<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, 1998
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-1160
---------------------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05- 0203650
--------------------------------------------------------------------
(State or other jurisdiction of (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 12, 1999.
-------------------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
three and twelve months ended
December 31, 1998 and 1997 I-1
Consolidated Balance Sheets as of
December 31, 1998, December 31, 1997
and September 30, 1998 I-2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1998 and 1997 I-3
Consolidated Statements of Capitalization as of
December 31, 1998, December 31, 1997
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 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM I. FINANCIAL STATEMENTS
- ------- --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED DECEMBER 31
---------------------------------
(Unaudited)
---------
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
------------------ ------------------
1998 1997 1998 1997
------------------ ------------------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 51,877 $ 59,200 $176,703 $208,200
Cost of gas sold 25,628 32,333 84,943 114,017
-------- -------- -------- --------
Operating margin 26,249 26,867 91,760 94,183
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 11,612 11,318 46,107 47,449
Depreciation and amortization 4,094 3,454 14,123 12,840
Taxes:
State gross earnings 1,556 1,756 5,163 6,009
Local property and other 1,890 1,879 7,740 7,623
Federal income 1,836 2,246 3,932 4,433
-------- -------- -------- --------
Total operating expenses 20,988 20,653 77,065 78,354
-------- -------- -------- --------
Operating income 5,261 6,214 14,695 15,829
Other, net 167 157 594 456
-------- -------- -------- --------
Income before interest expense 5,428 6,371 15,289 16,285
-------- -------- -------- --------
Interest expense:
Long-term debt 1,546 1,490 6,418 6,012
Other 301 526 1,140 1,786
Interest capitalized (76) (82) (248) (263)
-------- -------- -------- --------
1,771 1,934 7,310 7,535
-------- -------- -------- --------
Net income 3,657 4,437 7,979 8,750
Dividends on preferred stock (104) (139) (452) (591)
-------- -------- -------- --------
Net income applicable to
common stock $ 3,553 $ 4,298 $ 7,527 $ 8,159
======== ======== ======== ========
Net income per
common share - basic $ 2.86 $ 3.46 $ 6.05 $ 6.56
======== ======== ======== ========
Net income per
common share - diluted $ 2.86 $ 3.46 $ 6.05 $ 6.56
======== ======== ======== ========
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>
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(thousands)
<TABLE>
<CAPTION>
(Unaudited)
----------
December 31, December 31, September 30,
1998 1997 1998
----------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Gas plant, at original cost $321,119 $295,994 $ 313,549
Less - Accumulated depreciation and
plant acquisition adjustments 121,969 111,631 119,916
-------- -------- -----------
199,150 184,363 193,633
-------- -------- -----------
Current assets:
Cash and temporary cash investments 887 3,674 798
Accounts receivable, less allowance of
$2,404 at 12/31/98, $1,924 at 12/31/97
and $2,137 at 9/30/98 21,507 38,549 9,938
Unbilled revenues 9,649 10,809 1,610
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage 11 - 11
Materials and supplies 951 1,077 1,166
Prepaid and refundable taxes 2,319 1,962 4,417
Prepayments 1,610 604 1,663
-------- -------- -----------
36,934 56,675 19,603
-------- -------- -----------
Deferred charges and other assets 15,517 12,484 15,378
-------- -------- -----------
Total assets $251,601 $253,522 $ 228,614
======== ======== ===========
CAPITALIZATION AND LIABILITIES
- -------------------------------
Capitalization (see accompanying
statement) $164,923 $158,090 $ 164,462
-------- -------- -----------
Current liabilities:
Notes payable 14,300 32,310 9,720
Current portion of long-term debt 3,155 3,654 3,050
Accounts payable 22,358 12,546 7,332
Accrued taxes 3,421 4,889 2,537
Accrued vacation 1,594 1,545 1,597
Customer deposits 2,977 3,406 2,998
Other 4,193 4,273 4,769
-------- -------- -----------
51,998 62,623 32,003
-------- -------- -----------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 21,876 20,823 21,351
Unamortized investment tax credits 2,158 2,315 2,197
Other 10,646 9,671 8,601
-------- -------- -----------
34,680 32,809 32,149
-------- -------- -----------
Commitments and contingencies - - -
-------- -------- -----------
Total capitalization and liabilities $251,601 $253,522 $ 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 THREE MONTHS ENDED DECEMBER 31
--------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
1998 1997
------------------
(thousands)
<S> <C> <C>
Cash provided by (used for)-
Operating Activities:
Net income $ 3,657 $ 4,437
Items not requiring cash:
Depreciation and amortization 4,001 3,486
Change as a result of regulatory actions - 1,500
Deferred Federal income taxes 525 225
Amortization of investment tax credits (39) (39)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (11,569) (7,428)
Unbilled revenues (8,039) (8,151)
Deferred gas costs - 151
Inventories 215 89
Prepaid and refundable taxes 2,098 1,331
Prepayments 53 362
Accounts payable 14,326 1,932
Accrued taxes 884 2,360
Accrued vacation, customer deposits
and other (600) (503)
Deferred charges and other 844 230
-------- -------
Net cash provided by (used for)
operating activities 6,356 (18)
-------- -------
Investing Activities:
Expenditures for property, plant and
equipment, net (7,753) (5,713)
-------- -------
Financing Activities:
Payments on long-term debt (1,796) (1,940)
Increase in notes payable 4,580 11,900
Cash dividends on preferred stock (104) (139)
Cash dividends on common stock (1,194) (1,194)
-------- -------
Net cash provided by financing activities 1,486 8,627
-------- -------
Increase in cash and temporary cash investments 89 2,896
Cash and temporary cash investments at
beginning of period 798 778
-------- -------
Cash and temporary cash investments at
end of period $ 887 $ 3,674
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period-
Interest (net of amount capitalized) $ 1,964 $ 1,710
Income taxes (net of refunds) $ 4 $ -
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)
-----------
December 31, December 31, September 30,
1998 1997 1998
----------------------------------------------
<S> <C> <C> <C>
Common stockholder's investment:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 as of 12/31/98,
12/31/97 and 9/30/98 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,478 37,546 37,590
Retained earnings 45,166 42,415 42,807
-------- -------- --------
Total common equity 83,888 81,205 81,641
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 48 shares as of
12/31/98 and 9/30/98, and 4,800 6,400 4,800
-------- -------- --------
64 shares as of 12/31/97
Long-term debt:
First Mortgage Bonds 75,728 69,600 77,328
Other long-term debt 2,479 2,988 2,573
Capital leases 1,183 1,551 1,170
-------- -------- --------
Total long-term debt 79,390 74,139 81,071
Less current portion 3,155 3,654 3,050
-------- -------- --------
Long-term debt, net 76,235 70,485 78,021
-------- -------- --------
Total capitalization $164,923 $158,090 $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
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.
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 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.
I-5
<PAGE>
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
control and thus considers them as Changes. In fiscal 1999, the Registrant
intends to file with the Division for recovery of a portion of these losses.
These factors continue to adversely affect the Registrant in fiscal 1999. Under
the Plan's design, which assumed normal weather, the Registrant should have had
earnings in year one of the Plan in excess of 10.9 percent. The earnings in
excess of 10.9 percent were to be deferred in the deferred revenue account to
fund capital investments and other Plan commitments in the remaining two years
of the Plan. 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 remainder of Energize RI is
substantially impaired.
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 a result, the Registrant's gas inventories of
approximately $18 million at September 30, 1997 were sold at book value to DETM
on October 1, 1997.
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. This 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 that
form of gas supply into its distribution system. The Registrant will receive
$2.6 million from ALNG as reimbursement for costs associated with the project
including labor, engineering and legal expenses that will result as part of this
arrangement.
I-6
<PAGE>
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 December 31, 1998, 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 December 31, 1998,
approximately $2.2 million had been spent primarily on studies at this site. In
accordance with state laws, such a study is monitored by the Rhode Island
Department of Environmental Management (DEM). The purpose of this study was to
determine the extent of environmental contamination at 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 April 1999
and will continue for a duration of three to six months. During the remediation
process, the remaining one-third of the property will also be investigated and
remediated if necessary.
At December 31, 1998, the Registrant 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 has accrued $3.4 million at
December 31, 1998, 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 the existence of contaminants 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
December 31, 1998, the Registrant has extracted the underground oil storage tank
and has removed 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 preliminary negotiations to sell the property back to the previous
owner, who would continue to remediate the site. In addition, in 1997,
contamination from scrapped meters and regulators was discovered at this site.
The Registrant reported this to the DEM and the Rhode Island Department of
Health and has completed the necessary remediation. Costs incurred by the
Registrant to remediate this site were approximately $.1 million.
I-7
<PAGE>
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. The current operator conducted tests that support a finding that the
Registrant may be partially responsible for some of the contamination.
Additional investigation is underway to determine the extent of the problem and
the Registrant's responsibility.
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 December 31, 1998, the
Registrant has charged environmental assessment and remediation costs of $2.7
million and an estimated $3.4 million in future costs to the accumulated
depreciation reserve and has amortized $.6 million of these costs.
Management has begun discussions with other parties who may assist the
Registrant in paying any future costs at the above sites. Management believes
that its program for managing environmental issues, combined with rate recovery
and financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
New Accounting Pronouncements
- -----------------------------
In 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.
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).
I-8
<PAGE>
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
For the current quarter and twelve month period, the Registrant's
operating revenues, operating margin and net income applicable to common stock
have decreased over the comparable period presented, as shown in the table
below:
(000's)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31 Ended December 31
Percent Percent
1998 1997 Change Change 1998 1997 Change Change
------- ------- -------- ------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
revenues $51,877 $59,200 $(7,323) (12.4) $176,703 $208,200 $(31,497) (15.1)
======= ======== ======== ======= ======== ======== ======= ======
Operating margin $26,249 $26,867 $ (618) (2.3) $ 91,760 $ 94,183 $ (2,423) (2.6)
======= ======== ======== ======= ======== ======== ======= ======
Net income
applicable to
common stock $ 3,553 $ 4,298 $ (745) (17.3) $ 7,527 $ 8,159 $ (632) (7.7)
======= ======== ======== ======= ======== ======== ======= ======
</TABLE>
I-10
<PAGE>
Operating Margin
- ----------------
Operating margin decreased approximately $.6 million on 2.3 percent compared
to the same quarter last year and approximately $2.4 million or 2.6 percent for
the twelve months ended December 31, 1998 versus the same period last year.
During the latest quarter, the Registrant experienced weather that was 14
percent warmer than the same quarter last year. This warmer weather resulted in
decreased margin of approximately $2.5 million. This decrease was partially
offset by the write-off of $1.5 million of previously deferred gas costs in the
first quarter of fiscal 1998 in connection with Energize RI.
The Registrant experienced weather that was 15 percent warmer for the twelve
months ended December 31, 1998 versus the same period last year. The warmer
temperatures resulted in decreased margin of approximately $7.4 million compared
to last year. Offsetting the warmer than normal weather was $9.4 million of
margin generated under Energize RI which became effective October 1, 1997. This
additional margin includes $9.1 million associated with adjusting the Gas Charge
Clause (GCC) mechanism.
Additionally, non-firm margin decreased $1.6 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 teminated 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.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased approximately $.3
million or 2.6 percent from the same quarter last year and decreased
approximately $1.3 million or 2.8 percent for the twelve months ended December
31, 1998 when compared to the same twelve month period last year.
The Registrant's operating and maintenance expense increase quarter over
quarter is primarily attributable to normal recurring pay increases.
The twelve month decrease is primarily attributable to a decrease in the 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. The Registrant's other
operating and maintenance expenses were essentially flat due to cost management.
The Company continually reviews its operating expenses in order to keep
expenses as low as possible; however, expenses can vary from year to year.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $.6 million or
18.5 percent compared to the same quarter last year and approximately $1.3
million or 10.0 percent for the twelve months ended December 31, 1998 versus the
same period last year. This increase was the result of increased capital
spending for Energize RI commitments including technology projects as well as
the amortization of previously deferred environmental costs. Effective October
1, 1997, ProvGas began amortizing environmental costs over a ten-year period in
accordance with Energize RI.
I-11
<PAGE>
Taxes
- -----
Taxes for the current quarter versus last year decreased approximately $.6
million or 10.2 percent and decreased approximately $1.2 million or 6.8 percent
for the current twelve-month period versus last year. The decrease in taxes,
mainly State gross earnings and Federal income, was the result of lower
operating revenues and lower pretax earnings.
Other, net
- ----------
Other, net remained flat in the current quarter versus the same quarter last
year and increased approximately $.1 million for the twelve months ended
December 31, 1998 versus the same period last year. The majority of the
increase is attributable to interest income earned as a result of Federal income
tax refunds resulting from amending prior year tax returns.
Interest Expense
- ----------------
Interest expense decreased $.2 million or 8.4 percent during the latest
quarter compared to the same quarter last year and decreased approximately $.2
million or 3.0 percent during the latest twelve months compared to the same
twelve months last year. The Registrant's short-term borrowings decreased as a
result of the Series S First Mortgage Bond issuance in April 1998.
FUTURE OUTLOOK
Regulatory
Under Energize RI, the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999 and 2000, respectively. In addition, the Registrant may
not earn less than a seven percent return on average common equity. In the
event 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 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
control and thus considers them as Changes. In fiscal 1999, the Registrant
intends to file with the Division for recovery of a portion of these losses.
These factors continue to adversely affect the Registrant in fiscal 1999. Under
the Plan's design, which assumed normal weather, the Registrant should have had
earnings in year one of the Plan in excess of 10.9 percent. The earnings in
excess of 10.9 percent were to be deferred in the deferred revenue account to
fund capital investments and other Plan commitments in the remaining two years
of the Plan. 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 remainder of Energize RI is
substantially impaired.
I-12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities increased approximately $6.4 million for the quarter ended December
31, 1998 compared to the same period last year. This increase was primarily due
to a temporary increase in accounts payable for gas supply due to the timing of
payments made to Duke Energy Trading and Marketing, L.L.C. (DETM). Offsetting
this increase was 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 DETM.
Capital expenditures for the quarter ended December 31, 1998 of $7.8 million
increased $2.1 million or 36 percent when compared to $5.7 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. Anticipated capital expenditures for the remainder
of Energize RI are expected to total approximately $51.3 million.
During the current quarter, the Registrant's cash flow from financing
activities decreased $7.1 million due primarily to a temporary reduction in
short-term borrowings. This reduction is due to the increase in cash flow from
operating activities as discussed above. In September 1998, the Registrant
repurchased $6.4 million of Series M First Mortgage Bonds. The Registrant
issued $15 million in Series T First Mortgage Bonds on February 8, 1999, the
proceeds of which 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 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 developed in 1992
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 function of customer inquiry, service
orders and billing. It also includes the replacement of its business
applications 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. This
migration is expected to be completed by June 30, 1999.
The Registrant has completed an inventory and assessment of its remaining
IT systems and IT infrastructure. All mission critical systems are expected to
be remediated, upgraded or replaced and tested 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.
I-13
<PAGE>
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 has completed the assessment of its embedded components.
Many of the components associated with the Registrant's mission critical systems
have been identified as Year 2000 ready. A remediation plan for mission
critical embedded systems has been completed and implementation of this plan is
underway. Remediation and testing of mission critical embedded systems is
scheduled to be completed by June 30, 1999. Remediation and testing of all
other embedded systems is planned to be completed by September 30, 1999.
3. Upstream/Downstream
The Registrant has developed a plan to identify its major suppliers and
customers and will evaluate their Year 2000 readiness through a combination of
correspondence, telephone interviews, and site visits. The Registrant is
actively participating with the Rhode Island Y2K (Year 2000) Group 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, DETM, 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
Registrant's plan to address the assessment of third parties provides for
contacting all other critical suppliers by March 31, 1999. The assessment of all
other suppliers will continue throughout 1999. Any risk areas that surface as a
result of these assessments will be addressed in contingency planning.
4. Contingency Planning
The Registrant has contingency plans in place for response to certain
emergency operational situations. The Registrant has begun conducting workshops
to develop actionable contingency plans which will address risks to its major
business processes due 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 preliminary comprehensive budget for all
phases of its Year 2000 effort. The Registrant expects to capitalize Year 2000
costs incurred with 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 consult with the RIPUC on a
periodic basis when, in management's opinion, significant amounts might be
expended for Year 2000 costs.
As of December 31, 1998, the Registrant had deferred Year 2000 costs of
approximately $3.2 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 $8
million to $11 million. These estimated costs include external contractors and
service providers, 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 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. Substantially all of these costs are currently included in the rates
being charged to the Registrant's customers under Energize RI, and therefore are
being expensed as they are incurred.
I-14
<PAGE>
These cost estimates and the dates on which the Registrant plans to
complete Year 2000 modification and testing processes 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 and the upgrade of
its Supervisory Control and Data Acquisition software applications prior to
January 1, 2000 are 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 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.
The Rhode Island Public Utilities Commission has opened a generic docket to
investigate the readiness of regulated utilities for the millennium. Hearings
are scheduled for February 17 and 18, 1999. The Registrant has been requested to
present information regarding its Year 2000 readiness.
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-15
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
---------------------------
Item 6 (a). Exhibits
----------- --------
10a. Liquified Natural Gas Service Precedent Agreement dated December 11,
1998 between Algonquin LNG, Inc. and the Registrant.
Item 6 (b). Reports on Form 8-K
----------- -------------------
No reports on Form 8-K were filed during the quarter for which this report
is filed.
II-1
<PAGE>
THE PROVIDENCE GAS COMPANY
--------------------------
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of
results for the 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
Teasurer
Date: February 12, 1999
-------------------
II-2
<PAGE>
This PRECEDENT AGREEMENT FOR FIRM LNG SERVICE ("Precedent Agreement") is
made and entered into this 11th day of December, 1998, by and between
---- --------
Algonquin LNG, Inc., a Delaware corporation ("ALNG") and The Providence Gas
Company, a Rhode Island corporation ("Customer").
W I T N E S S E T H:
WHEREAS, ALNG proposes to construct, install, own, operate and maintain
certain new facilities at ALNG's existing liquefied natural gas ("LNG") storage
facility located in Providence, Rhode Island ("Project"); and
WHEREAS, Customer desires to obtain from ALNG firm storage and regasification
service which will be made available as a result of the Project;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, and intending to be legally bound, ALNG and Customer agree to the
following:
1. Subject to the terms and conditions of this Precedent Agreement,
ALNG shall proceed with due diligence to obtain from all governmental and
regulatory authorities having competent jurisdiction over the premises the
authorizations and/or exemptions ALNG determines are necessary: (i) for ALNG to
construct, own, operate, and maintain the ALNG facilities necessary to provide
the firm LNG service contemplated herein; (ii) for ALNG to make the necessary
revisions and/or modifications to its FERC Gas Tariff to reflect the firm LNG
service contemplated herein; and (iii) for ALNG to perform its obligations as
contemplated in this Precedent Agreement. ALNG reserves the right to file and
prosecute any and all applications for such authorizations and/or exemptions,
any supplements or amendments thereto, and, if necessary, any court review, in a
manner it deems to be in its best interest. Customer expressly agrees to
support and cooperate with, and to not oppose, obstruct or otherwise interfere
with in any manner whatsoever, the efforts of ALNG to obtain all authorizations
and/or exemptions and supplements and amendments thereto necessary for ALNG to
provide the firm LNG service contemplated in this Precedent Agreement and to
perform its obligations as contemplated by this Precedent Agreement.
2. Within thirty (30) days after execution of this Precedent Agreement,
Customer will advise ALNG in writing of: (i) any facilities which Customer must
construct, or cause to be constructed, in order for Customer to utilize the firm
LNG service contemplated in this Precedent Agreement; and (ii) any necessary
authorizations, approvals and/or exemptions (governmental, internal or
otherwise) for Customer to execute and/or utilize the Service Agreement
contemplated in Paragraph 4 of this Precedent Agreement and/or to construct or
cause to be constructed any facilities necessary for Customer to utilize the
firm LNG service contemplated in this Precedent Agreement.
2
<PAGE>
3. Subject to the terms and conditions of this Precedent Agreement,
Customer shall proceed with due diligence to obtain on a timely basis all
necessary internal and third party authorizations and all necessary governmental
and regulatory authorizations and/or exemptions for customer: (i) to construct
and operate, or cause to be constructed and operated, any facilities necessary
to enable Customer to fully utilize the firm LNG service contemplated in this
Precedent Agreement; (ii) to execute the Service Agreement contemplated in
Paragraph 4 of this Precedent Agreement; and (iii) to perform its obligations as
contemplated in this Precedent Agreement. Customer reserves the right to file
and prosecute applications for such authorizations and/or exemptions, any
supplements or amendments thereto, and, if necessary, any court review, in a
manner it deems to be in its best interest; provided, however, Customer shall
pursue such authorizations and/or exemptions and any supplements and amendments
thereto in a manner designed to implement the firm LNG service contemplated
herein in a timely manner and Customer shall in no event take any action that
would obstruct, interfere with or delay ALNG's receipt of the authorizations
and/or exemptions and any supplements and amendments thereto contemplated
hereunder or otherwise jeopardize implementation of the firm LNG service
contemplated in this Precedent Agreement. ALNG agrees to use reasonable efforts
to assist Customer in obtaining all authorizations necessary for Customer to
utilize the firm LNG service contemplated in this Precedent Agreement. Customer
agrees to promptly notify ALNG in writing when each of the required
authorizations, approvals and/or exemptions are received, obtained, rejected or
denied.
3
<PAGE>
Customer shall also promptly inform ALNG as to whether any such authorizations,
approvals, and/or exemptions received or obtained are acceptable to Customer.
4. To effectuate the firm LNG service contemplated herein, Customer and
ALNG are contemporaneously executing a service agreement under ALNG's Rate
Schedule FST-LG ("Service Agreement"). Effective with the commencement of
service under the Service Agreement, the Service Agreement will supersede and
cancel the service agreement between Customer and ALNG included as part of
ALNG's FERC Gas Tariff, Fourth Revised Volume No. 2, as Rate Schedule X-4. Such
Service Agreement will: (i) specify a Contract Storage Quantity ("CSQ") of
600,000 dekatherms ("Dth"), exclusive of fuel requirements; (ii) specify a
maximum daily vaporization quantity of 95,000 Dth per day; (iii) specify a
primary term commencing on the date of execution of the Service Agreement and
continuing in full force and effect until and including May 1, 2009, provided,
however, that subject to twelve months prior written notice, Customer shall have
the right to extend the term of Service Agreement through and including May 1,
2019; (iv) provide for ALNG to receive Customer's LNG, in liquid phase at
ALNG's Providence, Rhode Island storage facility and store and redeliver, either
in liquid or gaseous phase, LNG to Customer, or for Customer's account; and (v)
be subject to ALNG's system rates, in effect from time to time, plus Boiloff, as
provided for in ALNG's FERC Gas Tariff. Service under the Service Agreement
will commence on the date specified by ALNG in its written notice to Customer
pursuant to Paragraph 5 of this Precedent Agreement.
4
<PAGE>
5. Prior to commencement of service under the Service Agreement, ALNG
shall notify Customer in writing that all of the conditions precedent set forth
in Paragraph 8 of this Precedent Agreement have been satisfied, or waived by the
party for whose benefit the condition was imposed, and that service under the
Service Agreement will commence on a date certain, which date will be the later
of: (i) November 1, 1999; or (ii) the date that all of the conditions precedent
set forth in Paragraph 8 of this Precedent Agreement have been satisfied, or
waived by the party for whose benefit the condition was imposed, and ALNG is
ready and able to commence such firm LNG service. As of the commencement of
service under the Service Agreement, ALNG will stand ready to provide firm LNG
service for Customer pursuant to the terms of the Service Agreement and Customer
will pay ALNG for all applicable charges associated with the Service Agreement.
6. ALNG will undertake the design of facilities and any other
preparatory actions necessary for ALNG to complete and file its certificate
application(s) with the Commission. Upon satisfaction of the conditions
precedent set forth in Paragraph 8 (a) (i), 8 (a)(ii), 8 (a)(iv), 8 (a)(v), 8
(b)(i), 8 (b)(ii), and 8 (b)(iii) of this Precedent Agreement, or waiver of the
same by the party for whose benefit the condition is imposed, ALNG may proceed
(subject to the continuing commitments of all customers executing precedent
agreements for service utilizing the firm LNG storage capacity to be made
available by the facilities contemplated in this Precedent Agreement) with the
5
<PAGE>
necessary design of facilities, acquisition of materials, supplies, properties,
rights-of-way and any other necessary preparations to implement the firm LNG
service under the Service Agreement as contemplated in this Precedent Agreement.
7. Upon satisfaction of the conditions precedent set forth in Paragraph 8
(a) (i), 8 (a)(ii), 8 (a)(iii), 8 (a)(iv), 8 (a)(v), 8 (b)(i), 8 (b)(ii), and 8
(b)(iii) of this Precedent Agreement, or waiver of the same by the party for
whose benefit the conditions are imposed, ALNG shall proceed (subject to the
continuing commitments of all customers executing precedent agreements for
service utilizing the firm LNG capacity to be made available by the facilities
contemplated in this Precedent Agreement) with due diligence to construct the
authorized ALNG facilities and to implement the firm LNG service contemplated in
this Precedent Agreement on or about November 1, 1999. Notwithstanding ALNG's
due diligence, if ALNG is unable to commence the firm LNG service for Customer
as contemplated herein by November 1, 1999, ALNG will continue to proceed with
due diligence to complete arrangements for such firm LNG service, and commence
the firm LNG service for Customer at the earliest practicable date thereafter.
ALNG will neither be liable nor will this Precedent Agreement or the Service
Agreement be subject to cancellation if ALNG is unable to complete the
construction of such authorized and necessary ALNG facilities and commence the
firm LNG service contemplated herein by November 1, 1999.
8. Commencement of service under the Service Agreement and ALNG's and
Customer's rights and obligations under the Service Agreement are expressly made
subject to satisfaction of the following conditions precedent:
(a) ALNG's
6
<PAGE>
(i) receipt and acceptance by November 1, 2000, of all necessary
authorization(s) from the Federal Energy Regulatory
Commission ("Commission") to construct, own, operate and
maintain the facilities necessary to provide the firm LNG
service contemplated herein and in the Service Agreement, to
make all tariff modifications necessary to provide service
under the Service Agreement as contemplated in this
Precedent Agreement, and to perform its obligations under
the lease agreement, displacement agreement and boiloff
agreement referenced in Paragraphs 8 (a) and 8 (b) of this
Precedent Agreement;
(ii) receipt by January 15, 1999 of approval from its Board of
Directors to expend the capital necessary for ALNG to
construct the facilities necessary to provide the firm LNG
service contemplated herein and in the Service Agreement;
(iii) receipt of all other necessary governmental authorizations,
approvals, and permits required to construct the facilities
necessary to provide the firm LNG service contemplated
herein and in the Service Agreement;
(iv) execution of precedent agreements and service agreements
with Customer and other customer(s) for the firm LNG service
contemplated herein for storage quantities sufficient to
make the Project economically viable for ALNG;
7
<PAGE>
(v) execution, on terms and conditions mutually agreeable to
ALNG and Customer, of a: (a) revised or new lease agreement
with Customer for the lease of real property associated with
ALNG's storage facility; and (b) LNG displacement service
agreement and boiloff agreement with Customer to effectuate
deliveries on a firm basis from ALNG's storage facility to
the interconnection of Customer's system with Algonquin Gas
Transmission Company; and
(vi) completion of construction of the necessary LNG facilities
required to render firm LNG service for Customer pursuant to
the Service Agreement and ALNG being ready and able to place
such facilities into service; and
(b) Customer's:
(i) receipt of all necessary authorizations, approvals, and/or
exemptions, of which Customer has notified ALNG in writing
pursuant to Paragraph 2 of this Precedent Agreement, for
Customer to utilize fully the firm LNG service contemplated
in this Precedent Agreement and to perform its obligations
under the lease agreement, displacement agreement and
boiloff agreement referenced in Paragraphs 8 (a) and 8 (b)
of this Precedent Agreement;
(ii) receipt by January 15, 1999 of approval from its Board of
Directors to expend the capital necessary for Customer to
construct the facilities (if any) necessary to utilize the
firm LNG service comtemplated herein and in the Service
Agreement; and
8
<PAGE>
(iii) execution, on terms and conditions mutually agreeable to
Customer and ALNG, of a: (a) revised or new Lease Agreement
with ALNG for the lease of real property associated with
ALNG's storage facility; and (b) LNG displacement service
agreement and boiloff agreement for ALNG to effectuate
deliveries on a firm basis from ALNG's storage facility to
the interconnection of Customer's system with Algonquin Gas
Transmission Company.
All governmental permits, certificates, and other authorizations and/or
exemptions required herein must be issued in form and substance satisfactory to
the party requesting such permits, certificates, and other authorizations and/or
exemptions. All governmental approvals required by this Precedent Agreement
must be duly granted by the Commission or other governmental agency or authority
having jurisdiction, and must be final and nonappealable; but the party for
whose benefit the condition was imposed may waive the condition that such
approvals be final and nonappealable.
9. If Customer: (i) terminates this Precedent Agreement for any reason
other than (a) the inability of ALNG to obtain Commission authorizations and/or
exemptions in form and substance substantially as requested or (b) on the basis
that any of the conditions precedent contained in Paragraph 8(b) herein are not
satisfied; (ii) otherwise
9
<PAGE>
fails to perform, in whole or in material part, its duties and obligations
hereunder; or (iii) interferes with or obstructs the receipt by ALNG of the
authorizations and/or exemptions contemplated by this Precedent Agreement as
requested by ALNG and ALNG does not receive the authorizations and/or exemptions
in form and substance as requested by ALNG or does not receive such
authorizations and/or exemptions at all, then Customer shall, at the option and
election of ALNG, reimburse ALNG for Customer's proportionate share (as prorated
based on initial CSQs among all customers taking actions described in this
Paragraph 9) of ALNG's costs incurred, accrued, allocated to, or for which ALNG
is contractually obligated to pay in conjunction with its efforts, from the date
this Precedent Agreement is executed through the date on which the events stated
in (i), (ii), or (iii) above occur, to satisfy its obligations under this
Precedent Agreement ("Pre-service Costs"). Pre-service Costs will include, but
will not be limited to, those expenditures and/or costs incurred, accrued,
allocated to, or for which ALNG is contractually obligated to pay associated
with engineering, construction, environmental, regulatory, and/or legal
activities, and internal overhead and administration and any other costs related
to the firm service contemplated in this Precedent Agreement incurred in
furtherance of ALNG's efforts to satisfy its obligations under this Precedent
Agreement.
10. ALNG and Customer expressly agree that the execution of this Precedent
Agreement and the performance of the LNG service contemplated in this Precedent
Agreement is without prejudice to any rights or obligations the parties have to
each other under separate and distinct agreements.
10
<PAGE>
11. If the conditions precedent set forth in Paragraph 8 of this Precedent
Agreement have not been fully satisfied, or waived by the party for whose
benefit the condition was imposed, by the applicable dates specified therein and
this Precedent Agreement has not been terminated under Paragraphs 12, 13 or 14
of this Precedent Agreement, then either ALNG or Customer may thereafter
terminate this Precedent Agreement and the related Service Agreement by giving
ninety (90) days prior written notice of its intention to terminate to the non-
terminating party; provided, however, if the conditions precedent are satisfied,
or waived by the party for whose benefit the conditions are imposed, within such
ninety (90) day notice period, then termination will not be effective.
12. In addition to the provisions of Paragraph 11 of this Precedent
Agreement, in the event that all conditions precedent set forth in Paragraph 8,
excluding the condition precedent set forth in Paragraph 8 (a)(vi), have not
been fully satisfied, or waived by the party for whose benefit the condition was
imposed, by November 1, 2000, and this Precedent Agreement has not been
terminated under Paragraphs 13 or 14 of this Precedent Agreement, then either
ALNG or Customer may thereafter terminate this Precedent Agreement and the
related Service Agreement by giving ninety (90) days prior written notice of its
intention to terminate to the non-terminating party; providing, however, if such
conditions precedent are satisfied, or waived by the party for whose benefit the
conditions are imposed, within such ninety (90) day notice period, then
termination will not be effective.
11
<PAGE>
13. In addition, and notwithstanding the provisions of Paragraphs 11 and
12 of this Precedent Agreement, ALNG may terminate this Precedent Agreement at
any time upon fifteen (15) days prior written notice given to the other party
hereto if termination by customer(s), other than by reason of commencement of
service, of other precedent agreements and service agreements for the firm LNG
service contemplated in this Precedent Agreement causes the Project contemplated
herein to become economically unviable, as determined by ALNG, or if all of the
other precedent agreements, service agreements or other contractual arrangements
for the firm LNG service contemplated in this Precedent Agreement are
terminated, other than by reason of commencement of service.
14. If this Precedent Agreement is not terminated pursuant to Paragraphs
11, 12, or 13 of this Precedent Agreement, then this Precedent Agreement will
terminate by its express terms on the date of commencement of service under the
Service Agreement pursuant to Paragraph 5 of this Precedent Agreement, and
thereafter ALNG's and Customer's rights and obligations related to the LNG
transaction contemplated herein shall be determined pursuant to the terms and
conditions of such Service Agreement and ALNG's FERC Gas Tariff, as effective
from time to time.
15. This Precedent Agreement may not be modified or amended unless the
parties execute written agreements to that effect.
12
<PAGE>
16. Any company which succeeds by purchase, merger, or consolidation of
title to the properties, substantially as an entirety, of ALNG or Customer, will
be entitled to the rights and will be subject to the obligations of its
predecessor in title under this Precedent Agreement. Otherwise, neither
Customer nor ALNG may assign any of its rights or obligations under this
Precedent agreement without the prior written consent of the other party hereto.
17. The recitals and representations appearing first above are hereby
incorporated in and made a part of this Precedent Agreement.
18. This Precedent Agreement shall be governed by, construed, interpreted,
and performed in accordance with the laws of the State of Texas, without
recourse to any laws governing the conflict of laws.
19. Except as herein otherwise provided, any notice, request, demand,
statement, or bill provided for in this Precedent Agreement, or any notice which
either party desires to give o the other, must be in writing and will be
considered duly delivered when mailed by registered or certified mail to the
other party's Post Office address set forth below:
ALNG: Vice President, Marketing
1284 Soldiers Field Road
Boston, MA 02135
Customer: The Providence Gas Company
Attn: Asst. Vice President, Gas Supply
100 Weybosset Street
Providence, RI 02903
13
<PAGE>
or at such other address as either party designates by written notice. Routine
communications, including monthly statements, will be considered duly delivered
when mailed by either registered, certified, or ordinary mail.
IN WITNESS WHEREOF, the parties hereto have caused this Precedent Agreement
to be duly executed by their duly authorized officers as of the day and year
first above written.
Algonquin LNG, Inc. Providence Gas Company
BY: J. J. Mullaney BY: James DeMetro
----------------- --------------------
TITLE: Vice President TITLE: Senior Vice President
-------------- ---------------------
14
<PAGE>
SERVICE AGREEMENT
(Applicable to Service Under Rate Schedule FST-LG)
--------------------------------------------------
This Agreement, is made and entered into this 11th day of December, 1998, by
---- --------
and between Algonquin LNG, Inc., a Delaware corporation (hereinafter referred to
as "ALNG") and Providence Gas Company a (hereinafter referred to as "Customer"
whether one or more persons).
WHEREAS, Customer desires to obtain from ALNG firm storage service pursuant to
the terms and conditions of ALNG's Rate Schedule FST-LG; and
WHEREAS, in order for ALNG to provide the firm service Customer desires ALNG
must install certain additional facilities and in connection therewith Customer
and ALNG have entered into a precedent agreement dated December 11, 1998
-----------------
("Precedent Agreement") to provide for certain terms and conditions related to
the firm service to be provided pursuant to this Agreement; and
WHEREAS, pursuant to the terms and conditions of the Precedent Agreement and
this Agreement ALNG desires to provide firm service to customer;
In consideration of the premises and of the mutual covenants herein contained,
the parties do agree as follows:
ARTICLE I
QUANTITY OF LNG TO BE STORED
Subject to the terms, conditions and limitations hereof and of ALNG's Rate
Schedule FST-LG, ALNG agrees to:
- receive for Customer's account and inject into its storage facility
liquefied natural gas ("LNG") in liquid form;
- store up to a maximum quantity at any one time of 600,000 Dth,
to constitute Customer's Contract Storage Quantity ("CSQ"); and
- withdraw up to a Maximum Daily Withdrawal Quantity ("MDWQ") of 95,000
Dth/d of stored gas as requested by Customer and deliver it to Customer
or for Customer's account.
<PAGE>
SERVICE AGREEMENT
(Applicable to Service Under Rate Schedule FST-LG)
--------------------------------------------------
(continued)
ARTICLE II
TERM OF AGREEMENT
2.1 This Agreement shall be effective as of the date first above written.
Service under this Agreement shall commence on the date specified by ALNG in
ALNG's written notification to Customer that all conditions precedent set forth
in the Precedent Agreement have been satisfied or waived and that all necessary
facilities are completed and available for service, which date will not be prior
to November 1, 1999. After service commences under this Agreement, this
Agreement shall continue in effect until and including May 1, 2009 ("Primary
Term") and shall remain in force from year-to-year thereafter unless terminated
by either party pursuant to Section 12 of the General Terms and Conditions;
provided, however, that subject to twelve months prior written notice, Customer
shall have the right to extend the term of this Agreement through and including
May 1, 2019. In the event that the Precedent Agreement is terminated for any
reason other than commencement of service pursuant to this Agreement, then
service under this Agreement shall not commence and this Agreement shall be null
and void.
ARTICLE III
RATE SCHEDULE AND ADJUSTMENTS
3.1 Customer shall pay for all services rendered hereunder and for the
availability of such service under ALNG's Rate Schedule FST-LG, as filed with
the Federal Energy Regulatory Commission, and as the same may be hereafter
revised or changed. The rate to be charged Customer for storage hereunder shall
not be more than the maximum rate under Rate Schedule FST-LG, nor less than the
minimum rate under Rate Schedule FST-LG.
Customer agrees that ALNG shall have the unilateral right to file with the
appropriate regulatory authority and make changes effective in (a) the rates and
charges applicable to service pursuant to ALNG's Rate Schedule FST-LG, (b)
ALNG's Rate Schedule FST-LG, pursuant to which service hereunder is rendered or
(c) any provision of the General Terms and Conditions applicable to Rate
Schedule FST-LG. ALNG agrees that Customer may protest or contest the
aforementioned filings, or may seek authorization from duly constituted
regulatory authorities for such adjustment of ALNG's existing FERC Gas Tariff as
may be found necessary to assure that the provisions in (a), (b), or (c) above
just and reasonable.
2
<PAGE>
SERVICE AGREEMENT
(Applicable to Service Under Rate Schedule FST-LG)
--------------------------------------------------
(continued)
ARTICLE IV
ADDRESSES
Except as herein otherwise provided, or as provided in the General Terms
and Conditions of ALNG's FERC Gas Tariff, any notice, request, demand,
statement, bill or payment provided for in this Agreement, or any notice which
any party may desire to give to the other, shall be in writing and shall be
considered as duly delivered when mailed by registered, certified, or first
class mail to the post office address of the parties hereto, as the case may be
as follows:
(a) Pipeline: Algonquin LNG, Inc.
5400 Westheimer Ct.
Houston, TX 77056
(b) Customer: Providence Gas Company
100 Weybosset Street
Providence, RI 02903
or such other address as either party shall designated by formal written notice.
ARTICLE V
RATE SCHEDULES AND GENERAL TERMS AND CONDITIONS
This Agreement and all terms and provisions contained or incorporated herein are
subject to the provisions of ALNG's applicable rate schedules and of ALNG's
General Terms and Conditions on file with the Federal Energy Regulatory
Commission, or other duly constituted authorities having jurisdiction, and as
the same may be legally amended or superseded, which rate schedules and General
Terms and Conditions are by this reference made a part hereof.
ARTICLE VI
INTERPRETATION
The interpretation and performance of this Agreement shall be in accordance with
the laws of the state of Rhode Island, excluding conflicts of law principles
that would require the application of the laws of a different jurisdiction.
3
<PAGE>
SERVICE AGREEMENT
(Applicable to Service Under Rate Schedule FST-LG)
--------------------------------------------------
(continued)
ARTICLE VII
AGREEMENTS BEING SUPERSEDED
This Agreement shall supersede (as of the date of commencement of service
hereunder as specified ARTICLE II of this Agreement) the following agreements
between the parties hereto for the storage of natural gas by ALNG for Customer:
Rate Schedule X-4, dated October 1, 1971, included in ALNG's
FERC Gas Tariff, Fourth Revised Volume No. 2; and Rate
Schedule FST-LG service agreement dated November 1, 1993.
4
<PAGE>
SERVICE AGREEMENT
(Applicable to Service Under Rate Schedule FST-LG)
--------------------------------------------------
(continued)
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective agents thereunto duly authorized, the day and year first
above written.
ALGONQUIN LNG, INC.
By: J. J. Mullaney
--------------
Title: Vice President
--------------
PROVIDENCE GAS COMPANY
By: James DeMetro
-------------
Title: Senior Vice President
---------------------
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 199,150
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 36,394
<TOTAL-DEFERRED-CHARGES> 15,517
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 251,601
<COMMON> 1,244
<CAPITAL-SURPLUS-PAID-IN> 37,478
<RETAINED-EARNINGS> 45,166
<TOTAL-COMMON-STOCKHOLDERS-EQ> 83,888
0
4,800
<LONG-TERM-DEBT-NET> 76,235
<SHORT-TERM-NOTES> 14,300
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,155
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 69,223
<TOT-CAPITALIZATION-AND-LIAB> 251,601
<GROSS-OPERATING-REVENUE> 51,877
<INCOME-TAX-EXPENSE> 1,836
<OTHER-OPERATING-EXPENSES> 44,780
<TOTAL-OPERATING-EXPENSES> 46,616
<OPERATING-INCOME-LOSS> 5,261
<OTHER-INCOME-NET> 167
<INCOME-BEFORE-INTEREST-EXPEN> 5,428
<TOTAL-INTEREST-EXPENSE> 1,771
<NET-INCOME> 3,657
104
<EARNINGS-AVAILABLE-FOR-COMM> 3,553
<COMMON-STOCK-DIVIDENDS> 1,194
<TOTAL-INTEREST-ON-BONDS> 1,546
<CASH-FLOW-OPERATIONS> 6,356
<EPS-PRIMARY> 2.86
<EPS-DILUTED> 2.86
</TABLE>
