<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-----------------------------------
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 incorporation (I.R.S. Employer
or organization) Identification No.)
100 WEYBOSSET STREET, PROVIDENCE, RHODE ISLAND 02903
- ----------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(401) 272-5040
- ----------------------------------------------------------------------------
Registrant's telephone number, including area code
- ----------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since
last report)
Indicate by 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 .
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1.00 par value; 1,243,598 shares outstanding at August 13, 1996.
- -------------------------------------------------------------------------------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
JUNE 30, 1996
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1: Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1996 and 1995 I-1
Consolidated Balance Sheets as of June 30, 1996,
June 30, 1995 and September 30, 1995 I-2
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1996
and 1995 I-3
Consolidated Statements of Capitalization
as of June 30, 1996, June 30, 1995
and September 30, 1995 I-4
Notes to Consolidated Financial Statements I-5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations I-9
PART II: OTHER INFORMATION
Item 6: Reports on Form 8-K II-1
Signature II-2
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
---------------- --------------- ----------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 42,522 $ 37,397 $179,053 $150,080 $209,016 $183,438
Cost of gas sold 23,602 20,821 100,910 82,462 117,433 101,515
--------- -------- -------- -------- -------- --------
Operating margin 18,920 16,576 78,143 67,618 91,583 81,923
--------- -------- -------- -------- -------- --------
Operating expenses:
Opersting and
maintenance 12,500 10,854 37,051 33,399 47,138 42,140
Depreciation and
amortization 3,056 2,485 8,623 7,455 11,218 9,829
Taxes -
State gross receipts 1,247 1,044 5,153 4,149 6,009 5,115
Local property and
other 1,652 1,684 5,000 4,990 6,602 6,072
Federal income (433) (358) 5,753 4,414 4,366 4,351
-------- ------- -------- -------- -------- --------
Total operating
expenses 18,022 15,709 61,580 54,407 75,333 67,507
---------- -------- -------- -------- -------- --------
Operating income 898 867 16,563 13,211 16,250 14,416
Other income, net 161 303 919 621 1,096 471
--------- -------- -------- -------- -------- --------
Income before
interest expense 1,059 1,170 17,482 13,832 17,346 14,887
-------- -------- -------- -------- -------- --------
Interest expense:
Long-term debt 1,525 1,268 4,362 3,819 5,629 5,119
Other 311 576 1,283 1,664 1,816 1,940
Interest capitalized (30) (28) (63) (75) (90) (104)
-------- -------- -------- -------- -------- --------
1,806 1,816 5,582 5,408 7,355 6,955
-------- -------- -------- -------- -------- --------
Net income (loss) (747) (646) 11,900 8,424 9,991 7,932
Dividends on preferred
stock (174) (174) (522) (522) (696) (696)
-------- -------- -------- -------- -------- --------
Net income(loss)applicable
to common stock $ (921) $ (820) $ 11,378 $ 7,902 $ 9,295 $ 7,236
======== ======== ======== ======== ======== ========
Earnings per
common share $ (.74) $ (.66) $ 9.15 $ 6.35 $ 7.47 $ 5.82
======== ======== ======== ======== ======== ========
Dividends paid per
common share $ .92 $ .92 $ 2.76 $ 2.76 $ 3.68 $ 3.68
======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ======== ========
</TABLE>
PAGE I-1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS
--------------
1996 1995
---- ----
(Thousands, except per share amounts)
<S> <C> <C>
Operating revenues $ 42,522 $ 37,397
Cost of gas sold 23,602 20,821
-------- --------
Operating margin 18,920 16,576
-------- --------
Operating expenses:
Operating and
maintenance 12,500 10,854
Depreciation and
amortization 3,056 2,485
Taxes -
State gross receipts 1,247 1,044
Local property and
other 1,652 1,684
Federal income (433) (358)
-------- --------
Total operating
expenses 18,022 15,709
-------- --------
Operating income 898 867
Other income, net 161 303
-------- --------
Income before
interest expense 1,059 1,170
-------- --------
Interest expense:
Long-term debt 1,525 1,268
Other 311 576
Interest capitalized (30) (28)
-------- --------
1,806 1,816
-------- --------
Net income(loss) (747) (646)
Dividends on preferred
stock (174) (174)
-------- --------
Net income (loss) applicable
to common stock $ (921) $ (820)
======== ========
Earnings per
common share $ (.74) $ (.66)
======== ========
Dividends paid per
common share $ .92 $ .92
======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6
======== ========
</TABLE>
PAGE I-1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
NINE MONTHS
---------------
1996 1995
---- ----
(Thousands, except per share amounts)
<S> <C> <C>
Operating revenues $179,053 $150,080
Cost of gas sold 100,910 82,462
-------- --------
Operating margin 78,143 67,618
-------- --------
Operating expenses:
Operating and
maintenance 37,051 33,399
Depreciation and
amortization 8,623 7,455
Taxes -
State gross receipts 5,153 4,149
Local property and
other 5,000 4,990
Federal income 5,753 4,414
-------- --------
Total operating
expenses 61,580 54,407
-------- --------
Operating income 16,563 13,211
Other income, net 919 621
-------- --------
Income before
interest expense 17,482 13,832
-------- --------
Interest expense:
Long-term debt 4,362 3,819
Other 1,283 1,664
Interest capitalized (63) (75)
-------- --------
5,582 5,408
-------- --------
Net income 11,900 8,424
Dividends on preferred
stock (522) (522)
-------- --------
Net income applicable
to common stock $ 11,378 $ 7,902
======== ========
Earnings per
common share $ 9.15 $ 6.35
======== ========
Dividends paid per
common share $ 2.76 $ 2.76
======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6
======== ========
</TABLE>
PAGE I-1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
TWELVE MONTHS
-------------
1996 1995
---- ----
(Thousands, except per share amounts)
<S> <C> <C>
Operating revenues $209,016 $183,438
Cost of gas sold 117,433 101,515
-------- --------
Operating margin 91,583 81,923
-------- --------
Operating expenses:
Operating and
maintenance 47,138 42,140
Depreciation and
amortization 11,218 9,829
Taxes -
State gross receipts 6,009 5,115
Local property and
other 6,602 6,072
Federal income 4,366 4,351
-------- --------
Total operating
expenses 75,333 67,507
-------- --------
Operating income 16,250 14,416
Other income, net 1,096 471
-------- --------
Income before
interest expense 17,346 14,887
-------- --------
Interest expense:
Long-term debt 5,629 5,119
Other 1,816 1,940
Interest capitalized (90) (104)
-------- --------
7,355 6,955
-------- --------
Net income 9,991 7,932
Dividends on preferred
stock (696) (696)
-------- --------
Net income applicable
to common stock $ 9,295 $ 7,236
======== ========
Earnings per
common share $ 7.47 $ 5.82
======== ========
Dividends paid per
common share $ 3.68 $ 3.68
======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6
======== ========
</TABLE>
PAGE I-1
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands)
-----------
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1996 1995 1995
---------------------------------
ASSETS
- ------
<S> <C> <C> <C>
Gas plant, at original cost $264,429 $243,322 $247,933
Less - Accumulated depreciation and
utility plant acquisition adjustments 96,659 85,942 85,867
-------- -------- --------
167,770 157,380 162,066
-------- -------- --------
Current assets:
Cash and temporary cash investments 1,024 708 791
Accounts receivable, less
allowance of $5,249 at 6/30/96, $3,625 at
6/30/95 and $2,309 at 9/30/95 24,639 22,095 13,807
Unbilled revenues 1,635 2,012 2,637
Deferred gas costs 2,371 -- 1,196
Inventories, at average cost -
Liquefied natural gas, propane and under-
ground storage 7,317 7,129 9,976
Materials and supplies 1,242 1,410 1,427
Prepaid and refundable taxes 3,957 5,692 5,272
Prepayments 970 697 1,328
-------- -------- --------
43,155 39,743 36,434
-------- -------- --------
Deferred charges and other assets 12,892 15,395 16,227
-------- -------- --------
Total assets $223,817 $212,518 $214,727
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying statement) $159,338 $140,618 $153,502
-------- -------- --------
Current liabilities:
Notes payable 4,900 7,700 4,337
Current portion of long-term debt 1,994 1,875 1,950
Accounts payable 14,103 15,759 13,896
Accrued taxes 4,266 8,494 5,863
Accrued vacation 1,932 1,870 1,634
Customer deposits 3,999 3,775 3,937
Refundable gas costs -- 5,384 --
Other 4,438 3,306 3,574
-------- -------- --------
35,632 48,163 35,191
-------- -------- -------
Deferred credits and reserves:
Accumulated deferred Federal income taxes 18,910 15,931 17,892
Unamortized investment tax credits 2,550 2,708 2,668
Other 7,387 5,098 5,474
-------- -------- --------
28,847 23,737 26,034
-------- -------- --------
Total capitalization and liabilities $223,817 $212,518 $214,727
======== ======== ========
</TABLE>
Page I-2
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1996 1995
-------------------
(THOUSANDS)
<S> <C> <C>
Cash provided by (used for)
Operations:
- ----------
Net income $ 11,900 $ 8,424
Items not requiring cash-
Depreciation and amortization 8,723 7,700
Changes as a result of regulatory action (1,453) --
Amortization of deferred charges & other 1,166 974
Deferred Federal income taxes 1,021 1,145
Amortization of investment tax credits (118) (118)
Change in assets and liabilities
which provided (used) cash:
Accounts receivable (10,849) (4,431)
Unbilled revenues 1,002 865
Deferred gas costs (1,175) 15,349
Inventories 2,844 4,174
Prepaid and refundable taxes 1,312 (2,185)
Prepayments 358 761
Accounts payable 207 (2,280)
Accrued taxes 2,461 2,437
Refundable gas costs -- 5,384
Accrued vacation, customer deposits
& other 1,242 441
Deferred charges & other 486 (2,558)
-------- --------
Net cash provided by operations 19,127 36,082
-------- --------
Investment Activities:
- ---------------------
Expenditures for property, plant and
equipment, net (13,621) (13,354)
-------- --------
Total (13,621) (13,354)
-------- --------
Financing Activities:
- --------------------
Issuance of mortgage bonds 15,000 --
Payments on long-term debt (1,881) (1,909)
Decrease in notes payable, net (14,437) (17,000)
Cash dividends on preferred shares (522) (522)
Cash dividends on common shares (3,433) (3,433)
-------- --------
Total (5,273) (22,864)
-------- --------
Increase in cash & temporary cash
investments 233 (136)
Cash and cash equivalents at beginning
of period 791 844
-------- --------
Cash and cash equivalents at end of period $ 1,024 $ 708
======== ========
Supplemental disclosures of cash flow information:
Cash paid year-to-date-
Interest (net of amount capitalized) $ 4,906 $ 4,563
Income taxes (net of refunds) $ 1,858 $ 1,410
</TABLE>
PAGE I-3
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1996 1995 1995
------------------------------------
<S> <C> <C> <C>
Common stock equity:
common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 at 6/30/96,
6/30/95,and 9/30/95 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,636 37,812 37,820
Retained earnings 39,901 35,183 31,956
-------- -------- --------
Total common stock equity 78,781 74,239 71,020
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 80 shares at 6/30/96,
6/30/95 and 9/30/95 8,000 8,000 8,000
--------- -------- --------
Long-term debt:
First mortgage bonds 72,800 59,400 74,400
Capital leases 1,751 854 2,032
--------- -------- --------
Total long-term debt 74,551 60,254 76,432
Less current portion 1,994 1,875 1,950
--------- -------- --------
Long-term debt, net 72,557 58,379 74,482
--------- -------- --------
Total capitalization $159,338 $140,618 $153,502
========= ======== ========
</TABLE>
PAGE I-4
<PAGE>
THE PROVIDENCE GAS COMPANY
Notes To Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to provide a
fair statement of the results for the periods reported; however, such results
are not necessarily indicative of results to be expected for the year, due to
the seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in this Form 10-Q pursuant to the rules and regulations of
the Securities and Exchange Commission. However, the disclosures herein when
read with the annual report for 1995 filed on Form 10-K are adequate to make the
information presented not misleading.
Gas Charge Clause
- -----------------
In May 1996, the Rhode Island Public Utilities Commission approved a Rate
Design Settlement Agreement. The Agreement included changes to the Registrant's
gas cost recovery mechanism; specifically, the Agreement replaced the previous
Cost of Gas Adjustment Clause (CGA) with Gas Charge Adjustment Clauses (GCC)
effective June 2, 1996. In addition to those items previously recovered through
the CGA, the GCC provides for the recovery of: (1) inventory financing costs;
(2) working capital associated with gas supply purchases; (3) bad debt expenses
associated with the gas revenue portion of customer bills; and (4) liquefied
natural gas operating and maintenance expenses, all of which were previously
recovered in base rates. The GCC 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, customers over a subsequent period.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified for consistent
presentation with the current period.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact of
such standards and requirements which are subject to change and can take effect
retroactively. The Registrant continues to monitor the status of these laws and
regulations. Such monitoring involves the review of past activities and current
operations, and may include expending funds to investigate or clean-up certain
sites. To the best of its knowledge, subject to the following, the Registrant
believes it is in substantial compliance with such laws and regulations.
At June 30, 1996, the Registrant is aware of four 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 PRP's. With respect to one of
the Plympton sites, the Registrant has joined with other PRP's in entering
PAGE I-5
<PAGE>
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, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of June 30,
1996, approximately $1.1 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by the
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at the site.
The Registrant has completed the study which indicates that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the best
alternative. At June 30, 1996, the Registrant has compiled a preliminary range
of costs based on remediation alternatives, ranging from $1.3 million to in
excess of $5.0 million. Based on the proposals for remediation work the
Registrant has accrued $1.3 million at June 30, 1996, for anticipated future
remediation costs at this site. Also, the Registrant has negotiated an
agreement, which is subject to Federal regulatory approval, with a third party
which provides for reimbursement of up to $2.5 million of certain remediation
costs to be incurred at this site.
Tests conducted following the recent discovery of an abandoned underground
oil storage tank at the Registrant's Westerly, Rhode Island operations center
confirm the existence of contaminants at this site. The Registrant is currently
conducting tests at this site, the costs of which are being shared equally with
the prior owner, to determine the nature and extent of the contamination. Due to
the early stages of investigation, management cannot offer any conclusions as to
whether any remediation will be required 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 $1.4 million and an estimated $1.3 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
June 30, 1996. 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.
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 and financial contributions from others, will likely avoid any material
adverse effect on its results of operations or its financial condition as a
result of the ultimate resolution of the above sites.
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.
PAGE I-6
<PAGE>
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 its transition costs
to net between $19 million and $21 million of which $15.2 million has been
included in the GCC and is currently being collected from customers. The
remaining minimum obligation of $3.8 million has been recorded in the
accompanying consolidated balance sheet along with a regulatory asset
anticipating future recovery through the GCC.
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.
Rate Case
- ---------
In February 1995, the Registrant 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 the
Registrant. 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 recorded several adjustments to its first
quarter 1996 financial statements. Specifically:
a) The Registrant began 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 reduced its regulatory liability for one
year's property tax expense resulting in a one time gain of approximately $4.1
million before tax.
b) The Registrant wrote-off and will not recover approximately $1.6 million,
before tax, of restructuring costs previously deferred. The RIPUC had previously
allowed the Registrant recovery of similar costs, but determined that the costs
of the 1994 reorganization should not be recovered in rates.
c) The Registrant wrote-off approximately $440,000, before tax, of previously
deferred rate case expenses.
d) The Registrant wrote-off approximately $470,000, 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.
PAGE I-7
<PAGE>
New Accounting Pronouncements
- -----------------------------
Management continues to analyze the new accounting statement, 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".
Based on the current regulatory environment, management does not believe
adoption of SFAS No. 121 will have a material impact on the financial position
or results of operations of the Registrant. Adoption of SFAS No. 121 is required
in fiscal 1997 although the Registrant may adopt at an earlier date.
PAGE I-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The Registrant's current operating revenues and operating margin for the
quarter, nine and twelve month periods, increased over comparable prior periods.
Net income showed a decrease for the quarter while net income for the nine and
twelve month periods posted increases as shown in the table below.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(000's)
Operating revenues $42,522 $37,397 $179,053 $150,080 $209,016 $183,438
======= ======= ======== ======== ======== ========
Operating margin $18,920 $16,576 $ 78,143 $ 67,618 $ 91,583 $ 81,923
======= ======= ======== ======== ======== ========
Net income (loss) applicable to
common stock $ (921) $ (820) $ 11,378 $ 7,902 $ 9,295 $ 7,236
======= ======= ======== ======== ======== ========
</TABLE>
Operating Revenues And Operating Margin
- ---------------------------------------
During the current fiscal year period, the Registrant has experienced
colder than normal weather resulting in temperatures averaging 17.6 percent
colder than last year. This increase in heating load, due to the colder
temperatures, represents approximately $5.7 million in increased operating
margin for the nine and twelve months periods, respectively.
Additionally, the Rhode Island Public Utilities Commission (RIPUC) approved
a rate increase effective December 17, 1995. Operating margin for the current
quarter and nine month period, versus last year, increased approximately
$600,000 and $2.9 million, respectively, as a result of the rate increase. As a
result of the RIPUC's approval in February 1996 of the Integrated Resource
Plan's (IRP) performance-based ratemaking mechanism, the Registrant recorded an
increase in operating margin of $1.5 million in the current quarter as a result
of gas cost savings achieved for the twelve month plan period which ended June
1996. This savings was somewhat offset by a one time charge to operating and
maintenance expenses of $800,000 to fund a low income assistance program as
discussed below. The IRP settlement agreement covers a three year period. The
Registrant's ability to record up to $1.5 million in operating margin annually
is dependent upon achieving certain levels of gas cost savings for each plan
year. Also see Liquidity and Capital Resource discussion.
Operating And Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased, during the current
quarter versus last year, approximately $1.6 million or 15.2 percent. The
increase is primarily attributable to a higher uncollectible revenue provision
due to the increased operating revenues resulting from the colder temperatures,
a one time charge of $800,000 to fund a low income assistance program associated
with the RIPUC's February 1996 approval of the IRP, and a one time charge of
approximately $100,000 for costs associated with the IRP regulatory proceeding.
In addition, expenses of approximately $400,000 were incurred for outside
services associated with the development of new energy service offerings.
Operation and maintenance expenses increased approximately $3.7 million or 10.9
percent and $5.0 million or 11.9 percent for the nine and twelve month periods,
respectively, for the reasons described above.
PAGE I-9
<PAGE>
Taxes
- -----
Taxes for the current quarter versus last year were flat while the nine and
twelve month periods versus last year increased approximately, $2.4 million or
17.4 percent and $1.4 million or 9.3 percent, respectively. The increase in
taxes, mainly Federal income and state gross receipts tax, resulted from higher
pretax income and higher operating revenues, respectively.
Other Income
- ------------
Other income increased approximately $298,000 and $625,000 for the nine and
twelve month periods respectively versus last year. The increase is due to
regulatory adjustments including a one-time gain for the regulatory change in
accounting for property taxes which was offset by the write-offs of previously
deferred reorganization and other costs for which recovery was not allowed as
part of the rate award received from the RIPUC on November 17, 1995. (See notes
to consolidated financial statements.)
Interest Expense
- ----------------
Interest expense for the current quarter versus last year was flat while
increasing approximately $174,000 or 3.2 percent and $400,000 or 5.8 percent for
the nine and twelve month periods, respectively. A decrease in weighted average
short-term borrowings caused short-term interest expense to decrease during the
current quarter versus last year. The Registrant's long-term interest expense
for the current quarter, nine and twelve month periods has increased slightly as
a result of the Series R First Mortgage Bond issuance in December 1995.
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 the current
regulatory environment, management does not believe SFAS No. 121 will have a
material 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". Management does not
believe SFAS No. 123 will have an impact on the Registrant's results of
operations or financial position.
There are virtually unlimited opportunities to unbundle services, form
alliances, custom-tailor services for customers, and greatly increase the
competition with other energy suppliers. To facilitate the transition to a
diversified energy marketer, the Registrant is planning to form business
alliances outside of its traditional utility business. The Registrant is also
seeking investment opportunities in non-regulated energy ventures. These energy
marketing ventures will increasingly be separate from the distribution utility.
There are strategic long-term planning costs associated with developing the new
energy service offerings. The Registrant estimates these costs to be in the
range of $400,000 to $900,000 for fiscal year 1996.
In May 1996, the Rhode Island Public Utilities Commission approved a Rate
Design Settlement Agreement among The Registrant, the Division of Public
Utilities and Carriers, The Energy Council of Rhode Island (TEC-RI) and a
consortium of oil heat organizations. The Agreement begins a process of
unbundling natural gas service in Rhode Island enabling customers to choose
their gas suppliers. The Agreement went into effect June 2, 1996. While this
initial step is available to the largest commercial and industrial customers,
approximately 120, the Registrant is required to make an additional filing in
March 1997 that would expand the eligibility of unbundled services to other
customers. The Registrant does not know the number of customers that would be
impacted by the March 1997 filing at this time.
PAGE I-10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the latest nine months, the Registrant's accounts receivable and
unbilled revenue have increased approximately $10 million. These fluctuations
are the result of higher monthly sales during the first and second quarters and
a moratorium on residential shut-offs during the heating season. Because of
these increases, which negatively impact cashflow, the Registrant must borrow to
maintain an appropriate level of liquidity. Management believes its available
financings are sufficient to meet these seasonal needs.
The Registrant experienced a sharp decrease in its net cash provided by
operations during the latest quarter as compared to last year, primarily as the
result of gas cost collections. Last year, the net cash provided by operations
increased as a result of the collection of gas costs from a substantial
underrecovery which previously existed.
In December 1995, the Registrant received proceeds of $15 million related
to an issuance of First Mortgage Bonds, Series R (7.5%), which will mature in
December 2025. The net proceeds received from the issuance were used to pay down
short-term debt.
Capital expenditures for the latest fiscal year-to-date quarter of $13.6
million were stable when compared to $13.4 million last year. Capital
expenditures for the remainder of the fiscal year are expected to be
approximately $6.4 million. Anticipated capital expenditures for the next three
years are expected to total between $55 million to $65 million.
In February 1995, the Registrant filed for rate relief requesting an
approximate eight 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.
In February 1996, the Registrant received approval of a three-year
Settlement Agreement between itself and the Division of Public Utilities and
Carriers (Division) regarding the Integrated Resource Plan (IRP), which was
filed with the RIPUC in July 1994. The purpose of the IRP is to optimize the
utilization of production transmission and distribution resources so that
customers receive high quality services at the lowest possible costs.
The Settlement Agreement provides for: (1) funding associated with Demand
Side Management programs of $500,000, which are designed to provide equipment
rebates for specific load building programs; (2) funding associated with a low
income weatherization program of $200,000, which is designed to assist low
income customers through the installation of conservation measures; and (3) a
performance-based ratemaking mechanism. The Settlement Agreement also contains a
general agreement that the Registrant's strategy and steps included in its
supply plan are reasonable.
The Settlement Agreement also provides for a one-time funding of up to
$800,000 for a Low Income Assistance Program (LIAP) through a portion of the
Registrant's share of the performance-based ratemaking mechanism. The LIAP was
developed in response to the Registrant's anticipated loss of approximately $1.5
million in Federal funding for the low income heat assistance program
administered by the State of Rhode Island for fiscal 1996.
PAGE I-11
<PAGE>
The funding of these programs is generated through annual gas cost savings
beginning in July 1995. The Registrant has performed an analysis of gas cost
savings since July 1995 and believes that sufficient savings have been achieved
as of June 30, 1996 to provide funding for these programs without incurring a
charge to income. Accordingly, in the current quarter, the Registrant recorded
its annual share of the performance-based ratemaking mechanism under this
agreement which resulted in a $1.5 million increase to operating margin.
Although the settlement agreement contains a methodology used to calculate the
actual gas cost savings, the ultimate analysis of savings is subject to RIPUC
review and approval which will occur in the fourth quarter of the fiscal year.
PAGE I-12
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
- -------- -----------------
REPORTS ON FORM 8-K
- -------------------
No reports on Form 8-K were filed during the quarter for which this report
is filed.
PAGE II-1
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of results
for the period reported, but such results are not necessarily indicative of
results to be expected for the year, due to the seasonal nature of the
Registrant's gas operations. All accounting policies and practices have been
applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Providence Gas Company
(Registrant)
BY:/s/Gary S. Gillheeney
------------------------
GARY S. GILLHEENEY
Senior Vice President,
Treasurer and CFO
Date: August 13, 1996
---------------
PAGE II-2
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