<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, 2000
---------------------------
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 9, 2000.
- --------------------------------------------------------------------------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
MARCH 31, 2000
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
Three, six and twelve months ended
March 31, 2000 and 1999 I-1
Consolidated Balance Sheets as of
March 31, 2000, March 31, 1999
and September 30, 1999 I-2
Consolidated Statements of Cash Flows for the
six months ended March 31, 2000 and 1999 I-3
Consolidated Statements of Capitalization as of
March 31, 2000, March 31, 1999
and September 30, 1999 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 MARCH 31
------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 79,375 $ 77,908 $132,427 $131,209
Cost of gas sold 39,509 39,070 64,824 64,698
-------- -------- -------- --------
Operating margin 39,866 38,838 67,603 66,511
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 12,876 13,053 23,977 24,665
Depreciation and amortization 4,510 4,121 9,013 8,215
Taxes:
State gross earnings 2,336 2,328 3,925 3,927
Local property and other 2,388 2,218 4,453 4,108
Federal income 5,349 5,177 7,554 7,483
-------- -------- -------- --------
Total operating expenses 27,459 26,897 48,922 48,398
-------- -------- -------- --------
Operating income 12,407 11,941 18,681 18,113
Other income 149 170 274 337
-------- -------- -------- --------
Income before interest expense 12,556 12,111 18,955 18,450
-------- -------- -------- --------
Interest expense:
Long-term debt 1,748 1,687 3,512 3,233
Other 407 375 769 676
Interest capitalized (60) (93) (119) (169)
-------- -------- -------- --------
2,095 1,969 4,162 3,740
-------- -------- -------- --------
Net income 10,461 10,142 14,793 14,710
Dividends on preferred stock 75 105 145 209
-------- -------- -------- --------
Net income applicable to
common stock $ 10,386 $ 10,037 $ 14,648 $ 14,501
======== ======== ======== ========
Net income per
common share - basic $8.35 $8.07 $11.78 $11.66
======== ======== ======== ========
Net income per
common share - diluted $8.35 $8.07 $11.78 $11.66
======== ======== ======== ========
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
--------------------
2000 1999
-------- --------
(thousands, except per share amounts)
<S> <C> <C>
Operating revenues $180,557 $182,649
Cost of gas sold 82,712 86,862
-------- --------
Operating margin 97,845 95,787
-------- --------
Operating expenses:
Operation and maintenance 44,795 46,959
Depreciation and amortization 17,363 14,787
Taxes:
State gross earnings 5,314 5,345
Local property and other 8,590 7,863
Federal income 4,799 4,550
-------- --------
Total operating expenses 80,861 79,504
-------- --------
Operating income 16,984 16,283
Other income 872 317
-------- --------
Income before interest expense 17,856 16,600
-------- --------
Interest expense:
Long-term debt 7,085 6,623
Other 1,231 1,048
Interest capitalized (338) (269)
-------- --------
7,978 7,402
-------- --------
Net income 9,878 9,198
Dividends on preferred stock 284 418
-------- --------
Net income applicable to common stock $ 9,594 $ 8,780
======== ========
Net income per common share - basic $ 7.71 $ 7.06
======== ========
Net income per common share - diluted $ 7.71 $ 7.06
======== ========
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)
(Unaudited)
-----------
March 31, March 31, September 30,
2000 1999 1999
---------------------------------------
ASSETS
- ------
Gas plant, at original cost $336,449 $328,914 $ 334,310
Less - Accumulated depreciation and
plant acquisition adjustments 126,059 131,377 125,144
-------- -------- -----------
210,390 197,537 209,166
-------- -------- -----------
Current assets:
Cash and temporary cash investments 1,450 3,109 982
Accounts receivable, less allowance of
$5,760 at 3/31/00, $4,114 at 3/31/99
and $1,999 at 9/30/99 36,459 36,672 9,030
Unbilled revenues 10,638 7,736 2,707
Inventories, at average cost -
Materials, supplies, and fuels 944 1,126 994
Prepaid and refundable taxes 2,182 1,284 3,250
Prepayments 1,329 1,248 1,897
-------- -------- -----------
53,002 51,175 18,860
-------- -------- -----------
Deferred charges and other assets 22,685 17,061 23,460
-------- -------- -----------
Deferred environmental costs 10,996 5,881 9,719
-------- -------- -----------
Total assets $297,073 $271,654 $ 261,205
======== ======== ===========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying
statement) $189,844 $187,854 $ 183,353
-------- -------- -----------
Current liabilities:
Notes payable 17,500 - 11,800
Current portion of long-term debt 3,260 3,131 3,393
Accounts payable 26,635 27,735 9,586
Accrued compensation 1,036 1,479 1,542
Accrued environmental costs 4,165 3,400 6,145
Accrued interest 1,649 1,557 1,630
Accrued taxes 10,827 8,187 2,874
Accrued vacation 2,126 1,898 1,724
Accrued workers compensation 707 596 595
Customer deposits 3,097 2,962 2,923
Other 2,438 2,131 3,153
-------- -------- -----------
73,440 53,076 45,365
-------- -------- -----------
Deferred credits, reserves, and other
liabilities:
Accumulated deferred Federal income
taxes 23,380 22,401 23,128
Unamortized investment tax credits 1,962 2,118 2,040
Accrued pension 7,033 5,815 6,825
Other 1,414 390 494
-------- -------- -----------
33,789 30,724 32,487
-------- -------- -----------
Commitments and contingencies
Total capitalization and liabilities $297,073 $271,654 $ 261,205
======== ======== ===========
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)
2000 1999
-------------------
(thousands)
Cash provided by (used for)-
Operating Activities:
Net income $ 14,793 $ 14,710
Items not requiring cash:
Depreciation and amortization 9,013 8,215
Deferred Federal income taxes 252 1,050
Amortization of investment tax credits (78) (79)
Change as a result of regulatory action (344) -
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (27,429) (26,734)
Unbilled revenues (7,931) (6,126)
Inventories 50 51
Prepaid and refundable taxes 1,068 3,133
Prepayments 568 415
Accounts payable 17,174 20,403
Accrued compensation (506) 254
Accrued interest 19 100
Accrued taxes 7,953 5,532
Accrued vacation, accrued workers
compensation, customer deposits
and other 317 215
Accrued pension 208 134
Deferred charges and other 890 (442)
-------- --------
Net cash provided by operating activities 16,017 20,831
-------- --------
Investing Activities:
Expenditures for property, plant and
equipment, net (13,030) (17,512)
-------- --------
Financing Activities:
Issuance of mortgage bonds - 15,000
Payments on long-term debt (2,486) (2,092)
Increase (decrease) in notes payable 5,700 (9,720)
Redemption of preferred stock (3,200) (1,600)
Cash dividends on preferred stock (145) (209)
Cash dividends on common stock (2,388) (2,387)
-------- --------
Net cash used by financing activities (2,519) (1,008)
-------- --------
Increase in cash and temporary cash investments 468 2,311
Cash and temporary cash investments at
beginning of period 982 798
-------- --------
Cash and temporary cash investments at
end of period $ 1,450 $ 3,109
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period-
Interest (net of amount capitalized) $ 3,982 $ 3,540
Income taxes (net of refunds) $ 2,120 $ 653
Schedule of non-cash investing activities:
Capital lease obligations for equipment $ - $ 115
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,
2000 1999 1999
----------------------------------------
<S> <C> <C> <C>
Common stockholder's investment:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 as of 3/31/00,
3/31/99 and 9/30/99 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 42,238 37,526 42,454
Retained earnings 59,739 54,921 47,479
-------- -------- --------
Total common equity 103,221 93,691 91,177
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 0 shares as of
3/31/00 and 32 shares as of - 3,200 3,200
-------- -------- --------
3/31/99 and 9/30/99
Long-term debt:
First Mortgage Bonds 88,219 90,728 89,819
Other long-term debt 1,370 2,317 1,994
Capital leases 294 1,049 556
-------- -------- --------
Total long-term debt 89,883 94,094 92,369
Less current portion 3,260 3,131 3,393
-------- -------- --------
Long-term debt, net 86,623 90,963 88,976
-------- -------- --------
Total capitalization $189,844 $187,854 $183,353
======== ======== ========
</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 1999 filed on Form 10-K are adequate to make the
information presented not misleading.
2. 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 (Energize RI or the
Plan) among the Registrant, the Rhode Island Division of Public Utilities and
Carriers (Division), the Energy Council of Rhode Island, and The George Wiley
Center. Effective October 1, 1997 through September 30, 2000, Energize RI
provides firm customers with a price decrease of approximately 4.0 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. Also, in connection with
the Plan, the Registrant wrote off approximately $1.5 million of previously
deferred gas costs in October 1997. Energize RI also provides for the Registrant
to make significant capital investments to improve its distribution system and
support economic development. Specific capital improvement projects funded under
Energize RI are estimated to total approximately $26 million over its three-year
term. In addition, under Energize RI, the Registrant provides funding for the
Low-Income Assistance Program at an annual level of $1.0 million, the Demand
Side Management Rebate 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 allowing the Registrant to provide
unbundled service offerings for up to 10 percent per year of firm deliveries.
As part of Energize RI, the Registrant has reclassified and is amortizing
approximately $4.0 million of prior environmental costs. These costs and all
environmental costs incurred during the term of the Plan will be amortized over
a 10-year period, in accordance with the levels authorized in Energize RI.
Under Energize RI, the Registrant may earn up to 10.9 percent, but not less
than 7.0 percent, annually on its average common equity, which is capped at
$81.0 million, $86.2 million, and $92.0 million in fiscal 1998, 1999, and 2000,
respectively. In the event that the Registrant earns in excess of 10.9 percent
or less than 7.0 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 RIPUC.
I-5
<PAGE>
As part of Energize RI, the Registrant is permitted to file annually with
the Division for the recovery of exogenous changes which may occur during the
three-year term of the Plan. Exogenous 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 between the Registrant and
the Division regarding either the nature or quantification of the exogenous
changes are to be resolved by the RIPUC. The impact of any such exogenous
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 winter weather and the loss of non-
firm margin. The Registrant believed the causes of these two events were beyond
its reasonable control and thus deemed them to be exogenous changes. In March
1999, the Registrant reached an agreement with the Division, which allowed for
the recovery of $2.45 million in revenue losses attributable to exogenous
changes experienced by the Registrant in fiscal 1998. The RIPUC reviewed the
exogenous changes agreement to ensure consistency with the terms of Energize RI
and affirmed the agreement at its May 28, 1999 open meeting.
During fiscal 1999, the Registrant recognized into revenue $2.45 million
for the exogenous changes recovery, and has a remaining deferred balance as of
March 31, 2000 of approximately $.1 million of revenue under the provisions of
the earnings cap of Energize RI.
The Registrant intends to file for recovery of exogenous changes
experienced in 1999 which resulted from factors similar to those experienced in
1998. Absent further exogenous recovery 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 this year, the final year of Energize RI, is substantially
impaired.
As Energize RI is due to expire on September 30, 2000, several alternatives
are available to the Registrant to address the expiration of this program
including the possible extension or replication of Energize RI or filing a rate
case. On January 31, 2000, the Registrant filed for a two-month extension of
Energize RI to allow time for the Registrant to discuss its options with the
appropriate parties. At an open meeting on February 22, 2000 the two-month
extension was approved. On April 7, 2000 the Registrant filed for an additional
two-month extension, which was subsequently approved at the April 13, 2000 open
meeting.
3. 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), a
joint venture of Duke Energy Corporation and Mobil Corporation, for a term of
three years commencing October 1, 1997. 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, under the contract,
the Registrant transferred responsibility for its pipeline capacity resources,
storage contracts, and liquified 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.
In addition to 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'
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.
I-6
<PAGE>
Included in the DETM contract are a number of other important features. The
Registrant has retained the right to continue to make gas supply portfolio
changes to reduce supply costs. The Registrant may realize demand cost
reductions by terminating higher-priced contracts. The outsourcing of day-to-day
supply management relieves the Registrant of the need to perform certain
upstream supply management functions. This 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 replacing its existing LNG
service contract with Algonquin Gas Transmission Company (Algonquin), a
subsidiary of Duke Energy Corporation. Algonquin 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 during the winter
period. The service provided for in the agreement began November 10, 1999. Under
the terms of the agreement, Algonquin replaced and expanded the vaporization
capability at the tank. The Registrant has received approximately $2.6 million
from Algonquin. Of the $2.6 million, approximately $.9 million represents
reimbursement received by the Registrant in 1999 for costs incurred related to
the project including labor, engineering, and legal expenses. The remaining
portion of the payment, or approximately $1.7 million was received in January
2000,and serves as reimbursement for the additional costs that DETM will incur
as a result of the release of the Algonquin storage capacity to DETM as provided
for in the gas supply asset management contract described above.
In June 1999, the Federal Energy Regulatory Commission (FERC) issued an
order in Docket Number CP99-113 approving Algonquin's project described above.
In that order FERC also approved the new 10-year contract between Algonquin and
the Registrant for service from the tank and the Registrant's parallel filing,
PR99-8, requesting regulatory authorization to charge Algonquin for displacement
of gas for other Algonquin customers.
As a result of FERC Order 636 and other related orders, pipeline
transportation companies have incurred significant costs, collectively known as
transition costs. The majority of these costs will be reimbursed by the
pipeline's customers, including the Registrant. The Registrant estimates its
transition costs to be approximately $21.7 million, of which $16.2 million has
been included in the GCC and collected from customers through September 30,
1997. As part of the above supply contract, DETM assumed liability for these
transition costs during the contract's three-year term. At the end of the three-
year term of the contract, the Registrant will assume any remaining liability,
which is not expected to be material.
4. 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, 2000, the Registrant was aware of five sites at which future
costs may be incurred.
I-7
<PAGE>
Plympton Sites (2)
- ------------------
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two C. M. Brackett sites in Plympton, Massachusetts. Disposal
contractors employed in the past, either directly or indirectly by the
Registrant and other PRPs, allegedly deposited waste materials at the C. M.
Brackett sites. With respect to one of the sites, the Registrant has joined with
other PRPs in entering into an Administrative Consent Order with the
Massachusetts Department of Environmental Protection. The same group is
currently negotiating a similar agreement for the second site. 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.
Providence Site
- ---------------
During 1995, the Registrant began a study at its primary gas distribution
facility located at 642 Allens Avenue in Providence, Rhode Island. This site
formerly contained a manufactured gas plant operated by the Registrant. As of
March 31, 2000 approximately $3.0 million had been spent primarily on studies
and the formulation of remediation work plans under Rhode Island Department of
Environmental Management (DEM) supervision.
The Registrant has completed the initial investigation to determine the
extent of environmental contamination for the most contaminated portions of the
property. The Registrant has compiled a preliminary range of costs, based on
removal and off-site disposal of the most contaminated soil, ranging from $7.0
million to in excess of $9.0 million. As of March 31, 2000, approximately $3.7
million had been spent on the remediation of this soil. The remediation of the
most contaminated portions of the property is scheduled to be completed
approximately six months after DEM issues the final air quality permit for the
project.
An investigation of the remaining soil was begun in December 1999 and was
completed in March 2000. The total cost of this soil characterization was
approximately $1.5 million. In addition, as of March 31, 2000, the Registrant
has not begun its groundwater investigation at this site. The results of the
additional investigation will be included in the determination of the final
remedial solution.
Because of the uncertainties associated with the pending investigation and
remedial solutions, the Registrant can not offer any conclusions as to the total
future cost of remediation of the property at this time. Based on the proposals
for remediation work, the Registrant has an accrual balance of $4.2 million at
March 31, 2000 for anticipated future remediation and investigation costs at
this site.
Westerly Site
- -------------
The Registrant acquired the Westerly, Rhode Island operations center in
1990 from another company. In 1996 an environmental investigation revealed the
existence of coal tar waste on the site. The Registrant never operated a
manufactured gas plant at this location, but the previous owner did. The former
manufactured gas plant is allegedly the source of the coal tar waste. In
February 1999, DEM issued the Registrant and the previous owner a letter of
responsibility for the site. As of March 31, 2000, the Registrant had removed an
underground oil storage tank and regulators containing mercury from the site, as
well as some localized contamination. The costs associated with the
investigation and removal of localized contamination 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 at
no cost to the Registrant. 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. The Registrant has
completed the required cleanup related to any mercury-containing regulators and
remains responsible for cleanup of any mercury released into adjacent water.
Costs incurred by the Registrant to remediate this site were approximately $.1
million.
I-8
<PAGE>
Allens Avenue Site
- ------------------
In November 1998, the Registrant received a letter of responsibility from
DEM relating to possible contamination on previously owned property at 170
Allens Avenue in Providence. The current operator of the property has also
received a letter of responsibility. A work plan has been created and approved
by DEM. An investigation has begun to determine the extent of contamination as
well as the extent of the Registrant's responsibility. The Registrant has
entered into a cost-sharing agreement with the current operator of the property,
under which the Registrant is responsible for approximately 20 percent of the
costs related to the investigation. Costs of testing at this site as of March
31, 2000 were approximately $.3 million. Until the results of the investigation
are known, the Registrant cannot offer any conclusions as to its responsibility.
General
- -------
In prior rate cases filed with the RIPUC, ProvGas 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 ProvGas' environmental
investigation and remediation expenditures, ProvGas 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 10-year period, in accordance with the levels
authorized in Energize RI. Additionally, it is ProvGas' 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, 2000, ProvGas
has incurred environmental assessment and remediation costs of $8.3 million and
has an accrual balance of $4.2 million for future costs.
Management has begun discussions with other parties who may assist ProvGas
in paying the costs associated with the remediation of 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.
5. Commitments and Contingencies
-----------------------------
The Registrant has employment agreements with 3 officers. Upon a change in
control of the Registrant, potential severance expense will substantially
increase. The Registrant's salary severance expense could total approximately
$1.1 million.
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 including without limitation statements regarding the Registrant's
financial position, strategic initiatives, the effect of its parent company's
proposed merger with Southern Union Company (Southern Union), and statements
addressing industry developments are forward-looking statements. Where, in any
forward-looking statement, the Registrant or its management expresses an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can
be no assurance that the statement of expectation or belief will result or be
achieved or accomplished. The following are some of the factors which could
cause actual results to differ materially from those anticipated: general
economic, financial, and business conditions; changes in government regulations,
the actions taken or decisions rendered by any regulatory body, and the impact
such changes, actions, or decisions might have on the Registrant, including the
regulatory approvals or the timeliness of such approvals of the Registrant's
parent company's proposed merger with Southern Union; competition in the energy
services sector; regional weather conditions; the availability, cost, and heat
content of natural gas; development and operating costs; the success and costs
of advertising and promotional efforts; the availability and terms of capital;
the ability to attract and retain qualified employees; unanticipated
environmental liabilities; the Registrant's ability to grow its business through
significant customer growth; the costs and effects of unanticipated legal
proceedings; the impacts of unusual items resulting from ongoing evaluations of
business strategies and asset valuations; and changes in business strategy.
RESULTS OF OPERATIONS
The Registrant's operating revenues, operating margin, and net income for
the three, six, and twelve months ended March 31, 2000 and for comparable
periods ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
(thousands)
Three Months Six Months Twelve Months
Ended March 31 Ended March 31 Ended March 31
2000 1999 2000 1999 2000 1999
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating
revenues $79,375 $77,908 $132,427 $131,209 $180,557 $182,649
======= ======= ======== ======== ======== ========
Operating margin $39,866 $38,838 $ 67,603 $ 66,511 $ 97,845 $ 95,787
======= ======= ======== ======== ======== ========
Net income
applicable to
common stock $10,386 $10,037 $ 14,648 $ 14,501 $ 9,594 $ 8,780
======= ======= ======== ======== ======== =======
</TABLE>
I-10
<PAGE>
Operating Margin
- ----------------
Operating margin increased approximately $1.0 million or 2.6 percent
compared to the same quarter last year. The margin increase was due to
approximately $.3 million related to the 1998 exogenous change recovery and
approximately $.7 million in non-firm margin due to a more favorable pricing
difference between natural gas and alternate fuels. During the latest quarter,
the Registrant experienced weather that was .6 percent colder than the same
quarter last year. This colder weather did not affect margin when compared to
the same quarter last year.
Operating margin increased approximately $1.1 million or 1.6 percent when
compared to the same six-month period last year. Factors that contributed to the
increase in margin were approximately $.3 million related to the 1998 exogenous
change recovery and $.5 million in non-firm margin primarily due to a more
favorable pricing difference between natural gas and alternate fuels. Also, the
Registrant recognized approximately $.5 million of additional margin as a result
of actual rate reductions of pipeline fixed costs as provided for in the Duke
Energy Trading and Marketing, L.L.C. contract. Weather for the six-month period
was 8.1 percent warmer than normal. During the period, weather was essentially
the same as last year.
Operating margin increased approximately $2.1 million or 2.1 percent for
the twelve months ended March 31, 2000 versus the same period last year. Factors
that contributed to the increase were $2.2 million related to the 1998 exogenous
change recovery and $.8 million in non-firm margin. Also, the Registrant
recognized approximately $.4 million of additional margin as a result of actual
rate reductions of pipeline fixed costs as provided for in the Duke Energy
Trading and Marketing, L.L.C. contract. Partially offsetting the increases, the
Registrant experienced weather that was .5 percent warmer for the twelve months
ended March 31, 2000 versus the same period last year. The warmer temperatures
resulted in decreased margin of approximately $.7 million compared to last year.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses decreased approximately $.2
million or 1.4 percent from the same quarter last year, $.7 million or 2.8
percent from the same six-month period last year, and approximately $2.2 million
or 4.6 percent for the twelve months ended March 31, 2000 when compared to the
same twelve month period last year. The three-month and six-month decreases are
primarily attributable to decreases in the Registrant's expenses due to the end
of the regulatory phase-in of Statement of Financial Accounting Standards No.
106 costs in September 1999 and a reduction in the regulatory expenses assessed
by the Division. Also decreasing expenses were cost control measures that were
implemented in response to the warmer weather. Partially offsetting the
decreases was an increase in labor. The labor increase was attributable to cost
of living increases, as well as the completion of technology projects, for which
labor had previously been capitalized. Partially offsetting the labor increases
was a decrease in severance expense, a temporary decrease in the number of
employees, and a decrease in employee recruiting costs.
In addition to the factors described above, the decrease in the twelve-
month expenses is also attributable to a one-time reimbursement of approximately
$.9 million for costs incurred under a FERC-approved contract with Algonquin Gas
Transmission Company.
The Registrant continually reviews its operating expenses and takes action
to keep expenses as low as possible; however, expenses can vary from year to
year.
I-11
<PAGE>
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $.4 million
or 9.4 percent compared to the same quarter last year, approximately $.8 million
or 9.7 percent compared to the same six-month period last year, and
approximately $2.6 million or 17.4 percent for the twelve months ended March 31,
2000 versus the same period last year. This increase is the result of increased
capital spending for Energize RI commitments; technology projects; Year 2000
costs, which were capitalized as authorized under the provisions of Energize RI;
and the amortization of environmental costs. The Registrant is amortizing
environmental and Year 2000 costs over 10-year and 5-year periods, respectively,
in accordance with the levels authorized in Energize RI. The Registrant
anticipates increased environmental amortization expense in future years
pursuant to its planned environmental remediation program. Also, amortization
expense for Year 2000 costs will be higher in the future than originally
anticipated.
Taxes
- -----
Taxes for the current quarter versus last year increased approximately $.4
million or 3.6 percent, approximately $.4 million or 2.7 percent for the current
six-month period versus last year, and approximately $.9 million or 5.3 percent
for the current twelve-month period versus last year. The increases in taxes are
due to increased local property taxes as a result of capital spending and
increases in Federal income tax as a result of increased pretax earnings.
Other income
- ------------
Other income remained essentially flat in the current quarter versus the
same quarter last year, decreased approximately $.1 million in the current six-
month period versus last year, and increased approximately $.6 million for the
twelve months ended March 31, 2000 versus the same period last year. In 1998,
the Registrant established a reserve for a refund under an order by the Division
which was subsequently vacated in 1999, at which time the original reserve was
reversed, contributing approximately $.5 million to the twelve-month increase.
Interest Expense
- ----------------
Interest expense increased $.1 million or 6.4 percent during the latest
quarter compared to the same quarter last year, approximately $.4 million or
11.3 percent when compared to the same six-month period last year, and
approximately $.6 million or 7.8 percent during the latest twelve months
compared to the same twelve months last year. Long-term interest expense
increased as a result of ProvGas' Series T First Mortgage Bond issuance in
February 1999, which refinanced short-term borrowings. The Series T issuance
enabled the Company to secure a favorable long-term financing rate.
Additionally, short-term interest expense has increased as a result of increased
notes payable and higher interest rates.
FUTURE OUTLOOK
Regulatory
Under the Price Stabilization Plan Settlement Agreement (Energize RI or the
Plan), the Registrant may earn up to 10.9 percent, but not less than 7.0
percent, annually on its average common equity, which is capped at $81.0
million, $86.2 million, and $92.0 million in fiscal 1998, 1999, and 2000,
respectively. In the event that the Registrant earns in excess of 10.9 percent
or less than 7.0 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 RIPUC.
I-12
<PAGE>
As part of Energize RI, the Registrant is permitted to file annually with
the Rhode Island Division of Public Utilities and Carriers (Division) for the
recovery of exogenous changes which may occur during the three-year term of the
Plan. Exogenous 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 between the Registrant and the Division regarding either
the nature or quantification of the exogenous changes are to be resolved by the
Rhode Island Public Utilities Commission (RIPUC). The impact of any such
exogenous 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 winter weather and the loss of non-
firm margin. The Registrant believed the causes of these two events were beyond
its reasonable control and thus deemed them to be exogenous changes. In March
1999, the Registrant reached an agreement with the Division, which allowed for
the recovery of $2.45 million in revenue losses attributable to exogenous
changes experienced by the Registrant in fiscal 1998. The RIPUC reviewed the
exogenous changes agreement to ensure consistency with the terms of Energize RI
and affirmed the agreement at its May 28, 1999 open meeting.
During fiscal 1999, the Registrant recognized into revenue $2.45 million
for the exogenous changes recovery, and has a remaining deferred balance as of
March 31, 2000 of approximately $.1 million of revenue under the provisions of
the earnings cap of Energize RI.
The Registrant intends to file for recovery of exogenous changes
experienced in 1999 which resulted from factors similar to those experienced in
1998. Absent further exogenous recovery 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 this year, the final year of Energize RI, is substantially
impaired.
As Energize RI is due to expire on September 30, 2000, several alternatives
are available to the Registrant to address the expiration of this program
including the possible extension or replication of Energize RI or filing a rate
case. On January 31, 2000, the Registrant filed for a two-month extension of
Energize RI to allow time for the Registrant to discuss its options with the
appropriate parties. At an open meeting on February 22, 2000 the two-month
extension was approved. On April 7, 2000 the Registrant filed for an additional
two-month extension, which was subsequently approved at the April 13, 2000 open
meeting.
On August 31, 1999, the Registrant's settlement agreement for enhancements
to its Business Choice program was approved by the RIPUC in Docket 2902 and
became effective September 1, 1999. Specifically, there will now be rolling
enrollment for transportation service, which will allow customers to execute
transportation agreements throughout the year, rather than during limited
enrollment periods. The program now has approximately 1,700 firm transportation
customers with annual deliveries of over 5 billion cubic feet per year, which is
approximately 25 percent of the Registrant's total annual firm deliveries. There
are 14 marketers serving the Registrant's customers and transporting on the
system. Additional enhancements to the Business Choice program were filed with
the RIPUC under a supplemental settlement agreement in Docket 2902 on October 8,
1999 and were approved on October 27, 1999. These enhancements do not generate
additional revenue.
Merger
A special meeting of the shareholders of the Registrant's parent company,
Providence Energy Corporation (ProvEnergy), has been scheduled for May 22, 2000.
The purpose of this special meeting is to approve the merger described in the
merger agreement with Southern Union Company. The merger agreement was included
as Annex 1 of ProvEnergy's proxy statement dated April 6, 2000.
I-13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $4.8 million for the fiscal year to date
March 31, 2000 compared to the same period last year. On a comparative basis,
the current year cash flow decreased as a result the timing of gas supply
payments.
Capital expenditures for the fiscal year to date March 31, 2000 of $13.0
million decreased $4.5 million or 25.6 percent when compared to $17.5 million
for the same period last year. This spending decrease was due primarily to the
completion of technology projects during fiscal 1999. Capital expenditures for
the remainder of fiscal year 2000 and for fiscal year 2001 are expected to be
approximately $41.9 million in total.
During the current six-month period, the Registrant's cash flow from
financing activities decreased $1.5 million due primarily to the redemption of
preferred stock.
I-14
<PAGE>
THE PROVIDENCE GAS COMPANY
- --------------------------
PART II. OTHER INFORMATION
- ---------------------------
Item 6 (b). Reports on Form 8-K
- --------------------------------
There were no 8-K's filed by the Registrant during the current quarter.
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/ KENNETH W. HOGAN
-------------------------
KENNETH W. HOGAN
Vice President, Chief Financial
Officer, and Treasurer
Date: May 9, 2000
-----------
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 210,390
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 53,002
<TOTAL-DEFERRED-CHARGES> 33,681
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 297,073
<COMMON> 1,244
<CAPITAL-SURPLUS-PAID-IN> 42,238
<RETAINED-EARNINGS> 59,739
<TOTAL-COMMON-STOCKHOLDERS-EQ> 103,221
0
0
<LONG-TERM-DEBT-NET> 86,623
<SHORT-TERM-NOTES> 17,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,260
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 86,469
<TOT-CAPITALIZATION-AND-LIAB> 297,073
<GROSS-OPERATING-REVENUE> 132,427
<INCOME-TAX-EXPENSE> 7,554
<OTHER-OPERATING-EXPENSES> 106,192
<TOTAL-OPERATING-EXPENSES> 113,746
<OPERATING-INCOME-LOSS> 18,681
<OTHER-INCOME-NET> 274
<INCOME-BEFORE-INTEREST-EXPEN> 18,955
<TOTAL-INTEREST-EXPENSE> 4,162
<NET-INCOME> 14,793
145
<EARNINGS-AVAILABLE-FOR-COMM> 14,648
<COMMON-STOCK-DIVIDENDS> 2,388
<TOTAL-INTEREST-ON-BONDS> 3,512
<CASH-FLOW-OPERATIONS> 16,017
<EPS-BASIC> 11.78
<EPS-DILUTED> 11.78
</TABLE>
