<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________________to___________________________
Commission file number 0-1160
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THE PROVIDENCE GAS COMPANY
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
- --------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
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(Address of principal executive offices)
(Zip Code)
(401) 272-5040
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Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___.
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $1.00 par value; 1,243,598 shares outstanding at July 31, 1997.
- -----------------------------------------------------------------------------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
JUNE 30, 1997
PART I: FINANCIAL INFORMATION PAGE
Item 1: Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1997 and 1996 I-1
Consolidated Balance Sheets as of June 30, 1997,
June 30, 1996 and September 30, 1996 I-2
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1997
and 1996 I-3
Consolidated Statements of Capitalization
as of June 30, 1997, June 30, 1996
and September 30, 1996 I-4
Notes to Consolidated Financial Statements I-5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations I-8
PART II: OTHER INFORMATION
Item 6: Reports on Form 8-K II-1
Signature II-2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ ---------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996
------- ------- -------- -------- -------- --------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $40,679 $42,522 $178,942 $179,053 $210,490 $209,016
Cost of gas sold 20,910 23,602 101,199 100,910 118,340 117,433
------- ------- -------- -------- -------- --------
Operating margin 19,769 18,920 77,743 78,143 92,150 91,583
------- ------- -------- -------- -------- --------
Operating expenses:
Operating and maintenance 11,264 12,500 34,740 37,051 45,805 47,138
Depreciation and amortization 3,141 3,056 9,306 8,623 12,240 11,218
Taxes -
State gross earnings 1,097 1,247 5,168 5,153 6,076 6,009
Local property and other 1,921 1,652 5,636 5,000 7,406 6,602
Federal income 198 (433) 5,961 5,753 4,626 4,366
------- ------- -------- -------- -------- --------
Total operating expenses 17,621 18,022 60,811 61,580 76,153 75,333
------- ------- -------- -------- -------- --------
Operating income 2,148 898 16,932 16,563 15,997 16,250
Other, net 165 161 416 919 473 1,096
------- ------- -------- -------- -------- --------
Income before interest expense 2,313 1,059 17,348 17,482 16,470 17,346
------- ------- -------- -------- -------- --------
Interest expense:
Long-term debt 1,505 1,525 4,537 4,362 6,064 5,629
Other 397 311 1,223 1,283 1,438 1,816
Interest capitalized (57) (30) (152) (63) (182) (90)
------- ------- -------- -------- -------- --------
1,845 1,806 5,608 5,582 7,320 7,355
------- ------- -------- -------- -------- --------
Net income (loss) 468 (747) 11,740 11,900 9,150 9,991
Dividends on preferred stock (139) (174) (487) (522) (661) (696)
------- ------- -------- -------- -------- --------
Net income(loss)applicable to common stock $ 329 $ (921) $ 11,253 $ 11,378 $ 8,489 $ 9,295
======= ======= ======== ======== ======== ========
Earnings per common share $ 0.26 $ (.74) $ 9.05 $ 9.15 $ 6.83 $ 7.47
======= ======= ======== ======== ======== ========
Dividends paid per common share $ 0.96 $ .92 $ 2.88 $ 2.76 $ 3.84 $ 3.68
======= ======= ======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======= ======= ======== ======== ======== ========
</TABLE>
PAGE I-1
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
----------------------------
(Thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1997 1996 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $283,309 $264,429 $270,149
Less - Accumulated depreciation and
utility plant acquisition adjustments 106,629 96,659 98,563
-------- -------- --------
176,680 167,770 171,586
-------- -------- --------
Current assets:
Cash and temporary cash investments 1,059 1,024 923
Accounts receivable, less
allowance of $2,912 at 6/30/97, $5,249 at
6/30/96 and $2,983 at 9/30/96 28,364 24,639 14,001
Unbilled revenues 687 1,635 2,333
Deferred gas costs 1,389 2,371 13,128
Inventories, at average cost -
Liquefied natural gas, propane and under-
ground storage 11,526 7,317 15,794
Materials and supplies 1,103 1,242 1,151
Prepaid and refundable taxes 4,755 3,957 3,215
Prepayments 772 970 1,465
-------- -------- --------
49,655 43,155 52,010
-------- -------- --------
Deferred charges and other assets 12,262 12,892 13,919
-------- -------- --------
Total assets $238,597 $223,817 $237,515
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying statement) $161,724 $159,338 $155,299
-------- -------- --------
Current liabilities:
Notes payable 9,605 4,900 20,800
Current portion of long-term debt 2,649 1,994 2,023
Accounts payable 17,257 14,103 16,480
Accrued taxes 6,168 4,266 1,867
Accrued vacation 1,907 1,932 1,673
Customer deposits 3,419 3,999 3,956
Other 4,732 4,438 5,036
-------- -------- --------
45,737 35,632 51,835
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes 20,085 18,910 19,903
Unamortized investment tax credits 2,393 2,550 2,510
Other 8,658 7,387 7,968
-------- -------- --------
31,136 28,847 30,381
-------- -------- --------
Total capitalization and liabilities $238,597 $223,817 $237,515
======== ======== ========
</TABLE>
PAGE I-2
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Thousands)
<S> <C> <C>
Cash provided by (used for)
Operations:
- -----------
Net income $ 11,740 $ 11,900
Items not requiring cash-
Depreciation and amortization 9,402 8,723
Changes as a result of regulatory action -- (1,453)
Deferred Federal income taxes 183 1,021
Amortization of investment tax credits (117) (118)
Change in assets and liabilities
which provided (used) cash:
Accounts receivable (14,363) (10,849)
Unbilled revenues 1,646 1,002
Deferred gas costs 11,739 (1,175)
Inventories 4,316 2,844
Prepaid and refundable taxes (1,541) 1,312
Prepayments 693 358
Accounts payable 777 207
Accrued taxes 4,301 2,461
Accrued vacation, customer deposits
& other (556) 1,242
Deferred charges & other 1,946 1,652
-------- --------
Net cash provided by operations 30,166 19,127
-------- --------
Investment Activities:
- ---------------------
Expenditures for property, plant and
equipment, net (12,585) (13,621)
-------- --------
Financing Activities:
- --------------------
Issuance of mortgage bonds -- 15,000
Issuance of other long-term debt 1,345 --
Payments on long-term debt (1,924) (1,881)
Decrease in notes payable, net (11,195) (14,437)
Redemption of preferred stock (1,600) --
Cash dividends on preferred shares (487) (522)
Cash dividends on common shares (3,584) (3,433)
-------- --------
Total (17,445) ( 5,273)
-------- --------
Increase in cash & temporary cash
investments 136 233
Cash and cash equivalents at beginning
of period 923 791
-------- --------
Cash and cash equivalents at end of period $ 1,059 $ 1,024
======== ========
Supplemental disclosures of cash flow information:
Cash paid year-to-date-
Interest (net of amount capitalized) $ 5,471 $ 4,906
Income taxes (net of refunds) $ 2,215 $ 1,858
Schedule of noncash investing and
financing activities:
Equipment financed through capital leases $ 232 $ --
Equipment financed through other
long-term debt $ 1,330 $ --
</TABLE>
PAGE I-3
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
<TABLE>
<CAPTION>
(Unaudited)
June 30, June 30, September 30,
1997 1996 1996
----------------------------------
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 at 6/30/97,
6/30/96, and 9/30/96 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,657 37,636 37,657
Retained earnings 43,611 39,901 35,943
-------- -------- --------
Total common stock equity 82,512 78,781 74,844
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 64 shares at 6/30/97,
and 80 shares at
6/30/96 and 9/30/96 6,400 8,000 8,000
-------- -------- --------
Long-term debt:
First mortgage bonds 71,200 72,800 72,800
Other long-term debt 2,675 -- --
Capital leases 1,586 1,751 1,678
-------- -------- --------
Total long-term debt 75,461 74,551 74,478
Less current portion 2,649 1,994 2,023
-------- -------- --------
Long-term debt, net 72,812 72,557 72,455
-------- -------- --------
Total capitalization $161,724 $159,338 $155,299
======== ======== ========
</TABLE>
PAGE I-4
<PAGE>
THE PROVIDENCE GAS COMPANY
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in this
report reflects all normal, recurring adjustments necessary to provide a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in this Form 10-Q pursuant to the rules and regulations of
the Securities and Exchange Commission. However, the disclosures herein when
read with the annual report for 1996 filed on Form 10-K are adequate to make the
information presented not misleading.
In the second quarter of 1997, the Registrant began to employ derivative
financial instruments in the form of natural gas options for the purpose of
managing commodity price risk. These derivative instruments were purchased
under the Pilot Hedging Program approved by the Rhode Island Public Utilities
Commission (RIPUC) in October 1996. Under the program, expenditures for
purchases and exercises of the financial instruments, net of proceeds from
sales, are flowed through the Gas Charge Clause (GCC) and cannot exceed
$800,000.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified for consistent presentation
with the current period.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean-
up certain sites. To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.
At June 30, 1997, the Registrant is aware of four sites at which future costs
may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRP's. With respect to one
of the Plympton sites, the Registrant has joined with other PRP's in entering
into an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of June 30,
1997, approximately $1.7 million had been spent on studies at this site. In
accordance with state laws, such
PAGE I-5
<PAGE>
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
initial phase of the study which indicates that some clean-up will be required.
The Registrant has several remediation options for the site and is currently
negotiating with DEM and contractors to arrive at the best alternative. At June
30, 1997, the Registrant has compiled a preliminary range of costs based on
remediation alternatives, ranging from $1.7 million to approximately $3.0
million. However, because of the uncertainties associated with environmental
assessment and remediation activities, the future costs of remediation could be
higher than the alternatives noted above. Based on the proposals for
remediation work, the Registrant has accrued $1.7 million at June 30, 1997 for
anticipated future remediation costs at this site. Also, the Registrant has
negotiated an agreement, 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. The Agreement received Federal
regulatory approval in May 1997, however, the approval allows for rehearing
prior to acceptance by the filing party. The agreement has not been accepted or
enacted by the third party.
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
a 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 addition in the first
quarter of 1997, contamination from scrapped meters and regulators was
discovered at this site. The Registrant has reported this to the DEM and the
Rhode Island Department of Health and is in the process of remediation. It is
anticipated that remediation will cost between $30,000 and $100,000. Based on
the expected remediation costs, the Registrant has accrued $30,000 at June 30,
1997 for anticipated future remediation costs 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 $2.0 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
June 30, 1997. Management believes that this rate recovery mechanism is
appropriate for recovery of future costs. Additionally, it is the Registrant's
practice to consult with the Rhode Island Public Utilities Commission (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 such recovery.
Management has begun discussions with other parties who may assist the
Registrant in paying future costs at the above sites. Management believes that
its program for managing environmental issues, combined with rate recovery and
financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
Gas Supply Restructuring
- ------------------------
Federal Energy Regulatory Commission (FERC) Order 636 and other related orders
(the Orders) have significantly changed the structure and types of services
offered by pipeline transportation companies. The most significant components
of the restructuring occurred in November 1993. In response to these changes,
the Registrant has successfully negotiated new pipeline transportation and gas
storage contracts.
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
PAGE I-6
<PAGE>
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 to
approximately $21.5 million, net of refunds received based on FERC settlements,
of which $15.5 million has been included in the GCC and is currently being
collected from customers. The remaining minimum obligation of $6.0 million has
been recorded in the accompanying consolidated balance sheet along with a
regulatory asset anticipating future recovery through the GCC.
The Registrant's ultimate liability may differ from the above estimate based on
FERC settlements with the Registrant's pipeline transportation suppliers. FERC
has approved settlements with four of its pipelines, which account for the bulk
of the Registrant's transition costs. Based on the information available, the
Registrant believes that its current estimate of transition costs is reasonable.
New Accounting Pronouncements
- -----------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The statement replaces the presentation of
primary earnings per share with the presentation of basic earning per share.
This statement would have no effect on the Registrant's earnings per share for
the periods presented.
In July 1997, FASB issued Statement of Financial Accounting Standards No. 130
(SFAS No. 130), "Reporting Comprehensive Income", which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. The statement requires additional disclosure
only and will not affect the financial position or results of operations of the
Registrant.
PAGE I-7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
- -------------
Providence Gas Company (the Registrant) 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
quarterly report 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. Factors which could cause actual results
to differ materially from those anticipated 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.
RESULTS OF OPERATIONS
The Registrant's operating revenues, operating margin and net income for the
three months, nine months and twelve months ended June 30, 1997 and comparable
periods ended June 30, 1996 are as follows:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
1997 1996 1997 1996 1997 1996
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $40,679 $42,522 $178,942 $179,053 $210,490 $209,016
======= ======= ======= ======== ======== ========
Operating margin $19,769 $18,920 $ 77,743 $ 78,143 $ 92,150 $ 91,583
======= ======= ======== ======== ======== ========
Net income applicable
to common stock $ 329 $ (921) $ 11,253 $ 11,378 $ 8,489 $ 9,295
======= ======= ======== ======== ======== ========
</TABLE>
PAGE I-8
<PAGE>
Operating Revenues and Operating Margin
---------------------------------------
During the quarter ended June 30, 1997, weather was 24.9 percent colder than
normal as opposed to 7.9 percent colder than normal in the corresponding
period of the prior year. This resulted in increased operating margin of $0.7
million from the quarter ended June 30, 1996 to the quarter ended June 30,
1997. Revenues for the quarter decreased approximately $1.8 million from the
corresponding quarter of the prior year due to lower gas costs. Gas costs had
no effect on margin as the Registrant recovers actual gas costs through the
GCC.
For the nine months ended June 30, 1997, weather was normal as opposed to 5.5
percent colder than normal for the nine months ended June 30, 1996. This
resulted in decreased margin of approximately $1.7 million. This decrease was
offset by rate increases effective December 17, 1995. These rate increases
accounted for increased margin of approximately $0.8 million. In addition,
margin increased approximately $0.4 million as a result of phasing in to rates
the Registrant's post-retirement expenses approved by the Rhode Island Public
Utilities Commission (RIPUC) in September 1996. Revenues for the most recent
fiscal year to date have decreased $0.1 million as the result of the warmer
weather offset by increased revenues as a result of higher gas costs in the
first six months of fiscal year 1997. The Company recovers actual gas costs
through the GCC and, therefore, the increased gas costs had no effect on
operating margin. In addition, the Registrant had higher revenues due to the
approved rate increase effective December 17, 1995. These increases were
offset due to decreases as the result of the warmer weather.
Weather for the twelve month period ended June 30, 1997 was 3.6 percent warmer
than the corresponding period from the prior year, which resulted in decreased
margin of $1.8 million. This decrease was offset by an increase of
approximately $1.3 million due to increased rates that became effective
December 17, 1995 and $0.4 million as the result of additional revenues for
post-retirement expenses.
Operation and Maintenance Expense
---------------------------------
Operation and maintenance expenses for the quarter ended June 30, 1997
decreased approximately $1.2 million or 9.9 percent from the same quarter last
year. This decrease was due to a decrease in uncollectible expenses of
approximately $900,000 primarily as the result of a one-time funding of a low
income assistance program of $800,000 made in the prior year in connection
with the Integrated Resource Plan (IRP) as well as improved collection efforts
by the Registrant. Also, outside services decreased by approximately $500,000
due to expenditures made in the prior year relating to new energy service
offerings and the filing of the IRP with the RIPUC. These decreases were
offset by an increase in labor of approximately $0.2 million as the result of
performance, cost of living and negotiated union contract increases.
Operation and maintenance expenses for the nine months ended June 30, 1997,
decreased approximately $2.3 million or 6.2 percent from the corresponding
period of the prior year. This decrease was primarily due to a $1.9 million
decrease in uncollectible expenses as the result of the one-time funding of
the low income assistance program noted above and improved collection efforts
by the Registrant. Outside services decreased approximately $0.5 million as
the result of the prior year expenditures relating to new energy service
offerings and the filing of the IRP. These decreases were offset by
PAGE I-9
<PAGE>
an increase in labor of $0.6 million as the result of performance, cost of
living and negotiated union contract increases. In addition, the Registrant's
post-retirement expenses increased by approximatley $0.2 million as the result
of the phasing of these expenses into rates. The remaining decrease was due
to decreases of the Registrant's pension expense as a result of the
performance of the pension plan's assets in the current fiscal year as well as
decreased maintenance expenses due to one-time projects in the prior year.
Operation and maintenance expenses for the twelve months ended June 30, 1997
decreased approximately $1.3 million or 2.8 percent. This decrease was
primarily the result of decreases in uncollectible expenses and outside
services offset by labor increases as described above.
Depreciation and Amortization
-----------------------------
Depreciation and amortization increased approximately $0.1 million or 2.8
percent for the three months ended June 30, 1997, approximately $0.7 million
or 7.9 percent for the nine months ended June 30, 1997 and $1.0 million or 9.1
percent for the twelve months ended June 30, 1997. These increases are due to
increased capital spending, including technology related assets with shorter
depreciable lives, as well as an increase in depreciation rates that became
effective with the rate increase on December 17, 1995.
Taxes
-----
Taxes for the current quarter increased approximately $0.8 million or 30.4
percent. This increase was primarily the result of a $0.6 million increase in
Federal taxes due to the increased operating income in the current quarter.
In addition, there was an increase of $0.3 million in local property and other
taxes, which is due to increases in capital spending as well as increases in
property tax rates. Taxes for the nine and twelve months ended June 30, 1997
increased $0.9 million or 5.4 percent and $1.1 million or 6.7 percent,
respectively, primarily as the result of increased property taxes.
Other, net
----------
Other, net for the quarter ended June 30, 1997 remained consistent with the
corresponding period of the prior year. Other, net decreased approximately
$0.5 million during the nine months ended June 30, 1997. This decrease is
primarily due to regulatory adjustments made in the first quarter of fiscal
1996 including a one-time gain for the regulatory change in accounting for
property taxes.
Other, net decreased approximately $0.6 million for the twelve month period
ended June 30, 1997, as a result of the one-time regulatory adjustments as
discussed above.
Interest Expense
----------------
Interest expense for the quarter, nine and twelve months ended June 30, 1997
remained consistent with the corresponding periods of the prior year. Interest
expense for the twelve months ended June 30, 1997 decreased $35,000 or 0.5
percent from the same period last year. The decrease in other interest for
the twelve months ended June 30, 1997 was the result of an undercollection of
gas costs under the Gas Charge
PAGE I-10
<PAGE>
Clause during the current twelve month period. In the prior period, the
Registrant had overcollected gas costs and therefore incurred interest expense
on this overcollection while the Registrant received interest on the
undercollected amounts in the current period. This decrease was offset by an
increase in interest on long-term debt as the result of Series R First
Mortgage Bonds issued in December of 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. This initial program is available to
approximately 120 of the largest commercial and industrial customers.
In April 1997, the Registrant filed a plan for the second phase of unbundling
with the RIPUC. Under this filing, the Registrant evaluated the services
offered in the first phase of the unbundling as well as proposed to further
expand the availability of unbundled services to an additional 3,400 medium
and large commercial and industrial customers. The Registrant hopes to
implement such services in December 1997.
In August 1997, the Company filed a Settlement Agreement in Docket No. 2581,
the Price Stabilization Proceeding. The Agreement, which is an alternative to
a general rate increase filing, provides for implementation of a three-year
price stabilization plan beginning in October 1997 that includes: (1) an
immediate decrease in the Gas Charge to residential, commercial, and
industrial sales service customers; (2) a three-year freeze in the Gas Charge
and base rates at those reduced levels; and (3) revenues to fund the Company's
commitment to incremental capital investments and further unbundling of
services. The Agreement is currently under review by the RIPUC.
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 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, under the terms of the Agreement,
cannot exceed $800,000. The Registrant began trading FRM tools in the second
quarter of 1997.
The Registrant is exposed to credit risk in the event of nonperformance by
counter parties to these options, as well as nonperformance by the counter
parties of the transactions against which they are hedged. The Registrant
believes that the credit risk associated with options is no
PAGE I-11
<PAGE>
greater than that associated with the primary contracts which they hedge and
that elimination of the risk of increases in natural gas prices relating to
the hedged gas purchases lowers the Registrant's overall business risk.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the nine months ended June 30, 1997, the Registrant's accounts
receivable and unbilled revenue have increased $12.7 million. These
fluctuations are the result of higher monthly sales, primarily during the
first and second quarters and a moratorium on residential shut-offs during the
heating season. Because of these increases, which negatively impact cash flow,
the Registrant must borrow to maintain an appropriate level of liquidity.
Management believes its available financings are sufficient to meet these
seasonal needs.
The Registrant experienced an increase in its net cash provided by operations
during the latest quarter as compared to last year, primarily as the result of
a decrease in deferred gas costs. This decrease was due to the collection of
prior period gas cost underrecoveries in the current period.
In February 1997, the Registrant redeemed 16,000 shares of its preferred stock
at the par value of $1,600,000 as a result of the annual sinking fund
requirement.
Capital expenditures for the nine months ended June 30, 1997 of $14.1 million
which includes $1.5 million of capital financed directly through capital
leases and long-term debt, increased when compared to $13.6 million last year.
The increase in capital expenditures was due to increased spending for
technology to redesign and integrate the Registrant's customer-related
information systems. Capital expenditures for the remainder of the fiscal year
are expected to be approximately $7.9 million of which $0.5 million is
expected to be financed through long-term notes. Anticipated capital
expenditures for the next three years are expected to total between $50
million to $60 million. If the price stabilization plan discussed above is
approved, this expenditure range will increase significantly.
In February 1996, the Registrant received approval of a three-year Settlement
Agreement between itself and the 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 cost.
The Settlement Agreement provides for: (1) funding associated with Demand
Side Management programs, which are designed to provide equipment rebates for
specific load building programs; (2)
PAGE I-12
<PAGE>
funding associated with a low income weatherization program, which is designed
to assist low income customers through the installation of conservation
measures; and (3) a performance-based ratemaking incentive. The Settlement
Agreement also contains a general agreement that the Registrant's strategy and
steps included in its supply plan are reasonable.
The funding of these programs is generated through annual gas cost savings
beginning in July of each year. The Registrant has performed an analysis of
gas cost savings since July 1996 and believes that sufficient savings have
been achieved as of June 30, 1997 to provide funding for these programs
without incurring a charge to income. Accordingly, in the current quarter,
the Registrant recorded its annual share of the performance-based ratemaking
incentive under this agreement, which resulted in a $1.5 million increase to
operating margin. Although the Settlement Agreement contains a methodology
used to calculate the actual gas cost savings, the ultimate analysis of
savings is subject to RIPUC review and approval which will occur in fourth
quarter of the fiscal year.
If the price stabilization plan discussed above is approved, the Registrant
would continue to fund the programs described above and would no longer have
the same performance based ratemaking incentive.
PAGE I-13
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
------- -----------------
Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which this
report is filed.
PAGE II-1
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
It is the opinion of management that the financial information contained
in this report reflects all adjustments necessary for a fair statement of
results for the period reported, but such results are not necessarily
indicative of results to be expected for the year, due to the seasonal nature
of the Registrant's gas operations. All accounting policies and practices have
been applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Providence Gas Company
(Registrant)
BY:/s/Gary S. Gillheeney
---------------------------
GARY S. GILLHEENEY
Senior Vice President,
Treasurer and CFO
Date: August 14, 1997
-----------------
PAGE II-2
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