<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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________________
Commission file number 0-1160
----------------------------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(401) 272-5040
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___.
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $1.00 par value; 1,243,598 shares outstanding at August 14, 1998.
- -------------------------------------------------------------------------------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
JUNE 30, 1998
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1998 and 1997 I-1
Consolidated Balance Sheets as of June 30, 1998,
June 30, 1997 and September 30, 1997 I-2
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1998
and 1997 I-3
Consolidated Statements of Capitalization
as of June 30, 1998, June 30, 1997
and September 30, 1997 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-9
PART II: OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
------------------ ------------------ ------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $31,155 $40,679 $164,041 $178,942 $195,772 $210,490
Cost of gas sold 13,758 20,910 83,242 101,199 99,400 118,340
-------- -------- -------- -------- -------- --------
Operating margin 17,397 19,769 80,799 77,743 96,372 92,150
-------- -------- -------- -------- -------- --------
Operating expenses:
Operation and
maintenance 10,981 11,264 34,500 34,740 46,895 45,805
Depreciation and
amortization 3,449 3,141 10,360 9,306 13,459 12,240
Taxes -
State gross earnings 922 1,097 4,867 5,168 5,722 6,076
Local property and
other 1,992 1,921 5,966 5,636 7,763 7,406
Federal income (591) 198 6,684 5,961 5,212 4,626
-------- -------- -------- -------- -------- --------
Total operating
expenses 16,753 17,621 62,377 60,811 79,051 76,153
-------- -------- -------- -------- -------- --------
Operating income 644 2,148 18,422 16,932 17,321 15,997
Other, net 219 165 523 416 478 473
-------- -------- -------- -------- -------- --------
Income before
interest expense 863 2,313 18,945 17,348 17,799 16,470
-------- -------- -------- -------- -------- --------
Interest expense:
Long-term debt 1,716 1,505 4,688 4,537 6,193 6,064
Other 187 397 1,180 1,223 1,566 1,438
Interest capitalized (39) (57) (193) (152) (261) (182)
-------- -------- -------- -------- -------- --------
1,864 1,845 5,675 5,608 7,498 7,320
-------- -------- -------- -------- -------- --------
Net income (loss) (1,001) 468 13,270 11,740 10,301 9,150
Dividends on preferred
stock (105) (139) (383) (487) (522) (661)
-------- -------- -------- -------- -------- --------
Net income(loss)
applicable to common
stock $ (1,106) $ 329 $ 12,887 $ 11,253 $ 9,779 $ 8,489
======== ======== ======== ======== ======== ========
Earnings per
common share $ (.89) $ .26 $ 10.36 $ 9.05 $ 7.86 $ 6.83
======== ======== ======== ======== ======== ========
Dividends paid per
common share $ .96 $ .96 $ 2.88 $ 2.88 $ 3.84 $ 3.84
======== ======== ======== ======== ======== ========
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,
1998 1997 1997
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $307,516 $283,309 $290,614
Less - Accumulated depreciation and
utility plant acquisition adjustments 117,729 106,629 108,478
-------- -------- --------
189,787 176,680 182,136
-------- -------- --------
Current assets:
Cash and temporary cash investments 7,629 1,059 778
Accounts receivable, less
allowance of $3,558 at 6/30/98, $2,912 at
6/30/97 and $1,739 at 9/30/97 17,507 28,364 13,120
Unbilled revenues 1,334 687 2,658
Deferred gas costs -- 1,389 7,151
Inventories, at average cost -
Liquefied natural gas, propane and under-
ground storage 8 11,526 18,001
Materials and supplies 998 1,103 1,166
Prepaid and refundable taxes 4,418 4,755 3,293
Prepayments 662 772 966
-------- -------- --------
32,556 49,655 47,133
-------- -------- --------
Deferred charges and other assets 12,338 12,262 12,874
-------- -------- --------
Total assets $234,681 $238,597 $242,143
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying statement) $177,197 $161,724 $157,012
-------- -------- --------
Current liabilities:
Notes payable -- 9,605 20,410
Current portion of long-term debt 3,650 2,649 3,707
Accounts payable 4,502 17,257 16,114
Accrued taxes 6,466 6,168 2,529
Accrued vacation 1,859 1,907 1,658
Customer deposits 3,148 3,419 3,430
Other 4,709 4,732 4,639
-------- -------- --------
24,334 45,737 52,487
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes 21,273 20,085 20,598
Unamortized investment tax credits 2,236 2,393 2,354
Other 9,641 8,658 9,692
-------- -------- --------
33,150 31,136 32,644
-------- -------- --------
Commitments and contingencies -- -- --
Total capitalization and liabilities $234,681 $238,597 $242,143
======== ======== ========
</TABLE>
PAGE I-2
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(Thousands)
<S> <C> <C>
Cash provided by (used for)
Operating Activities:
- --------------------
Net income $ 13,270 $ 11,740
Items not requiring cash:
Depreciation and amortization 10,456 9,402
Changes as a result of regulatory action 1,500 --
Deferred Federal income taxes 675 183
Amortization of investment tax credits (118) (117)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 13,441 (14,363)
Unbilled revenues 1,324 1,646
Deferred gas costs (2) 11,739
Inventories 160 4,316
Prepaid and refundable taxes (1,125) (1,541)
Prepayments 304 693
Accounts payable (6,112) 777
Accrued taxes 3,937 4,301
Accrued vacation, customer deposits
and other (11) (556)
Deferred charges and other 496 1,946
-------- --------
Net cash provided by operations 38,195 30,166
-------- --------
Investing Activities:
- --------------------
Expenditures for property, plant and
equipment, net (17,934) (12,585)
-------- --------
Financing Activities:
- --------------------
Issuance of mortgage bonds 15,000 --
Proceeds from other long-term debt -- 1,345
Payments on long-term debt (2,435) (1,924)
Decrease in notes payable, net (20,410) (11,195)
Redemption of preferred stock (1,600) (1,600)
Cash dividends on preferred shares (383) (487)
Cash dividends on common shares (3,582) (3,584)
-------- --------
Net cash used for financing activities (13,410) (17,445)
-------- --------
Increase in cash and temporary cash
investments 6,851 136
Cash and temporary cash investments
at the beginning of period 778 923
-------- --------
Cash and temporary cash investments
at the end of period $ 7,629 $ 1,059
======== ========
Supplemental disclosures of cash flow information:
Cash paid year-to-date-
Interest (net of amount capitalized) $ 5,292 $ 5,471
Income taxes (net of refunds) $ 2,251 $ 2,215
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,
1998 1997 1997
-------- --------- -------------
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 at 6/30/98,
6/30/97, and 9/30/97 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,543 37,657 37,685
Retained earnings 48,616 43,611 39,311
-------- -------- --------
Total common stock equity 87,403 82,512 78,240
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 48 shares at 6/30/98,
and 64 shares at
6/30/97 and 9/30/97 4,800 6,400 6,400
-------- -------- --------
Long-term debt:
First mortgage bonds 84,600 71,200 71,200
Other long-term debt 2,713 2,675 3,207
Capital leases 1,331 1,586 1,672
-------- -------- --------
Total long-term debt 88,644 75,461 76,079
Less current portion 3,650 2,649 3,707
-------- -------- --------
Long-term debt, net 84,994 72,812 72,372
-------- -------- --------
Total capitalization $177,197 $161,724 $157,012
======== ======== ========
</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 a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein when read
with the annual report for 1997 filed on Form 10-K are adequate to make the
information presented not misleading.
Rates and Regulation
- --------------------
The Registrant is subject to the regulatory jurisdiction of the Rhode Island
Public Utilities Commission (RIPUC) with respect to rates and charges, standards
of service, accounting and other matters. In August 1997, the RIPUC approved
the Price Stabilization Plan Settlement Agreement, (the Plan or Energize RI)
among the Registrant, the Rhode Island Division of Public Utilities and Carriers
(the Division), The Energy Council of Rhode Island, and the George Wiley Center.
Effective October 1, 1997 through September 30, 2000, Energize RI provides
customers with an initial price decrease of approximately four percent and a
three-year price freeze. In connection with the price decrease, the Registrant
will write-off and not recover $1.5 million of previously deferred gas costs.
Under Energize RI, the Gas Charge Clause (GCC) will be suspended for the entire
three-year term of the Plan. Any excess or deficiency between amounts billed
and actual gas costs incurred will be retained or borne by the Registrant.
Energize RI also requires the Registrant to make significant capital investments
to improve its distribution system. Capital investments required by Energize RI
are estimated to total approximately $26 million over its three-year term. In
addition, the Registrant is required to fund the Demand Side Management Rebate
Assistance Program and the Low Income Weatherization Program at annual levels of
$.5 million and $.2 million, respectively. Energize RI also calls for the
Registrant to fund the Low Income Assistance Program at an annual level of $1.0
million. Finally, Energize RI continues the process of unbundling by requiring
the Registrant to provide unbundled service offerings for up to 10 percent per
year of firm system throughput.
As part of Energize RI, the Registrant will amortize over a ten year period
approximately $4.0 million of environmental costs previously charged to the
accumulated depreciation reserve. All environmental costs incurred during the
term of Energize RI will also be amortized over a ten year period.
Under Energize RI the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million and $92.0 million in
fiscal 1998, 1999, and 2000, respectively. In addition, the Registrant may not
earn less than a seven percent return on average common equity under the Plan.
In the event that the Registrant earns in excess of 10.9 percent or less than
seven percent, the Registrant will defer revenues or costs through a deferred
revenue account over the term of the Plan. Any balance in the deferred revenue
account at the end of the Plan will be refunded to or recovered from customers
in a manner determined by all parties and approved by the RIPUC.
I-5
<PAGE>
The Integrated Resource Plan (IRP) was terminated as a result of Energize RI.
In addition to the funding for the demand side management program and low income
weatherization and assistance programs, the IRP provided for a performance-based
ratemaking mechanism. The Registrant was able to record its annual share of the
performance-based ratemaking mechanism in both 1997 and 1996, which resulted in
a $1.5 million increase to operating margin in each of those years. As part of
the performance-based ratemaking mechanism, the Registrant was allowed to record
approximately $3.0 million in non-firm margin, subject to the Registrant's
ability to generate sufficient gas cost savings for customers. In both fiscal
1997 and 1996, the Registrant achieved enough savings to earn $3.0 million in
non-firm margin in each of those years. As a result of Energize RI, the
Registrant will only retain the actual margin earned from non-firm customers.
Gas Supply
- ----------
The Registrant has entered into a full requirements contract with Duke Energy
Trading and Marketing, LLC (DETM) to provide all of its gas supply needs
beginning October 1, 1997 and continuing through September 30, 2000. DETM will
provide all gas supplies required by the Registrant, while the Registrant is
committed to purchase all supplies exclusively from DETM. Supplies required by
the Registrant's firm sales customers will be purchased at a single, fixed
commodity price for the entire contract period. In order to provide this
service, DETM, for the contract period, will take responsibility for the
Registrant's pipeline capacity resources not previously released, all storage
contracts and all LNG capacity. Under the contract, DETM has purchased all
working gas in storage including both LNG and contract storage as of October 1,
1997. Gas inventories purchased were valued at approximately $18 million. All
supply resources assigned to DETM will revert back to the Registrant on October
1, 2000. The contract was entered into following a competitive bidding process.
As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover the Registrant's non-firm sales customer's
needs and to make up the supply imbalances of transportation customers. DETM
will also provide various other services to the Registrant's transportation
service customers including enhanced balancing, standby and the storage and
peaking services available under the Registrant's recently approved FT-2 storage
service effective December 1, 1997. DETM will receive the supply related
revenues from these services in exchange for providing the supply management
inherent in these services.
Included in the DETM contract are a number of other important features. The
Registrant has retained the right to continue to make portfolio changes to
reduce supply costs. To the extent the Registrant makes such changes the
Registrant must keep DETM whole for the value lost over the remainder of the
contract period. The contract relieves the Registrant of the need to perform
certain upstream supply management functions which will make it possible for the
Registrant to take on the additional supply management workload required by the
further unbundling of firm sales customers without major staffing additions.
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.
I-6
<PAGE>
At June 30, 1998, 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 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, 1998,
approximately $2.0 million has been spent primarily on studies at this site. In
accordance with state laws, such a 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 for
two-thirds of the property. The remediation will begin in August of 1998 and
will continue for a duration of three to six months. During the remediation
process the remaining one-third of the property will also be investigated and
remediated if necessary. At June 30, 1998, the Registrant has compiled a
preliminary range of costs based on a thermal desorption remediation process,
ranging from $1.7 million to $5.0 million. However, because of the uncertainties
associated with environmental assessment and remediation activities, the future
cost of remediation could be higher than the range noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at June
30, 1998 for anticipated future remediation costs at this site.
Tests conducted following the discovery in 1996 of an abandoned underground
oil storage tank at the Registrant's Westerly, Rhode Island operations center
confirmed 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 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 $50,000.
Accordingly, the Registrant has accrued $50,000 at June 30, 1998 for anticipated
future remediation costs.
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. Due to the magnitude of the Registrant's environmental
investigation and remediation expenditures, the Registrant sought current
recovery for these amounts. As a result, in accordance with the Price
Stabilization Plan Settlement Agreement described in "Rates and Regulation",
--------------------
which became effective October 1, 1997, all environmental investigation and
remediation costs incurred through September 30, 1997, as well as all costs
incurred during the three-year term of the Plan, will be amortized over a ten-
year period. 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. As of June 30, 1998, the
Registrant has charged environmental
I-7
<PAGE>
remediation costs of $2.4 million and an estimated $1.7 million to the
accumulated depreciation reserve and has amortized $.3 million of these costs.
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 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.
New Accounting Pronouncements
- -----------------------------
In October 1997, the Registrant adopted the Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share", which is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
replaces the presentation of primary earnings per share with the presentation of
basic earnings per share on the face of the income statement. Basic earnings
per share excludes dilution and is calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Basic earnings per share and diluted earnings per share are the
same for all periods presented. Earnings per share for the prior periods
presented have been unchanged when calculated under SFAS No. 128.
Effective October 1, 1997, the Registrant adopted the provisions of Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities". This Statement
provides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
The Registrant has recorded environmental remediation liabilities of
approximately $1.7 million at June 30, 1998. SOP 96-1 did not have an impact on
the Registrant's financial position or results of operations upon adoption.
Also see "Environmental Matters".
---------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 130, which is effective for
fiscal years beginning after December 15, 1997, requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 131, which is effective
for fiscal years beginning after December 15, 1997, requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. These statements require additional disclosure
only and will not affect the financial position or results of operations of the
Registrant.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
This statement will not affect the financial position or results of
operations of the Registrant.
I-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The 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"
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations, and releases. All
statements other than statements of historical facts included in this 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; changes in government regulations;
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; the ability
of the Registrant to acquire and implement computer software that will be Year
2000 capable as well as Year 2000 readiness by key customers, vendors and
service providers; unanticipated environmental liabilities; 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
applicable to common stock for the three, nine and twelve months ended June 30,
1998 and for comparable periods ended June 30, 1997 are as follows:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
1998 1997 1998 1997 1998 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $31,155 $40,679 $164,041 $178,942 $195,772 $210,490
======= ======= ======== ======== ======== ========
Operating margin $17,397 $19,769 $ 80,799 $ 77,743 $ 96,372 $ 92,150
======= ======= ======== ======== ======== ========
Net income (loss)
applicable to
common stock $(1,106) $ 329 $ 12,887 $ 11,253 $ 9,779 $ 8,489
======= ======= ======== ======== ======== ========
</TABLE>
Operating Margin
- ----------------
During the latest quarter, the Registrant experienced weather that was 26.0
percent warmer than the same quarter last year. The warmer temperatures resulted
in decreased margin of approximately $1.1 million compared to the same quarter
last year. Offsetting the warmer than normal weather is $1.9 million of margin
generated by Energize RI, which became effective October 1, 1997. This
additional margin resulted from freezing the Gas Charge Clause ("GCC") mechanism
used previously to adjust for the over or underrecovery of gas costs which was
approximately $2.3 million and was offset by the funding of the Integrated
Resource Plan ("IRP") programs
I-9
<PAGE>
of approximately $400,000. The implementation this year of Energize RI changed
how the Registrant records its gas costs resulting in higher margin reflected in
the first half of the fiscal year and lower margin in the second half. While
this change does not impact annual earnings, it reduced margin in the quarter by
$1.3 million compared to the same period last year. An additional $1.5 million
decrease in margin in the current quarter in comparison to the same quarter last
year is a result of not recording the performance-based ratemaking mechanism
under the Integrated Resource Plan (IRP) Settlement Agreement approved by the
RIPUC (Rhode Island Public Utilities Commission) which was terminated in
September 1997 as a result of Energize RI.
Additionally, non-firm margin decreased $0.6 million during the current
quarter of fiscal year 1998 when compared with the same quarter of fiscal 1997.
Prior to Energize RI, the Registrant was allowed to record approximately $3.0
million in non-firm margin under the terms of the IRP, subject to the
Registrant's ability to generate sufficient gas cost savings for customers. As
a result of Energize RI, the Registrant retains the actual non-firm margin
earned. Due to an unfavorable pricing difference between natural gas and
alternate fuels, the Registrant experienced a decrease in non-firm sales and
transportation margin. This decrease is expected to continue during the
remainder of the fiscal year.
During the current year, weather has been 7.4 percent warmer than the same
period last year. The warmer temperatures resulted in decreased margin of
approximately $3.7 million compared to last year. Offsetting the warmer than
normal weather is $8.2 million of margin generated by Energize RI. The
additional margin which resulted from freezing the GCC mechanism used previously
to adjust for the over or underrecovery of gas costs was approximately $10.9
million and was offset by the write-off of $1.5 million of previously deferred
gas costs and funding of the IRP programs of approximately $1.2 million. When
compared to the same period last year when seasonal gas cost factors were being
used, operating margin has increased approximately $1.8 million. The effect of
this increase, however, will reverse in the subsequent quarter and will have no
impact on annual earnings.
Additionally, non-firm margin decreased $1.7 million during the current year
when compared with the prior year as explained above.
An additional $1.5 million decrease in margin during the current year in
comparison to the prior year is a result of not recording the performance-based
ratemaking mechanism under the IRP which was terminated in September 1997 as a
result of Energize RI.
The increase in operating margin for the twelve month periods presented is
primarily due to the reasons stated above.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses were stable for the periods
presented.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $300,000 or 9.8
percent for the three months ended, approximately $1.1 million or 11.3 percent
for the nine months ended and approximately $1.2 million or 10.0 percent for the
twelve months ended June 30, 1998, respectively, versus the same periods last
year. These increases are the result of capital spending and the amortization
of previously deferred environmental costs. Effective October 1, 1997 the
Registrant began amortizing environmental costs over a ten-year period in
accordance with Energize RI.
Taxes
- -----
Taxes decreased approximately $900,000 or 27.8 percent for the three months
ended, increased approximately $800,000 or 4.5 percent for the nine months ended
and increased approximately $600,000 or 3.3 percent for the twelve months ended
June 30, 1998, respectively, versus the same periods last year. The overall
change in taxes is primarily due to changes in Federal income taxes as a result
of the changes in pretax income this year compared to last year. Additionally,
local property and other taxes have increased as result of capital spending
during the past year.
I-10
<PAGE>
Interest Expense
- ----------------
Interest expense increased approximately $19,000 or 1.0 percent for the three
months ended, and increased approximately $100,000 or 1.2 percent for the nine
months ended and approximately $200,000 or 2.4 percent for the twelve months
ended June 30, 1998, respectively, versus the same periods last year. During
the prior year, interest expense was impacted by accrued interest on the over or
under recovery of gas costs that was due to or from ratepayers. Effective
October 1, 1997, the Registrant froze the GCC mechanism in connection with
Energize RI. During the three-year term of the Plan, the Registrant will no
longer accrue interest on the over or under collection of gas costs from
ratepayers.
Future Outlook
- --------------
A) Regulatory
Under Energize RI, the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999 and 2000, respectively. In addition, the Registrant may not
earn less than a seven percent return on average common equity. In the event the
Registrant earns in excess of 10.9 percent or less than seven percent, the
Registrant will defer revenues or costs through a deferred revenue account. Any
balance in the deferred revenue account at the end of the Plan will be refunded
to or recovered from customers in a manner to be approved by the RIPUC.
The implementation this year of Energize RI changed how the Registrant
records its gas costs, resulting in higher margin reflected in the first half of
the fiscal year and lower margin in the second half. While this change does not
impact annual earnings, it reduced margin in the third quarter by $1.3 million
compared to last year's third quarter.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, the Division, TEC-RI, and a consortium of oil heat organizations.
The Agreement began a process of unbundling natural gas service in Rhode Island,
enabling customers to choose their gas suppliers. The Agreement went into effect
in June 1996. The initial step was available to approximately 120 of the largest
commercial and industrial customers. In August 1997, the RIPUC approved a plan,
called "Business Choice", to further unbundle services to an additional 3,400
medium and large commercial and industrial customers. The Registrant commenced
Business Choice in December 1997. At June 30, 1998, the Registrant had
approximately 1,000 firm transportation customers.
Energize RI continues the process of unbundling by requiring the Registrant
to provide unbundled service offerings for up to 10 percent per year of firm
system throughput.
Liquidity and Capital Resources
- -------------------------------
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings.
Management believes its available financings are sufficient to meet these
seasonal needs.
During the current nine month period, the Registrant's cash flow from
operations increased approximately $8.0 million compared to the same period last
year. This increase is primarily due to the sale of the Registrant's working gas
in storage to Duke Energy Trading and Marketing as well as additional margin
generated by Energize RI. The additional cash flows resulting from Energize RI
have enabled the Registrant to avoid seasonal short-term borrowings during the
current fiscal year.
I-11
<PAGE>
Capital expenditures for the year to date period of $17.9 million increased
$5.3 million or 42.5 percent when compared to the $12.6 million last year. As a
result of Energize RI, the Registrant is committed to making significant capital
improvements to its distribution system during the Plan's three-year term. These
improvements will expand the distribution system into economically developing
areas of Rhode Island as well as accelerate the replacement of older mains and
services. Additionally, technology expenditures relating to the Registrant's
decision to move to a client server environment have also contributed to this
increase. Capital expenditures for the remainder of the fiscal year are expected
to be approximately $9.8 million. Anticipated capital expenditures during this
and the next two fiscal years are expected to total approximately $81.3 million.
To finance capital expenditures, the Registrant issued $15 million in First
Mortgage bonds in April 1998 at 6.82 percent. These bonds require semi-annual
interest payments and a lump sum repayment of principal in 20 years.
The Registrant continues to focus on addressing Year 2000 implications in its
technology systems, embedded technologies, and with its significant suppliers
and key customers.
Year 2000 readiness will in large part be achieved in the course of the
Registrant's implementation of its long range technology plan to migrate from a
mainframe environment to a client server environment. Pursuant to this plan
significant portions of the Registrant's software, including its customer
billing and financial reporting systems, are currently being replaced. The new
client server systems will lower operating costs, increase functionality and
provide flexibility, as well as be Year 2000 ready. The implementation date for
these systems is scheduled for the first quarter in calendar 1999.
The Registrant has partnered with a major engineering and consulting firm to
address embedded technology. The system identification phase of this assessment
is expected to be completed by September 1998.
Also, the Registrant will commence its assessment of Year 2000 readiness of
its significant suppliers and key customers no later than the end of calendar
1998 and will continue this assessment on an ongoing basis.
Failure of the Registrant or any of its significant vendors to complete any
necessary modifications and conversions in a timely manner could have a material
adverse impact on the operations of the Registrant.
I-12
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6 (a). Exhibits
- ---------------------
10. Redacted gas supply contract dated October 1, 1997 between Duke Energy
Trading and Marketing, LLC and the Registrant.
27. Financial Data Schedule
Item 6 (b). Reports on Form 8-K
- --------------------------------
No reports on Form 8-K were filed during the quarter for which this report is
filed.
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,
Chief Financial Officer,
Treasurer and Assistant Secretary
Date: August 14, 1998
----------------
II-2
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH MATERIAL HAS BEEN FILED WITH THE COMMISSION
PURSUANT TO RULE 24.
EXHIBIT 10
FIRM PURCHASE/SALE AGREEMENT
Duke Energy Trading and Marketing, L.L.C., a Delaware limited liability company
("Seller"), and The Providence Gas Company, a Rhode Island corporation
("Buyer"), each sometimes referred to individually as "Party" and referred to
collectively as the "Parties" enter into this Firm Purchase/Sale Agreement
(together with the General Provisions set forth in Appendix "1", collectively,
this "Agreement"). All capitalized terms not defined in this Firm Purchase/Sale
Agreement are defined in Appendix 1.
ARTICLE 1. TERM This Agreement shall be in effect for a term of three (3) years
- ---------------
from the Effective Date of October 1, 1997. Termination of this Agreement in all
instances shall be subject to Section 9.4.
ARTICLE 2. SCOPE OF AGREEMENT 2.1. Scope of Agreement. The Parties agree that
- ----------------------------- ------------------
this Agreement is a "requirement contract" and that Seller shall be the
exclusive supplier of Buyer's Requirements Quantity during the term of this
Agreement. The specific terms and conditions reached between Buyer and Seller
regarding the purchase of the Requirements Quantity of Gas by Buyer from Seller
are specified in Exhibit "B" and are herein incorporated by reference. In the
event of any conflict between the terms of Exhibit B, this Firm Purchase/Sale
Agreement or Appendix 1, the priority will be that Exhibit B will govern,
followed by this Firm Purchase/Sale Agreement, followed by Appendix 1.
ARTICLE 3. QUANTITY OBLIGATIONS 3.1. Seller's Obligations.
- ------------------------------- --------------------
3.1.1. Seller's Scheduling and Delivery Obligations and Measurement. Seller
------------------------------------------------------------
shall Schedule and deliver at the appropriate Delivery Points on a firm basis
each Gas Day 100% of the total quantity of Gas required by Buyer to meet on such
Gas Day is Requirements Quantity, which includes Gas for Firm Customers on
Buyer's system and Gas for Interruptible Sales and Gas-Related Transportation
Requirements as defined in Appendix 1, below. Gas will be measured by Seller's
Transporter at the Delivery Points.
3.1.2. Interruptible Sales Requirements [CONFIDENTIAL TREATMENT REQUESTED] In
--------------------------------
the event of unauthorized use of gas by a NFS customer of Buyer, Seller shall
nonetheless be obligated to deliver to Buyer the associated gas quantity, but
Seller shall be entitled to the aggregate amount of any Tariff charges received
by
1
<PAGE>
Buyer for such unauthorized usage, net of reimbursement of Buyer's actual LNG
trucking costs or incremental LNG operating costs incurred as a result of such
usage. In order to facilitate Seller's planning processes, [Confidential
Treatment Requested] that were attributable to such customers as soon as
thereafter as practicable. Seller shall notify Buyer promptly (and, where
practicable, on three (3) Business Day's notice) of any condition which, in
Seller's opinion, would make the curtailment or interruption of Buyer's NFS
customers necessary in order to continue to supply the gas requirements of the
Buyer's Firm Customers. Any interruption or curtailment of Buyer's NFS
customers, however, shall be effected by Buyer in its sole discretion in
accordance with the provisions of Buyer's Tariff. Buyer may interrupt its NFS
customers as needed to protect system integrity and operations. Buyer shall give
Seller promptly (and, where practicable, on three (3) Business Day's notice) of
any condition which, in Buyer's opinion would make interruption of NFS customers
necessary.
3.1.3. Seller's Supply Warranty. Seller represents and warrants that it will
------------------------
have and maintain a supply of Gas capable of being delivered to the Delivery
Points, which will include LNG as described in the Asset Management Agreement,
sufficient to satisfy Buyer's Requirements Quantity.
3.1.4. Gas- Related Transportation Obligations. As exclusive compensation for
---------------------------------------
servicing Gas-Related Transportation Requirements, Seller shall be entitled to
receive the net amount of incremental Tariff charges and credits for such
services received by Buyer, including any associated penalties or charges for
unauthorized use or daily or monthly imbalances, as calculated in accordance
with Buyer's Tariff. In the event of unauthorized use of gas or the creation of
imbalances by a transportation customer of Buyer, Seller shall nonetheless be
obligated to deliver to Buyer the associated gas quantity, but Seller shall be
entitled to any charges for such unauthorized usage or imbalance received by
Buyer, as provided in the preceding sentence. In order to facilitate Seller's
planning processes, Buyer shall periodically make available to Seller Buyer's
load data respecting its transportation customers and identify the quantity of
Buyer's requirements for each Day that were attributable to its transportation
customers as soon thereafter as practicable.
3.2. Seller's Failure to Deliver. If on any Gas Day Seller fails to deliver
---------------------------
Buyer's Requirements Quantity, then such occurrence shall constitute a "Seller's
Deficiency Default" and "Seller's Deficiency Quantity" shall be the numerical
difference between the actual Buyer's Requirements Quantity and the amount of
Gas actually delivered for such Gas Day. In the event of a Seller's Deficiency
Default where Buyer is able to replace Seller's Deficiency Quantity, Seller
shall pay Buyer as damages an amount equal to the product of the Seller's
Deficiency Quantity multiplied by the Replacement Price Differential. In the
event Buyer is unable to replace Seller's Deficiency Quantity, Buyer's
liquidated damages shall equal the Non-Replacement Price Differential multiplied
by Seller's Deficiency Quantity. Payment to Buyer shall be made on the 25th Day
of the Month in which Seller receives Buyer's statement for same. The
availability of
2
<PAGE>
this remedy will not relieve Seller of its obligation to stand ready to and
actually to deliver Buyer's Requirements Quantity during the term of this
Agreement.
3.3. Buyer's Notification and Purchase Obligations. Buyer shall notify Seller
---------------------------------------------
of the quantity of Gas it will require in accordance with the definition of
Scheduling as it pertains to Buyer as provided in Appendix 1 and in Section 3.1
with respect to Interruptible Sales and Gas-Related Transportation. Buyer will
receive at the Deliver Points each Gas Day a quantity of Gas equal to Buyer's
Requirements Quantity.
3.4. Preclusion of Buyer's Purchase of Gas From Others. If on any Gas Day,
-------------------------------------------------
Buyer purchases from a third party any portion of Buyer's Requirements Quantity
for which delivery is tendered by Seller, then such occurrence shall constitute
a "Buyer's Deficiency Default" and "Buyer's Deficiency Quantity" shall be the
quantity of Gas Buyer purchased from third parties on such Gas Day. In the
event of a Buyer's Deficiency Default, Buyer shall pay Seller an amount equal to
the product of Buyer's Deficiency Quantity multiplied by the Replacement Price
Differential. Payment to Seller shall be made in accordance with the Financial
Matters provisions set forth in Appendix "1".
ARTICLE 4. DEFAULTS AND REMEDIES 4.1. Early Termination. If a Triggering
-----------------
Event (defined in Section 4.2) occurs with respect to either Party at any time
during the term of this Agreement, the other Party (the "Notifying Party") may
(i) upon two (2) Business Days written notice to the first Party, which notice
shall be given no later than Sixty (60) Days after the discovery of the
occurrence of the Triggering Event, establish a date on which this Agreement
will terminate ("Early Termination Date") except as provided in Section 9.4, and
(ii) withhold any payments due; provided, upon the occurrence of any Triggering
Event listed in item (iv) of Section 4.2 as it may apply to any party, a Party
may at its sole option declare that this Agreement shall terminate, without
notice, as if an Early Termination Date had been immediately declared except as
provided in Section 9.4. If an Early Termination Date occurs, the Notifying
Party shall in good faith calculate its damages, including its associated costs
and attorneys' fees, resulting from the termination of this Agreement (the
"Termination Payment"). The Termination Payment will equal (i) the difference
between the value of (a) the remaining term, quantities and prices under this
Agreement had it not been terminated and (b) the equivalent quantities and
relevant market prices for the remaining term either quoted by a bona fide third
party offer or, at Notifying Party's sole option, which are reasonably expected
to be available in the market under a replacement contract for such Agreement;
plus (ii) the liquidated value of any hedge positions pursuant to Exhibit B; and
(iii) reasonable transaction associated costs and attorneys' fees. To ascertain
the market prices of a replacement contract the Notifying Party may consider,
among other valuations, any or all of the settlement prices of NYMEX Gas futures
contracts, at the applicable delivery point, and/or the Exchange Price,
quotations from leading dealers in Gas swap contracts and other bona fide third
party offers, all adjusted for the length of the remaining term and the Basis
Difference. If the calculation of the Termination Payment does not result in
damages to the Notifying Party, the Termination Payment shall be zero. The
Notifying Party shall give the Affected Party (defined in Section 4.2) written
notice of the amount of the Termination Payment, inclusive of a statement
showing its determination. The
3
<PAGE>
Affected Party shall pay the Termination Payment to the Notifying Party within
ten (10) Days of receipt of such notice. At the time for payment of any amount
due under this Article 4, each Party shall pay to the other Party all additional
amounts payable by its pursuant to this Agreement, but all such amounts shall be
netted and aggregated with any Termination Payment payable hereunder.
4.2. Triggering Event shall mean, with respect to a Party (the "Affected
----------------
Party"): (i) the failure by the Affected Party to make, when due, any payment
required under this Agreement if such failure is not remedied within five (5)
Business Days after written notice of such failure is given to the Affected
Party; provided, the payment is not the subject of a good faith dispute as
described in the Billing and Payment provisions in Appendix 1, or (ii) any
material representation or warranty made by the Affected Party in this Agreement
shall prove to have been false or misleading in any material respect when made
or deemed to be repeated and such representation or warranty is an essential and
material part of the bargain of the Parties, or (iii) the failure by the
Affected Party to perform any material obligation set forth in this Agreement
(other than its obligations to make any payment or obligations which are
otherwise specifically covered in this Section 4.2. as a separate Triggering
Event), and such failure is not excused by Force Majeure or cured within five
(5) Business Days after written notice thereof is given to the Affected Party or
(iv) the Affected Party shall (a) make an assignment or any general arrangement
for the benefit of creditors, (b) file a petition or otherwise commence,
authorize or acquiesce in the commencement of a proceeding or cause under any
bankruptcy or similar law for the protection of creditors, or have such petition
filed against it and such proceeding shall not have been dismissed for thirty
(30) Days, (c) otherwise become bankrupt or insolvent (however evidenced) or (d)
be unable to pay its debts as they fall due or (v) Seller's unexcused failure to
deliver Buyer's Requirements Quantity for a cumulative period of three (3) or
more Gas Days in a twelve (12) Month period or a cumulative period of five (5)
Gas Days during the term of this Agreement, or (vi) Buyer's unexcused failure to
receive its Requirements Quantity, for a cumulative period of three (3) or more
Gas Days in twelve (12) Month period or a cumulative period of five (5) Gas Days
during the term of this Agreement, (vii) an event of any material default in
respect of the Asset Management Agreement or (ix) Seller's unexcused failure to
deliver a sufficient quantity of Gas, which failure directly causes Buyer to be
unable to serve its Firm Customers on any Gas Day, or (x) the continuance of a
Force Majeure event rendering the affected Party unable to carry out its
obligations hereunder in excess of the periods permitted in accordance with
Article 5, or (xi) the failure to provide additional security in accordance with
the provisions of Section 4.5 or Paragraph 7 of Appendix "1", within two (2)
Business Days from the date of request.
4.3. Other Events. If the Affected Party's activities hereunder are affected
------------
by any law, regulation or governmental action unknown or unplanned to a
materially greater or different extent than that existing on the Effective Date
and such event either (i) renders this Agreement illegal or unenforceable or
(ii) materially adversely effects the application of this Agreement to the
Affected Party, with respect to its financial position or otherwise, then upon
request of either Party, the Parties will in good faith attempt to renegotiate
the terms of the Agreement to respond to such change, but, if they fail to do so
after a period of 30 Days, in the case of (i) above, either
4
<PAGE>
Party, and in the case of (ii) above, only the Affected Party, shall at such
time have the right to declare an Early Termination Date in accordance with the
provisions hereof; provided, notwithstanding the rights of the Parties to
declare an Early Termination Date as above stated, the Affected Party shall be
liable for payment of the Termination Payment calculated by the non-Affected
Party as provided in Section 4.1.
-----------
4.4. Offset. Each Party reserves to itself all rights, set-offs, counterclaims
------
and other remedies and defenses consistent with Section 9.3 (to the extent not
-----------
expressly herein waived or denied) which such Party has or may be entitled to
arising from or out of this Agreement. The obligations to make payment under
this Agreement may be offset against each other, set off or recouped therefrom.
4.5. Security. In the event either Seller or Buyer fails to maintain a credit
--------
rating as published by Standard and Poor's of at least "BBB" or Moody's
Investors Services, Inc. of "Baa2", then within fifteen (15) days of such
occurrence, (i) in the case of Seller, Seller shall either (a) cause each of
Duke Capital Corporation and Mobil Corporation to provide a Guarantee of
Seller's remaining obligations under this Agreement, or (b) provide a Letter of
Credit satisfactory to Buyer in an amount to be determined at the time of such
event, and (ii) in the case of Buyer, Buyer shall either (a) maintain a
prepayment balance with Seller equal to two month's purchase obligation on the
first business day of each such month in an escrow account established on
standard commercial terms with a financial institution acceptable to Seller that
will act as escrow agent for the Payment of such balances to satisfy the
obligations of Buyer arising hereunder for such months, with interest on such
account balance to accrue and be disbursed monthly to Buyer, unless required to
make payment to Seller hereunder or to maintain the required monthly escrow
balance, or (b) provide a Letter of Credit satisfactory to Seller sufficient to
cover two (2) months worth of purchase obligations.
4.6. Curtailment Priority. In the event Seller fails to deliver all or any part
--------------------
of the Requirements Quantity, whether or not such failure is excused under the
terms of this Agreement, Buyer, pursuant to the terms and conditions of its
Tariff, and applicable regulations, shall curtail its Customers pursuant to the
emergency load shedding policies of the Rhode Island Public Utility Commission.
ARTICLE 5. FORCE MAJEURE. Except with respect to payment obligations, in the
- ------------------------
event either Party is rendered unable, wholly or in part, by Force Majeure to
carry out its obligations hereunder, it is agreed that upon such Party's giving
notice and full particulars of such Force Majeure to the other Party as soon as
reasonably possible (such notice to be confirmed in writing), the obligations of
the Party giving such notice, to the extent they are affected by such event,
shall be suspended from the inception and during the continuance of the Force
Majeure for a period of up to sixty (60) Days in the aggregate during any twelve
(12) Month period, but for no longer period. Except as provided in Exhibit B,
the Party receiving notice of Force Majeure may immediately take such action as
it deems necessary at its expense for the entire sixty (60) Day period or any
part thereof. The Parties expressly agree that upon the expiration of
5
<PAGE>
the sixty (60) Day period Force Majeure shall no longer apply to the obligations
hereunder and both Buyer and Seller shall be obligated to perform. The cause of
the Force Majeure shall be remedied with all reasonable diligence and dispatch.
ARTICLE 6. TAXES 6.1 Allocation of and Indemnify for Taxes. The Contract Price
- ---------------- -------------------------------------
includes full reimbursement for, and Seller is liable for and shall pay, or
cause to be paid, or reimburse Buyer if Buyer has paid, all Taxes applicable to
the Gas prior to its delivery at the Delivery Points; provided that Buyer will
be responsible for any inventory tax on Gas held in storage, including LNG
storage, to the extent the storage service is subject to the Asset Management
Agreement. In the event Buyer is required to remit such Tax, the amount thereof
shall be deducted from any sums becoming due to Seller hereunder. Seller shall
indemnify, defend and hold harmless Buyer from any Claims for such Taxes. The
Contract Price does not include reimbursement for, and Buyer is liable for and
shall pay, cause to be paid, or reimburse Seller if Seller has paid, all Taxes
applicable to the Gas at and after the Delivery Points, including local property
Taxes assessed upon the value of storage Gas held in inventory pursuant to the
Asset Management Agreement referenced in Article 8 hereof. Buyer shall
indemnify, defend and hold harmless Seller from any Claims for such Taxes.
6.2 Cooperation. Upon request, a Party shall provide a certificate of
-----------
exemption or other evidence of exemption from any Tax and each Party agrees to
cooperate with the other in obtaining an exemption and minimizing Taxes payable
under this Agreement.
ARTICLE 7. TITLE, RISK OF LOSS, INDEMNITY AND BALANCING 7.1 Title, Risk of loss
- ------------------------------------------------------- -------------------
and Indemnity. As between the Parties, Seller shall be deemed to be in exclusive
- -------------
control and possession of Gas Schedule hereunder and responsible for any damage
or injury caused thereby prior to the time the same shall have been delivered to
Buyer at the Delivery Points. At and after delivery of Gas to Buyer at the
Delivery Points, Buyer shall be deemed to be in exclusive control and possession
thereof and responsible for any injury or damage caused thereby. Title to Gas
Schedule hereunder shall pass from Seller to Buyer at the Delivery Points.
Seller and Buyer each assumes all liability for and shall indemnify, defend and
hold harmless the other Party from any Claims, including injury to and death of
persons, arising from any act or incident occurring when title to the Gas is
vested in the indemnifying Party. IT IS THE INTENT OF THE PARTIES THAT THIS
INDEMNITY AND THE LIABILITY ASSUMED UNDER THIS SECTION BE WITHOUT REGARD TO THE
CAUSE OR CAUSES THEREOF, INCLUDING, WITHOUT LIMITATION, THE NEGLIGENCE OF ANY
INDEMNIFIED PARTY, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, OR
ACTIVE OR PASSIVE; PROVIDED, NEITHER PARTY SHALL BE LIABLE IN RESPECT OF ANY
CLAIM TO THE EXTENT SAME RESULTED FROM THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT
OR BAD FAITH OF THE INDEMNIFIED PARTY.
6
<PAGE>
7.2. Correction of Imbalances, Cashouts and Penalties. Seller shall be
------------------------------------------------
responsible for any imbalance penalties on any interstate pipeline, unless
caused by Buyer's failure to give proper and/or timely notice in accordance with
Section 3.3 above.
ARTICLE 8. ASSET MANAGEMENT AGREEMENT. In connection with this Agreement, Buyer
- -------------------------------------
will release or assign to Seller by mutually agreeable instrument of transfer
and Seller will take responsibility for all Gas supply and transportation assets
of Buyer that are currently used by Buyer to serve Buyer's Requirements
Quantity, including, without limitation, Buyer's interstate pipeline
transportation and storage contracts, Buyer's contracts for the purchase of Gas,
and Buyer's LNG storage and purchase contracts, all of which collectively are
referred to as the "Gas Assets," with the mutually agreeable instrument of
transfer referred to as the "Asset Management Agreement." The Asset Management
Agreement will include, among others, provisions regarding the following
matters: (i) the release or assignment by Buyer to Seller of Buyer's Gas Assets;
(ii) the agreement by Buyer and Seller to execute any necessary consent, release
or assignment document needed by either Party to effectuate the transfer of the
Gas Assets as contemplated by the Parties; (iii) the agreement by Seller to take
full responsibility for the burdens and management of all the Gas Assets and
associated contracts transferred by the Asset Management Agreement, including
payment of all charges, penalties or fees associated with such Gas Assets and
assumption of all liability arising from such Gas Assets or their associated
contracts from the date of transfer; (iv) the corresponding agreement of Buyer
to permit Seller to obtain the full value of any benefits associated with the
Gas Assets and associated contracts from the date of transfer; (v) the agreement
by Buyer to permit Seller to manage the Gas Assets on a daily basis as Seller
determines in its sole discretion; (vi) the corresponding agreement by Seller to
refrain from taking any action that would modify beyond the term of this
Agreement the provisions of a contract related to a Gas Asset or impair the
value of any of the Gas Assets without Buyer's written consent; (vii) the
agreement by Seller to transfer the Gas Assets back to Buyer upon termination of
this Agreement or for other specified reasons of default; (viii) the agreement
by Seller to provide Buyer with specific information concerning management of
the Gas Assets to permit Buyer to be assured that Seller will be capable of
satisfying its obligation under Article 3 of this Agreement, including in
particular, information concerning LNG storage and use; (ix) the agreement that
notwithstanding such arrangements, Buyer shall retain the exclusive possession
and control of all its physical operating facilities; (x) the agreement that the
amount payable to Seller shall be subject to adjustment from time to time
pursuant to a "Tracker Agreement" to reflect changes in the demand charges
payable by Seller pursuant to pipeline transportation or storage contracts
assigned thereunder and changes in the economic value of gas assets attributable
to interim modifications thereto effected by Buyer; and (xi) the agreement by
the Parties to permit a Party to use injunctive or other equitable relief to
enforce the provisions of the Asset Management Agreement.
ARTICLE 9. MISCELLANEOUS 9.1. Notices. All notices, including, without
- ------------------------ -------
limitation, consents, and communications made pursuant to this Agreement shall
be made as specified in Exhibit "A." Notices required to be in writing shall be
delivered in written form by letter,
7
<PAGE>
facsimile or other documentary form. Notice by facsimile or hand delivery shall
be deemed to have been received by the close of the Business Day on which it was
transmitted or hand delivered (unless transmitted or hand delivered after close
in which case it shall be deemed received at the close of the next Business Day)
or such earlier time confirmed by the receiving Party. Notice by overnight mail
or courier shall be deemed to have been received two Business Days after it was
sent or such earlier time confirmed by the receiving Party. Notices by US Mail
shall be deemed received by the recipient four (4) days after being sent. Any
Party may change its addresses by providing notice of same in accordance
herewith.
9.2. Transfer. This Agreement, including, without limitation, each
--------
indemnification, shall inure to and bind the permitted successors and assigns of
the Parties; provided, neither Party shall transfer this Agreement without the
prior written approval of the other Party which may not be unreasonably
withheld; provided further, either Party may transfer its interest to any parent
or affiliate by assignment, merger or otherwise without the prior approval of
the other Party; provided that no such transfer will materially impair
performance under this Agreement and provided further that no such transfer
shall operate to relieve the transferor Party of its obligations hereunder. Any
Party's transfer in violation of this Section 9.2 shall be void.
9.3. Limitation of Remedies. Liability and Damages and Mitigation. THE PARTIES
------------------------------------------------------------
DO HEREBY CONFIRM THAT THE EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED IN
THIS AGREEMENT SATISFY THE ESSENTIAL PURPOSES HEREOF. FOR BREACH OF ANY
PROVISION FOR WHICH AN EXPRESS REMEDY OR MEASURE OF DAMAGES IS HEREIN PROVIDED,
SUCH EXPRESS REMEDY OR MEASURE OF DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY
HEREUNDER, THE OBLIGOR'S LIABILITY SHALL BE LIMITED AS SET FORTH IN SUCH
PROVISION AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. IF
NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY HEREIN PROVIDED, THE OBLIGOR'S
LIABILITY SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY, SUCH DIRECT ACTUAL
DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY HEREUNDER AND ALL OTHER REMEDIES
OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. UNLESS EXPRESSLY HEREIN PROVIDED,
NEITHER PARTY SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY
OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS INTERRUPTION DAMAGES, IN
TORT, CONTRACT, UNDER ANY INDEMNITY PROVISION OR OTHERWISE. IT IS THE INTENT OF
THE PARTIES THAT THE LIMITATIONS HEREIN IMPOSED ON REMEDIES AND THE MEASURE OF
DAMAGES BE WITHOUT REGARD TO THE CAUSE OR CAUSES RELATED THERETO, INCLUDING,
WITHOUT LIMITATION, THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH NEGLIGENCE BE
SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. TO THE EXTENT ANY DAMAGES
REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE
DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN
ADEQUATE REMEDY IS INCONVENIENT AND THE LIQUIDATED DAMAGES CONSTITUTE A
REASONABLE APPROXIMATION OF THE HARM OR LOSS. The Parties acknowledge the duty
to mitigate damages hereunder.
8
<PAGE>
Each Party may utilize its discretion, with commercially reasonable foresight,
to adjust the timing and staggering of the purchases or sales of Gas quantities
in its efforts to mitigate damages. No claim that a Party failed to mitigate
damages shall be grounded solely on the basis of counter Gas market movement.
9.4. Winding Up Arrangements. Upon the expiration of the Parties' sale and
-----------------------
purchase obligations under this Agreement, any monies, penalties or other
charges due and owing Seller shall be paid, any corrections or adjustments to
payments previously made shall be determined, and any refunds due Buyer made,
within 60 Days. Any imbalances in receipts or deliveries shall be corrected to
zero balance within 60 Days. All indemnity and confidentiality obligations and
audit rights shall survive the termination of this Agreement. The Parties'
obligations provided in this Agreement shall remain in effect after such
expiration solely for the purpose of complying with this winding-up Section 9.4.
9.5. Applicable Law. THIS AGREEMENT AND THE RIGHTS AND DUTIES OF THE PARTIES
--------------
ARISING OUT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED, ENFORCED AND
PERFORMED IN ACCORDANCE WITH THE LAWS OF THE STATE OF RHODE ISLAND, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW, AND ANY PROCEEDING BROUGHT TO ENFORCE
ANY PROVISION OF THIS AGREEMENT WILL BE BROUGHT IN A COURT IN THE STATE OF RHODE
ISLAND.
9.6. Entire Agreement Evidence of Agreement, Modification, No Third Party
-------------------------------------------------------------------
Beneficiary, Severability, Headings and Incorporation by Reference. This
- ------------------------------------------------------------------
Agreement, the Exhibits and Appendices hereto, if any, constitute the entire
agreement between the Parties relating to the subject matter contemplated by
this Agreement. There are no prior or contemporaneous agreements or
representations (whether oral or written) affecting the subject matter other
than those herein expressed. No amendment or modification to this Agreement
shall be enforceable, unless reduced to writing and executed by both Parties.
The provisions of this Agreement shall not impart rights enforceable by any
person, firm or organization not a Party or not bound as a Party, or not a
permitted successor or assignee of a Party bound to this Agreement. Except as
otherwise herein stated, any provision, article or section declared or rendered
unlawful by a court of law or regulatory agency with jurisdiction over the
Parties or deemed unlawful because of a statutory change will not otherwise
affect the lawful obligations that arise under this Agreement. The headings used
for the Articles herein are for convenience and reference purposes only. All
Exhibits and Appendices references in this Agreement, if any, are incorporated.
9.7. Confidentiality. Each Party will not disclose the terms of this Agreement
---------------
to a third party (other than the Party's and its affiliates' employees, lenders,
counsel, accountants or prospective purchasers of any rights who have agreed to
keep such terms confidential) except in order to comply with any applicable law,
order, regulation or exchange rule; provided, each Party shall notify the other
Party of any proceeding of which it is aware which may result in disclosure and
use reasonable efforts to prevent or limit the disclosure. Seller further agrees
not to disclose or utilize for its competitive benefit information gained
hereunder respecting Buyer's operations that is not readily or generally known
to other gas marketers doing business in Rhode Island,
9
<PAGE>
including customer lists and customer specific usage information The Parties
shall be entitled to all remedies available at law or in equity to enforce, or
seek relief in connection with, this confidentiality obligation; provided, all
monetary damages shall be limited in accordance with Section 9.3; and provided
further, that each Party will only be required with respect to the obligations
regarding confidentiality to exercise such care in maintaining the
confidentiality of this Agreement as it normally exercises in preserving the
confidentiality of its other commercially sensitive documents. If a Party (the
"Receiving Party") is requested or required to make a disclosure of such
information pursuant to law, legal process or a regulatory request or
requirement, the Receiving Party will notify the other Party (the "Disclosing
Party") of such request or requirement as soon as reasonably possible so that
the Disclosing Party may pursue all available remedies to prevent such
disclosure including, but not limited to, a protective order. The Receiving
Party shall cooperate with the Disclosing Party in any attempt by the Disclosing
Party to prevent such a disclosure and, if required to disclose any of the
confidential information despite attempts by the Disclosing Party to prevent
same, will disclose only that part that it is required to disclose.
Notwithstanding the above, Buyer may, under appropriate requests for
confidentiality protections from a regulatory body with jurisdiction over Buyer,
which may or may not be granted, disclose and discuss this Agreement with any
such regulatory body, and either Party may disclose the existence of this
Agreement, but not the specific pricing terms, to a pipeline if required to
effectuate this Agreement or the Asset Management Agreement, provided that a
confidentiality agreement has been executed with such pipeline.
9.8 Counterparts. The Parties have executed this Agreement in multiple
- ----------------
counterparts to be construed as one effective as of the Effective Date;
DUKE ENERGY TRADING AND MARKETING, L.L.C.
Name /s/ Donald Sinclair
-----------------------------------------
Title ________________________________________
THE PROVIDENCE GAS COMPANY
Name /s/ James Demetro
-----------------------------------------
Title Senior Vice President
----------------------------------------
10
<PAGE>
APPENDIX "1"
GENERAL PROVISIONS
Paragraph 1. USAGE AND DEFINITIONS: All references to Articles and Sections are
---------------------
to those set forth in this Agreement. Reference to any document means such
document as amended from time-to-time and reference to any Party includes any
permitted successor or assignee thereof. The following definitions and any terms
defined internally in this Agreement shall apply to this Agreement and all
notices and communications made pursuant to this Agreement.
"Asset Management Agreement" means the agreement so titled between Buyer
--------------------------
and Seller dated as of the date hereof.
"Asset Management Contracts" shall mean those transportation, storage, or
--------------------------
supply agreements identified in the Asset Management Agreement that are
either assigned to Seller or managed by Seller on Buyer's behalf.
"Basis Difference" shall mean the difference that may exist for any period
----------------
between the Exchange Price and the Spot Price at the Delivery Point.
"Btu" means the amount of energy required to raise the temperature of one
---
pound of pure water one degree Fahrenheit from 59 degrees Fahrenheit to 60
degrees Fahrenheit.
"Business Day" means a Day on which Federal Reserve member banks in New
------------
York City are open for business and a Business Day shall open at 8:00 a.m.
and close of 6:00 p.m. local time.
"C.T." means prevailing Central Time.
----
"Claims" means all claims or actions, threatened or filed and whether
------
groundless, false or fraudulent, that directly or indirectly relate to the
subject matters of the indemnity, and the resulting losses, damages,
expenses, attorneys' fees and court costs, whether incurred by settlement
or otherwise, and whether such claims or actions are threatened or filed
prior to or after the termination of this Agreement.
"Contract Price" means the price for the purchase or sale of Gas pursuant
--------------
to this Agreement.
"Day" means a period of 24 consecutive hours, beginning at midnight C.T. on
---
any calendar Day.
"Delivery Point(s)" means the appropriate points of delivery into Buyer's
-----------------
System.
"Exchange Price" means the price for any specified delivery months as
--------------
established by trading natural gas futures on the New York Mercantile
Exchange covering such delivery
1
<PAGE>
months for Henry Hub.
"Firm Customers" means all customers of Buyer receiving services under firm
--------------
sales rate schedule.
"Force Majeure" means an event not anticipated as of the Effective Date,
-------------
which is not within the reasonable control of the Party, or in the case of
third party obligations of facilities, the third party claiming suspension
and which by the exercise of due diligence such Party, or third party, is
unable to overcome or obtain or cause to be obtained a commercially
reasonable substitute performance therefor; provided neither (i) the loss
of Buyer's markets nor Buyer's inability economically to use or resell Gas
purchased hereunder nor (ii) the loss or failure of Seller's Gas supply
including, without limitation, depletion of reserves or other failure of
production except as provided in the Asset Management Contracts, nor
Seller's ability to sell Gas to a market at a more advantageous price,
shall constitute an event of Force Majeure, "Force Majeure" shall include
an event of Force Majeure occurring with respect to the facilities or
services of the Buyer's or Seller's Transporter and incorporates by
reference Force Majeure as defined by the Asset Management Contracts.
"GAAP" means generally accepted accounting principles, consistently
----
applied.
"Gas" means methane and other gaseous hydrocarbons or liquefied natural gas
---
("LNG") meeting, with respect to non-LNG, the quality standards and
specifications of the Transporter used to deliver the Gas at the Delivery
Points or with respect to LNG, of such quality that it does not impair the
proper operation of the storage facility or vaporization equipment used for
such LNG.
"Gas Day" means a period of twenty-four (24) consecutive hours beginning at
-------
the time of the applicable Transporter's gas Day.
"Gas-Related Transportation Requirements" means the delivery and
---------------------------------------
availability to Buyer of the full quantity of gas and capacity resources
required to meet Buyer's gas-related obligations under its transportation
rate schedules or the successors thereto, including obligations as to daily
and monthly balancing (including "cash-outs"), pool balancing services,
assignment to and utilization by FT-2 transportation customers of storage
resources, and the assignment and release of designated pipeline capacity
to transportation customers, all in accordance with the provisions of the
Tariff as in effect from time to time.
"Indemnified Party" and "Indemnifying Party" means the Party receiving and
----------------- ------------------
providing an Indemnity, respectively.
"Interest Rate" means, for any date, two percent over the per annum rate of
-------------
interest announced as the "Prime Rate" from time-to-time for commercial
loans by Citibank,
2
<PAGE>
N.A. as established by the administrative body of such bank charged with the
responsibility of establishing such rate, as same may change from time-to-time;
provided, the Interest Rate shall never exceed the maximum lawful rate permitted
by applicable law.
"Interruptible Sales Requirements" means the delivery to Buyer of the full
--------------------------------
quantity of gas required to meet Buyer's obligations to its interruptible
customers under its Non-Firm Sales Service rate schedule, Rate-60 ("NFS") or its
less than 365 Day Cogeneration Services rate schedule, Rate 50 (S)2, or the
successors thereto, or pursuant to its November 1993 Contract with the
(Confidential Treatment Requested)
"Letter of Credit" means an irrevocable letter of credit, issued by a financial
----------------
institution who holds a minimum credit rating as published by Standard and
Poor's of "BBB-" or Moody's Investors Services, Inc. of "Baal", and acceptable
to the party whose favor the letter of credit is issued, such acceptance not to
be unreasonably or arbitrarily withheld.
"MMBtu" means one million Btus.
-----
"Month" means a period of time beginning at midnight C.T. on the first Day of
-----
any calender Month and ending at midnight C.T. on the first Day of the following
calender Month.
"Non-Replacement Price Differential" means the positive difference, if any,
----------------------------------
obtained by subtracting the Contract Price from the greater of (i) 110% of
---- -------
the average Spot Price for that Gas Day for any location in the United States
east of Rocky Mountains, or (ii) the actual pipeline penalty charge for
unauthorized takes or overruns incurred by Buyer as a result of Seller's
failure.
"Operational Needs" means the Gas needed by Buyer to satisfy all system
-----------------
integrity, balancing and physical operational requirements, plus any Gas
required to satisfy the Gas-Related Transportation Requirements and
Interruptible Sales Requirements.
"Period of Delivery" means the period from the date Scheduling obligations are
------------------
to commence to the date same are to terminate.
"Pipeline" means a company authorizes to ship Gas on behalf of itself or others
--------
on physical Gas transmission facilities.
"Replacement Price Differential" means (i) in the event of a Seller's Deficiency
------------------------------
Default, the positive difference, if any, obtained by subtracting the Contract
Price from the sum of (a) the cost to Buyer, including incremental
transportation costs and other basis adjustments, or penalty charges incurred,
to replace Seller's Deficiency Quantity for such Gas Day plus (b) 25% of that
total delivered cost as an administrative charge representing liquidated damages
to cover Buyer's costs in arranging for such replacement supply; and
3
<PAGE>
(ii) in the event of a Buyer's Deficiency Default the sum of (a) the positive
difference between the Contract Price and the price to Seller, subtracting all
incremental costs incurred by Seller, received in reselling the Gas to a third
party; and (b) twenty-five percent (25%) of that total delivered cost as an
administrative charge representing liquidated damages to cover Seller's costs in
arranging such sales.
"Requirements Quantity" means the quantity of Gas on any Gas Day that is needed
--------------------
to serve the full requirements of Buyer on that Gas Day, which includes Gas
required by Buyer for its Firm Customers and Gas required by Buyer to serve its
Operational Needs; provided that in no event will the Requirements Quantity on
any Gas Day be greater than the sum of Buyer's maximum daily transportation
quantities (excluding transportation of storage withdrawal quantities), plus
Buyer's maximum daily storage withdrawals, plus Buyer's maximum daily LNG
withdrawals, all as provided in the Asset Management Agreement.
"Scheduling" or "Schedule" means that (i) with respect to Seller, Seller shall
---------- --------
arrange for the delivery of the quantity of gas required to meet Buyer's system
demand at each Delivery Point during the Gas Day, as provided in the Asset
Management Agreement. In connection with this obligation, Seller shall utilize
the no-notice and intra-day capabilities embedded in the supply resources
detailed in the Asset Management Agreement to provide for unanticipated changes
in Buyer's projected requirements; and (ii) with respect to Buyer, Buyer will
cooperate with Seller in the development of seasonal, monthly and daily
operational plans to assist in the determination of Buyer's Requirements
Quantity and will provide Seller with (a) a preliminary Requirements Quantity on
the Day prior to gas flow, (b) information on gas scheduled for delivery to
serve Buyer's transportation service customers, (c) updates of the projected
Requirements Quantity as weather and Buyer's operating conditions change, (d)
notification regarding specific operational needs of Buyer at specific Delivery
Points and (e) other information as specified in the Asset Management Agreement.
"Spot Price" means the price set forth in Gas Daily(R) (Pasha Publications,
----------
Inc.), or successor publication, in the column "Daily Price Survey" under the
listing applicable to the geographic location agreed for the relevant Gas Day.
If there is no single price published for that particular Gas Day, but there is
published a range of prices under the above column and listing, then the Spot
Price shall be the average of such high and low prices. In the event that no
price or range of prices is published for that particular Gas Day, then the Spot
Price shall be the average of the following: the price (determined as stated
above) for each of the first Gas Day immediately preceding and following the Gas
Day in which the default occurred for which a Spot Price can be determined.
"Tariff" means the tariff of the Providence Gas Company on file with the Rhode
------
Island Public Utilities Commission, RI-PUC-PGC-NO.100, to the successor thereto.
"Taxes" means any or all ad valorem, property, occupation, severance,
-----
production,
4
<PAGE>
extraction, first use, conservation, Btu or energy, gathering, transport,
Pipeline, utility, gross receipts, gas or oil revenue, gas or oil import,
privilege, sales, use, consumption, excise, lease, transaction, and other
or new taxes, governmental charges, licenses, fees, permits and
assessments, or increases therein, other than taxes based on net income or
net worth.
"Transporter" means either the Pipeline delivering or receiving Gas at a
-----------
Delivery Point.
Paragraph 2. Representations and Warranties. As a material inducement to
------------------------------
entering into this Agreement, each Party, with respect to itself, hereby
represents and warrants to the other Party continuing throughout the term of
this Agreement as follows: (i) there are no suits, proceedings, judgments,
rulings or orders by or before any court or any governmental authority that
materially adversely affect its ability to perform this Agreement or the rights
of the other Party under this Agreement, (ii) it is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
formation, and it has the corporate right, power and authority and is qualified
to conduct its business, and to execute and deliver this Agreement and perform
its obligations under the same, and all regulatory authorizations have been
maintained as necessary for it to legally perform its obligations hereunder,
(iii) the making and performance by it of this Agreement is within its powers,
has been duly authorized by all necessary action on its part.
Paragraph 3. Transportation. Seller shall obtain, or cause to be obtained,
--------------
transportation to the Delivery Point, and Buyer shall obtain, or cause to be
obtained, transportation from the Delivery Point.
Paragraph 4. Gas Specifications. Seller represents that all Gas delivered
------------------
hereunder shall meet or exceed the specifications required above.
Paragraph 5. Operational Flow Orders. Should either party receive an operational
-----------------------
flow order or other order or notice from a Transporter requiring action to be
taken in connection with this Agreement or Gas flowing under this Agreement
("OFO"), such Party shall immediately notify the other Party of the OFO and
---
provide the other Party a copy of same by facsimile. Each Party shall indemnify,
defend and hold harmless the other Party from any Claims, including, without
limitation, all non-compliance penalties and attorneys' fees, associated with an
OFO of which the Indemnifying Party failed to give the Indemnified Party the
notice required hereunder.
Paragraph 6. Financial Matters: Billing Invoice Date Charges and Payment. Buyer
----------------- -------------------- -------------------
agrees to pay Seller for all gas delivered at the price(s) provided for in
Article 3 and Exhibit B of this Agreement. By the 10th Day of each calendar
Month following the Month in which Gas was Scheduled under this Agreement,
Seller shall provide Buyer with a written statement setting forth Gas Scheduled
during the preceding Month, and other charges due Seller, including, without
limitation, deficiency charges under Article 3. Billing and payment will be
based on Scheduled quantities. Within five Business Days of the request of
either Party, the other Party shall provide, to the extent it has a legal right
of access thereto and/or such statement is then available, a copy of the
Transporter's allocation or imbalance statement applicable to Gas sold
5
<PAGE>
hereunder for the requested period. The difference, if any, between Scheduled
and actual quantities delivered or accepted shall be treated as imbalances under
Article 7. Buyer shall remit any amounts due on the 25th Day of the Month by
electronic funds in which Seller's statement was received. If the due date for
any payment to be made under this Agreement is not a Business Day, the due date
for such payment shall be the following Business Day. Payment of all funds shall
be made in U.S currency and as indicated in Exhibit "A" in such manner that
funds are immediately available to the payee on the applicable due date. Each
Party shall take all actions necessary to effect payments in accordance with the
process stated in Exhibit "A". If Buyer or Seller should fail to remit any
amounts in full when due hereunder, interest on the unpaid portion shall accrue
from the date due at a rate equal to the Interest Rate. Billings, payments and
statements shall be made to the accounts or the address/facsimiles specified in
Exhibit "A".
Paragraph 7. Failure to Pay. If either Party fails to make a timely payment and
--------------
such failure is not remedied within ten (10) Business Days after such Party
receives written notice of default, the nondefaulting Party may require
additional security until such default is cured; provided, if the defaulting
Party, in good faith, shall dispute the amount of any such billing or part
thereof and shall pay such amounts as it concedes to be correct, no such
security requirement shall be permitted.
Paragraph 8. Audit Rights. During the term of this Agreement and for a period of
------------
two years from the last day of the Month in which Gas was delivered. Buyer or
Seller or any third party representative thereof shall have the right, upon
reasonable notice and at reasonable times to examine the books and records of
the other to the extent reasonably necessary to verify the accuracy of any
billing statement, payment demand, charge, payment or computation made under
this Agreement. The records of the Parties shall be retained in accordance with
Section 9.6 of the Firm Purchase/Sale Agreement for a like period to facilitate
the audit rights of the Parties.
Paragraph 9. Financial Information. If requested by Buyer, Seller shall deliver
----------------------
(i) within 120 Days following the end of each fiscal year, a copy of the
combined audited financial statements of Duke Energy Trading and Market
Services, L.L.C. and Duke Energy Marketing, L.P. for such fiscal year and (ii)
within 60 Days after the end of each of its first three (3) fiscal quarters of
each fiscal year, a copy of the quarterly report containing unaudited combined
financial statements of Duke Energy Trading and Marketing, L.L.C and Duke Energy
Marketing, L.P. for such fiscal quarter. In addition, Duke Energy Trading and
Marketing, L.L.C. will notify The Providence Gas Company within five (5)
Business Days in the event there is any material adverse change in the financial
condition of Duke Energy Trading and Marketing, L.L.C and Duke Energy Marketing,
L.P. If requested by Seller, Buyer shall deliver (i) within 120 Days following
the end of each fiscal year, a copy of its annual report containing consolidated
financial statements for such fiscal year certified by Independent certified
public accountants and (ii) within 60 Days after the end of each of its first
three fiscal quarters of each fiscal year, a copy of its quarterly report
containing unaudited consolidated financial statements for such fiscal quarter.
In all cases the statements shall be for the most recent accounting period and
prepared in accordance with GAPP; provided, should any such statements not be
timely due to a delay in preparation or certification, such delay shall not be
considered a default so long as such Party diligently pursues
6
<PAGE>
the preparation, certification and delivery of the statements.
Paragraph 10. Warranty of Title to Gas. Seller warrants that title to Gas to be
------------------------
Scheduled by Seller is free from all production burdens, liens and adverse
claims and warrants its right to sell the same. Seller agrees to indemnify,
defend and hold harmless Buyer against all Claims to or against the title of
said Gas. In the event any Claim is asserted to said Gas, Buyer, in addition to
other remedies, may suspend its obligation to pay for said Gas up to the amount
of such Claim.
Paragraph 11. Alternate Price Redetermination. If any or all of the indices used
-------------------------------
to determine the Spot Price are not available in the future, the Parties agree
to promptly negotiate a mutually satisfactory alternate index for the Spot
Price.
Paragraph 12. Effect of Waiver or Consent. No waiver or consent by either Party,
---------------------------
express or implied, of any one or more defaults by the other Party in the
performance of any provision of this Agreement shall operate or be construed as
a waiver or consent of any other default or defaults whether of a like or
different nature. Failure by a Party to complain of any act of the other Party
or to declare the other Party in default with respect to this Agreement,
regardless of how long that failure continues, shall not constitute a waiver by
that Party of its rights with respect to that default until the applicable
statue of limitations period has run.
Paragraph 13. Indemnification. With respect to each indemnification included in
---------------
this Agreement the indemnity is given to the extent authorized by law and the
following provisions shall be considered applicable. The Indemnified Party shall
promptly notify the Indemnifying Party in writing of any Claim and the
Indemnifying Party shall have the right to assume the investigation and defense
thereof, including the employment of counsel, and shall be obligated to pay
reasonable related attorneys' fees; provided, the Indemnified Party shall have
the right to employ separate counsel and participate in the defense of any
Claim, but, the attorney's fees of such counsel shall be paid by the Indemnified
Party unless the employment of such counsel has been consented to in writing by
the Indemnifying Party or the Indemnifying Party has failed to assume the
defense and employ counsel in a timely manner; provided further, if the named
parties to any Claim includes both Parties, and the Indemnified Party shall have
been advised by counsel that there may be a legal defense available to it which
is different from those available to the Indemnifying Party, the Indemnified
Party may elect to employ separate counsel at the expense of the Indemnifying
Party, in which case the Indemnifying Party shall pay the defense of the Claim
on behalf of the Indemnified Party. The Parties shall use reasonable efforts to
cooperate in the defense of any Claim. The Indemnifying Party shall not be
liable for any settlement of a Claim without its express written consent
thereto. The Indemnifying Party shall reimburse the Indemnifying Party for
payments made or costs incurred in respect of an indemnity with the proceeds of
any judgment, insurance, bond, surety or other recovery made with respect to an
event covered by the indemnity.
7
<PAGE>
EXHIBIT "A"
FIRM PURCHASE/SALE AGREEMENT
NOTICE / COMMUNICATION / PAYMENT
TO SELLER: 10777 Westheimer, Suite 650
Houston, Texas 77042
Notices/Correspondence: Attention: Contract Administration
Phone: (713) 260-1800
Facsimile No: (713) 260-1825
Invoices: Attention: Gas Accounting
Phone: (713) 260-1800
Facsimile No. (713) 260-1825
Payments by Wire Transfer: Duke Energy Trading and Marketing, L.L.C.
Chase Manhattan Bank
New York, NY
[CONFIDENTIAL TREATMENT REQUESTED]
Nominations: Attention: Gas Control
Facsimile No.: (713) 260-1850
TO BUYER: 100 Weybosset Street
Providence, Rhode Island 02903
Notices/Correspondence: Attention:
Phone:
Facsimile:
Invoices: Attention:
Phone:
Facsimile:
Payments:
Nominations:
1
<PAGE>
EXHIBIT "B"
FIRM PURCHASE/SALE AGREEMENT
The Exhibit "B" outlines the Agreement between Buyer and Seller regarding the
firm purchase and sale of Gas under the following terms and conditions.
CONTRACT QUANTITY: Requirements Quantity
DELIVERY POINTS: The appropriate points of delivery into Buyer's
System.
CONTRACT PRICE: [CONFIDENTIAL TREATMENT REQUESTED]
PERIOD OF DELIVERY: October 1, 1997 to September 30, 2000
*The parties acknowledge that the Contract Price for Firm customers as
provided herein is the result of Buyer's and Seller's Agreement to fix an
Exchange Price and Basis difference for the Term of this Agreement ("Trigger
Price")
The parties acknowledge that a hedge position is a financial transaction
which requires liquidation if physical delivery or receipt of fixed price Gas or
Trigger Price Gas is interrupted for any reason (except a force majeure event
declared by Seller or interruption caused by Seller's breach). Such interruption
may require liquidation of the entire position, which may not be partially
liquidated to accommodate only the duration, or anticipated duration, of the
interruption. In the event any hedge position is undertaken by Seller in order
to meet its obligations hereunder, and the delivery of the fixed price or
Trigger Price Gas is interrupted for any reason, except force majeure declared
by Seller or interruption caused by Seller's breach, then the Buyer shall be
liable to Seller for any loss incurred by Seller in liquidating such hedge
position in a commercially reasonable manner, which shall include reasonable
efforts to mitigate any such loss and to limit any liquidation to the term of
actual interruption. A loss is incurred when all costs of undertaking the
position exceed the net liquidation proceeds. In the event such liquidation
yields a profit (i.e. net liquidation proceeds exceed all costs of undertaking
the position), then the Buyer shall be paid or credited with such profit.
Seller, in the exercise of its reasonable commercial discretion, shall
determine: (i) whether the anticipated or estimated duration of the interruption
justifies liquidation of the entire position, and (ii) whether the affected
hedge position may be feasibly or economically liquidated in part only. For
purposes of this Exhibit "B," a force majeure event declared by Seller shall not
include any event declared by a third party (neither Buyer nor Seller) which
prevents Seller form carrying out its obligations hereunder.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 189,787
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 32,556
<TOTAL-DEFERRED-CHARGES> 12,338
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 234,681
<COMMON> 1,244
<CAPITAL-SURPLUS-PAID-IN> 37,543
<RETAINED-EARNINGS> 48,616
<TOTAL-COMMON-STOCKHOLDERS-EQ> 87,403
0
4,800
<LONG-TERM-DEBT-NET> 84,994
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,650
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 53,834
<TOT-CAPITALIZATION-AND-LIAB> 234,681
<GROSS-OPERATING-REVENUE> 164,041
<INCOME-TAX-EXPENSE> 6,684
<OTHER-OPERATING-EXPENSES> 138,935
<TOTAL-OPERATING-EXPENSES> 145,619
<OPERATING-INCOME-LOSS> 18,422
<OTHER-INCOME-NET> 523
<INCOME-BEFORE-INTEREST-EXPEN> 18,945
<TOTAL-INTEREST-EXPENSE> 5,675
<NET-INCOME> 13,270
383
<EARNINGS-AVAILABLE-FOR-COMM> 12,887
<COMMON-STOCK-DIVIDENDS> 3,582
<TOTAL-INTEREST-ON-BONDS> 4,688
<CASH-FLOW-OPERATIONS> 38,195
<EPS-PRIMARY> 10.36
<EPS-DILUTED> 10.36
</TABLE>
