with the Registrant's pipeline
transportation suppliers. FERC has approved settlements with three
of its pipelines, which account for the bulk of the Registrant's
transition costs. Negotiations are continuing on one additional
pipeline, and based on the information available, the Registrant
believes that its current range for transition costs is reasonable.
E.ENVIRONMENTAL
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 expanding 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.
II-19
At September 30, 1995, the Registrant is aware of three sites at which
future costs may be incurred.
The Registrant has been designated as a potentially responsible party
(PRP) under the Comprehensive Environmental Response Compensation and
Liability Act of 1980 at two sites at Plympton, Massachusetts on which
waste material is alleged to have been deposited by disposal
contractors employed in the past either directly or indirectly by the
Registrant and other PRPs. With respect to one of the Plympton sites,
the Registrant has joined with other PRPs in entering into an
Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant,
in connection with both Plympton sites, are not anticipated to be
material to the financial condition of the Registrant.
During 1995, the Registrant voluntarily began a study at its primary
gas distribution facility located in Providence. In accordance with
state laws, such a voluntary study is monitored by the Rhode Island
Department of Environmental Management. The purpose of this study is
to determine the extent of environmental contamination on the site,
if any. The study is continuing, and although results are not
conclusive, preliminary findings indicate that clean-up may be
required. The level of clean-up is likely to vary significantly
depending upon the proposed future use of the site. In fact, if the
site remains in its present use, only minimal clean-up may be
required.
As of September 30, 1995, the Registrant cannot estimate the future
cost of investigation and clean-up as a result of the uncertainties
discussed. As of September 30, 1995, approximately $590,000 had been
spent on studies at this site.
In its rate case filed in February 1995, the Registrant 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. Accordingly,
environmental investigation costs of approximately $841,000 have been
charged to the accumulated depreciation reserve at September 30, 1995.
Management believes that this rate recovery mechanism is appropriate
for recovery of future costs. Should future developments warrant
additional rate recovery mechanisms, management will seek such
recovery.
In addition to rate recovery, management has a program to ascertain
the possibility of recovery under prior insurance coverage. Also,
management has begun discussions with other parties who may assist the
Registrant in paying future costs incurred at the above sites.
Management believes that its program for managing environmental issues
combined with rate recovery, possible insurance 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 three sites.
F.FUEL ASSISTANCE PROGRAM
The Registrant participates in the State of Rhode Island's Fuel
Assistance Program, the Percentage of Income Payment Plan. As a
result, the Registrant has agreed to accept partial payment on certain
customer accounts from various state agencies. As of September 30,
1995, $2.5 million was due from the State of Rhode Island related to
gas consumed by customers over the last two years.
G. LEASE RECEIVABLES
In prior years, the Registrant sold to a financial institution lease
receivables of hot water heaters and conversion burners installed at
customers homes or businesses. These receivables were sold with
recourse limited to default by the lessee. In the event of default,
the Registrant would recognize as a loss the excess of the receivable
balance, net of established reserves for such default over the value
of the equipment. The balance of these receivables as of September
30, 1995 is approximately $1,062,000.
II-20
7.FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value disclosures for the following financial instruments:
Cash, Cash Equivalents and Short-term Debt
The carrying amount approximates fair value due to the short-term
maturity of these instruments.
Long-term Debt and Preferred Stock
The fair value of long-term debt and preferred stock is estimated
based on currently quoted market prices for similar types of issues.
The carrying amounts and estimated fair values of the Registrant's
financial instruments at September 30 are as follows:
1995
Carrying Fair
(in thousands) Amount Value
Cash and cash equivalents $ 791 $ 791
Short-term debt* 4,337 4,337
Long-term debt* 76,432 81,816
Preferred stock 8,000 8,800
1994
Carrying Fair
(in thousands) Amount Value
Cash and cash equivalents $ 844 $ 844
Short-term debt 24,700 24,700
Long-term debt 62,163 64,565
Preferred stock 8,000 8,000
* Adjusted for the issuance of $15 million in First Mortgage Bonds,
Series R subsequent to year-end.
The difference between the carrying amount and the fair value of the
Registrant's preferred stock and long-term debt, if they were settled
at amounts reflected above, would be recovered in the Registrant's
rates over a prescribed amortization period. Accordingly, any
settlement would not result in a material impact on the Registrant's
financial position or results of operations.
8.RESTRUCTURING
In June 1994, the Registrant, following a six month study of its major
processes, realigned its personnel to meet the existing and future
challenges associated with an increasingly competitive energy
marketplace. The intent of the restructuring was to significantly
improve the Registrant's customer services, lower operating costs and
increase operating efficiencies.
Approximately 30 people were separated from the Registrant, while
approximately 18 new employees have been hired to fill newly defined
positions. The employees bring skill, expertise and experiences to
the Registrant not previously available within its work force.
The direct cost of this realignment is estimated to be about $1
million, net of tax. A significant portion of this $1 million is
severance pay and related benefits for personnel who were separated
during 1994. Substantially, all costs have been paid as of September
30, 1995. The Registrant has discussed the reorganization with the
RIPUC and based on prior RIPUC allowance of similar costs, the
Registrant deferred these costs in anticipation of recovery in its
next rate case. (See Footnote 10 for subsequent event.)
II-21
9.RATE CHANGES
In February 1995, the Registrant filed for rate relief requesting an
approximate 8 percent general rate increase. The major issues
contributing to the rate request were an increase in depreciation due
to capital spending, an increase in working capital needs and an
increase in capital expenditures. (See Footnote 10 for subsequent
event.)
10. SUBSEQUENT EVENT - RATE ORDER
On November 17, 1995, the RIPUC issued its decision on the rate
request made by the Registrant in February 1995. In its decision, the
RIPUC authorized the Registrant to increase its rates to recover
additional annual revenues in the amount of $3,990,000. Subsequent
to the issuance of the rate decision, the RIPUC approved the
Registrant's motion to reconsider a revenue adjustment of $171,572.
That approval increases the overall rate increase to $4,161,572.
Additionally, as a result of the order, the Registrant will record
several adjustments to its first quarter 1996 financial statements.
Specifically:
a) The Registrant will begin calculating property tax expense for
rate purposes based on the current year's expense plus an estimate
of one year's increase in expense. Previously, the Registrant was
required to estimate two year's increase in expense. As a result,
the Registrant will reduce its regulatory liability for one year's
property tax expense resulting in a one time gain of approximately
$3,900,000 before tax.
b) The Registrant will write-off and not recover the $1,600,000,
before tax, of restructuring costs previously deferred. (See
Footnote 8.) The RIPUC had previously allowed the Registrant
recovery of similar costs, but decided differently upon
reconsideration of this issue.
c) The Registrant will write-off approximately $400,000, before tax,
of previously deferred rate case expenses. (See Footnote 1.)
d) The Registrant will write-off approximately $461,000, before tax,
of construction expenditures previously capitalized. These costs
were capitalized in accordance with generally accepted accounting
principles and were based on Federal Energy Regulatory Commission
guidance on accounting for such costs. The RIPUC agreed that such
costs could be capitalized beginning in 1996, but did not allow
recovery of previously capitalized costs.
The net effect of the above adjustments will be recorded in the
Registrant's first quarter financial statements, and based on
management's current estimates, will not result in a material impact.
II - 22<PAGE>
11.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited quarterly financial information for the
two years ended September 30, 1995 and 1994. Quarterly variations
between periods are caused primarily by the seasonal nature of gas
sales and the availability of gas.
(thousands, except
per share amounts)
Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30
Fiscal 1995
Operating revenues $48,282 $64,401 $37,397 $29,963
Operating income (loss) 4,843 7,501 867 (313)
Net income (loss)
applicable to
common stock 3,169 5,553 (820) (2,083)
Net income (loss)
applicable to
common stock
per share* 2.55 4.47 (.66) (1.68)
Fiscal 1994
Operating revenues $62,055 $81,813 $41,917 $33,358
Operating income (loss) 4,972 7,729 552 1,205
Net income (loss)
applicable to common
stock 3,625 6,180 (1,089) (666)
Net income (loss)
applicable to
common stock
per share* 2.91 4.97 (.88) (.53)
* Calculated on the basis of weighted average shares outstanding during
the quarter.
II - 23<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of the Providence Gas Company:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of PROVIDENCE GAS COMPANY (a
Rhode Island corporation and a wholly owned subsidiary of Providence
Energy Corporation) as of September 30, 1995 and 1994, and the related
consolidated statements of income, changes in common stockholder's
investment and cash flows for each of the three years in the period ended
September 30, 1995. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
the schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Providence Gas Company as of September 30, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years
in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 2 and 5 to the accompanying financial
statements, effective October 1, 1993, the Company changed its method of
accounting for income taxes and post-retirement benefits other than
pensions.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the
accompanying index to the financial statements is presented for purposes
of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein, in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
November 17, 1995
II-24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
II-25<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is furnished with respect to the
executive officers of the Registrant:
Year Office
Name and Age Office First Held
James H. Dodge (55) Chairman, President and Chief
Executive Officer 1992
James DeMetro (47) Vice President Energy Services 1992
Gary S. Gillheeney (40) Vice President Financial
and Information Services,
Treasurer and Assistant
Secretary 1994
Alycia L. Goody (43) Vice President, General Counsel and
Corporate Secretary 1994
Patricia O. Keene (50) Vice President Customer Activities 1994
William D. Mullin (47) Vice President Corporate Relations 1994
Robert W. Owens (47) Vice President Operations
1994
Bruce G. Wilde (49) Vice President Human Resources
and Assistant Secretary 1994
Mr. Dodge was elected President and Chief Executive Officer in August
1990 after the retirement of Louis R. Hampton. Mr. Dodge subsequently
became Chairman of the Board in January 1992. Prior to his employment
with the Registrant, he was President and Chief Executive Officer of
Vermont Gas Systems, Inc. Vermont Gas Systems, Inc. is a regulated
public utility which sells natural gas to a portion of the population of
the State of Vermont.
Mr. DeMetro was elected Vice President Energy Services in March 1992.
For more than five years prior thereto, Mr. DeMetro served the Brooklyn
Union Gas Company, a regulated natural gas utility, in various management
positions, most recently as Manager, Rates and Regulations.
Mr. Gillheeney was elected Vice President Financial and Information
Services, Treasurer and Assistant Secretary in January 1994. For more
than five years prior thereto, Mr. Gillheeney served the Registrant in
various management positions, most recently as Assistant Treasurer and
Controller.
Ms. Goody was elected Vice President, General Counsel and Corporate
Secretary in December 1994. For four years prior thereto, Ms. Goody
served as General Counsel and Corporate Secretary. For two more years
prior to that, Ms. Goody served the Registrant as Corporate Counsel.
Ms. Keene was elected Vice President Customers Activities in December,
1994. For more than five years prior thereto, Ms. Keene served as
General Manager for NYNEX in various capacities.
Mr. Mullin was elected Vice President Corporate Relations in January
1994. For five years prior to his current position, he served the
Registrant in various management positions, most recently as Vice
President, Operations.
Mr. Owens was elected Vice President Operations in January 1994. For
more than five years prior thereto, Mr. Owens served in various
management positions, most recently as Vice President, Treasurer and
Chief Financial Officer.
Mr. Wilde was elected Vice President Human Resources and Assistant
Secretary in May 1994. For more than five years prior thereto, Mr. Wilde
served the Registrant in various management positions, most recently as
Assistant Vice President for Personnel.
III - 1
PART III
DIRECTORS OF THE REGISTRANT
The following information is furnished with respect to the Directors
of the Registrant.
Name Director Since Expiration of Term
Gilbert R. Bodell, Jr. 1980 1995
James H. Dodge 1991 1997
John H. Howland 1993 1996
Douglas H. Johnson 1993 1996
Dorothy G. Kramer 1976 1997
Paul F. Levy 1995 1998
Romolo A. Marsella 1993 1996
M. Anne Szostak 1995 1998
Kenneth W. Washburn 1975 1997
W. Edward Wood 1995 1998
Gilbert R. Bodell, Jr. is Chairman and former President, Frontier
Manufacturing Company (textiles); former Vice President, Valley Lace Co.
and Esten Dyeing and Finishing Co., Inc.
James H. Dodge has been Chairman since January, 1992 and President and
Chief Executive Officer of the Registrant since August, 1990; from 1984
through August, 1990: President and Chief Executive Officer of Vermont
Gas Systems, Inc. (a regulated natural gas utility) and affiliated
companies.
John H. Howland is President and Chief Operating Officer, Original
Bradford Soap Works, Inc.
Douglas H. Johnson is Vice President and Managing Partner, M. Van
Leesten & Johnston, Inc. (business and urban planning consultants) since
October 1991; from 1980 to October, 1991: President and Chief Executive
Officer, Peerless Precision, Inc. (aerospace manufacturing company).
Dorothy G. Kramer is a retired Senior Vice President, Treasurer and
Corporate Secretary, Taco, Inc. (manufacturers of pumping, heat transfer
and hydronic control equipment).
Paul F. Levy is Adjunct Professor, Massachusetts Institute of
Technology. From 1992 to 1995, Visiting Lecturer; from 1987 to 1992:
Executive Director, Massachusetts Water Resources Authority (a public
authority).
Romolo A. Marsella is President, Marsella Development Corporation (real
estate development).
M. Anne Szostak is Senior Vice President, Fleet Financial Group;
Chairman of the Board, Fleet Bank, Maine. From 1991 to 1994: President
and Chief Executive Officer, Fleet Bank of Maine; and from 1988 to 1991:
Vice President, Fleet Financial Group.
Kenneth W. Washburn is Chairman and President, Union Wadding Company
(manufacturers of non-woven textiles).
W. Edward Wood is President, BDS Management Group (management and
consulting services to a variety of private businesses); from November
1990 to May 1991: Chief of Staff to Governor-elect and Governor of Rhode
Island: from January to November 1990: Chief of Staff, Phoenix
Associates III (private investment group).
III-2
ITEM 11. EXECUTIVE COMPENSATION
For the information called for by this item, reference is made to pages
5 to 10 of the Providence Energy Corporation's proxy statement filed
December 19, 1995 with the Securities and Exchange Commission for the
annual meeting of shareholders to be held January 18, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable. All of the Registrant's voting securities are held by
Providence Energy Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
III-3
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
THE PROVIDENCE GAS COMPANY
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules
Balance Sheets--September 30, 1995 and 1994
Statements of Income for the years ended September 30, 1995, 1994 and 1993
Statements of Cash Flows for the years ended September 30, 1995, 1994 and
1993
Statements of Capitalization--September 30, 1995 and 1994
Statements of Changes in Common Stockholders' Investment for the years
ended September 30, 1995, 1994 and 1993
Notes to Financial Statements
Report of Independent Public Accountants
II. Reserves for the years ended September 30, 1995, 1994 and 1993.
Schedules I to XIII not listed above are omitted as not applicable
or not required under Regulation S-X.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the latest quarter of the
Registrant's fiscal year ended September 30, 1995.
(c) Exhibits
The following exhibits are filed as part of this report:
3.1 Charter (incorporated by reference to Exhibit 3.1 to the
Registrant's registration statement on Form S-1 (Registration No.
2-72726)).
3.2 Bylaws. (Filed as Exhibit 3.2 to the Report on Form 10-K of the
Registrant in Form 10-K for the year ended September 30, 1993,
incorporated herein by this reference.)
4.1 Indenture dated as of August 1, 1981 from the Registrant to St. Louis
Union Trust Company, Trustee, filed as Exhibit 4.1 to Registration
Statement of the Registrant on Form S-1 (Registration No.
2-72726), incorporated herein by this reference.
4.2 First Supplemental Indenture dated as of May 1, 1986 from the
Registrant to Centerre Trust Company of St. Louis, Trustee (filed as
Exhibit 4 (b) to Registration Statement of the Registrant on Form S-3
(Registration No. 33-5023), incorporated herein by this reference).
4.2 Thirteenth Supplemental Indenture dated as of May 1, 1986 from the
(a) Registrant to Rhode Island Hospital Trust National Bank.
4.3 First Mortgage Indenture dated as of January 1, 1922, as
supplemented by First through Twelfth Supplemental Indentures,
(incorporated by reference to Exhibit 10.10 to the Registrant's
registration statement on Form S-1 (Registration No. 2-72726)).
4.4 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures dated
as of August 1, 1988, June 1, 1990 and November 1, 1992,
respectively (incorporated by reference to Exhibit 4 to the report
of Providence Energy Corporation (Commission File No. 1-10032) to
the Securities and Exchange Commission on Form 10-Q for the quarter
ended March 31, 1993).
4.5 Seventeenth Supplemental Indenture dated as of November 1, 1993.
(Filed as Exhibit 4.5 to the report of the Registrant in Form 10-K
for the year ended September 30, 1993, incorporated herein by this
reference.)
4.6 Eighteenth Supplemental Indenture dated as of December 1, 1995.
IV - 1
10.1 Material contracts listed in Exhibits 10 (a) through 10 (ff)
(excluding Exhibits 10 (x), 10 (y), 10 (cc) and 10 (dd)) to
Registration Statement of Providence Energy Corporation on Form S-2
(Registration No. 33-24125), incorporated herein by this reference.
10.2 Management contract dated December 19, 1994 between James H. Dodge,
Chairman, President, and Chief Executive Officer of the Registrant.
(Filed as Exhibit 10.2 to the report of the Registrant in Form 10-Q
for the quarter ended December 31, 1994, incorporated herein by this
reference.)
10.5 Non-firm Margin Sharing Agreement. (Filed as Exhibit 10.3 to the
report of the Registrant in Form 10-K for the year ended September 30,
1992, incorporated herein by this reference.)
10.6 Management contract dated December 19, 1994 between James DeMetro,
Vice President Energy Services of the Registrant. (Filed as Exhibit
10.6 to the report of the Registrant in Form 10-Q for the quarter
ended December 31, 1994, incorporated herein by this reference.)
10.7 Management contract dated December 19, 1994 between Robert W. Owens,
Vice President Operations of the Registrant. (Filed as Exhibit 10.7
to the report of the Registrant in Form 10-Q for the quarter ended
December 31, 1994, incorporated herein by this reference.)
10.8 Management contract dated December 19, 1994 between Gary S.
Gillheeney, Vice President, Financial and Information Services,
Treasurer and Assistant Secretary of the Registrant. (Filed as
Exhibit 10.8 to the report of the Registrant in Form 10-Q for the
quarter ended December 31, 1994, incorporated herein by this
reference.)
10.9 Management contract dated December 19, 1994 between William D.
Mullin, Vice President Corporate Relations of the Registrant. (Filed
as Exhibit 10.9 to the report of the Registrant in Form 10-Q for the
quarter ended December 31, 1994, incorporated herein by this
reference.)
13 Portions of the Annual Report to shareholders for the fiscal year
ended September 30, 1995. (Pages 14 through 35.)
22 Subsidiaries of the Registrant.
IV-2
Schedule II
PROVIDENCE GAS COMPANY
RESERVES FOR THE YEARS ENDED
SEPTEMBER 30, 1995, SEPTEMBER 30, 1994 AND SEPTEMBER 30, 1993
(Thousands of Dollars)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/94 to Operations Add (Deduct) Created 9/30/95
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,606 $3,113 $ -- $3,803 $ 1,916
Allowance for lease
receivables -
current 347 -- 34 313
other 80 -- -- -- 80
Total $ 3,033 $3,113 $ -- $ 3,837 $ 2,309
======= ====== ======= ======= =======
Allowance for lease
receivables -
long-term $ 951 $ -- $ (200) $ 100 $ 651
======= ====== ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $14,786 $2,010 $ 837 $ (259)(C)17,892
Unamortized investment
tax credit 2,826 -- -- 158 2,668
Other-
Liability and
damage reserve 421 400 -- 487 334
Other 6,502 621 1,486(A) 2,693 5,916
Total other 6,923 1,021 1,486 3,180 6,250
Total deferred
credits and
reserves $24,535 $3,031 $ 2,323 $ 3,079 $26,810
======= ====== ======= ======= =======
IV-3
SCHEDULE II (cont'd)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/93 to Operations Add (Deduct) Created 9/30/94
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,987 $4,930 $ -- $4,311 $ 2,606
Allowance for lease
receivables -
current 381 -- -- 34 347
other 96 -- -- 16 80
Total $ 2,464 $4,930 $ -- $ 4,361 $ 3,033
======= ====== ======= ======= =======
Allowance for lease
receivables -
long-term $ 778 $ 316 $ -- $ 143 $ 951
======= ====== ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $13,423 $6,882 $ -- $5,519 $14,786
Unamortized investment
tax credit 2,984 -- -- 158 2,826
Other-
Liability and
damage reserve 296 145 -- 20 421
Other 5,085 1,166 2,785(B) 2,534 6,502
Total other 5,381 1,311 2,785 2,554 6,923
Total deferred
credits and
reserves $21,788 $8,193 $ 2,785 $8,231 $24,535
======= ====== ======= ====== =======
IV - 3(a)<PAGE>
Schedule II (cont'd)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/92 to Operations Add (Deduct) Created 9/30/93
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,248 $3,927 $ -- $4,188 $ 1,987
Allowance for lease
receivables -
current 418 -- -- 37 381
other -- 96 -- -- 96
Total $ 2,666 $4,023 $ -- $ 4,225 $ 2,464
======= ====== ======= ======= =======
Allowance for lease
receivables -
long-term $ 760 $ 190 $ -- $ 172 $ 778
======= ====== ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $13,108 $ 315 $ -- $ -- $13,423
Unamortized investment
tax credit 3,140 -- -- 156 2,984
Other-
Liability and
damage reserve 146 150 -- -- 296
Other 4,505 1,116 1,744(A) 2,280 5,085
Total other 4,651 1,266 1,744 2,280 5,381
Total deferred
credits and
reserves $20,899 $1,581 $ 1,744 $ 2,436 $21,788
======= ====== ======= ======= =======
(A) Includes advance payments on customers' service agreements and adjustments
to the regulatory pension liability.
(B) Principally a reserve for restructuring charges which was offset
by a deferred regulatory asset. Also reported are advance payments on
customer service agreements and adjustments to the regulatory pension
liability.
(C) Represents adjustment to the regulatory asset and liability for FAS
No. 109 activity.
IV - 3(b)
<PAGE>
Exhibit 22 - SUBSIDIARY OF REGISTRANT
ProvEnergy Investments, Ltd. - Incorporated under the laws of Rhode Island.
IV-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE PROVIDENCE GAS COMPANY
By JAMES H. DODGE
James H. Dodge, Chairman, President and CEO
Date December 26, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
JAMES H. DODGE Chairman, President, and CEO
James H. Dodge (Principal Executive Officer) 12-22-95
GARY S. GILLHEENEY Vice President, Financial 12-22-95
Gary S. Gillheeney and Information Services,
Treasurer and Assistant
Secretary
GILBERT R. BODELL, JR. Director 12-21-95
Gilbert R. Bodell, Jr.
JOHN H. HOWLAND Director 12-21-95
John H. Howland
DOUGLAS H. JOHNSON Director 12-19-95
Douglas H. Johnson
DOROTHY G. KRAMER Director 12-21-95
Dorothy G. Kramer
PAUL F. LEVY Director 12-21-95
Paul F. Levy
ROMOLO A. MARSELLA Director 12-21-95
Romolo A. Marsella
M. ANNE SZOSTAK Director 12-21-95
M. Anne Szostak
KENNETH W. WASHBURN Director 12-21-95
Kenneth W. Washburn
W. EDWARD WOOD Director 12-19-95
W. Edward Wood
IV-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE PROVIDENCE GAS COMPANY
By JAMES H. DODGE
James H. Dodge, Chairman, President and CEO
Date December 26, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
Chairman, President, and CEO
James H. Dodge (Principal Executive Officer)
Vice President, Financial
Gary S. Gillheeney and Information Services,
Treasurer and Assistant
Secretary
Director
Gilbert R. Bodell, Jr.
Director
Louis R. Hampton
Director
John H. Howland
Director
Douglas H. Johnson
Director
Dorothy G. Kramer
Director
Paul F. Levy
Director
Romolo A. Marsella
Director
M. Anne Szostak
Director
Kenneth W. Washburn
Director
W. Edward Wood
IV - 5
<PAGE>
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 791
<SECURITIES> 0
<RECEIVABLES> 13,733
<ALLOWANCES> 2,309
<INVENTORY> 11,403
<CURRENT-ASSETS> 36,434
<PP&E> 247,933
<DEPRECIATION> 85,867
<TOTAL-ASSETS> 214,727
<CURRENT-LIABILITIES> 34,415
<BONDS> 74,400
<COMMON> 71,020
0
8,000
<OTHER-SE> 82
<TOTAL-LIABILITY-AND-EQUITY> 214,727
<SALES> 180,043
<TOTAL-REVENUES> 12,898
<CGS> 0
<TOTAL-COSTS> 98,985
<OTHER-EXPENSES> 65,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,181
<INCOME-PRETAX> 15,925
<INCOME-TAX> 3,027
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,515
<EPS-PRIMARY> 4.68
<EPS-DILUTED> 4.68
</TABLE>
