<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 June 30, 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
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(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
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(Address of principal executive offices)
(Zip Code)
401-272-5040
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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 August
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9, 2000.
--------
<PAGE>
THE PROVIDENCE GAS COMPANY
FORM 10-Q
JUNE 30, 2000
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three and nine months ended
June 30, 2000 and 1999 I-1
Consolidated Balance Sheets as of
June 30, 2000, June 30, 1999 and
September 30, 1999 I-2
Consolidated Statements of Cash Flows for the
nine months ended June 30, 2000 and 1999 I-3
Consolidated Statements of Capitalization as of
June 30, 2000, June 30, 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
<PAGE>
PART I. FINANCIAL INFORMATION
------- ---------------------
ITEM I. FINANCIAL STATEMENTS
------- ---------------------
THE PROVIDENCE GAS COMPANY
------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------
FOR THE PERIODS ENDED JUNE 30
------------------------------------------
(Unaudited)
------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------------ ---------------------
2000 1999 2000 1999
------------------ ---------------------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 33,602 $ 29,515 $ 166,029 $ 160,724
Cost of gas sold 14,637 11,225 79,461 75,923
------- ------- -------- --------
Operating margin 18,965 18,290 86,568 84,801
------- ------- -------- --------
Operating expenses:
Operation and maintenance 11,691 10,170 35,668 34,835
Depreciation and amortization 4,456 4,063 13,469 12,278
Taxes:
State gross earnings 971 870 4,896 4,797
Local property and other 2,231 2,125 6,684 6,233
Federal income (851) (210) 6,703 7,273
------- ------- -------- --------
Total operating expenses 18,498 17,018 67,420 65,416
------- ------- -------- --------
Operating income 467 1,272 19,148 19,385
Other income 272 357 546 694
------- ------- -------- --------
Income before interest expense 739 1,629 19,694 20,079
------- ------- -------- --------
Interest expense:
Long-term debt 1,747 1,794 5,259 5,027
Other 544 83 1,313 759
Interest capitalized (99) (120) (218) (289)
------- ------- -------- --------
2,192 1,757 6,354 5,497
------- ------- -------- --------
Net income (loss) (1,453) (128) 13,340 14,582
Dividends on preferred stock - 69 145 278
------- ------- -------- --------
Net income (loss) applicable to
common stock $ (1,453) $ (197) $ 13,195 $ 14,304
======= ======= ======== ========
Net income (loss) per
common share - basic $ (1.17) $ (.16) $ 10.61 $ 11.50
======= ======= ======== ========
Net income (loss) per
common share - diluted $ (1.17) $ (.16) $ 10.61 $ 11.50
======= ======= ======== ========
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)
-----------
June 30, June 30, September 30,
2000 1999 1999
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
------
Gas plant, at original cost $341,810 $337,115 $334,310
Less - Accumulated depreciation and
plant acquisition adjustments 129,567 135,000 125,144
-------- -------- --------
212,243 202,115 209,166
-------- -------- --------
Current assets:
Cash and temporary cash investments 833 971 982
Accounts receivable, less allowance of
$5,258 at 6/30/00, $3,382 at 6/30/99
and $1,999 at 9/30/99 22,120 16,571 9,030
Unbilled revenues 2,635 2,224 2,707
Inventories, at average cost-
Materials and supplies 842 1,201 994
Prepaid and refundable taxes 3,938 3,062 3,250
Prepayments 1,354 1,666 1,897
-------- -------- --------
31,722 25,695 18,860
-------- -------- --------
Deferred environmental costs 10,868 7,757 9,719
-------- -------- --------
Deferred charges and other assets 22,648 19,762 23,460
-------- -------- --------
Total assets $277,481 $255,329 $261,205
======== ======== ========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization (see accompanying
statement) $186,835 $186,322 $183,353
-------- -------- --------
Current liabilities:
Notes payable 19,800 3,000 11,800
Current portion of long-term debt 3,271 3,015 3,393
Accounts payable 12,052 9,482 9,586
Accrued compensation 1,083 1,617 1,542
Accrued environmental costs 2,681 5,000 6,145
Accrued interest 1,418 1,262 1,630
Accrued taxes 8,983 5,347 2,874
Accrued vacation 2,428 1,951 1,724
Accrued workers compensation 506 563 595
Customer deposits 2,667 2,794 2,923
Other 2,759 3,581 3,153
-------- -------- --------
57,648 37,612 45,365
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 23,506 22,926 23,128
Unamortized investment tax credits 1,922 2,079 2,040
Accrued pension 7,137 5,881 6,825
Other 433 509 494
-------- -------- --------
32,998 31,395 32,487
-------- -------- --------
Commitments and contingencies
Total capitalization and liabilities $277,481 $255,329 $261,205
======== ======== ========
</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 NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
2000 1999
-------- --------
(thousands)
Cash provided by (used for)-
Operating Activities:
Net income $ 13,340 $ 14,582
Items not requiring cash:
Depreciation and amortization 13,469 12,278
Change as a result of regulatory actions (435) (1,413)
Deferred Federal income taxes 378 1,575
Amortization of investment tax credits (118) (118)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (13,090) (6,633)
Unbilled revenues 72 (614)
Inventories 152 (24)
Prepaid and refundable taxes (688) 1,355
Prepayments 543 (3)
Accounts payable 2,576 2,150
Accrued compensation (459) 392
Accrued interest (212) (195)
Accrued taxes 6,109 2,692
Accrued vacation, accrued workers
compensation, customer deposits
and other 400 480
Accrued pension 312 200
Deferred charges and other 65 648
-------- --------
Net cash provided by
operating activities 22,414 27,352
-------- --------
Investing Activities:
Expenditures for property, plant and
equipment, net (20,751) (27,558)
-------- --------
Financing Activities:
Issuance of mortgage bonds - 15,000
Payments on long-term debt (2,884) (2,442)
Increase (decrease) in notes payable 8,000 (6,720)
Redemption of preferred stock (3,200) (1,600)
Cash dividends on common shares (3,583) (3,581)
Cash dividends on preferred shares (145) (278)
-------- --------
Net cash provided by (used in) financing
activities (1,812) 379
-------- --------
Increase in cash and temporary
cash investments (149) 173
Cash and temporary cash investments at
beginning of period 982 798
-------- --------
Cash and temporary cash investments at
end of period $ 833 $ 971
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest (net of amount capitalized) $ 6,329 $ 5,463
Income taxes (net of refunds) $ 5,301 $ 2,953
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)
(Unaudited)
-----------
June 30, June 30, September 30,
2000 1999 1999
-----------------------------------
Common stockholder's investment:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 as of 6/30/00,
6/30/99 and 9/30/99 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 42,286 37,619 42,454
Retained earnings 57,091 53,530 47,479
-------- -------- --------
Total common equity 100,621 92,393 91,177
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 0 shares as of
6/30/00 and 32 shares as of 6/30/99
and 9/30/99 - 3,200 3,200
-------- -------- --------
Long-term debt:
First Mortgage Bonds 88,005 90,728 89,819
Other long-term debt 1,216 2,093 1,994
Capital leases 264 923 556
-------- -------- --------
Total long-term debt 89,485 93,744 92,369
Less current portion 3,271 3,015 3,393
-------- -------- --------
Long-term debt, net 86,214 90,729 88,976
-------- -------- --------
Total capitalization $186,835 $186,322 $183,353
======== ======== ========
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
and 2000, the Registrant recognized into revenue $2.0 million and $.4 million,
respectively, for the exogenous changes recovery. The remaining balance will be
recognized as revenue in the fourth quarter of fiscal 2000 in accordance with
the terms of Energize RI.
Other exogenous changes related to fiscal 1999 and 2000 are addressed in
the prospective agreement discussed below.
On August 2, 2000, the Registrant, the Division, the Energy Council of
Rhode Island, and the George Wiley Center (Settling Parties) filed a Price
Stabilization Plan (the Agreement) with the RIPUC to become effective October 1,
2000, if approved. The Agreement seeks a 21-month extension of Energize RI with
certain modifications to reflect changes in the Registrant's cost of service and
its gas commodity cost since the commencement of Energize RI in fiscal 1998. The
Agreement provides a level of rate stability for customers, includes incentives
for increased earnings for the Registrant, includes a weather mitigation clause,
and allows the Registrant to continue the infrastructure investment in its
distribution system.
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'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.
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.
In anticipation of the full requirements gas supply contract with DETM
expiring on September 30, 2000, the Registrant has entered into an agreement to
extend the existing gas supply contract, but with significant modifications.
Under the modified agreement DETM will continue to provide asset management for
all pipeline transportation and storage services. Supply purchases will be made
at market prices rather than fully fixed prices or at prices locked in by the
Registrant. The extension agreement is subject to regulatory and management
approvals.
On November 10, 1999, the Registrant's LNG service contract with Algonquin
Gas Transmission Company (Algonquin), a subsidiary of Duke Energy Corporation,
became effective. 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 pipeline's customers, including the Registrant, will
reimburse the majority of these costs. The Registrant estimates its transition
costs to be approximately $21.7 million, of which $16.2 million was 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 June 30, 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 facility
was also the site of a former manufactured gas plant operated by the Registrant.
Approximately $3.0 million has been expended on studies and the formulation of
the remediation work plan.
The remediation of the soil, in accordance with the work plan, began in
July 1999 and is scheduled for completion in December 2000. Recent milestones
achieved during the most recent quarter include the issuance of several required
state and local permits as well as the beginning of soil processing.
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 June 30, 2000, approximately $4.7 million
has been expended on the remediation of this soil.
An investigation of the remaining soil was begun in December 1999 and was
completed in March 2000 at a cost of approximately $1.5 million. Based on the
results of that investigation, the Registrant is going to propose a final
remedial solution that addresses soils over the entire site. As of June 30, 2000
the Registrant had not begun its groundwater investigation at this site.
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 $2.7 million at
June 30, 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, the Rhode Island Department of Environmental Management (DEM)
issued the Registrant and the previous owner a letter of responsibility for the
site. As of June 30, 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. It is anticipated that the parties will sign the
purchase and sale agreement 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 June 30,
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, 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 10-year period, in
accordance with the levels authorized in Energize RI. Additionally, it is the
Registrant's practice to consult with the RIPUC on a periodic basis when, in
management's opinion, significant amounts might be expended for environmental-
related costs. As of June 30, 2000, ProvGas has incurred environmental
assessment and remediation costs of $9.9 million and has a remaining accrual
balance of $2.7 million for future costs.
Management is pursuing discussions with third parties relating to
contributions to defray 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, which currently
provide for substantial severance payments upon separation from the Registrant
and continuing through the 24 months following the merger of the Registrant's
parent company with Southern Union Company. 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; Southern
Union's shareholders' approval of the proposed merger with the Registrant's
parent company; 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
(loss) for the three and nine months ended June 30, 2000 and for comparable
periods ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
(thousands)
Three Months Nine Months
Ended June 30 Ended June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating
revenues $33,602 $29,515 $166,029 $160,724
======= ======= ======== ========
Operating margin $18,965 $18,290 $ 86,568 $ 84,801
======= ======= ======== ========
Net income (loss)
applicable to
common stock $(1,453) $ (197) $ 13,195 $ 14,304
======= ======= ======== ========
</TABLE>
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<PAGE>
Operating Margin
----------------
Operating margin increased approximately $.7 million or 3.7 percent
compared to the same quarter last year. During the latest quarter, the
Registrant experienced weather that was 28 percent colder than the same quarter
last year. This colder weather increased margin by approximately $1.3 million
when compared to the same period last year. Also increasing margin was
approximately $.2 million of additional margin as a result of actual rate
reductions of pipeline fixed costs as provided for in the DETM contract.
Partially offsetting the increases in margin for the quarter, was approximately
$.9 related to the 1998 exogenous change recovery, which was recognized in
fiscal 1999.
Operating margin increased approximately $1.8 million or 2.1 percent when
compared to the same nine-month period last year. Weather for the nine-month
period was 3.5 percent colder than last year, which increased margin by
approximately $.9 million. Also contributing to the increase in margin was
approximately $.4 million in non-firm margin primarily due to a more favorable
pricing difference between natural gas and alternate fuels. Also, the Registrant
recognized approximately $.7 million of additional margin as a result of actual
rate reductions of pipeline fixed costs as provided for in the DETM contract.
Partially offsetting these increases was approximately $.6 million related to
the 1998 exogenous recovery, which was recognized in fiscal 1999.
Operating and Maintenance Expenses
----------------------------------
Overall, operating and maintenance expenses increased approximately $1.5
million or 15.0 percent from the same quarter last year. The three-month
increase was primarily attributable to the receipt of a one-time reimbursement
of expenses under a contract with Algonquin LNG, Inc. in the third quarter of
fiscal 1999. Also contributing to the increase was an increase in labor as a
result of cost of living increases. Partially offsetting the labor increases,
was a temporary decrease in the number of employees and a decrease in recruiting
costs. Operating and maintenance expenses also decreased due to the end of the
Registrant's regulatory phase-in of costs associated with Statement of Financial
Accounting Standards No. 106 in September 1999.
Operating and maintenance expenses increased approximately $.8 million or
2.4 percent from the same nine-month period last year. The increase was due to
the same factors as the three-month increase, as well as an increase in labor as
a result of the completion of technology projects, for which labor had been
previously capitalized.
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.
Depreciation and Amortization Expenses
--------------------------------------
Depreciation and amortization expense increased approximately $.4 million
or 9.7 percent compared to the same quarter last year and approximately $1.2
million or 9.7 percent when compared to the same nine-month 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 currently amortizing environmental and
Year 2000 costs over 10-year and 5-year periods, respectively, in accordance
with the levels authorized in Energize RI.
I-11
<PAGE>
Taxes
-----
Taxes for the current quarter versus last year decreased approximately $.4
million or 15.6 percent. The decrease in taxes for the current quarter is due to
decreased Federal income tax as a result of decreased pretax earnings. The lower
pretax earnings also resulted in lower Federal income taxes in the current nine-
month period compared to the same period last year. Offsetting the lower Federal
income taxes in the nine-month period, were increased property taxes as a result
of capital spending.
Interest Expense
----------------
Interest expense increased approximately $.4 million or 24.8 percent during
the latest quarter compared to the same quarter last year and approximately $.9
million or 15.6 percent when compared to the same nine-month period last year.
Short-term interest expense has increased as a result of higher short-term
interest rates and increased notes payable due to the timing of collection of
accounts receivable, as well as capital spending.
FUTURE OUTLOOK
Regulatory
A. Energize RI - 1998 to 2000
------------------------------
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.
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
and 2000, the Registrant recognized into revenue $2.0 million and $.4 million,
respectively, for the exogenous changes recovery. The remaining balance will be
recognized as revenue in the fourth quarter of fiscal 2000 in accordance with
the terms of Energize RI.
Other exogenous changes related to fiscal 1999 and 2000 are addressed in
the prospective agreement discussed below. Based on weather experienced and the
level of exogenous dollars available in fiscal 2000, the Registrant does not
anticipate earning a 10.9 percent return on average common equity this year.
I-12
<PAGE>
B. Price Stabilization Plan
----------------------------
On August 2, 2000 the Registrant, the Division, the Energy Council of Rhode
Island, and the George Wiley Center (Settling Parties) filed a Price
Stabilization Plan (the Agreement) with the RIPUC to become effective October 1,
2000, if approved. The Agreement seeks a 21-month extension of Energize RI with
certain modifications to reflect changes in the Registrant's cost of service and
its gas commodity cost since the commencement of Energize RI in fiscal 1998. The
Agreement provides a level of rate stability for customers, includes incentives
for increased earnings for the Registrant, includes a weather mitigation clause,
and allows the Registrant to continue the infrastructure investment in its
distribution system.
C. Business Choice
-------------------
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 is now rolling
enrollment for transportation service, which allows customers to execute
transportation agreements throughout the year, rather than during limited
enrollment periods. The program now has approximately 1,550 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 12 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. The Registrant continually evaluates expansion and
enhancements to the Business Choice program.
Merger
A special meeting of the shareholders of the Registrant's parent company,
Providence Energy Corporation (ProvEnergy), took place on May 22, 2000. The
purpose of this special meeting was to approve the merger described in the
merger agreement with Southern Union Company (Southern Union). The merger
agreement was included as Annex 1 of ProvEnergy's proxy statement dated April 6,
2000. At the meeting, the shareholders approved the terms of the proposed merger
with Southern Union.
On July 24, 2000, the Division issued an order in which it adopted and
approved the settlement agreement dated May 31, 2000 that had been filed by
ProvEnergy, Southern Union, and certain of their affiliates. In the same order,
the Division approved the January 27, 2000 notification/petition by ProvEnergy
and Southern Union relating to the merger agreement signed on November 15, 1999,
as amended, between the two parties.
The Division's order remains contingent upon Southern Union obtaining
approval of their shareholders. Southern Union has scheduled a special meeting
of its shareholders on August 29, 2000 for approval of its merger with
ProvEnergy. It is anticipated that the merger will close late in this fiscal
year.
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $4.9 million for the nine months ended June
30, 2000 compared to the same period last year. The current year cash flow
decreased as a result of an increase in accounts receivable due to increased
sales and the timing of receivable collections.
Capital expenditures for the nine months ended June 30, 2000 of $20.8
million decreased $6.8 million or 24.7 percent when compared to $27.6 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 $39.5 million in total.
During the current nine-month period, the Registrant's cash flow from
financing activities decreased $2.2 million compared to the same period last
year due primarily to the acceleration of the redemption of preferred stock.
I-13
<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 period reported, but such results are not necessarily indicative of
results to be expected for the year, due to the seasonal nature of the
Registrant's gas operations. All accounting policies and practices have been
applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Providence Gas Company
(Registrant)
BY: /s/ KENNETH W. HOGAN
----------------------------
KENNETH W. HOGAN
Vice President, Chief Financial
Officer, and Treasurer
Date: August 9, 2000
--------------
II-2
