<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 March 31, 1999
-------------------------------------------
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
--------------------------------------------------------------
May 13, 1999.
-------------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
MARCH 31, 1999
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three, six and twelve months ended
March 31, 1999 and 1998 I-1
Consolidated Balance Sheets as of
March 31, 1999, March 31, 1998 and
September 30, 1998 I-2
Consolidated Statements of Cash Flows for the
six months ended March 31, 1999 and 1998 I-3
Consolidated Statements of Capitalization as of
March 31, 1999, March 31, 1998 and
September 30, 1998 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-10
PART II: OTHER INFORMATION
Item 5 Other Information II-1
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM I. FINANCIAL STATEMENTS
- ------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED MARCH 31
------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
-------------------- ----------------------
1999 1998 1999 1998
-------------------- ----------------------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 78,664 $ 73,686 $130,541 $132,886
Cost of gas sold 39,070 37,151 64,698 69,484
-------- -------- -------- --------
Operating margin 39,594 36,535 65,843 63,402
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 13,053 12,201 24,665 23,519
Depreciation and amortization 4,121 3,457 8,215 6,911
Taxes:
State gross earnings 2,351 2,189 3,907 3,945
Local property and other 2,218 2,095 4,108 3,974
Federal income 5,426 5,029 7,262 7,275
-------- -------- -------- --------
Total operating expenses 27,169 24,971 48,157 45,624
-------- -------- -------- --------
Operating income 12,425 11,564 17,686 17,778
Other, net 170 147 337 304
-------- -------- -------- --------
Income before interest expense 12,595 11,711 18,023 18,082
-------- -------- -------- --------
Interest expense:
Long-term debt 1,687 1,482 3,233 2,972
Other 375 467 676 993
Interest capitalized (93) (72) (169) (154)
-------- -------- -------- --------
1,969 1,877 3,740 3,811
-------- -------- -------- --------
Net income 10,626 9,834 14,283 14,271
Dividends on preferred stock (105) (139) (209) (278)
-------- -------- -------- --------
Net income applicable to
common stock $ 10,521 $ 9,695 $ 14,074 $ 13,993
======== ======== ======== ========
Net income per
common share - basic $ 8.46 $ 7.79 $ 11.32 $ 11.25
======== ======== ======== ========
Net income per
common share - diluted $ 8.46 $ 7.79 $ 11.32 $ 11.25
======== ======== ======== ========
Weighted average number of
shares outstanding:
Basic 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ========
Diluted 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM I. FINANCIAL STATEMENTS
- -----------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED MARCH 31
------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
TWELVE MONTHS
------------------------
1999 1998
------------------------
(thousands, except per
share amounts)
<S> <C> <C>
Operating revenues $181,681 $205,296
Cost of gas sold 86,862 106,552
-------- --------
Operating margin 94,819 98,744
-------- --------
Operating expenses:
Operation and maintenance 46,959 47,178
Depreciation and amortization 14,787 13,151
Taxes:
State gross earnings 5,325 5,897
Local property and other 7,863 7,692
Federal income 4,329 6,001
-------- --------
Total operating expenses 79,263 79,919
-------- --------
Operating income 15,556 18,825
Other, net 617 424
-------- --------
Income before interest expense 16,173 19,249
-------- --------
Interest expense:
Long-term debt 6,623 5,982
Other 1,048 1,776
Interest capitalized (269) (279)
-------- --------
7,402 7,479
-------- --------
Net income 8,771 11,770
Dividends on preferred stock (418) (556)
-------- --------
Net income applicable to
common stock $ 8,353 $ 11,214
======== ========
Net income per
common share - basic $ 6.72 $ 9.01
======== ========
Net income per
common share - diluted $ 6.72 $ 9.01
======== ========
Weighted average number of
shares outstanding:
Basic 1,243.6 1,243.6
======== ========
Diluted 1,243.6 1,243.6
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-1(a)
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(thousands)
<TABLE>
<CAPTION>
(Unaudited)
---------------------------------------
March 31, March 31, September 30,
1999 1998 1998
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $328,914 $300,644 $ 313,549
Less - Accumulated depreciation and
plant acquisition adjustments 125,496 114,632 119,916
-------- -------- -----------
203,418 186,012 193,633
-------- -------- -----------
Current assets:
Cash and temporary cash investments 3,109 727 798
Accounts receivable, less allowance of
$4,114 at 3/31/99, $2,845 at 3/31/98
and $2,137 at 9/30/98 36,672 36,118 9,938
Unbilled revenues 7,068 6,182 1,610
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage 11 8 11
Materials and supplies 1,115 959 1,166
Prepaid and refundable taxes 1,284 2,145 4,417
Prepayments 1,248 678 1,663
-------- -------- -----------
50,507 46,817 19,603
-------- -------- -----------
Deferred charges and other assets 17,061 12,262 15,378
-------- -------- -----------
Total assets $270,986 $245,091 $ 228,614
======== ======== ===========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying
statement) $187,427 $164,730 $ 164,462
-------- -------- -----------
Current liabilities:
Notes payable - 15,600 9,720
Current portion of long-term debt 3,131 3,650 3,050
Accounts payable 27,735 11,083 7,332
Accrued taxes 7,946 8,102 2,537
Accrued vacation 1,898 1,801 1,597
Customer deposits 2,962 3,230 2,998
Accrued environmental expense 3,400 - -
Accrued interest 1,557 1,104 1,457
Accrued workers compensation 596 487 530
Accrued compensation 1,479 935 1,225
Other 2,131 2,078 2,247
-------- -------- -----------
52,835 48,070 32,693
-------- -------- -----------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 22,401 21,048 21,351
Unamortized investment tax credits 2,118 2,275 2,197
Accrued environmental expense - 1,750 1,750
Other 6,205 7,218 6,161
-------- -------- -----------
30,724 32,291 31,459
-------- -------- -----------
Commitments and contingencies
Total capitalization and liabilities $270,986 $245,091 $ 228,614
======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-2
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED MARCH 31
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1999 1998
-------- --------
(thousands)
<S> <C> <C>
Cash provided by (used for)-
Operating Activities:
Net income $ 14,283 $ 14,271
Items not requiring cash:
Depreciation and amortization 8,215 6,911
Change as a result of regulatory actions - 1,500
Deferred Federal income taxes 1,050 450
Amortization of investment tax credits (79) (79)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (26,734) (5,082)
Unbilled revenues (5,458) (3,524)
Deferred gas costs - (2)
Inventories 51 199
Prepaid and refundable taxes 3,133 1,148
Prepayments 415 290
Accounts payable 20,403 469
Accrued taxes 5,291 5,573
Accrued Interest 100 (89)
Accrued compensation 254 (836)
Accrued vacation, Accrued workers
compensation, customer deposits
and other 215 145
Deferred charges and other (1,864) 601
-------- --------
Net cash provided by
operating activities 19,275 21,945
-------- --------
Investing Activities:
Expenditures for property, plant and
equipment, net (15,956) (10,766)
-------- --------
Financing Activities:
Issuance of mortgage bonds 15,000 -
Payments on long-term debt (2,092) (2,153)
Decrease in notes payable (9,720) (4,810)
Redemption of preferred stock (1,600) (1,600)
Cash dividends on common shares (2,387) (2,389)
Cash dividends on preferred shares (209) (278)
-------- --------
Net cash used for financing activities (1,008) (11,230)
-------- --------
Increase (decrease) in cash and temporary
cash investments 2,311 (51)
Cash and temporary cash investments at
beginning of period 798 778
-------- --------
Cash and temporary cash investments at
end of period $ 3,109 $ 727
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest (net of amount capitalized) $ 3,540 $ 3,790
Income taxes (net of refunds) $ 653 $ 1,536
Schedule of non-cash investing activities:
Capital lease obligations for equipment $ 115 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-3
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(thousands)
<TABLE>
<CAPTION>
(Unaudited)
-----------
March 31, March 31, September 30,
1999 1998 1998
-------------------------------------
<S> <C> <C> <C>
Common stockholder's investment:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 as of 3/31/99,
3/31/98 and 9/30/98 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,526 37,495 37,590
Retained earnings 54,494 50,915 42,807
-------- -------- --------
Total Common equity 93,264 89,654 81,641
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 32 shares as of
3/31/99 and 48 shares as of 3/31/98
and 9/30/98 3,200 4,800 4,800
-------- -------- --------
Long-term debt:
First Mortgage Bonds 90,728 69,600 77,328
Other long-term debt 2,317 2,897 2,573
Capital leases 1,049 1,429 1,170
-------- -------- --------
Total long-term debt 94,094 73,926 81,071
Less current portion 3,131 3,650 3,050
-------- -------- --------
Long-term debt, net 90,963 70,276 78,021
-------- -------- --------
Total capitalization $187,427 $164,730 $164,462
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-4
<PAGE>
THE PROVIDENCE GAS COMPANY
Notes to Consolidated Financial Statements
1. 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 1998 filed on Form 10-K are adequate to make the
information presented not misleading.
2. Reclassifications
-----------------
Certain prior period amounts have been reclassified for consistent
presentation with the current period.
3. 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 (TEC-RI), and the George
Wiley Center. Effective October 1, 1997 through September 30, 2000, Energize RI
provides firm customers with a price decrease of approximately four percent in
addition to a three-year price freeze. Under Energize RI, the Gas Charge Clause
(GCC) mechanism has been suspended for the entire term. 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 the three-year term. In addition,
Energize RI requires the Registrant to fund the Low-Income Assistance Program at
an annual level of $1 million, the Demand Side Management Program at an annual
level of $.5 million and the Low-Income Weatherization Program at an annual
level of $.2 million. Energize RI also continues the process of unbundling by
requiring the Registrant to provide unbundled service offerings for up to 10
percent per year of firm deliveries.
As part of Energize RI, the Registrant will amortize approximately $4.0
million of environmental costs previously charged to the accumulated
depreciation reserve. These costs and all environmental costs incurred during
the term of the Plan will be amortized over a 10-year period. Also, in
connection with the Plan, the Registrant wrote-off approximately $1.5 million of
previously deferred gas costs in October 1997.
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 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 to the Plan and approved by the
RIPUC. As of March 31, 1999, no deferred revenue has been recorded by the
Registrant.
I-5
<PAGE>
As part of Energize RI, the Registrant is permitted to file with the
Division for the recovery of the impact of exogenous changes (Changes) which may
occur during the three-year term of the Plan. Changes are defined as
"...significant increases or decreases in the Registrant's costs or revenues
which are beyond the Registrant's reasonable control." Any disputes regarding
either the nature or quantification of the Changes are to be resolved by the
RIPUC. The impact of any Changes will be debited or credited to a regulatory
asset or liability account throughout the term of Energize RI and will be
recovered or refunded at the expiration of the Plan through a method to be
determined.
In fiscal 1998, the Registrant did not earn its allowed rate of return
primarily as a result of the extremely warm weather and the loss of non-firm
margin. The Registrant believes the causes of these two events were beyond its
reasonable control and thus considers them as Changes. In March 1999, the
Registrant reached an agreement with the Division for exogenous changes of $2.45
million. Currently the RIPUC is reviewing the exogenous change agreement to
ensure consistency with the terms of Energize RI. Absent favorable recovery for
the changes and/or other factors such as colder than normal weather, the
Registrant's ability to earn a 10.9 percent return on average common equity
during the final year of Energize RI is substantially impaired.
4. Gas Supply
----------
As part of the Price Stabilization Plan Settlement Agreement described above
in Rates and Regulations, the Registrant entered into a full requirements gas
---------------------
supply contract with Duke Energy Trading and Marketing, L.L.C. (DETM) for a term
of three years. Under the contract, DETM guarantees to meet the Registrant's
supply requirements; however, the Registrant must purchase all of its gas supply
exclusively from DETM. In addition the Registrant transferred responsibility
for its pipeline capacity resources, storage contracts and liquefied natural gas
(LNG) capacity to DETM.
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 customers'
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 approved Firm Transportation
(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 outsourcing day to day supply management 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.
The Registrant has entered into an agreement to amend its existing service
contract with Algonquin LNG, Inc. (ALNG), a subsidiary of Duke Energy. ALNG is
the owner and operator of a LNG tank located in Providence, Rhode Island. The
Registrant relies upon this service to provide gas supply into its distribution
system. The agreement, subject to regulatory approvals, is expected to begin on
November 1, 1999. Under the terms of the agreement, ALNG will replace and expand
the vaporization capability at the tank and make other necessary improvements to
modernize the tank and ensure its reliable operation in the future. The
Registrant will receive enhanced gas supply capability and will no longer be
responsible for compressing boil-off from the LNG tank before delivering it into
its distribution system. Under the terms of the agreement, the Registrant will
receive approximately $2.6 million. Of the $2.6
I-6
<PAGE>
million, approximately $900,000 represents reimbursement for costs incurred by
the Registrant related to the project including labor, engineering and legal
expenses that will result as part of this arrangement. The remaining portion of
the payment, or approximately $1.7 million, will be paid to DETM under the
Registrant's contract with DETM as reimbursement for the additional costs that
DETM will incur when the ALNG storage capacity is released to DETM as provided
for in the gas supply contract described above.
In April 1999 the Registrant was notified by ALNG that it was declaring
force majeure as provided for under the terms of the existing service agreement,
so that the LNG tank could be emptied, inspected and if necessary, repaired. The
replacement, expansion and modernization described above is not expected to be
affected by the additional work being done on the tank.
5. Environmental Matters
---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean
up certain sites. To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.
At March 31, 1999, the Registrant was aware of five 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 in 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 PRPs. With respect to one of
the Plympton sites, the Registrant has joined with other PRPs 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 March 31, 1999,
approximately $2.6 million had been spent primarily on studies and the
formulation of remediation work plans 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 the site. The Registrant has completed the study
which indicated that remediation will be required for two-thirds of the
property. The remediation is expected to begin in this fiscal year and will
continue for a duration of three to six months. During the remediation period,
the remaining one-third of the property will also be investigated and remediated
if necessary.
The Registrant has compiled a preliminary range of costs, based on removal
and off-site disposal of contaminated soil, ranging from $3.4 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 range noted. Based on the proposals for
remediation work, the Registrant accrued $3.4 million at March 31, 1999 for
anticipated future remediation costs at this site.
Tests conducted following the discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center in
1996 confirmed
I-7
<PAGE>
the existence of coal tar waste at this site. As a result, the Registrant
completed a site characterization test. Based on the findings of that test, the
Registrant concluded that remediation would be required. As of March 31, 1999,
the Registrant had removed an underground oil storage tank and regulators
containing mercury disposed of on the site, as well as some localized
contamination. The costs associated with the site characterization test and
partial removal of soil contaminants were shared equally with the former owner
of the property. The Registrant is currently engaged in negotiations to transfer
the property back to the previous owner, who would continue to remediate the
site. The purchase and sale agreement is anticipated to be signed during the
current fiscal year, at which time the previous owner will assume
responsibility for removal of coal tar waste on the site. The Registrant
remains responsible for clean up of any mercury released into adjacent water.
Contamination from scrapped meters and regulators which were discovered in 1997
were reported to the DEM and the Rhode Island Department of Health and the
Registrant has completed the necessary remediation. Costs incurred by the
Registrant to remediate this site were approximately $.1 million.
In November 1998, the Registrant received a letter of responsibility from
DEM relating to possible contamination on previously-owned property on Allens
Avenue in Providence. The current operator of the property has been similarly
notified. Both parties have been designated as PRPs. Currently, a work plan is
being created, which will be presented to DEM for approval. Once approved an
investigation will begin in order to determine the extent of the problem and the
Registrant's responsibility. The Registrant has entered into a cost sharing
agreement with the current operator of the property, under which the Registrant
will be held responsible for approximately 20 percent of the costs related to
the investigation. Costs incurred to date by the Registrant for this
investigation have been less than $100,000.
In prior rate cases filed with the RIPUC, 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 Regulations,
---------------------
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 March 31, 1999, the Registrant
has charged environmental assessment and remediation costs of $3.2 million and
an estimated $3.4 million in future costs to the accumulated depreciation
reserve and has amortized $.7 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.
6. New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131, which is
effective for the Registrant's fiscal year ending September 30, 1999, requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. This statement requires additional
disclosure only and will not affect the financial position or results of
operations of the Registrant.
I-8
<PAGE>
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 on 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 the Registrant's fiscal year ending September
30, 2000. 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 a company's election,
before January 1, 1998).
The Registrant has not yet quantified the impact of adopting SFAS No. 133 on
its consolidated financial statements and has not determined the timing of or
method of adoption of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". It applies to all nongovernmental
entities and is effective for the Registrant's financial statements for the
fiscal year ending September 30, 2000. The provisions of this SOP should be
applied to internal-use software costs incurred in fiscal years subsequent to
December 15, 1998 for all projects, including those projects in progress upon
initial application of the SOP.
The SOP establishes accounting standards for the determination of capital or
expense treatment of expenditures for computer software developed or obtained
for internal use based upon the stage of development. The SOP defines the three
stages as (1) Preliminary Project, (2) Application Development and (3) Post-
Implementation/Operation. As a general rule, the Preliminary Project and Post-
Implementation/Operation phase expenditures are expensed and Application
Development expenditures are capitalized.
The Registrant will adopt the SOP upon the effective date and assess its
impact at that time.
I-9
<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 Form 10-Q
regarding the Registrant's financial position, strategic initiatives and
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 or regulatory
policies; competition in the energy services sector; regional weather
conditions; the availability and cost of natural gas; development and operating
costs; the availability and terms of capital; the business abilities and
judgment of personnel; the ability of the Registrant and its suppliers and
customers to modify or redesign their computer systems to work properly in the
Year 2000; the Registrant's ability to grow its business through customer
growth; 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, six and twelve months ended March 31,
1999 and for comparable periods ended March 31, 1998 are as follows:
(thousands)
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
Ended March 31 Ended March 31 Ended March 31
1999 1998 1999 1998 1999 1998
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $78,664 $73,686 $130,541 $132,886 $181,681 $205,296
======= ======= ======== ======== ======== ========
Operating margin $39,594 $36,535 $ 65,843 $ 63,402 $ 94,819 $ 98,744
======= ======= ======== ======== ======== ========
Net income applicable
to common stock $10,521 $ 9,695 $ 14,074 $ 13,993 $ 8,353 $ 11,214
======= ======= ======== ======== ======== ========
</TABLE>
Operating Margin
- ----------------
During the latest quarter, operating margin increased $3.1 million or 8.4
percent compared to the same quarter last year.
The Registrant experienced weather that was 10.3 percent colder than the
same quarter last year. The colder temperatures resulted in increased margin of
approximately $2.6 million compared to the same quarter last year. Additionally,
customer growth resulted in additional margin of approximately $500,000 during
the current quarter.
I-10
<PAGE>
During the current six month period, weather has been similar in comparison
to the same six month period last year. Customer growth has resulted in
approximately $600,000 in additional margin for the six-month period this year
in comparison to last year. Additionally, margin increased this year over last
year as a result of a one-time write off of $1.5 million in fiscal year 1998 of
previously deferred gas costs in connection with Energize RI.
The Registrant experienced weather that was 6 percent warmer for the twelve
months ended March 31, 1999 as compared to the same period last year. The
warmer temperatures resulted in the Registrant recognizing decreased margin of
$1.3 million compared to last year. Offsetting the warmer than normal weather
was $2.5 million of margin generated under Energize RI as a result of adjusting
the Gas Charge Clause mechanism on October 1, 1997.
The Registrant's non-firm margin decreased $1.2 million when compared with
the twelve months ended last year. Prior to Energize RI, the Registrant was
allowed to recover approximately $3.0 million in non-firm margin under the terms
of the Integrated Resource Plan (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 alternative fuels, the Registrant
experienced a decrease in non-firm sales and transportation margin.
As part of Energize RI, the performance-based ratemaking mechanism
(Mechanism) under the IRP was terminated in September 1997. During the previous
twelve month period the Registrant recorded $1.5 million in additional margin as
a result of this Mechanism. Thus, a decrease in margin from the twelve months
ended this year to the same period last year occurred because this Mechanism was
no longer available.
Additionally, the last six months of fiscal year 1997 included the impact on
margin resulting from the use of seasonal gas cost factors. As a result of no
longer using these seasonal gas cost factors since October 1, 1997, margin
decreased approximately $3.1 million in total for the twelve-month period.
Customer growth contributed approximately $600,000 of additional margin for the
twelve-month period ended March 31, 1999 compared to the same period last year.
Despite warmer than normal weather for the twelve-month period, margin
increased due to the reasons described above.
Operating and Maintenance Expenses
- ----------------------------------
Overall operating and maintenance expenses increased approximately $900,000
or 7.0 percent and $1.1 million or 4.9 percent versus the comparable three and
six-month periods ended March 31 last year. The Registrant's operating and
maintenance expenses have increased as a result of normal pay increases,
severance pay and employee recruiting fees.
Operating and maintenance expenses have decreased approximately $200,000 or
.5 percent for the twelve month period ended March 31, 1999 as compared to the
twelve month period ended March 31, 1998. During the twelve months ended March
31, 1999 the increases noted above have been offset by a decrease in bad debt
expense. The decrease in bad debts was attributable to improved collection
experience and the implementation of new credit policies, as well as decreased
operating revenues from warmer than normal weather.
Depreciation and Amortization Expense
- -------------------------------------
Depreciation and amortization expense increased approximately $700,000 or
19.2 percent for the three months ended March 31, 1999, approximately $1.3
million or 18.9 percent for the six months ended March 31, 1999 and
approximately $1.6 million or 12.4 percent for the twelve months ended March 31,
1999, versus the same periods last year.
I-11
<PAGE>
These increases are the result of increased capital spending for Energize RI
commitments, technology projects, Year 2000 costs, as well as the amortization
of environmental costs.
Taxes
- -----
Taxes increased approximately $700,000 or 7.3 percent for the three months
ended March 31, 1999 and $83,000 or 0.5 percent for the six months ended March
31, 1999. For the twelve months ended March 31, 1999, taxes decreased
approximately $2.1 million or 10.6 percent. The changes are primarily due to
fluctuations in Federal income and state gross earnings taxes as a result of
varying levels of pretax income and operating revenues. Additionally, local
property taxes increased as a result of capital spending.
Interest Expense
- ----------------
Interest expense increased approximately $92,000 or 4.9 percent for the
three months ended March 31, 1999, and decreased $71,000 or 1.9 percent for the
six months ended March 31, 1999 and approximately $77,000 or 1.0 percent during
the twelve months ended March 31, 1999, versus the same periods last year. Long-
term interest expense has increased as a result of the Registrant's Series S
First Mortgage Bond issuance in April 1998 and the Series T First Mortgage Bond
issuance in February 1999.
Future Outlook
- --------------
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 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 to be determined by all parties to the Plan and approved by the Rhode
Island Public Utilities Commission (RIPUC).
As part of Energize RI, the Registrant is permitted to file with the RI
Division of Public Utilities and Carriers (Division) for the recovery of the
impact of exogenous changes (Changes) which may occur during the three-year term
of the Plan. Changes are defined as "...significant increases or decreases in
the Registrant's costs or revenues which are beyond the Registrant's reasonable
control." Any disputes regarding either the nature or quantification of the
Changes are to be resolved by the RIPUC. The impact of any Changes will be
debited or credited to a regulatory asset or liability account throughout the
term of Energize RI and will be recovered or refunded at the expiration of the
Plan through a method to be determined.
In fiscal year 1998, the Registrant did not earn its allowed rate of return
primarily as a result of the extremely warm weather and the loss of non-firm
margin. The Registrant believes the causes of these two events were beyond its
reasonable control and thus considers them as Changes. In March 1999, the
Registrant reached an agreement with the Division for exogenous changes of $2.45
million. Currently the RIPUC is reviewing the exogenous change agreement to
ensure consistency with the terms of Energize RI. Absent favorable recovery for
the Changes and/or other factors such as colder than normal weather, the
Registrant's ability to earn a 10.9 percent return on average common equity
during the final year of Energize RI is substantially impaired.
At the conclusion of the latest enrollment period on March 1, 1999, an
additional 210 customers had signed up for Business Choice. The program now has
approximately 1,700 firm transportation customers with annual deliveries of
almost 6 billion cubic
I-12
<PAGE>
feet per year which is approximately 28 percent of the Registrant's total annual
firm deliveries. There are 14 different marketers serving the Registrant's
customers and transporting on the system.
On April 1, 1999, the Registrant filed with the RIPUC a proposal for
enhancements to the Business Choice program. The proposed changes do not
generate additional revenue for the Registrant but rather effect the terms and
conditions under which transportation service is offered.
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $2.7 million for the six months ended March
31, 1999 compared to the same period last year. The decrease was primarily due
to the prior year receipt of funds in the first quarter of fiscal 1998 in
relation to the sale of the Registrant's working gas in storage to Duke Energy
Trading and Marketing, L.L.C. The decrease was offset by a temporary increase in
accounts payable related to the timing of such gas supply payments.
Capital expenditures for the six months ended March 31, 1999 of $16.0
million increased $5.2 million or 48.2 percent when compared to $10.8 million
for the same period last year. This spending increase was due primarily to the
Registrant's continued efforts to move its information technology systems from a
mainframe to a client server environment. Capital expenditures for the remainder
of fiscal year 1999 and fiscal year 2000 are expected to total approximately
$43.1 million.
During the current six months, the Registrant's cash used for financing
activities decreased $10.2 million. The Registrant issued $15 million in Series
T First Mortgage Bonds on February 8, 1999. The proceeds were used to reduce
borrowings under its lines of credit as well as for general corporate purposes.
The Series T bonds are for a 30 year term at an interest rate of 6.5 percent.
The Registrant estimates savings of approximately $1.8 million over the life of
the new debt. The Registrant has received an order from the Division which
permits the amortization of the Series M bond repurchase premium over the life
of the Series T bonds.
YEAR 2000 UPDATE
The Registrant's company-wide Year 2000 (Y2K) Project is proceeding on
schedule. The Project addresses the problem arising from the use in software
programs and computing infrastructure of two-digit years to define the
applicable year, rather than four-digit years, and from time-sensitive software
that may recognize a date using "00" as the last two digits of the year 1900,
rather than the year 2000.
Readiness
The Registrant recognizes that the products and services that the Registrant
provides to its customers are essential, and senior management has made Year
2000 readiness a top priority. The Registrant's Year 2000 Project Office is
working with two international consulting firms to ensure the continuity of
mission critical business systems and processes before and beyond the Year 2000.
The Registrant has organized the Project around the following four major areas:
1. Information Technology (IT) Systems
The Registrant continues to implement its technology plan, which includes
the migration from a mainframe centric to a client server centric environment.
The migration includes the replacement of the Customer Information System (CIS)
which supports the business functions of customer inquiry, service orders and
billing. Migration also includes the replacement of business applications
I-13
<PAGE>
such as financial, human resources, and procurement with an Enterprise Resource
Planning (ERP) system. These new business applications have been represented to
be Year 2000 ready by their respective vendors. Validation testing of these
systems for Year 2000 readiness is expected to be completed by June 30, 1999.
The Registrant completed an inventory and assessment of its existing IT
systems and IT infrastructure in March 1999. The Registrant is currently
engaged in the implementation phase to achieve Year 2000 readiness. The
Registrant has created a Year 2000 test lab to test many of its IT systems. All
mission critical systems are expected to be remediated and tested for Year 2000
readiness by June 30, 1999.
The Registrant has implemented procurement policies as part of its efforts
to ensure Year 2000 readiness. These policies address any future changes to the
Registrant's IT systems environment and its future acquisitions of IT systems.
2. Embedded Systems
Embedded microprocessors are found in equipment deployed in the Registrant's
distribution and facility operations. The distribution area includes, but is
not limited to, the monitoring, storage, measurement and control of the flow of
natural gas. The facility area includes, but is not limited to, back-up power
supply, HVAC and security at the Registrant's offices.
The Registrant completed the assessment of its embedded components in March
1999. Many of the components associated with the Registrant's mission critical
systems have been identified as Year 2000 ready. Remediation and testing of
mission critical embedded systems including ProvGas' Supervisory Control and
Data Acquisition gas distribution system was completed this quarter.
Remediation and testing of all other embedded systems is planned to be completed
by September 30, 1999.
3. Upstream/Downstream
The Registrant has identified its major suppliers and will continue to
evaluate their Year 2000 readiness through a combination of correspondence,
telephone interviews, and site visits. The Company has had correspondence with
all of its major suppliers and none of the correspondence indicated concern for
potential business disruption. The Registrant is actively participating with
the Rhode Island Y2K Association which acts as a communication forum for key
customers as well as the other essential suppliers of services such as
telecommunications, water and electric.
The Registrant has contacted its major suppliers critical to the delivery of
natural gas to its system, including interstate pipelines, Duke Energy Trading
and Marketing, New England Electric System and Bell Atlantic. All suppliers
have indicated that they are following a comprehensive program on a timely
schedule designed to (1) inventory and identify equipment and systems that are
date sensitive; (2) assess, test, remediate, and/or replace such equipment
and/or systems; (3) maintain continuity of service through preparation and
implementation of an appropriate contingency plan; and (4) assess the Y2K
program and compatibility of important upstream suppliers. While the Registrant
cannot guarantee Y2K readiness of these and other suppliers, information
received from them indicates that they expect to fulfill their obligations to
the Registrant on and after January 1, 2000. The assessment of all suppliers
will continue throughout 1999. Any risk areas that surface as a result of these
assessments will be addressed in contingency planning. The Registrant is
communicating its Year 2000 readiness to customers in bill stuffers, on its
website and in state-sponsored "town meetings" throughout its service territory.
The town meetings provide for updates from all the major utilities. They are
being held in different locations during April and May. Previously, on February
17, 1999 the Registrant provided testimony to the RIPUC regarding the
Registrant's Year 2000 readiness.
I-14
<PAGE>
4. Contingency Planning
The Registrant has contingency plans in place for response to certain
emergency operational situations. In addition, the Registrant has completed
over thirty workshops to develop actionable contingency plans which will address
risks to the top fifty business processes specifically related to the Year 2000
computer problem. Such contingency plans may include using manual procedures
and arranging for alternative suppliers. The Registrant expects its Year 2000
contingency plans to be in place by June 30, 1999, with continued refinement
throughout 1999.
Year 2000 Costs
The Registrant has developed a comprehensive budget for all phases of its
Year 2000 effort. The Registrant expects to capitalize Year 2000 and will
amortize these costs over a five-year amortization period consistent with the
regulatory treatment approved by the RIPUC under the Energize RI program.
Additionally, it is the Registrant's practice to communicate with the RIPUC on a
periodic basis when, in management's opinion, significant amounts might be
expended for Year 2000 costs.
As of March 31, 1999, the Registrant had deferred Year 2000 costs of
approximately $4.4 million which includes $.7 million for the assessment phase
of its Year 2000 effort. Remaining activities include project management and
consulting for the Year 2000 Project Office, contingency planning and testing of
the IT infrastructure and IT business systems. Costs for these activities,
together with previously deferred Year 2000 costs, are expected to range from $6
million to $9 million. These estimated costs include external contractors and
service providers and the balance of the unrecovered legacy CIS system that is
being replaced, as well as the purchase of computer hardware and software.
These estimates do not include Year 2000 costs which may be incurred by joint
ventures or partnerships for which the Registrant does not have primary
operating responsibility or for the costs of implementing the new CIS and ERP
systems pursuant to its ongoing technology plan.
Additionally, the Registrant does not separately track the internal costs
incurred for the Year 2000 project. Such costs are principally the related
payroll costs for the information systems group.
These cost estimates and the dates on which the Registrant plans to complete
Year 2000 modification and testing procedures and contingency planning are based
on management's current best estimates which were derived utilizing numerous
assumptions of future events, including the continued availability of
technological and certain other resources, the accuracy of third party
assurances and other factors. There can be no guarantee that these estimates
will be achieved and actual results may differ from those discussed above.
Risk Assessment
No amount of preparation and testing can guarantee Year 2000 readiness.
However, the Registrant believes that it has taken and will take appropriate
preventative measures designed to minimize disruption before, during and after
January 1, 2000.
The successful implementation of its CIS and ERP systems prior to January 1,
2000 is critical to enable the Registrant to avoid significant business
disruption in Year 2000. In addition, a disruption in the extraction or
processing, transmission or storage of gas or its distribution due to Year 2000
problems experienced by the
I-15
<PAGE>
Registrant's gas suppliers could prevent those suppliers from delivering a
sufficient amount of gas to enable the Registrant to serve certain customer
segments. Even if the flow of gas is not disrupted, customers may not be able
to receive gas if electrical service is disrupted.
Because of the difficulty of assessing Year 2000 readiness of these
suppliers and others outside the control of the Registrant, the Registrant
considers potential disruptions by these third parties to present the
"reasonably likely worst case scenario." The Registrant's inability to serve its
customers could result in increased costs, loss of revenue and potential claims.
This Year 2000 update contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements are subject to risks and uncertainties and actual results may
differ materially from those described herein.
I-16
<PAGE>
PROVIDENCE GAS COMPANY
----------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 5 Other Information
- ------------------------------
On April 26, 1999 the Directors of the Registrant elected Kenneth W. Hogan
as Vice President, Chief Financial Officer and Secretary.
Item 6 (b). Reports on Form 8-K
- --------------------------------
On March 25, 1999, the Registrant filed a report on Form 8-K regarding an
agreement for recovery of exogenous changes which allows the Registrant to
recover $2.45 million.
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/ JAMES H. DODGE
---------------------------
JAMES H. DODGE
Chairman, President and
Chief Executive Officer
Date: May 13, 1999
--------------
II-2
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<PAGE>
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<PERIOD-START> OCT-01-1998
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