THE PROVIDENCE GAS COMPANY
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended December 31, 1999
-----------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________ to _____________________
Commission file number 0-1160
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THE PROVIDENCE GAS COMPANY
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
401-272-5040
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common Stock, $1.00 par value; 1,243,598 shares outstanding at February 10,
- ---------------------------------------------------------------------------
2000.
- -----
THE PROVIDENCE GAS COMPANY
FORM 10-Q
DECEMBER 31, 1999
PAGE
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
three and twelve months ended
December 31, 1999 and 1998 I-1
Consolidated Balance Sheets as of
December 31, 1999, December 31, 1998
and September 30, 1999 I-2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1999 and 1998 I-3
Consolidated Statements of Capitalization as of
December 31, 1999, December 31, 1998
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
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM I. FINANCIAL STATEMENTS
- ------- --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED DECEMBER 31
---------------------------------
(Unaudited)
-----------
THREE MONTHS TWELVE MONTHS
----------------- -------------------
1999 1998 1999 1998
------- ------- -------- --------
(thousands, except per share amounts)
Operating revenues $53,052 $53,301 $179,090 $178,427
Cost of gas sold 25,315 25,628 82,273 84,943
------- ------- -------- --------
Operating margin 27,737 27,673 96,817 93,484
------- ------- -------- --------
Operating expenses:
Operation and maintenance 11,101 11,612 44,972 46,107
Depreciation and amortization 4,503 4,094 16,974 14,123
Taxes:
State gross earnings 1,589 1,599 5,306 5,206
Local property and other 2,065 1,890 8,420 7,740
Federal income 2,205 2,306 4,627 4,402
------- ------- -------- --------
Total operating expenses 21,463 21,501 80,299 77,578
------- ------- -------- --------
Operating income 6,274 6,172 16,518 15,906
Other income 125 167 893 294
------- ------- -------- --------
Income before interest expense 6,399 6,339 17,411 16,200
------- ------- -------- --------
Interest expense:
Long-term debt 1,764 1,546 7,024 6,418
Other 362 301 1,199 1,140
Interest capitalized (59) (76) (371) (248)
------- ------- -------- --------
2,067 1,771 7,852 7,310
------- ------- -------- --------
Net income 4,332 4,568 9,559 8,890
Dividends on preferred stock 70 104 314 452
------- ------- -------- --------
Net income applicable to
common stock $ 4,262 $ 4,464 $ 9,245 $ 8,438
======= ======= ======== ========
Net income per
common share - basic $ 3.43 $ 3.59 $ 7.43 $ 6.79
======= ======= ======== ========
Net income per
common share - diluted $ 3.43 $ 3.59 $ 7.43 $ 6.79
======= ======= ======== ========
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
======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
I-1
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(thousands)
(Unaudited)
-----------
December 31, December 31, September 30,
1999 1998 1999
-------------------------------------
ASSETS
- ------
Gas plant, at original cost $333,438 $321,119 $334,310
Less - Accumulated depreciation and
plant acquisition adjustments 123,364 127,562 125,144
-------- -------- --------
210,074 193,557 209,166
-------- -------- --------
Current assets:
Cash and temporary cash investments 1,534 887 982
Accounts receivable, less allowance of
$3,594 at 12/31/99, $2,404 at 12/31/98
and $1,999 at 9/30/99 19,881 21,507 9,030
Unbilled revenues 15,905 11,073 2,707
Inventories, at average cost -
Materials, supplies, and fuels 982 962 994
Prepaid and refundable taxes 1,882 2,276 3,250
Prepayments 1,661 1,610 1,897
-------- -------- --------
41,845 38,315 18,860
-------- -------- --------
Deferred charges and other assets 23,162 15,517 23,460
-------- -------- --------
Deferred environmental costs 11,088 5,593 9,719
-------- -------- --------
Total assets $286,169 $252,982 $261,205
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying
statement) $183,997 $165,834 $183,353
-------- -------- --------
Current liabilities:
Notes payable 19,600 14,300 11,800
Current portion of long-term debt 3,246 3,155 3,393
Accounts payable 24,136 22,358 9,586
Accrued compensation 1,298 1,016 1,542
Accrued environmental expense 5,719 3,400 6,145
Accrued interest 1,383 1,210 1,630
Accrued taxes 5,522 3,891 2,874
Accrued vacation 1,772 1,594 1,724
Accrued workers compensation 679 577 595
Customer deposits 2,902 2,977 2,923
Deferred revenue 200 - 315
Other 3,052 2,406 2,838
-------- -------- --------
69,509 56,884 45,365
-------- -------- --------
Deferred credits, reserves, and other
liabilities:
Accumulated deferred Federal income
taxes 23,254 21,876 23,128
Unamortized investment tax credits 2,001 2,158 2,040
Accrued pension 6,929 5,749 6,825
Other 479 481 494
-------- -------- --------
32,663 30,264 32,487
-------- -------- --------
Commitments and contingencies
Total capitalization and liabilities $286,169 $252,982 $261,205
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
I-2
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE MONTHS ENDED DECEMBER 31
--------------------------------------
(Unaudited)
-----------
1999 1998
-------------------
(thousands)
Cash provided by (used for)-
Operating Activities:
Net income $ 4,332 $ 4,568
Items not requiring cash:
Depreciation and amortization 4,503 4,094
Deferred Federal income taxes 126 525
Amortization of investment tax credits (39) (39)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (10,851) (11,569)
Unbilled revenues (13,198) (9,463)
Deferred gas costs - -
Inventories 12 215
Prepaid and refundable taxes 1,368 2,141
Prepayments 236 53
Accounts payable 14,453 14,326
Accrued compensation (244) (208)
Accrued interest (247) (246)
Accrued taxes 2,648 1,354
Accrued vacation, accrued workers
compensation, customer deposits
and other 210 (554)
Accrued pension 104 68
Deferred charges and other (112) 1,772
-------- --------
Net cash provided by operating activities 3,301 7,037
-------- --------
Investing Activities:
Expenditures for property, plant and
equipment, net (6,980) (8,434)
-------- --------
Financing Activities:
Payments on long-term debt (2,305) (1,796)
Increase in notes payable 7,800 4,580
Cash dividends on preferred stock (70) (104)
Cash dividends on common stock (1,194) (1,194)
-------- --------
Net cash provided by financing activities 4,231 1,486
-------- --------
Increase in cash and temporary cash investments 552 89
Cash and temporary cash investments at
beginning of period 982 798
-------- --------
Cash and temporary cash investments at
end of period $ 1,534 $ 887
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period-
Interest (net of amount capitalized) $ 2,231 $ 1,964
Income taxes (net of refunds) $ 1 $ 4
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
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(thousands)
(Unaudited)
-----------
December 31, December 31, September 30,
1999 1998 1999
---------------------------------------
Common stockholder's investment:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 as of 12/31/99,
12/31/98 and 9/30/99 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 42,188 37,478 42,454
Retained earnings 50,547 46,077 47,479
-------- -------- --------
Total common equity 93,979 84,799 91,177
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 32 shares as of
12/31/99 and 9/30/99, and 3,200 4,800 3,200
-------- -------- --------
48 shares as of 12/31/98
Long-term debt:
First Mortgage Bonds 88,219 75,728 89,819
Other long-term debt 1,521 2,479 1,994
Capital leases 324 1,183 556
-------- -------- --------
Total long-term debt 90,064 79,390 92,369
Less current portion 3,246 3,155 3,393
-------- -------- --------
Long-term debt, net 86,818 76,235 88,976
-------- -------- --------
Total capitalization $183,997 $165,834 $183,353
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
I-4
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
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 it to
recover $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 deferred approximately $.5 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 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.
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.
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. To the extent the Registrant makes such changes,
the Registrant must keep DETM whole for the value lost over the remainder of the
contract period. The outsourcing 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.
I-6
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 December 31, 1999, the Registrant was aware of five sites at which
future costs may be incurred.
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.
I-7
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
December 31, 1999, 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 December 31, 1999, approximately
$2.7 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 in
August 2000.
An investigation of the remaining property was begun in December 1999. The
Registrant anticipates this investigation to be completed in March 2000 at a
cost of approximately $1.5 million. In addition, as of December 31, 1999, the
Registrant has not begun its groundwater investigation at this site.
Because of the uncertainties associated with the pending investigations,
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 $5.7 million at December 31, 1999
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 December 31, 1999, 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.
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 December
31, 1999 were approximately $.2 million. Until the results of the investigation
are known, the Registrant cannot offer any conclusions as to its responsibility.
I-8
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 December 31, 1999,
ProvGas has incurred environmental assessment and remediation costs of $6.7
million and has an accrual balance of $5.7 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 three officers which become
operative upon a change in control of the Registrant and continue in effect for
a range of two to three years. Potential salary severance expense under
the agreements could total approximately $1.1 million.
I-9
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
10-Q including without limitation statements regarding the Registrant's
financial position, strategic initiatives, the effect of its 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 and cost of natural gas; development and
operating costs; the success and costs of advertising and promotional efforts;
the availability and terms of capital; 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 and twelve months ended December 31, 1999 and for comparable periods
ended December 31, 1998 are as follows:
(thousands)
Three Months Twelve Months
Ended December 31 Ended December 31
1999 1998 1999 1998
---- ---- ---- ----
Operating
revenues $53,052 $53,301 $179,090 $178,427
======= ======= ======== ========
Operating margin $27,737 $27,673 $ 96,817 $ 93,484
======= ======= ======== ========
Net income
applicable to
common stock $ 4,262 $ 4,464 $ 9,245 $ 8,438
======= ======= ======== ========
I-10
Operating Margin
- ----------------
Operating margin increased approximately $.1 million or .2 percent compared
to the same quarter last year and approximately $3.3 million or 3.6 percent for
the twelve months ended December 31, 1999 versus the same period last year.
During the latest quarter, the Registrant experienced weather that was .7
percent warmer than the same quarter last year. This warmer weather resulted in
a margin decrease of approximately $.3 million.
The Registrant experienced weather that was 7.1 percent colder for the
twelve months ended December 31, 1999 versus the same period last year. The
colder temperatures resulted in increased margin of approximately $1.8 million
compared to last year. Also contributing to the increase was $1.9 million
related to the 1998 exogenous change recovery, $.5 million in non-firm margin
and $.5 million in customer growth.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses decreased approximately $.5
million or 4.4 percent from the same quarter last year and approximately $1.1
million or 2.5 percent for the twelve months ended December 31, 1999 when
compared to the same twelve month period last year. The twelve-month decrease
is primarily attributable to a one-time reimbursement of approximately $.9
million for costs incurred under a FERC-approved contract with Algonquin Gas
Transmission Company. The remaining decrease is attributable to cost control
measures which were implemented in response to warmer weather.
The Company continually reviews its operating expenses in order to keep
expenses as low as possible; however, expenses can vary from year to year.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $.4 million
or 10.0 percent compared to the same quarter last year and approximately $2.9
million or 20.2 percent for the twelve months ended December 31, 1999 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. Effective October 1, 1997, the Registrant
began 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 will have increased environmental amortization expense in future
years as its planned environmental remediation program continues. Also,
amortization expense for Year 2000 costs will increase in the future as higher
levels of costs have been incurred from those originally anticipated.
Taxes
- -----
Taxes for the current quarter versus last year increased approximately $.1
million or 1.1 percent and approximately $1.0 million or 5.8 percent for the
current twelve-month period versus last year. The increases in taxes is due to
increased local property taxes as a result of capital spending and fluctuations
in federal income tax as a result of changes in pretax earnings.
Other income
- ------------
Other, net remained essentially flat in the current quarter versus the same
quarter last year and increased approximately $.6 million for the twelve months
ended December 31, 1999 versus the same period last year. In 1998, the
Registrant established a reserve for a refund under an order which was
subsequently vacated in 1999, at which time the original reserve was reversed,
contributing approximately $.5 million to the twelve-month increase.
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Interest Expense
- ----------------
Interest expense increased $.3 million or 16.7 percent during the latest
quarter compared to the same quarter last year and approximately $.5 million or
7.4 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. However, this increase was partially offset by the
Series S First Mortgage Bond issuance in April 1998, which refinanced higher
cost long-term debt. Additionally, short-term interest expense has increased as
a result of increased notes payable.
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.
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 it to
recover $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 deferred approximately $.5 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 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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $3.7 million for the quarter ended December
31, 1999 compared to the same period last year. On a comparative basis, the
current year cash flow decreased as a result of an increase in unbilled revenues
due to the time period covered in cycle billing.
Capital expenditures for the quarter ended December 31, 1999 of $7.0
million decreased $1.5 million or 17.2 percent when compared to $8.4 million for
the same period last year. This spending decrease was due primarily to
technology projects, which were completed during fiscal 1999. Capital
expenditures for the remainder of fiscal year 2000 and fiscal year 2001 are
expected to be approximately $48.0 million in total.
During the current quarter, the Registrant's cash flow from financing
activities increased $2.7 million due primarily to a temporary increase in
short-term borrowings.
YEAR 2000 UPDATE
Year 2000 (Y2K) readiness was a top priority for the Registrant. The
Registrant's company-wide Y2K Project was completed on schedule and all mission
critical systems and devices essential to providing safe, reliable service to
its customers were Y2K ready. The Registrant's operations were not in any way
disrupted by the rollover to January 1, 2000.
The Registrant has capitalized Year 2000 costs and is amortizing those
costs over a five-year amortization period consistent with the regulatory levels
authorized by the RIPUC under the Energize RI program. As of December 31, 1999,
the Registrant deferred total Year 2000 costs of approximately $7.7 million and
has amortized approximately $.5 million of these costs.
I-13
THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The annual meeting of shareholders was held on January 20, 2000 and the
following nominees to the Registrant's Board of Directors were elected as
Directors for terms expiring at the time of the 2003 annual meeting by the
following vote:
Mr. James H. Dodge 4,837,975 FOR 77,756 WITHHELD
Mr. Kenneth W. Washburn 4,835,171 FOR 80,560 WITHHELD
Item 6 (a). Exhibits
---------------------
10a. Employment Agreement dated October 1, 1999 between Peter J. Gill,
Vice President, Information Technology and the Registrant.
10b. Employment Agreement dated October 1, 1999, between Robert W. Owens,
Senior Vice President, Gas Distribution and the Registrant.
10c. Employment Agreement dated October 1, 1999 between Timothy S. Lyons,
Vice President, Marketing and Regulatory Affairs and the Registrant.
Item 6 (b). Reports on Form 8-K
--------------------------------
On November 15, 1999, the Registrant's parent company, Providence
Energy Corporation (ProvEnergy), filed a report on Form 8-K regarding
ProvEnergy's Agreement and Plan of Merger with Southern Union Company.
II-1
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: February 10, 2000
-----------------
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