<PAGE>
THE PROVIDENCE GAS COMPANY
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 quarterly period ended December 31, 1997
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-1160
--------------------------
THE PROVIDENCE GAS COMPANY
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
----------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
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:
Common Stock, $1.00 par value; 1,243,598 shares outstanding at
- --------------------------------------------------------------
February 13, 1998.
- ------------------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
DECEMBER 31, 1997
PAGE
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
three and twelve months ended
December 31, 1997 and 1996 I-1
Consolidated Balance Sheets as of
December 31, 1997, December 31, 1996
and September 30, 1997 I-2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1997 and 1996 I-3
Consolidated Statements of Capitalization as of
December 31, 1997, December 31, 1996
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
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM I. FINANCIAL STATEMENTS
- ------- --------------------
THE PROVIDENCE GAS COMPANY
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------
FOR THE PERIODS ENDED DECEMBER 31
-------------------------------------
(Unaudited)
-------------------------------------
THREE MONTHS TWELVE MONTHS
------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 59,200 $ 61,673 $208,200 $215,004
Cost of gas sold 32,333 35,673 114,017 122,580
-------- -------- -------- --------
Operating margin 26,867 26,000 94,183 92,424
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 11,318 11,004 47,449 47,618
Depreciation and amortization 3,454 3,019 12,840 11,792
Taxes -
State gross earnings 1,756 1,770 6,009 6,220
Local property and other 1,879 1,689 7,623 6,829
Federal income 2,246 2,302 4,433 4,410
-------- -------- -------- --------
Total operating expenses 20,653 19,784 78,354 76,869
-------- -------- -------- --------
Operating income 6,214 6,216 15,829 15,555
Other, net 157 72 456 426
-------- -------- -------- --------
Income before interest expense 6,371 6,288 16,285 15,981
-------- -------- -------- --------
Interest expense:
Long-term debt 1,490 1,520 6,012 6,096
Other 526 349 1,786 1,296
Interest capitalized (82) (39) (263) (125)
-------- -------- -------- --------
1,934 1,830 7,535 7,267
-------- -------- -------- --------
Net income 4,437 4,458 8,750 8,714
Dividends on preferred stock (139) (174) (591) (696)
-------- -------- -------- --------
Net income applicable to
common stock $ 4,298 $ 4,284 $ 8,159 $ 8,018
======== ======== ======== ========
Earnings per common share $3.46 $3.44 $6.56 $6.45
======== ======== ======== ========
Dividends paid per common share $.96 $.96 $3.84 $3.76
======== ======== ======== ========
Weighted average common shares
outstanding 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ========
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
THE PROVIDENCE GAS COMPANY
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
------------------------------------------------
(Unaudited)
------------------------------------------------
(Thousands)
December 31, December 31, September 30,
1997 1996 1997
------------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $295,994 $275,223 $ 290,614
Less - Accumulated depreciation and
utility plant acquisition adjustments 111,631 101,294 108,478
-------- -------- -----------
184,363 173,929 182,136
-------- -------- -----------
Current assets:
Cash and temporary cash investments 3,674 2,535 778
Accounts receivable, less allowance of
$1,924 at 12/31/97, $2,793 at 12/31/96
and $1,739 at 9/30/97 38,549 31,962 13,120
Unbilled revenues 10,809 10,341 2,658
Deferred gas costs - 15,518 7,151
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage - 14,741 18,001
Materials and supplies 1,077 1,089 1,166
Prepaid and refundable taxes 1,962 2,531 3,293
Prepayments 604 780 966
-------- -------- -----------
56,675 79,497 47,133
-------- -------- -----------
Deferred charges and other assets 12,484 13,293 12,874
-------- -------- -----------
Total assets $253,522 $266,719 $ 242,143
======== ======== ===========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying
statement) $158,090 $156,716 $ 157,012
-------- -------- -----------
Current liabilities:
Notes payable 32,310 38,000 20,410
Current portion of long-term debt 3,654 2,029 3,707
Accounts payable 12,546 24,608 16,114
Accrued taxes 4,889 5,091 2,529
Accrued vacation 1,545 1,637 1,658
Customer deposits 3,406 3,913 3,430
Other 4,273 4,036 4,639
-------- -------- -----------
62,623 79,314 52,487
-------- -------- -----------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 20,823 20,113 20,598
Unamortized investment tax credits 2,315 2,471 2,354
Other 9,671 8,105 9,692
-------- -------- -----------
32,809 30,689 32,644
-------- -------- -----------
Commitments and contingencies - - -
Total capitalization and liabilities $253,522 $266,719 $ 242,143
======== ======== ===========
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
THE PROVIDENCE GAS COMPANY
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE MONTHS ENDED DECEMBER 31
--------------------------------------
(Unaudited)
-----------
1997 1996
------------------------------
(Thousands of Dollars)
<S> <C> <C>
Cash provided by (used for)
Operating Activities:
Net income $ 4,437 $ 4,458
Items not requiring cash:
Depreciation and amortization-plant 3,486 3,051
Changes as a result of regulatory actions 1,500 -
Deferred Federal income taxes 225 210
Amortization of investment tax credits (39) (39)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (7,428) (17,961)
Unbilled revenues (8,151) (8,008)
Deferred gas costs 151 (2,390)
Inventories 89 1,115
Prepaid and refundable taxes 1,331 684
Prepayments 362 685
Accounts payable 1,932 8,128
Accrued taxes 2,360 3,224
Accrued vacation, customer deposits
and other (503) (1,003)
Deferred charges and other 230 793
------- --------
Net cash used for operations (18) (7,053)
------- --------
Investing Activities:
Expenditures for property, plant and
equipment, net (5,713) (5,470)
------- --------
Financing Activities:
Payments on long-term debt (1,940) (1,697)
Increase in notes payable, net 11,900 17,200
Cash dividends on preferred stock (139) (174)
Cash dividends on common stock (1,194) (1,194)
------- --------
Net cash provided by financing activities 8,627 14,135
------- --------
Increase in cash & temporary cash
investments 2,896 1,612
Cash and temporary cash investments at
beginning of period 778 923
------- --------
Cash and temporary cash investments at $ 3,674 $ 2,535
end of period ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period-
Interest (net of amount capitalized) $ 1,710 $ 1,722
Income taxes (net of refunds) $ - $ 3
</TABLE>
I-3
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(UNAUDITED)
-----------
(Thousands)
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1996 1997
-----------------------------------------
Common stockholders' investment:
Common stock, $1 par
<S> <C> <C> <C>
Authorized - 2,500 shares
Outstanding - 1,244 as of 12/31/97,
12/31/96 and 9/30/97 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,546 37,687 37,685
Retained earnings 42,415 39,033 39,311
-------- -------- --------
Total common equity 81,205 77,964 78,240
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 64 shares as of
12/31/97, 9/30/97 and 80 shares 6,400 8,000 6,400
-------- -------- --------
as of 12/31/96
Long-term debt:
First Mortgage Bonds 69,600 71,200 71,200
Other long-term debt 2,988 - 3,207
Capital Leases 1,551 1,581 1,672
-------- -------- --------
Total long-term debt 74,139 72,781 76,079
Less current portion 3,654 2,029 3,707
-------- -------- --------
Long-term debt, net 70,485 70,752 72,372
-------- -------- --------
Total capitalization $158,090 $156,716 $157,012
======== ======== ========
</TABLE>
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 R.I.) 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 R.I. 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 R.I., 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 incurred gas costs will be retained
or borne by the Registrant. Energize R.I. also requires the Registrant to make
significant capital investments to improve its distribution system. Capital
investments required by Energize R.I. 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 R.I. also calls for the Registrant to fund the Low Income
Assistance Program at an annual level of $1.0 million. Finally, Energize R.I.
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 R.I., 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 R.I. will also be amortized over a ten year period.
Under Energize R.I. 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 7 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 7 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
I-5
<PAGE>
Plan will be refunded to or recovered from customers in a manner determined by
all parties and approved by the RIPUC.
The Integrated Resource Plan (IRP) will be terminated as a result of
Energize R.I. 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 a credit of 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 R.I., 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, of
which $9 million has been collected from DETM. The remaining $9 million is
included in the accounts receivable balance in the accompanying consolidated
balance sheet. 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
I-6
<PAGE>
cannot predict the future impact of such standards and requirements which are
subject to change and can take effect retroactively. The Registrant continues to
monitor the status of these laws and regulations. Such monitoring involves the
review of past activities and current operations, and may include expending
funds to investigate or clean-up certain sites. To the best of its knowledge,
subject to the following, the Registrant believes it is in substantial
compliance with such laws and regulations.
At December 31, 1997, the Registrant is aware of four sites at which future
costs may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRP's. With respect to one
of the Plympton sites, the Registrant has joined with other PRP's in entering
into an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of December
31, 1997, approximately $1.9 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by the
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at this site.
The Registrant has completed the study which indicated that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the best
alternative. At December 31, 1997, the Registrant has compiled a preliminary
range of costs based on remediation alternatives, ranging from $1.7 million to
in excess of $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 alternatives noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at
December 31, 1997 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 between $50,000
and $100,000. Accordingly, the Registrant has accrued $50,000 at December 31,
1997 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
I-7
<PAGE>
treatment for all types of cost of removal. Accordingly, environmental
investigation costs of approximately $2.4 million and an estimated $1.7 million
for environmental remediation costs have been charged to the accumulated
depreciation reserve at December 31, 1997.
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.
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 December 31, 1997. 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 (FASB) 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 effect 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, or the failure to
comply with, 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 compliant; 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
For the current quarter and twelve month period, the Registrant's operating
revenues have decreased, while operating margin and net income applicable to
common stock have increased over the comparable period presented, as shown in
the table below:
(thousands where applicable)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31 Ended December 31
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $59,200 $61,673 $208,200 $215,004
======= ======= ======== ========
Operating margin $26,867 $26,000 $ 94,183 $ 92,424
======= ======= ======== ========
Net income applicable
to common stock $ 4,298 $ 4,284 $ 8,159 $ 8,018
======= ======= ======== ========
</TABLE>
I-9
<PAGE>
Operating Revenues and Operating Margin
- ---------------------------------------
During the latest quarter, the Registrant experienced weather that was 6.4
percent colder than the same quarter last year. This increase in colder weather
resulted in increased margin of approximately $800,000. Additionally, Energize
R.I. , which became effective October 1, 1997, provided additional net margin of
approximately $600,000 during the current quarter. The additional net margin
which resulted from freezing the GCC mechanism used previously to adjust for the
over or underrecovery of gas costs was approximately $2.8 million. This $2.8
million of margin was offset by the write-off of $1.5 million of previously
deferred gas costs, funding of the IRP programs of approximately $400,000 and a
deferred revenue adjustment of approximately $300,000. The above margin
increases were offset by a decrease in non-firm margin of approximately
$400,000.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased approximately $300,000 or
2.9 percent from the same quarter last year and were stable for the twelve
months ended December 31, 1997 when compared to same twelve month period last
year. The increase in the current quarter over the same quarter last year is
attributable to higher uncollectible revenues resulting from a decrease in
collections as well as an increase in employee benefit expense due to a rise in
health insurance premiums.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $400,000 or 14.4
percent compared to the same quarter last year and approximately $1.0 million or
8.9 percent for the twelve months ended December 31, 1997 versus the same period
last year. This increase is the result of capital spending during the past year
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 R.I.
Taxes
- -----
Taxes for the current quarter versus last year increased approximately $100,000
or 2.1 percent and increased approximately $600,000 or 3.5 percent for the
current twelve month period versus last year. The increase in taxes, mainly
local property and other, was the result of capital spending during the last
twelve month period.
Interest Expense
- ----------------
Interest expense increased approximately $100,000 or 5.7 percent during the
latest quarter compared to the same quarter last year and approximately $300,000
or 3.7 percent during the latest twelve months compared to the same twelve
months last year. During the prior year, interest expense was offset by accrued
interest on the underrecovery of gas costs that was due from ratepayers.
Effective October 1, 1997, the Registrant froze the GCC mechanism in connection
with Energize R.I. 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
- --------------
Under Energize R.I. 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
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.
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.
I-10
<PAGE>
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 December 31, 1997, the Registrant had
approximately 1,000 firm transportation customers.
Liquidity and Capital Resources
- -------------------------------
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the latest quarter, the Registrant's cash flow from changes in
accounts receivable and unbilled revenue decreased approximately $15.6 million.
These fluctuations are the result of higher monthly sales during the latest
quarter and a moratorium on residential shut-offs during the heating season.
Because of these increases, which negatively impact cash flow, the Registrant
must borrow to maintain an appropriate level of liquidity. Management believes
its available financings are sufficient to meet these seasonal needs.
Capital expenditures for the latest quarter of $5.7 million were fairly stable
when compared to the $5.5 million last year. As a result of Energize R.I., 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 mains and services. Capital
expenditures for the remainder of the fiscal year are expected to be
approximately $23.0 million. Anticipated capital expenditures during the three
years of Energize R.I. are expected to total approximately $72 million.
During the current year, the Registrant intends to make a debt offering of $15
million to finance its capital expenditures.
During the next two years, the Registrant plans to upgrade significant portions
of its computer software in connection with its decision to move towards a
client server environment. The replacement of the software will provide the
additional functionality necessary as the Registrant's business environment
continues to change. The new software will also be Year 2000 compliant. The
Registrant is continuing to assess its remaining computer applications for Year
2000 compliance and is currently unable to assess what impact future
modifications, if any, will have on the Registrant's results of operations.
I-11
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
- ---------------------------
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
--------------------------
PART II. OTHER INFORMATION
- -------- -----------------
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 periods 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 and
Treasurer
Date: February 13, 1998
-------------------
II-2
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