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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, 1996
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OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-1160
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THE PROVIDENCE GAS COMPANY
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(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 401-272-5040
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(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
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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 4, 1996: $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
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December 4, 1996.
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DOCUMENTS INCORPORATED BY REFERENCE
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NONE
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TABLE OF CONTENTS
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PART I PAGE
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Item 1 - Business
General I-1
Gas Supply I-2
Rates and Regulations I-2
Competition and Marketing I-5
Employees I-6
Storage Facilities I-7
Special Factors Affecting the Gas Industry I-7
FERC Regulations I-7
Environmental Regulations I-8
Other Standards I-10
Item 2 - Properties I-11
Item 3 - Legal Proceedings I-11
Item 4 - Submission of Matters to a Vote of Security Holders I-11
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder 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-9
Report of Independent Public Accountants II-30
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-31
PART III
Item 10 - Directors and Executive Officers of the Registrant III-1
Item 11 - Executive Compensation III-6
Item 12 - Security Ownership of Certain Beneficial Owners
and Management III-6
Item 13 - Certain Relationships and Related Transactions III-6
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Supplemental Schedules IV-4
Signatures IV-8
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PART I
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ITEM 1. BUSINESS
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The Providence Gas Company (the Registrant or ProvGas) and its subsidiary and
their representatives may from time to time make written or oral statements,
including statements contained in the Registrant's filings with the Securities
and Exchange Commission (SEC), which constitute or contain "forward-looking"
information as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations, and releases. All
statements other than statements of historical facts included in this Form 10-K
regarding the Registrant's financial position and strategic initiatives and
addressing industry developments are forward-looking statements. Where, in any
forward looking statement, the Registrant, or its management, expresses an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can
be no assurance that the statement of expectation or belief will result or be
achieved or accomplished. The following are factors which could cause actual
results to differ materially from those anticipated, and include but are not
limited to: general economic, financial and business conditions; competition in
the energy services sector; regional weather conditions; the availability and
cost of natural gas; development and operating costs; the success and costs of
advertising and promotional efforts; the availability and terms of capital; the
business abilities and judgment of personnel; unanticipated environmental
liabilities; changes in, or the failure to comply with, government regulations;
the costs and effects of unanticipated legal proceedings; the impacts of unusual
items resulting from ongoing evaluations of business strategies and asset
valuations; and changes in business strategy.
General
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The Registrant, 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 New York 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
163,000 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 817,000.
For the year ended September 30, 1996, residential sales accounted for
approximately 60% of total company sales, with commercial and industrial sales
representing, in the aggregate, approximately 40%. For the years ended
September 30, 1995 and 1994, residential sales represented approximately 48% and
50%, respectively, of the total sales, with commercial and industrial sales
representing, in the aggregate, approximately 52% and 50%, 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,
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approximately 139,000 services (a service is a pipe connecting a gas main with
piping on a customer's premises), approximately 159,000 gas meters, and the
necessary pressure regulators. The Registrant has regulating and metering
facilities at eight points of delivery from Algonquin Gas Transmission Company
(Algonquin) and one from Tennessee Gas Pipeline 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 conditions.
Gas Supply
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During 1996, the Registrant purchased 84% of its gas supply in the production
area with transportation and storage provided by firm pipeline contracts.
Liquefied natural gas (LNG) provided 5% of gas supply requirements. The
remaining 11% 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 supply and firm storage and 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 1996, the Registrant
received $5.7 million in revenue from released capacity, a 12% increase over the
$5.1 million of revenue generated in 1995. The revenues reduce the firm
customer's gas cost, making 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 1996, a number of supply contracts were put
out for bid, renegotiated or terminated. The most significant change was an
increase in storage capacity for an expiring supply contract.
Although the Registrant has significantly increased its storage capacities
since the implementation of FERC Order 636, 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.
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The Registrant is subject to the regulatory jurisdiction of the RIPUC with
respect to rates and charges, standards of service, accounting and other
matters. The standards set by the RIPUC affect all aspects of the
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Registrant's business, including its ability to market to new customers and to
meet competition from other fuel suppliers. (see Competition and Marketing.)
In February 1996, the Registrant received approval of a three-year Settlement
Agreement between itself and the Rhode Island 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
$900,000 in Federal funding for the low income heat assistance program
administered by the State of Rhode Island for 1996.
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 has achieved sufficient savings as of June 30, 1996
to provide funding for these programs without incurring a charge to income.
Accordingly, in 1996, 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.
Prior to the IRP, the cost of gas adjustment (CGA) clause contained a
provision that enabled the Registrant to retain margins associated with nonfirm
sales and transportation. Specifically, nonfirm margins above a threshold were
shared at the ratio 66 2/3% to firm customers and 33 1/3% to the Registrant.
This provision is suspended during the term of the IRP.
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. In November
1995, 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 ProvGas' motion to reconsider a revenue
adjustment of $171,572. That approval increases the overall rate increase to
$4,161,572. In addition, as a result of the order, ProvGas recorded several
adjustments to its 1996 financial statements. Specifically:
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a) ProvGas 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, ProvGas was required to estimate two year's increase in expense. As
a result, ProvGas reduced its regulatory liability for one year's property tax
expense resulting in a one time gain of approximately $4,100,000 before tax.
b) ProvGas wrote-off the $1,600,000, before tax, of restructuring costs
previously deferred. (See Footnote 9 in 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 wrote-off approximately $440,000, before tax, of previously
deferred rate case expenses. (See Footnote 1 in the Notes to the Consolidated
Financial Statements filed herewith as Item 8.)
d) ProvGas 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 FERC 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 did not result in a material gain or
loss.
The following table sets forth the results of ProvGas' applications before the
RIPUC for rate increases since 1981.
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Annualized Annualized Authorized
Date of Rate Increase Date Rates Rate Increase Return on
Application Requested Effective Granted (*) Common Equity
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<S> <C> <C> <C> <C>
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
</TABLE>
(*) Although the RIPUC reviews and approves all changes in gas costs billed to
customers through the Gas Charge Clauses (GCC), such changes are not part of the
general rate filings described above. See Footnotes 1 and 10 in the Notes to
the Consolidated Financial Statements filed herewith as Item 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
approval of a reconsideration motion.
The Registrant has been working closely with the RIPUC to develop a new rate
structure that will allow the Registrant to offer unbundled services
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designed to meet the needs of its largest customers, such that those customers
would have the option to purchase natural gas directly from suppliers and use
the Registrant to transport the gas. The Registrant believes that this rate
structure will foster a more competitive and flexible gas market in Rhode Island
and allow it to remain competitive by offering commercial/industrial businesses
value-added services at competitive prices.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, the Division, 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 program is available to approximately 120 of the largest commercial and
industrial customers, 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.
The Agreement also included changes to the Registrant's gas cost recovery
mechanism. Specifically, the agreement replaced the previous CGA with GCC
effective June 2, 1996. In addition to the commodity and related pipeline
transportation costs historically included in 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) a substantial portion of LNG operating and
maintenance expenses, all of which were previously recovered in base rates.
Similar to the former CGA, the GCC provides for reconciliation of total gas
costs billed with the actual cost of gas incurred. Any excess or deficiency in
amounts billed as compared to costs incurred is deferred and either refunded to,
or recovered from, customers over a subsequent period.
On October 8, 1996, the RIPUC approved a one year Pilot Hedging Program
Agreement between the Registrant and the Division. The objective of the pilot
program is to mitigate the impact of natural gas price escalation through
utilization of Financial Risk Management (FRM) tools, to develop a more balanced
gas supply cost approach and finally, to study in more detail some of the
benefits and costs associated with the program. The FRM tools will be limited
to the use of options, including calls, puts, and collars, under the pilot
program. The total expenditures for the purchase and exercise of the FRM tools
and the net proceeds from the sale of FRM tools will be flowed through the
Variable Gas Cost component of the GCC and cannot exceed $800,000.
Competition and Marketing.
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The Registrant experienced modest customer growth in both the residential and
commercial/industrial markets. In all, the average annual number of customers
rose one percent to 163,000. This customer growth was achieved in an
underperforming local economy that is now showing signs of improvement. The
Providence Place Mall is scheduled to begin construction in early 1997 and
brings an estimated 3,000 construction jobs and more than 2,800 permanent jobs
in sales, management and maintenance. The Fixed Income Group of Fidelity
Investments will bring to Rhode Island 2,500 new jobs and a $75 million state-
of-the-art
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facility, the direct result of a creative package of land, lease and tax
incentives offered by the State of Rhode Island. Also, the newly expanded T.F.
Green Airport, and the arrival of Southwest Airlines, will significantly improve
the competitiveness of transportation options.
In 1997, the Registrant's core marketing efforts will continue to focus on
adding profitable new load and building loyalty with existing customers. The
Registrant will continue joint marketing with the local network of heating
contractors to promote heating conversions of customers on existing gas mains.
In addition, the Registrant will extend its coupon rebate program for high
efficiency heating equipment offered in combination with participating
manufacturers and local distributors.
As a result of the Rate Design Settlement Agreement approved in May 1996, the
Registrant has been allowed to offer unbundled services to approximately 120 of
its largest customers. These customers are now able to purchase natural gas
directly from suppliers and use the Registrant to transport the gas. The
Company will make an additional filing in March 1997 that would expand the
eligibility of unbundled services to other customers. The Registrant believes
that this rate structure will foster a more competitive and flexible gas market
in Rhode Island and allow it to remain competitive by offering
commercial/industrial businesses value-added services at competitive prices.
In 1996, the Registrant implemented a Demand Side Management Program, which
furnishes rebates to customers installing new technologies, such as gas fired
air conditioning, cogeneration and gas motors. These technologies use
proportionately more natural gas during the summer months, when the distribution
system has available capacity. The DSM Program also allows for the utilization
of existing resources, such as mains, services and year-round supply contracts.
Employees
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As of September 30, 1996, the Registrant had 553 full-time employees.
Approximately 278 production, distribution and customer service employees are
covered by a collective bargaining agreement with Local 12431 of the United
Steelworkers of America. Current negotiations have resulted in a new five year
agreement, which became effective in January 1996.
The agreement was developed by a labor-management negotiations committee and
can be reopened for any reason at any time in order to allow for the committee
to deal with new issues as they arise, which results in increased flexibility in
the use of employees. This will result in increased job security and will
position the Registrant to reduce costs and increase levels of customer service.
The agreement calls for a general wage increase of 3.25% each year from 1997 to
2000.
Additionally, in March 1996, a thirty-eight month Labor Agreement was ratified
by Local 12431-02 of the United Steelworkers of America, which represents
approximately 96 office and clerical employees. The agreement calls for a 8.44%
wage increase over thirty-eight months.
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Storage Facilities
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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 4,604 million
cubic feet (MMcf), which is available for firm delivery, as well as storage
capacity of 210 MMcf available on an interruptible basis.
The Registrant has an agreement with Algonquin for the storage of up to the
equivalent of 1,200 MMcf of vaporized LNG in a tank owned by Algonquin and
located on land leased to Algonquin by the Registrant. The agreement expires in
2001, but the Registrant has an option to extend the agreement for an additional
thirty years. This agreement was renegotiated in 1996 as a result of
Algonquin's filing with the FERC to make major improvements and modifications to
the LNG facility, including the addition of liquefaction capability and the
replacement of existing equipment with state-of-the-art equipment. The
renegotiation of the contract will yield comparable service while reducing gas
supply and operating costs. The renegotiated contract is contingent upon
certain conditions being met, including FERC approval of the improvements, and
is scheduled to become effective November 1, 1998. 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
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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
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In recent years the 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
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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 its
transition costs to net between $21 million and $22 million, of which $15.8
million has been included in the GCC and is currently being collected from
customers. The remaining minimum obligation of $5.2 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 GCC. To the
extent that refunds are received based on FERC settlements, the refunds are
returned to customers through the GCC.
The Registrant's ultimate liability may differ from the above estimates based
on FERC's 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.
Environmental Regulations
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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, 1996, the Registrant was 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
into an Administrative Consent
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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 September
30, 1996, approximately $1.5 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 September 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 September 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 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 prior rate cases filed, 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 $1.8 million and an estimated $1.3 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
September 30, 1996. Of the environmental investigation costs incurred,
approximately $1.0 million and $600,000 were recorded in the years ended
September 30, 1996 and 1995, respectively, while the remainder were incurred in
prior years. Management believes that this rate recovery mechanism is
appropriate for recovery of any future costs. Additionally, it is the
Registrant's practice to consult with the RIPUC on a periodic basis when, in
management's opinion, significant amounts might be expended for environmental
related costs. Should future developments warrant additional rate recovery
mechanisms, management intends to seek such recovery.
Also, management has begun discussions with other parties who may assist the
Registrant in paying any future costs at the above sites. Management believes
that its program for managing environmental issues, combined with rate recovery
and financial contributions from others, will
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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.
Other Standards
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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 has been delegated to the RIPUC
and management believes that the Registrant is in substantial compliance with
all present requirements imposed by such agency.
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ITEM 2. PROPERTIES
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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 that 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
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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
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Not applicable.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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Not applicable. The Registrant is a wholly-owned subsidiary of Providence
Energy Corporation.
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ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
SELECTED FINANCIAL DATA
-----------------------
SUMMARY OF OPERATIONS
---------------------
FOR THE YEARS ENDED SEPTEMBER 30
--------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating revenues $210,601 $180,043 $219,143 $206,050 $187,705
Cost of gas sold 118,051 98,985 133,315 124,677 110,161
-------- -------- -------- -------- --------
Operating margin 92,550 81,058 85,828 81,373 77,544
-------- -------- -------- -------- --------
Operating expenses,
excluding taxes 59,673 53,536 54,588 51,754 51,103
Taxes, other than income 12,831 11,597 12,413 12,468 11,439
Federal income taxes 4,418 3,027 4,369 3,507 2,787
-------- -------- -------- -------- --------
Total operating expenses 76,922 68,160 71,370 67,729 65,329
-------- -------- -------- -------- --------
Operating income 15,628 12,898 14,458 13,644 12,215
Other, net 976 798 409 (3) 514
-------- -------- -------- -------- --------
Income before interest
expense 16,604 13,696 14,867 13,641 12,729
Interest expense 7,294 7,181 6,121 6,546 6,615
-------- -------- -------- -------- --------
Net income 9,310 6,515 8,746 7,095 6,114
Dividends on preferred
stock (696) (696) (696) (696) (696)
-------- -------- -------- -------- --------
Net income applicable to
common stock 8,614 5,819 8,050 6,399 5,418
Common dividends 4,627 4,577 4,501 4,427 4,726
-------- -------- -------- -------- --------
Income reinvested in
the corporation $ 3,987 $ 1,242 $ 3,549 $ 1,972 $ 692
======== ======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ========
Earnings per common share $ 6.93 $ 4.68 $ 6.47 $ 5.15 $ 4.36
======== ======== ======== ======== ========
Common dividends $ 3.72 $ 3.68 $ 3.62 $ 3.56 $ 3.80
======== ======== ======== ======== ========
</TABLE>
OTHER FINANCIAL DATA
--------------------
SEPTEMBER 30
------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Gas plant-at original cost $270,149 $253,438 $230,926 $213,218 $202,019
Gas plant-net of depreciation 171,453 161,956 151,394 141,929 137,791
Total assets 237,515 214,727 221,177 141,868 184,651
Capitalization:
Long-term debt 72,455 74,482 60,078 62,163 60,958
Redeemable cumulative preferred
stock 8,000 8,000 8,000 8,000 8,000
Common Stockholder's investment 74,844 71,020 69,841 64,861 46,403
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 $ 60.18 $ 57.11 $ 56.16 $ 52.16 $ 37.31
======== ======== ======== ======== ========
</TABLE>
II-2
<PAGE>
Item 7
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
- -------
The Registrant's current operating revenues, operating margin and net income
have increased over last year, as shown in the table below:
<TABLE>
<CAPTION>
(000's)
Percent
1996 1995 Change Change
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Operating revenues $210,601 $180,043 $30,558 17.0
Operating margin 92,550 81,058 11,492 14.2
Net income 9,310 6,515 2,795 42.9
</TABLE>
RESULTS OF OPERATIONS - 1996 VS 1995
Operating Revenue and Operating Margin
- --------------------------------------
During the current year, the Registrant has experienced colder than normal
weather resulting in temperatures averaging 16.8% colder than last year. The
increase in heating load due to the colder temperatures represents approximately
$5.7 million in increased operating margin. As a result of the colder
temperatures experienced during 1996, residential sales, which provide the
Registrant with its greatest source of revenues, increased 1,687 million cubic
feet (MMcf) or 13.5% over 1995. Also contributing to the increase was a net
increase in the average annual number of customers during 1996 over 1995 of
1,643 or 1%. This increase contributed approximately $300,000 of operating
margin.
Additionally, the Rhode Island Public Utilities Commission (RIPUC) approved a
rate increase effective December 17, 1995. Operating margin for the current
year increased approximately $3.2 million versus last year 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 1996 as a
result of gas cost savings achieved for the twelve month plan period which ended
June 1996. These savings were 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.
Interruptible and other volumes decreased approximately 2,300 MMcf versus last
year, primarily as a result of a decrease in non-firm sales of approximately
1,200 MMcf and a decrease in sales for resale of approximately 1,300 MMcf.
These decreases were offset by an increase in special contracts of approximately
200 MMcf. The decrease in interruptible and other sales did not have an impact
on the Registrant's operating margin or results of operations because the RIPUC
requires the Registrant to return any margins earned from these non-firm
customers to
II-3
<PAGE>
firm customers through the Gas Charge Clauses(GCC).
In addition, the Registrant's operating margin increased approximately $200,000
due to an increase in revenues to account for the phase-in of expenses
associated with Statement of Financial Accounting Standards (SFAS) No. 106.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses have increased approximately $4.6
million or 10.6% versus last year. The Registrant had an increase of $1.1
million in its uncollectible revenue provision due to the increased operating
revenues resulting from the colder-than-normal weather experienced during the
year. As a result of the Registrant's improved earnings, performance incentive
compensation expense increased approximately $700,000 in 1996 versus 1995.
Also, there were increased wage expenses of approximately $800,000 related to
performance, cost of living and negotiated union contract increases, as well as
overtime pay due to the colder-than-normal weather. Additionally, in
connection with the RIPUC's approval of the IRP in February 1996, the Registrant
had a one-time charge of $800,000 to fund a low income assistance program, as
well as $100,000 of costs associated with the regulatory proceeding. Finally,
approximately $200,000 of expenses relating to the phase-in of SFAS No. 106
costs were incurred, as well as expenses of approximately $600,000 for outside
services associated with the development of new energy service offerings. The
remaining $300,000 is attributable to increases in general operating costs.
The Registrant continually reviews its operating expenses in order to keep
expenses as low as possible. However, the Registrant's expenses will vary based
on weather and other factors.
Taxes
- -----
Taxes have increased approximately $2.6 million or 17.9% during the last year.
The increase in taxes, mainly Federal income and state gross earnings tax,
resulted from higher pretax income and higher operating revenues, respectively.
Interest Expense
- ----------------
Overall, interest expense for 1996 was stable when compared to 1995. A decrease
in weighted average short-term borrowings caused short-term interest expense to
decrease approximately $700,000 for the current year. The Registrant's long-term
interest expense for the current year has increased approximately $800,000 as a
result of the Series R First Mortgage Bond issuance in December 1995.
Future Outlook
- --------------
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, the Division of Public Utilities and Carriers (Division), 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 program is available to approximately 120 of
the largest commercial and
II-4
<PAGE>
industrial customers, 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. Also on October 8, 1996, the
RIPUC approved a one year Pilot Hedging Program Agreement between the Registrant
and the Division. The objective of the pilot program is to mitigate the impact
of natural gas price escalation through utilization of Financial Risk Management
(FRM) tools, to develop a more balanced gas supply cost approach and finally, to
study in more detail some of the benefits and costs associated with the program.
The FRM tools will be limited to the use of options, including calls, puts, and
collars, under the pilot program. The total expenditures for the purchase and
exercise of the FRM tools and the net proceeds from the sale of FRM tools will
be flowed through the Variable Gas Cost component of the GCC and cannot exceed
$800,000.
The Financial Accounting Standards Board (FASB) recently released 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 1997. Based on
the current regulatory environment, management does not believe the adoption of
SFAS No. 121 will have a material impact on the financial position or results of
operations.
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% warmer-than-normal. Overall, 1995 was 14.5% warmer
than 1994, thereby decreasing operating margin by almost $5 million.
As a result of the 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 or 10% 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%. 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 MMcf or 9%. 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 RIPUC required any margin earned from the sale of
gas for resale purposes be returned to firm customers through the GCC.
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 for the offering of 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
II-5
<PAGE>
margin of approximately $600,000.
Operating and Maintenance Expenses
- ----------------------------------
Operating and maintenance expenses decreased $1.8 million or 3.9% over last
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, the Registrant's expenses will vary based
on weather and other factors. As a result, the 3.9% decrease in expenses
experienced in 1995 will not necessarily reoccur in future years.
Taxes
- -----
Taxes decreased $2.1 million or 12.9% during 1995 as compared to 1994. 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, net
- ----------
Other, net increased by approximately $389,000 over 1994. This was attributed
to decreases in expenses related to the Registrant's customer equipment leasing
program along with decreases in promotional advertising expenses.
Interest Expense
- ----------------
Interest expense increased approximately $1.1 million or 17.3% in 1995 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.
Liquidity and Capital
- ---------------------
During 1996, the Registrant experienced a substantial decrease in its net cash
provided by operations primarily as the result of the timing of the recovery of
incurred gas costs through the GCC as discussed in Footnote 1 of the
accompanying consolidated financial statements.
Capital expenditures for 1996 were $20.3 million versus $19.1 million in 1995, a
6.3% increase. Approximately $400,000 of the increase was due to increased
environmental expenditures, which are included in the Registrant's depreciation
factors consistent with the rate recovery treatment for all types of cost of
removal. The remainder of the increase was primarily due to increased
expenditures by the Registrant in new technologies. Anticipated capital
expenditures for the next three years are expected to total between $50 million
and $60 million.
II-6
<PAGE>
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. The Registrant meets seasonal cash requirements and finances its
capital expenditures program on an interim basis through short-term borrowings.
As of September 30, 1996, the Registrant had lines of credit totaling
$48,000,000 with borrowings outstanding of $20,800,000.
During the next two years, the Registrant intends to make a debt offering in an
amount ranging from $10 to $15 million to finance its capital expenditures.
The Registrant's parent company's ability to pay dividends is largely dependent
upon receipt of dividends from the Registrant. Approximately $18 million of the
Registrant's retained earnings were available for dividends at the end of fiscal
1996 under the most restrictive terms of the Registrant's First Mortgage Bond
Indenture.
In February 1995, the Registrant filed for rate relief requesting an approximate
eight 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. 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. See Footnote 10 to the
accompanying consolidated financial statements for more details.
In February 1996, the Registrant received approval of a three-year Settlement
Agreement between itself and the Division regarding the 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 $900,000 in
Federal funding for the low income heat assistance program administered by the
State of Rhode Island for 1996.
The funding of these programs is generated through annual gas cost
II-7
<PAGE>
savings beginning in July 1995. The Registrant has performed an analysis of gas
cost savings since July 1995 and has achieved sufficient savings as of June 30,
1996 to provide funding for these programs without incurring a charge to income.
Accordingly, in 1996, the Registrant recorded its annual share of the
performance-based ratemaking mechanism under this agreement which resulted in a
$1.5 million increase in operating margin.
II-8
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30
------------
<TABLE>
<CAPTION>
1996 1995
---- ----
(Thousands of Dollars)
<S> <C> <C>
ASSETS
------
Gas plant, at original cost (notes 1, 4, 7, and 10) $270,149 $253,438
Less - Accumulated depreciation and
utility plant acquisition adjustments 98,563 91,372
-------- --------
171,586 162,066
-------- --------
Current assets:
Cash and temporary cash investments (notes 1 and 8) 923 791
Accounts receivable, less allowance of
$2,983 in 1996 and $2,309 in 1995 (notes 1,3 and 7) 14,001 13,807
Unbilled revenues (note 1) 2,333 2,637
Deferred gas costs (notes 1 and 7) 13,128 1,196
Inventories, at average cost -
Liquefied natural gas, propane and underground
storage 15,794 9,976
Materials and supplies 1,151 1,427
Prepaid and refundable taxes (note 2) 3,215 5,272
Prepayments 1,465 1,328
-------- --------
52,010 36,434
-------- --------
Deferred charges and other assets
(notes 1, 3, 6, 7, 9 and 10) 13,919 16,227
-------- --------
Total assets $237,515 $214,727
======== ========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization (see accompanying statement) $155,299 $153,502
-------- --------
Current liabilities:
Notes payable (notes 5 and 8) 20,800 4,337
Current portion of long-term debt (note 4) 2,023 1,950
Accounts payable (notes 6 and 7) 16,480 13,896
Accrued taxes (note 10) 1,867 5,863
Accrued vacation 1,673 1,634
Customer deposits 3,956 3,937
Other 5,036 3,574
-------- --------
51,835 35,191
-------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 19,903 17,892
Unamortized investment tax credits (note 2) 2,510 2,668
Other (notes 6,7 and 10) 7,968 5,474
-------- --------
30,381 26,034
-------- --------
Commitments and contingencies (note 7) - -
Total capitalization and liabilities $237,515 $214,727
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
II-9
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE FISCAL YEARS ENDED
--------------------------
SEPTEMBER 30
------------
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(Thousands, except per share amounts)
<S> <C> <C> <C>
Operating revenues $210,601 $180,043 $219,143
Cost of gas sold 118,051 98,985 133,315
-------- -------- --------
Operating margin 92,550 81,058 85,828
-------- -------- --------
Operating expenses:
Operation and maintenance 48,116 43,486 45,243
Depreciation and amortization 11,557 10,050 9,345
Taxes -
State gross earnings 6,061 5,005 6,326
Local property and other 6,770 6,592 6,087
Federal income (note 2) 4,418 3,027 4,369
-------- -------- --------
Total operating expenses 76,922 68,160 71,370
-------- -------- --------
Operating income 15,628 12,898 14,458
Other, net (notes 1 and 10) 976 798 409
-------- -------- --------
Income before interest expense 16,604 13,696 14,867
-------- -------- --------
Interest expense:
Long-term debt 5,889 5,086 4,987
Other 1,498 2,197 1,241
Interest capitalized (93) (102) (107)
-------- -------- --------
7,294 7,181 6,121
-------- -------- --------
Net income 9,310 6,515 8,746
Preferred dividends (note 4) (696) (696) (696)
-------- -------- --------
Net income applicable to
common stock $ 8,614 $ 5,819 $ 8,050
======== ======== ========
Earnings per common share (note 13) $ 6.93 $ 4.68 $ 6.47
======== ======== ========
Weighted average common
shares outstanding (note 13) 1,243.6 1,243.6 1,243.6
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-10
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE FISCAL YEARS ENDED SEPTEMBER 30
---------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Cash provided by (used for)
Operating Activities:
- ---------------------
Net income $ 9,310 $ 6,515 $ 8,746
Items not requiring cash:
Depreciation and amortization 11,686 10,026 9,321
Charges as a result of regulatory action (1,453) - -
Deferred Federal income taxes 1,968 2,010 1,109
Amortization of investment tax credits (158) (158) (158)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (194) 3,857 (724)
Unbilled revenues 304 240 (90)
Deferred gas costs (11,932) 14,153 2,120
Inventories (5,542) 1,310 413
Prepaid and refundable taxes 2,064 (869) 1,929
Prepayments (137) 130 (621)
Accounts payable 2,584 (4,143) (1,524)
Accrued taxes 62 (194) (156)
Accrued vacation, customer
deposits and other 1,494 569 302
Deferred charges and other 1,236 (1,658) (749)
-------- -------- -------
Net cash provided by operations 11,292 31,788 19,918
-------- -------- -------
Investment activities:
- ---------------------
Expenditures for property, plant and
equipment, net (20,346) (19,124) (19,408)
-------- -------- -------
Financing activities:
- --------------------
Equity infusion from parent - - 1,500
Issuance of mortgage bonds 15,000 - 16,000
Payments on long-term debt (1,954) (2,081) (466)
Increase (decrease) in notes payable, net 1,463 (5,363) (12,100)
Cash dividends on preferred shares (note 4) (696) (696) (696)
Cash dividends on common shares (4,627) (4,577) (4,501)
-------- -------- -------
Total 9,186 (12,717) (263)
-------- -------- -------
Increase (decrease) in cash and
cash equivalents 132 (53) 247
Cash and cash equivalents at beginning
of year 791 844 597
-------- -------- -------
Cash and cash equivalents at end of year $ 923 $ 791 $ 844
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for -
Interest (net of amount capitalized) $ 6,561 $ 6,456 $ 5,965
Income taxes (net of refunds) $ 2,367 $ 1,414 $ 1,205
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
II-11
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
SEPTEMBER 30
------------
<TABLE>
<CAPTION>
1996 1995
---- -----
(Thousands of Dollars)
<S> <C> <C>
Stockholder's investment: (notes 4 and 6)
Common stock, $1 Par, Authorized - 2,500,000 shares
Outstanding - 1,243,598 shares in 1996 and 1995 $ 1,244 $ 1,244
Amount paid in excess of par 37,657 37,820
Retained earnings 35,943 31,956
-------- --------
74,844 71,020
-------- --------
Cumulative preferred stock (notes 4 and 8):
Redeemable 8.7% series, $100 par
Authorized - 80,000 shares
Outstanding - 80,000 shares in 1996 and 1995 8,000 8,000
-------- --------
Long-term debt (notes 4, 7 and 8):
First Mortgage Bonds, secured by utility property -
Series M, 10.25%, 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 12,800 14,400
Series R, 7.50%, due December 15, 2025 15,000 15,000
Capital Leases 1,678 2,032
-------- --------
74,478 76,432
Less-current portion 2,023 1,950
-------- --------
72,455 74,482
-------- --------
Total capitalization $155,299 $153,502
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-12
<PAGE>
THE PROVIDENCE GAS COMPANY
---------------------------
CONSOLIDATED STATEMENTS OF CHANGES
----------------------------------
IN COMMON STOCKHOLDER'S INVESTMENT
----------------------------------
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
---------------------------------------------
<TABLE>
<CAPTION>
Shares Amount
Issued and Outstanding Paid in
---------------------- Excess Retained
Number Amount of Par Earnings
-------- --------- ---------- ---------
(Thousands)
<S> <C> <C> <C> <C>
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
($3.68 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
Add (deduct):
Net income - - - 9,310
Cash dividends on common shares
($3.72 per share) - - - (4,627)
Cash dividends on preferred
shares ($8.70 per share) - - - (696)
Accrual for Executive
Stock Compensation Plan - - (163) -
-------- --------- --------- -------
Balance, September 30, 1996 1,244 $1,244 $37,657 $35,943
======== ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-13
<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.
Use of Estimates in the Preparation of Financial Statements. The preparation
of financial statements in conformity with Generally Accepted Accounting
Principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Regulation. The Registrant is subject to regulation by the Rhode Island
Public Utilities Commission (RIPUC). The accounting policies of ProvGas conform
to GAAP as applied in the case of regulated public utilities and are in
accordance with the regulator's accounting requirements and rate making
practices.
Operating Revenues. Operating revenues consist principally of gas sales. The
Registrant 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 to 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 3.85 percent for 1996 and
3.75 percent for 1995 and 1994.
II-14
<PAGE>
The Registrant retires property units by charging original cost, cost of
removal, including environmental investigation and remediation costs, and
salvage value to accumulated depreciation.
Gas Charge Clause. In May 1996, the RIPUC 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 Clauses (GCC) effective June 2, 1996.
In addition to the commodity and related pipeline transportation costs
historically included in 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) a substantial portion of liquefied natural gas operating
and maintenance expenses, all of which were previously recovered in base rates.
Similar to the former CGA, the GCC provides for reconciliation of total gas
costs billed with the actual cost of gas incurred. Any excess or deficiency in
amounts billed as compared to costs incurred is deferred and either refunded to,
or recovered from, 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, net.
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.
<TABLE>
<CAPTION>
Deferred Charges include the following:
- ---------------------------------------
(thousands)
1996 1995
-------- --------
<S> <C> <C>
Cost of fuel assistance program $ 1,271 $ 1,836
Restructuring program - 1,600
Pension costs 6,823 6,279
Unamortized debt expense 2,109 2,217
Post-retirement benefits 1,041 1,041
Deferred rate case expense 242 798
Pipeline interconnection costs 309 625
Other deferred charges 2,124 1,831
------- -------
Total $13,919 $16,227
======= =======
</TABLE>
Temporary Cash Investments. Temporary cash investments are short-term, highly
liquid investments with a maturity to the
II-15
<PAGE>
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
The Registrant records income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which
requires deferred taxes to be provided for all temporary differences.
The following is a summary of the provision for Federal income taxes for the
three years ended September 30:
<TABLE>
<CAPTION>
(thousands of dollars) 1996 1995 1994
- ------------------------------ ------- ------- -------
<S> <C> <C> <C>
Current $2,821 $1,288 $3,333
Deferred 1,968 2,010 1,109
------ ------ ------
Total Federal income tax
provision $4,789 $3,298 $4,442
====== ====== ======
Income tax is charged to the
following:
Charged to operating
expenses $4,418 $3,027 $4,369
Included in other,
net 371 271 73
------ ------ ------
Total Federal income tax
provision $4,789 $3,298 $4,442
====== ====== ======
</TABLE>
The effective Federal income tax rates and the reasons for their differences
from the statutory Federal income tax rates are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rates 34.0% 34.0% 34.0%
Reversing temporary differences .3 (.1) (.4)
Amortization of investment
tax credits (.4) (.6) (.4)
Other .1 .3 .4
--- ---- ----
Effective Federal income tax rates 34.0% 33.6% 33.6%
==== ==== ====
</TABLE>
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:
II-16
<PAGE>
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(thousands of dollars)
<S> <C> <C>
Long-term deferred taxes
- ------------------------
Tax assets
Unamortized ITC $ 883 $ 934
Other 370 453
Tax liabilities
Property related (19,527) (17,183)
Pension costs (519) (614)
Deferred charges (1,110) (1,482)
-------- --------
Net deferred tax liability included in
accompanying consolidated balance
sheets $(19,903) $(17,892)
======== ========
Prepaid taxes
- -------------
Tax assets
Accounts receivable reserves $ 1,255 $ 785
Property tax reserves (400) 1,091
Alternative minimum tax 876 -
Other 822 803
Tax liabilities
Employee severance 56 (541)
Other (79) (121)
-------- --------
Net prepaid taxes 2,530 2,017
Prepaid gross earnings tax and other 685 3,255
-------- --------
Net prepaid and refundable taxes
included in accompanying consolidated
balance sheets $ 3,215 $ 5,272
======== ========
</TABLE>
Investment tax credits are amortized through credits to other, net over the
estimated lives of related property.
3. LEASE RECEIVABLES
The Registrant presently finances the installation of water heaters and other
appliances for its customers under one to three year finance agreements.
Previously, the Registrant leased water heaters and appliances to customers
under 10-year sales-type leases.
II-17
<PAGE>
Future minimum lease payments to be received are:
- ------------------------------------------------
(thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
1997 $ 544
1998 544
1999 544
2000 360
2001 362
------
2,354
Amount representing interest 388
------
Amount representing principal $1,966
======
</TABLE>
4. 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 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 $18 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, 1996, the annual sinking fund requirements and maturities of
long-term debt for the next five fiscal years are $1,600,000 in 1997, $2,509,000
in 1998, $2,509,000 in 1999, $2,509,000 in 2000 and $2,509,000 in 2001.
B. Redeemable Preferred Stock
The Registrant's preferred stock, which consists of 80,000 shares of $100 par
value, has an 8.7% cumulative annual dividend rate payable on a quarterly basis,
and has no voting power or privileges unless there is a default in the payment
of dividends or sinking fund obligation. 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 in February 1997.
5. 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, 1996, the Registrant had lines of credit totaling $48,000,000 with
borrowings outstanding of $20,800,000. The Registrant pays a fee for its
committed lines
II-18
<PAGE>
of credit rather than maintaining compensating balances. The weighted average
interest rate for borrowings outstanding at the end of the years was 5.65% in
1996, 5.98% in 1995 and 3.83% in 1994.
6. 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.
In 1996, the Registrant changed its plans as a result of negotiated union
contracts. The plans are to be formally amended by the Board of Directors in
1997. The changes resulted in additional service time being recognized, a
change in the benefit formula and an increase in the period of supplemental
payments. The net effect of these changes was an increase in the projected
benefit obligation and unrecognized prior service cost of approximately
$2,153,000.
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, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, including
vested benefit obligation of $(36,288) as
of September 30, 1996 and $(36,887)as
of September 30, 1995 (42,403) $(38,352)
======== ========
Projected benefit obligation for service
rendered to date $(57,003) $(50,515)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 62,941 58,003
------- --------
Excess of plan assets over projected
benefit obligation 5,938 7,488
Unrecognized net gain (13,144) (12,593)
Unrecognized prior service cost 3,100 1,164
Unrecognized net transition asset
being recognized over 15 years
from October 1, 1985 (545) (681)
-------- --------
Net accrued pension cost included in other
deferred credits and accounts payable at
September 30, 1996 and 1995 $ (4,651) $ (4,622)
======== ========
</TABLE>
Net pension cost for fiscal years 1996, 1995 and 1994 included the following
components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,702 $ 1,535 $ 1,582
Interest cost on benefit obligations 4,246 3,857 3,800
</TABLE>
II-19
<PAGE>
<TABLE>
<S> <C> <C> <C>
Annual return on plan assets (7,473) (10,293) 994
Net amortization and deferral 2,085 5,708 (6,227)
-------- ------- --------
Net periodic pension cost 560 807 149
Adjustments due to regulatory
action (427) (408) (126)
-------- ------- --------
Net periodic pension cost recognized $ 133 $ 399 $ 23
======== ======= ========
</TABLE>
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 GAAP, 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.
Since 1993, the post-retirement benefit costs for active employees are recorded
on an accrual basis, ratably over their service periods. Benefits of
$10,526,000 earned prior to 1993 have been deferred as an unrecognized
transition obligation, which the Registrant will amortize over a 20-year period.
The Registrant funds its post-retirement benefit obligations to a Voluntary
Employee Benefit Association (VEBA) Trust. Contributions to the VEBA Trust to
fund such obligations totaled $1,454,000 in 1996, $1,561,000 in 1995 and
$1,566,000 in 1994.
The Registrant recovers its post-retirement benefit obligations 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 1996, 1995 and
1994 post-retirement benefit obligations of $1,454,000, $1,561,000 and
$1,566,000, respectively, because such amounts were funded into the VEBA Trust.
Of the total post-retirement benefit obligations, $1,454,000, $1,231,000 and
$855,000 were included in rates during 1996, 1995 and 1994, respectively. In
September 1996, the RIPUC approved a ratable recovery of the cumulative
unrecovered difference of $1,041,000 during 1997, 1998 and 1999.
The Plan's costs and accumulated post-retirement benefit obligation for 1996,
1995 and 1994 are calculated by the Registrant's actuaries using assumptions and
estimates which include:
II-20
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Healthcare cost annual growth rate 11.4% 12.6% 12.6%
Healthcare cost annual growth rate - long-term 6.0 6.0 6.0
Expected long-term rate of return (union) 8.5 8.5 8.5
Expected long-term rate of return (non-union) 5.5 5.5 5.5
Discount rate 8.0 8.0 8.0
</TABLE>
The healthcare cost annual growth rate significantly impacts the estimated Plan
obligation and annual expense. For example, in 1996, a one percent change in
the above rates would change the obligation by $833,000 and would change the
annual expense by $90,000.
The obligations and assets of the Plan at September 30, 1996 and 1995 are (in
thousands):
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement
benefit obligation:
Current retirees $(6,975) $ (7,426)
Active employees-eligible for
benefits (889) (845)
Active employees (3,876) (3,694)
------- --------
Total post-retirement benefit
obligation (11,740) (11,965)
Plan assets at fair value 3,106 2,080
------- --------
Unfunded post-retirement benefit
obligation (8,634) (9,885)
Unrecognized transition
obligation 8,947 9,474
Unrecognized net (gain) or loss (313) 402
------- --------
Accrued post-retirement
benefit obligations included
in the Registrant's consolidated
balance sheets $ - $ (9)
======= ========
</TABLE>
The Registrant's actuarial determined Plan costs for 1996, 1995 and 1994
include:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ --------
<S> <C> <C> <C>
Service cost $ 222 $ 230 $ 238
Interest cost 896 909 835
Actual return on plan assets (98) (28) (37)
Amortization and deferral 434 450 530
------ ------ --------
Total annual plan costs $1,454 $1,561 $ 1,566
====== ====== ========
</TABLE>
C. Supplemental Retirement Plans
The Registrant provides certain supplemental retirement plans for key employees.
The projected benefit obligation is approximately $1,098,000 which is being
accrued over the service period of
II-21
<PAGE>
these key employees. The supplemental retirement plans are unfunded. The
Registrant expensed $310,000, $150,000 and $44,000 related to these benefits in
1996, 1995 and 1994, respectively.
D. Performance and Equity Incentive Plan
During 1993, the Board of Directors of Providence Energy, 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 vests on the fifth anniversary of
the grant date provided the participant is still employed by Providence Energy
Corporation or one of its subsidiaries. Vesting may be accelerated under certain
circumstances. The Plan also provides for cash compensation to key employees.
The executive compensation incentive awards paid by the Registrant under this
Plan totaled approximately $381,000 for 1996, $248,000 for 1995 and $240,000 for
1994. 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 $240,000 1994 award, $153,000 was paid in cash during fiscal 1995. Of
the $248,000 1995 award, $167,000 was paid in cash during fiscal 1996. Of the
$381,000 1996 award, $269,000 will be paid in cash during 1997. Grant shares
totaling 4,491, 5,371 and 4,902 were purchased by the Registrant for key
employees during 1996, 1995 and 1994, respectively.
E. Restricted Stock Incentive Plan
During 1996, the Board of Directors of Providence Energy adopted a Restricted
Stock Incentive Plan. The Restricted Stock Incentive Plan provides that up to
60,000 shares of common stock may be granted to employees of Providence Energy
and its subsidiaries, including the Registrant, with at least three months of
service, who are not officers or covered by a collective bargaining agreement,
at no cost to the employee. All participants are entitled to receive dividends,
however, full beneficial ownership vests on the third anniversary of the date of
the grant provided that the participant is still employed by Providence Energy
or one of its subsidiaries. Vesting may be accelerated under certain
circumstances.
Awards under the Restricted Stock Incentive Plan to employees of the Registrant
totaled approximately $146,000 in 1996 consisting of 7,954 shares. All amounts
awarded under the Restricted Stock Incentive Plan are deferred and amortized to
expense over a three-year period.
II-22
<PAGE>
7.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
conditions.
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:
- ------------------------------
<TABLE>
<CAPTION>
(thousands of dollars) 1996 1995
- ------------------------------------------------------
<S> <C> <C>
Gas plant $6,116 $6,116
Information systems 1,551 1,551
Accumulated depreciation (6,072) (5,659)
------ ------
$1,595 $2,008
====== ======
</TABLE>
Commitments for Capital Leases:
- ----------------------------------
<TABLE>
<CAPTION>
LNG Computer
(thousands of dollars) Storage Equipment Total
- --------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 136 $ 404 $ 540
1998 136 373 509
1999 136 373 509
2000 136 186 322
2001 135 - 135
------ ------- -------
$ 679 $1,336 2,015
====== =======
Amount representing interest 337
-------
Amount representing principal $ 1,678
=======
</TABLE>
C. OPERATING LEASES
The Registrant also leases facilities and equipment under operating leases with
a total future obligation of $483,000 as of September 30, 1996.
D. GAS SUPPLY RESTRUCTURING
Federal Energy Regulatory Commission (FERC) Order 636 and other
II-23
<PAGE>
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 its transition costs to net
between $21 million and $22 million, of which $15.8 million has been included in
the GCC and is currently being collected from customers. The remaining minimum
obligation of $5.2 million has been recorded in the accompanying consolidated
balance sheets along with a regulatory asset anticipating future recovery
through the GCC. To the extent that refunds are received based on FERC
settlements, the refunds are returned to customers 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.
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 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, 1996, the Registrant is aware of four sites at which future
costs may be incurred.
II-24
<PAGE>
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 ProvGas and other PRP's. With respect to one of the
Plympton sites, ProvGas has joined with other PRP's 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, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of September
30, 1996, approximately $1.5 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 this site.
The Registrant has completed the study which indicated 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 September 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 September 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 prior rate cases filed, 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 $1.8 million and an estimated $1.3 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
September 30, 1996. Of the environmental costs incurred, approximately $1.0
million and $600,000 were recorded in the years ended September 30, 1996 and
1995, respectively, while the remainder were recorded in prior years.
Management believes that
II-25
<PAGE>
this rate recovery mechanism is appropriate for recovery of any future costs.
Additionally, it is the Registrant's practice to consult with the RIPUC on a
periodic basis when, in management's opinion, significant amounts might be
expended for environmental related costs. Should future developments warrant
additional rate recovery mechanisms, management will seek recovery.
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.
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, 1996, $800,000 was due from the State of Rhode
Island related to gas consumed by customers over the last two years.
8. 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, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 923 $ 923 $ 791 $ 791
Short-term debt* 20,800 20,800 4,337 4,337
Long-term debt* 74,478 77,924 76,432 81,816
Preferred stock 8,000 8,395 8,000 8,800
</TABLE>
* 1995 amounts adjusted for the issuance of $15 million in First Mortgage Bonds,
Series R subsequent to year-end.
II-26
<PAGE>
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 should not result in a material
impact on the Registrant's financial position or results of operations.
9. 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
will bring skill, expertise and experiences to the Registrant not previously
available within its work force.
The direct cost of this realignment was approximately $1 million, net of tax,
consisting primarily of severance pay and related benefits for personnel who
were separated during 1994. Substantially all costs were paid as of September
30, 1995. The Registrant had 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 most recent rate case. (See Footnote
10.)
10. 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. 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
ProvGas' 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 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 $4,100,000 before tax.
II-27
<PAGE>
b) The Registrant wrote-off the $1,600,000, before tax, of restructuring costs
previously deferred. (See Footnote 9.) The RIPUC had previously allowed the
Registrant recovery of similar costs, but decided differently upon
reconsideration of this issue.
c) The Registrant wrote-off approximately $440,000, before tax, of previously
deferred rate case expenses. (See Footnote 1.)
d) The Registrant wrote-off approximately $470,000, before tax, of construction
expenditures previously capitalized. These costs were capitalized in
accordance with GAAP and were based on FERC 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 did not result in a material gain or
loss.
11. HEDGING
On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Agreement between the Registrant and the Rhode Island Division of Public
Utilities and Carriers. The Agreement allows the Registrant to use options,
including calls, puts and collars, in order to reduce the impact of changes in
the price of natural gas. The total expenditures for the purchase and exercise
of Financial Risk Management (FRM) tools and the net proceeds from the sale of
FRM tools will be flowed through the Variable Gas Cost component of the GCC and
cannot exceed $800,000.
The Registrant had not entered into any hedging transactions as of September 30,
1996 and, depending on market conditions, anticipates beginning sometime during
fiscal 1997.
12. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets and requires that regulatory assets which are no longer probable of
recovery through future revenues be charged to earnings. SFAS No. 121 will be
effective for the Registrant in fiscal 1997. At that time, the Registrant will
perform a full analysis of its long-lived assets. Based on the current
regulatory environment, management does not believe the adoption of SFAS No. 121
will have a material impact on the Registrant's financial position or results of
operations.
13. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited quarterly financial information for the two years
ended September 30, 1996 and 1995. Quarterly variations between periods are
caused primarily by the seasonal nature of gas sales and the availability of
gas.
II-28
<PAGE>
<TABLE>
<CAPTION>
(thousands, except per share amounts)
Quarter Ended
-------------
Dec. 31 Mar. 31 June 30 Sept. 30
------- ------- ------- --------
Fiscal 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $57,270 $79,261 $42,522 $31,548
Operating income (loss) 6,289 9,376 898 (935)
Net income (loss)
applicable to common
stock 4,880 7,419 (921) (2,764)
Net income (loss) per share
applicable to
common stock* 3.92 5.97 (.74) (2.22)
<CAPTION>
Fiscal 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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) per share
applicable to
common stock* 2.55 4.47 (.66) (1.68)
</TABLE>
* Calculated on the basis of weighted average shares outstanding during the
quarter.
II-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of 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 wholly owned subsidiary of Providence Energy Corporation)
as of September 30, 1996 and 1995, 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, 1996. These financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index to the financial statements are 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 7, 1996
II-30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
II-31
<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:
<TABLE>
<CAPTION>
Year Office
Name and Age Office First Held
- ------------ ------ ----------
<S> <C> <C>
James H. Dodge (56) Chairman, President and Chief
Executive Officer 1992
James DeMetro (48) Senior Vice President, Energy
Services 1996
Gary S. Gillheeney (41) Senior Vice President, Chief
Financial Officer and
Treasurer 1996
Robert W. Owens (48) Senior Vice President, Gas
Distribution 1996
Alycia L. Goody (44) Vice President, General Counsel
and Secretary 1994
Patricia O. Keene (51) Vice President, Customer Service 1996
William D. Mullin (48) Vice President, Economic
Development and Operations 1996
Bruce G. Wilde (50) Vice President, Administration
and Assistant Secretary 1996
Gary L. Beland (46) Assistant Vice President,
Gas Supply 1996
Peter J. Gill (37) Controller and Assistant
Treasurer 1996
Timothy S. Lyons (35) Assistant Vice President,
Pricing and Regulation 1996
</TABLE>
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 Senior Vice President, Energy Services in February of
1996. For four years prior thereto, Mr. DeMetro served the Registrant as Vice
President, Energy Services. 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.
III-1
<PAGE>
Mr. Gillheeney was elected Senior Vice President and Chief Financial Officer
in February 1996 and Treasurer in January 1994. For more than two years prior to
February 1996, Mr. Gillheeney served the Registrant as Vice President, Financial
and Information Services, as well as Treasurer. For more than five years prior
thereto, Mr. Gillheeney served the Registrant in various management positions,
most recently as Assistant Treasurer and Controller.
Mr. Owens was elected Senior Vice President, Gas Distribution in February
1996. For more than two years prior thereto, Mr. Owens served the Registrant as
Vice President, Operations. For more than five years prior thereto, Mr. Owens
served the Registrant in various management positions, most recently as Vice
President, Treasurer and Chief Financial Officer.
Ms. Goody was elected Vice President, General Counsel and Secretary in
December 1994. For two years prior thereto, Ms. Goody served Providence Energy
Corporation and ProvGas as General Counsel and Corporate Secretary. For four
years prior to that, Ms. Goody served the Registrant as Corporate Counsel.
Ms. Keene was elected Vice President, Customer Service in February 1996. For
more than a year prior thereto, Ms. Keene served the Registrant as Vice
President, Customer Activities. For more than five years prior thereto, Ms.
Keene served as General Manager for NYNEX in various capacities.
Mr. Mullin was elected Vice President, Economic Development and Operations in
February 1996. For more than two years prior thereto, Mr. Mullin served the
Registrant as Vice President, Corporate Relations. For five years prior
thereto, he served the Registrant in various management positions, most recently
as Vice President, Operations.
Mr. Wilde was elected Vice President, Administration in February 1996 and
Assistant Secretary in May 1994. For more than a year prior to his election as
Vice President, Administration, Mr. Wilde served the Registrant as Vice
President, Human Resources. For more than five years prior thereto, Mr. Wilde
served the Registrant in various management positions, most recently as
Assistant Vice President for Personnel.
Mr. Beland was elected Assistant Vice President, Gas Supply in February 1996.
For two years prior thereto, Mr. Beland served as Director of Gas and
Transportation Services. For more than five years prior thereto, Mr. Beland
served the Niagra Mohawk Power Corp., a regulated natural gas utility, in
various management positions, most recently as Manager, Gas Supply Planning.
Mr. Gill was elected Controller and Assistant Treasurer in February 1996. For
two years prior thereto, Mr. Gill served the Registrant as Director of Planning.
For four years prior thereto, Mr. Gill served the Registrant as Director of
Budgeting.
Mr. Lyons was elected Assistant Vice President, Pricing and Regulation in
February of 1996. For two years prior thereto, Mr. Lyons served the Registrant
as Director of Pricing. For two years
III-2
<PAGE>
prior thereto, Mr. Lyons served the Registrant as Director of Rates. Prior to
his employment with the Registrant, Mr. Lyons served Boston Gas, a regulated
natural gas utility as Director of Rates and Revenue Analysis.
III-3
<PAGE>
DIRECTORS OF THE REGISTRANT
- ---------------------------
The following information is furnished with respect to the Directors of the
Registrant.
<TABLE>
<CAPTION>
Name Director Since Expiration of Term
- ---- -------------- ------------------
<S> <C> <C>
Gilbert R. Bodell, Jr. 1980 1998
James H. Dodge 1991 1997
John H. Howland 1993 1999
Douglas H. Johnson 1993 1999
Dorothy G. Kramer 1976 1997
William Kreykes 1996 1999
Paul F. Levy 1995 1998
Romolo A. Marsella 1993 1999
M. Anne Szostak 1995 1998
Kenneth W. Washburn 1975 1997
W. Edward Wood 1995 1998
</TABLE>
Gilbert R. Bodell, Jr. is Chairman and former President, Frontier
Manufacturing Company (textile); former Vice President, Valley Lace Co. and
Esten Dyeing and Finishing Co.
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. (textiles).
Douglas H. Johnson is Vice President and Managing Partner, M. Van Leesten
Associates, 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 retired Senior Vice President, Treasurer and Corporate
Secretary, Taco, Inc. (manufacturers of pumping, heat transfer and hydronic
control equipment).
William Kreykes is President and Chief Executive Officer, Lifespan Corporation
since December 1994; from October 1990 to December 1994: President and Chief
Executive Officer, Rhode Island Hospital.
III-4
<PAGE>
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; from 1991 to
1996: Chairman of the Board, Fleet Bank of 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-5
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
For the information called for by this item, reference is made to pages 5 to
11 of the Providence Energy Corporation's proxy statement filed December 18,
1996 with the Securities and Exchange Commission for the annual meeting of
shareholders to be held January 16, 1997.
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-6
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
THE PROVIDENCE GAS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules
----------------------------------
Consolidated Balance Sheets--September 30, 1996 and 1995
Consolidated Statements of Income for the years ended September 30, 1996, 1995
and 1994
Consolidated Statements of Cash Flows for the years ended September 30, 1996,
1995 and 1994
Consolidated Statements of Capitalization--September 30, 1996 and 1995
Consolidated Statements of Changes in Common Stockholder's Investment for the
years ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Schedule II. Reserves for the years ended September 30, 1996, 1995 and 1994.
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, 1996.
(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 Providence Gas Company to St.
Louis Union Trust Company, Trustee, filed as Exhibit 4.1 to Registration
Statement of The Providence Gas Company 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 Providence
Gas Company to Centerre Trust Company of St. Louis, Trustee (filed as
Exhibit 4 (b) to Registration Statement of The Providence Gas Company on
Form S-3 (Registration No. 33-5023), incorporated herein by this
reference).
4.3 First Mortgage Indenture dated as of January 1, 1922, as supplemented by
First through Twelfth Supplemental Indentures,
IV-1
<PAGE>
(incorporated by reference to Exhibit 10.10 in 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. (Filed as
exhibit 4.6 to the report of the Registrant in Form 10-K for the year ended
September 30, 1995, incorporated herein by this reference.)
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 10.1 to the report of the Registrant in Form 10-Q for the
quarter ended December 31, 1994, incorporated herein by this reference.)
10.3 Management contract dated December 19, 1994 between James DeMetro, Vice
President, Energy Services of the Registrant. (Filed as Exhibit 10.1 to the
report of the Registrant in Form 10-Q for the quarter ended December 31,
1994, incorporated herein by this reference.)
10.4 Management contract dated December 19, 1994 between Robert W. Owens, Vice
President, Operations of the Registrant. (Filed as Exhibit 10.1 to the
report of the Registrant in Form 10-Q for the quarter ended December 31,
1994, incorporated herein by this reference.)
10.5 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 10.1 to the report of the
Registrant in Form 10-Q for the quarter ended December 31, 1994,
incorporated herein by this reference.)
10.6 Management contract dated December 19, 1994 between Alycia L. Goody, Vice
President, General Counsel and Secretary of the Registrant. (Filed as
Exhibit 10.1 to the report of the Registrant in form 10-Q for the quarter
ended December 31, 1994, incorporated herein by this reference.)
IV-2
<PAGE>
10.7 Management contract dated December 19, 1994 between William D. Mullin, Vice
President, Corporate Relations of the Registrant. (Filed as Exhibit 10.1 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 Bruce G. Wilde, Vice
President, Human Resources of the Registrant. (Filed as Exhibit 10.1 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 February 29, 1996 between Patricia O. Keene, Vice
President, Customer Activities of the Registrant. (Filed as Exhibit 10.1 to
the report of the Registrant in Form 10-Q for the quarter ended March 31,
1996, incorporated herein by this reference.)
22 Subsidiaries of the Registrant.
IV-3
<PAGE>
Supplemental Schedule
Schedule II
PROVIDENCE GAS COMPANY
----------------------
RESERVES FOR THE YEARS ENDED
----------------------------
SEPTEMBER 30, 1996, SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
-------------------------------------------------------------
(Thousands of Dollars)
<TABLE>
<CAPTION>
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/95 to Operations Add (Deduct) Created 9/30/96
-------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,916 $4,884 $ -- 3,826 $ 2,974
Allowance for lease
receivables -
current 313 -- -- 313 --
other 80 17 -- 88 9
------- ------ ------ ------ -------
Total $ 2,309 $4,901 $ -- $4,227 $ 2,983
======= ====== ====== ====== =======
Allowance for lease
receivables -
long-term $ 651 $1,179 $ -- $1,427 $ 403
======= ====== ====== ====== =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $17,892 $1,968 $ 43(C) $ -- $19,903
------- ------ ------ ------ -------
Unamortized investment
tax credit 2,668 -- -- 158 2,510
------- ------ ------ ------ -------
Other-
Liability and
damage reserve 334 520 -- 293 561
Other 5,140 1,303 1,727(D) 763 7,407
------- ------ ------ ------ -------
Total other 5,474 1,823 1,727 1,056 7,968
------- ------ ------ ------ -------
Total deferred
credits and
reserves $26,034 $3,791 $1,770 $1,214 $30,381
======= ====== ====== ====== =======
</TABLE>
IV-4
<PAGE>
SCHEDULE II (cont'd)
<TABLE>
<CAPTION>
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/94 to Operations Add (Deduct) Created 9/30/95
-------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
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 $1,096(C) $ -- $17,892
-------- ------ ------ ------ -------
Unamortized investment
tax credit 2,826 -- -- 158 2,668
-------- ------ ------ ------ -------
Other-
Liability and
damage reserve 421 400 -- 487 334
Other 5,735 621 408(A) 1,624 5,140
-------- ------ ------ ------ -------
Total other 6,156 1,021 408 2,111 5,474
-------- ------ ------ ------ -------
Total deferred
credits and
reserves $ 23,768 $3,031 $1,504 $2,269 $26,034
======== ====== ====== ====== =======
</TABLE>
IV-5
<PAGE>
Schedule II (cont'd)
<TABLE>
<CAPTION>
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/93 to Operations Add (Deduct) Created 9/30/94
-------- ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
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 $1,109 $ 254(C) $ -- $14,786
-------- ------ ------ ------ -------
Unamortized investment
tax credit 2,984 -- -- 158 2,826
-------- ------ ------ ------ -------
Other-
Liability and
damage reserve 296 145 -- 20 421
Other 4,291 1,166 1,726(B) 1,448 5,735
-------- ------ ------ ------ -------
Total other 4,587 1,311 1,726 1,468 6,156
-------- ------ ------ ------ -------
Total deferred
credits and
reserves $ 20,994 $2,420 $1,980 $1,626 $23,768
======== ====== ====== ====== =======
</TABLE>
(A) Includes adjustment to the regulatory pension liability.
(B) Principally a reserve for restructuring charges in addition to
adjustments to the regulatory pension liability.
(C) Represents adjustment to the regulatory asset and liability for FAS No.
109 activity.
(D) Principally an accrual for environmental investigation and remediation
costs in addition to adjustment to the regulatory pension liability.
IV-6
<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 /s/ JAMES H. DODGE
--------------------------------------------
James H. Dodge, Chairman, President and CEO
Date December 19, 1996
--------------------------------------------
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES H. DODGE Chairman, President, and CEO
- ------------------------ (Principal Executive Officer) 12-19-96
James H. Dodge --------
/s/ GARY S. GILLHEENEY Senior Vice President, 12-19-96
- ------------------------ Chief Financial Officer and --------
Gary S. Gillheeney Treasurer
/s/ GILBERT R. BODELL, JR. Director 12-19-96
- ------------------------ --------
Gilbert R. Bodell, Jr.
/s/ JOHN H. HOWLAND Director 12-19-96
- ------------------------ --------
John H. Howland
/s/ DOUGLAS H. JOHNSON Director 12-19-96
- ------------------------ --------
Douglas H. Johnson
/s/ DOROTHY G. KRAMER Director 12-19-96
- ------------------------ --------
Dorothy G. Kramer
/s/ WILLIAM KREYKES Director 12-19-96
- ------------------------ --------
William Kreykes
/s/ PAUL F. LEVY Director 12-19-96
- ------------------------ --------
Paul F. Levy
/s/ ROMOLO A. MARSELLA Director 12-19-96
- ------------------------ --------
Romolo A. Marsella
/s/ M. ANNE SZOSTAK Director 12-19-96
- ------------------------ --------
M. Anne Szostak
/s/ KENNETH W. WASHBURN Director 12-19-96
- ------------------------ --------
Kenneth W. Washburn
</TABLE>
IV-7
<PAGE>
Exhibit 22
SUBSIDIARY OF REGISTRANT
-------------------------------------
ProvEnergy Investments, Ltd. - Incorporated under the laws of Rhode Island.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 171,586
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 52,010
<TOTAL-DEFERRED-CHARGES> 13,919
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 237,515
<COMMON> 1,244
<CAPITAL-SURPLUS-PAID-IN> 37,657
<RETAINED-EARNINGS> 35,943
<TOTAL-COMMON-STOCKHOLDERS-EQ> 74,844
8,000
0
<LONG-TERM-DEBT-NET> 72,455
<SHORT-TERM-NOTES> 20,800
<LONG-TERM-NOTES-PAYABLE> 72,800
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,600
0
<CAPITAL-LEASE-OBLIGATIONS> 1,678
<LEASES-CURRENT> 423
<OTHER-ITEMS-CAPITAL-AND-LIAB> 59,393
<TOT-CAPITALIZATION-AND-LIAB> 237,515
<GROSS-OPERATING-REVENUE> 210,601
<INCOME-TAX-EXPENSE> 4,418
<OTHER-OPERATING-EXPENSES> 190,555
<TOTAL-OPERATING-EXPENSES> 194,973
<OPERATING-INCOME-LOSS> 15,628
<OTHER-INCOME-NET> 976
<INCOME-BEFORE-INTEREST-EXPEN> 16,604
<TOTAL-INTEREST-EXPENSE> 7,294
<NET-INCOME> 9,310
696
<EARNINGS-AVAILABLE-FOR-COMM> 8,614
<COMMON-STOCK-DIVIDENDS> 4,627
<TOTAL-INTEREST-ON-BONDS> 5,889
<CASH-FLOW-OPERATIONS> 11,292
<EPS-PRIMARY> 6.93
<EPS-DILUTED> 6.93
</TABLE>
