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, 1997
______________
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 incorporation (I.R.S. Employer
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
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 [_].
Common Stock, $1.00 par value; 1,243,598 shares outstanding at
- --------------------------------------------------------------
April 30, 1997.
- ---------------
THE PROVIDENCE GAS COMPANY
FORM 10-Q
MARCH 31, 1997
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three, six and twelve months ended
March 31, 1997 and 1996 I-1
Consolidated Balance Sheets as of
March 31, 1997, March 31, 1996 and
September 30, 1996 I-2
Consolidated Statements of Cash Flows for the
six months ended March 31, 1997 and 1996 I-3
Consolidated Statements of Capitalization as
of March 31, 1997, March 31, 1996 and
September 30, 1996 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-8
PART II: OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security
Holders II-1
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED MARCH 31
------------------------------
(Unaudited)
-----------
THREE MONTHS SIX MONTHS
-------------------- -----------
1997 1996 1997 1996
--------- --------- --------- -----------
(thousands, except per share amounts)
Operating revenues $ 76,590 $ 79,261 $138,263 $136,531
Cost of gas sold 44,616 46,164 80,289 77,308
-------- -------- -------- --------
Operating margin 31,974 33,097 57,974 59,223
-------- -------- -------- --------
Operating expenses:
Operation and
maintenance 12,472 13,049 23,476 24,551
Deprecation and
amortization 3,146 2,783 6,165 5,567
Taxes-
State gross
earnings 2,301 2,295 4,071 3,906
Local property and
other 2,026 1,718 3,715 3,348
Federal income 3,461 3,876 5,763 6,186
-------- -------- -------- --------
Total operating
expenses 23,406 23,721 43,190 43,558
-------- -------- -------- --------
Operating income 8,568 9,376 14,784 15,665
Other, net 179 136 251 758
-------- -------- -------- --------
Income before
interest expense 8,747 9,512 15,035 16,423
-------- -------- -------- --------
Interest expense:
Long-term debt 1,512 1,524 3,032 2,837
Other 477 421 826 972
Interest capitalized (56) (26) (95) (33)
-------- -------- -------- --------
1,933 1,919 3,763 3,776
-------- -------- -------- --------
Net income 6,814 7,593 11,272 12,647
Dividends on
preferred stock (174) (174) (348) (348)
-------- -------- -------- --------
Net income applicable
to common stock $ 6,640 $ 7,419 $ 10,924 $ 12,299
======== ======== ======== ========
Earnings per common
share $ 5.34 $ 5.97 $ 8.78 $ 9.89
======== ======== ======== ========
Dividends paid per
common share $ .96 $ .92 $ 1.92 $ 1.84
======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ========
PAGE I-1
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED MARCH 31
------------------------------
(Unaudited)
-----------
TWELVE MONTHS
-------------
1997 1996
---- ----
(thousands, except per share amounts)
Operating revenues $212,333 $203,891
Cost of gas sold 121,032 114,652
-------- --------
Operating margin 91,301 89,239
-------- --------
Operating expenses:
Operation and
maintenance 47,041 45,492
Depreciation and
amortization 12,155 10,647
Taxes-
State gross
earnings 6,226 5,806
Local property and
other 7,137 6,634
Federal income 3,995 4,441
-------- --------
Total operating
expenses 76,554 73,020
-------- --------
Operating income 14,747 16,219
Other, net 469 1,238
-------- --------
Income before
interest expense 15,216 17,457
-------- --------
Interest expense:
Long-term debt 6,084 5,372
Other 1,352 2,081
Interest capitalized (155) (88)
-------- --------
7,281 7,365
-------- --------
Net income 7,935 10,092
Dividends on
preferred stock (696) (696)
-------- --------
Net income applicable
to common stock $ 7,239 $ 9,396
======== ========
Earnings per common
share $ 5.82 $ 7.56
======== ========
Dividends paid per
common share $ 3.80 $ 3.68
======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6
======== ========
PAGE I-1(a)
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands)
(Unaudited)
-----------------------------------
March 31, March 31, September 30,
1997 1996 1996
-----------------------------------
ASSETS
- ------
Gas plant, at original cost $278,727 $260,467 $270,149
Less - Accumulated depreciation
and utility plant
acquisition adjustments 103,528 95,949 98,563
-------- -------- --------
175,199 164,518 171,586
-------- -------- --------
Current assets:
Cash and temporary cash investments 1,846 962 923
Accounts receivable, less allowance of
$4,040 at 3/31/97, $4,471 at 3/31/96
and $2,983 at 9/30/96 46,691 43,440 14,001
Unbilled revenues 8,151 9,510 2,333
Deferred gas costs 3,973 - 13,128
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage 7,631 2,201 15,794
Materials and supplies 1,095 1,408 1,151
Prepaid and refundable taxes 2,628 2,387 3,215
Prepayments 497 812 1,465
-------- -------- --------
72,512 60,720 52,010
-------- -------- --------
Deferred charges and other assets 12,800 13,244 13,919
-------- -------- --------
Total assets $260,511 $238,482 $237,515
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization $162,061 $161,480 $155,299
(See accompanying statement) -------- -------- --------
Current liabilities:
Notes payable 30,250 6,500 20,800
Current portion of long-term debt 2,420 2,034 2,023
Accounts payable 17,855 18,608 16,480
Accrued taxes 7,369 6,716 1,867
Accrued vacation 1,878 1,869 1,673
Customer deposits 3,613 3,938 3,956
Refundable gas costs - 6,260 -
Other 3,832 4,046 5,036
-------- -------- --------
67,217 49,971 51,835
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal
income taxes 20,323 18,569 19,903
Unamortized investment tax credits 2,432 2,589 2,510
Other 8,478 5,873 7,968
-------- -------- --------
31,233 27,031 30,381
-------- -------- --------
Commitments and contingencies - - -
Total capitalization and liabilities $260,511 $238,482 $237,515
======== ======== ========
PAGE I-2
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED MARCH 31
---------------------------------
(Unaudited)
-----------
1997 1996
--------- ---------
(Thousands of Dollars)
Cash provided by (used for)
Operating Activities:
- ---------------------
Net income $ 11,272 $ 12,647
Items not requiring cash:
Depreciation and amortization-plant 6,228 5,659
Changes as a result of regulatory
actions - (1,453)
Deferred Federal income taxes 420 680
Amortization of investment tax credits (78) (79)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (32,690) (29,650)
Unbilled revenues (5,818) (6,873)
Deferred gas costs 9,155 -
Inventories 8,219 7,794
Prepaid and refundable taxes 587 2,882
Prepayments 968 516
Accounts payable 1,375 4,712
Accrued taxes 5,502 4,911
Refundable gas costs - 7,456
Accrued vacation, customer deposits
and other (1,304) 717
Deferred charges and other 1,179 1,059
-------- --------
Net cash provided by
operations 5,015 10,978
-------- --------
Investing Activities:
- ---------------------
Expenditures for property, plant and
equipment, net (8,752) (8,593)
-------- --------
Financing Activities:
- ---------------------
Issuance of mortgage bonds - 15,000
Proceeds from other long-term debt 1,345 -
Payments on long-term debt (1,799) (1,740)
Increase(decrease) in notes payable, net 9,450 (12,837)
Redemption of preferred stock (1,600) -
Cash dividends on common shares (2,388) (2,289)
Cash dividends on preferred shares (348) (348)
-------- --------
Cash provided by (used for)
financing activities 4,660 ( 2,214)
-------- --------
Increase in cash & temporary cash
investments 923 171
Cash and cash equivalents at beginning
of period 923 791
-------- --------
Cash and cash equivalents at end
of period $ 1,846 $ 962
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period -
Interest (net of amount
capitalized) $ 3,682 $ 2,332
Income taxes (net of refunds) $ 966 $ 849
Schedule of noncash investing and financing
activities:
Capital lease obligation for
equipment $ 232 $ -
Other long-term debt for equipment $ 495 $ -
PAGE I-3
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
(unaudited)
March 31, March 31, September 30,
1997 1996 1996
--------- ----------- -----------
Common stock equity:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding -1,244 at 3/31/97,
3/31/96 and 9/30/96 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,607 37,612 37,657
Retained earnings 44,479 41,966 35,943
-------- -------- --------
Total common stock equity 83,330 80,822 74,844
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized -80 shares
Outstanding -64 shares at 3/31/97 and
80 shares at 3/31/96 and 9/30/96 6,400 8,000 8,000
-------- -------- --------
Long-term debt:
First mortgage bonds 71,200 72,800 72,800
Other long-term debt 1,840 - -
Capital leases 1,711 1,892 1,678
-------- -------- --------
Total long-term debt 74,751 74,692 74,478
Less current portion 2,420 2,034 2,023
-------- -------- --------
Long-term debt, net 72,331 72,658 72,455
-------- -------- --------
Total capitalization $162,061 $161,480 $155,299
======== ======== ========
PAGE I-4
PROVIDENCE GAS COMPANY
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in this
report reflects all normal, recurring adjustments necessary to provide 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 the consolidated 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 1996 filed on Form 10-K are adequate to make the
information presented not misleading.
In the second quarter of 1997, the Registrant began to employ derivative
financial instruments in the form of natural gas options for the purpose of
managing commodity price risk. These derivative instruments were purchased
under the Pilot Hedging Program approved by the Rhode Island Public Utilities
Commission (RIPUC) in October 1996. Under the program, expenditures for
purchases and exercises of the financial instruments, net of proceeds from
sales, are flowed through the Gas Charge Clause (GCC) and cannot exceed
$800,000.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified for consistent presentation
with the current period.
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, 1997, the Registrant is aware of four sites at which future costs
may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRP's. With respect to one
of the Plympton sites, the Registrant has joined with other PRP's in entering
into an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.
PAGE I-5
During 1995, the Registrant voluntarily began a study at its primary gas
distribution facility located in Providence, Rhode Island. This site formerly
contained a manufactured gas plant operated by the Registrant. As of March 31,
1997, approximately $1.6 million had been spent on studies at this site. In
accordance with state laws, such a voluntary study is monitored by the Rhode
Island Department of Environmental Management (DEM). The purpose of this study
was to determine the extent of environmental contamination at the site. The
Registrant has completed the initial phase of the study which indicates that
some clean-up will be required. The Registrant has several remediation options
for the site and is currently negotiating with DEM and contractors to arrive at
the best alternative. At March 31, 1997, the Registrant has compiled a
preliminary range of costs based on remediation alternatives, ranging from $1.7
million to approximately $3.0 million. However, because of the uncertainties
associated with environmental assessment and remediation activities, the future
costs of remediation could be higher than the alternatives noted above. Based on
the proposals for remediation work, the Registrant has accrued $1.7 million at
March 31, 1997 for anticipated future remediation costs at this site. Also, the
Registrant has negotiated an agreement, subject to Federal regulatory approval,
with a third party which provides for reimbursement of up to $2.5 million of
certain remediation costs to be incurred at this site. The agreement received
Federal regulatory approval in May 1997.
Tests conducted following the recent discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center
confirm the existence of contaminants at this site. The Registrant is currently
conducting tests at this site, the costs of which are being shared equally with
the prior owner, to determine the nature and extent of the contamination. Due
to the early stages of investigation, management cannot offer any conclusions as
to whether any remediation will be required at this site. In addition in the
first quarter of 1997, contamination from scrapped meters and regulators was
discovered at this site. The Registrant has reported this to the DEM and the
Rhode Island Department of Health and is in the process of remediation. It is
anticipated that remediation will cost between $30,000 and $100,000. Based on
the expected remediation costs, the Registrant has accrued $30,000 at March 31,
1997 for anticipated future remediation costs at this site.
In prior rate cases filed, 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. Accordingly, environmental investigation costs of
approximately $1.9 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
March 31, 1997. Management believes that this rate recovery mechanism is
appropriate for recovery of future costs. Additionally, it is the Registrant's
practice to consult with the Rhode Island Public Utilities Commission (RIPUC) on
a periodic basis, when in management's opinion, significant amounts might be
expended for environmental related costs. Should future developments warrant
additional rate recovery mechanisms, management will seek such recovery.
Management has begun discussions with other parties who may assist the
Registrant in paying future costs at the above sites. Management believes that
its program for managing environmental issues combined with rate recovery and
financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
Gas Supply Restructuring
- ------------------------
Federal Energy Regulatory Commission (FERC) Order 636 and other related orders
(the Orders) have significantly changed the structure and types of services
offered by
PAGE I-6
pipeline transportation companies. The most significant components of the
restructuring occurred in November 1993. In response to these changes, the
Registrant has successfully negotiated new pipeline transportation and gas
storage contracts.
At the same time, a number of contracts with gas suppliers have been negotiated
to complement the transportation and storage contracts. The portfolio of supply
contracts is designed to be market responsive and is diversified with respect to
contract lengths, source location and other contract terms. On a periodic
basis, the Registrant reviews all of its contracts to ensure a diverse, secure,
flexible and economical supply portfolio is maintained.
To meet the requirements of the Orders, the pipelines 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. Based upon
current information, the Registrant anticipates its transition costs to net to
approximately $21.3 million, net of refunds received based on FERC settlements,
of which $15.2 million has been included in the GCC and is currently being
collected from customers. The remaining minimum obligation of $6.1 million has
been recorded in the accompanying consolidated balance sheet along with a
regulatory asset anticipating future recovery through the GCC.
The Registrant's ultimate liability may differ from the above estimate based on
FERC settlements with the Registrant's pipeline transportation suppliers. FERC
has approved settlements with three of its pipelines, which account for the bulk
of the Registrant's transition costs. The Registrant has reached an agreement
on one additional pipeline, which is subject to final approval by the FERC.
Based on the information available, the Registrant believes that its current
estimate of transition costs is reasonable.
New Accounting Pronouncements
- -----------------------------
In October 1996, the Registrant adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The adoption of this statement did not
have an impact on the financial position or operations of the Registrant for the
six month period ended March 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The statement replaces the presentation of primary
earnings per share with the presentation of basic earning per share. This
statement would have no effect on the Registrant's earnings per share for the
periods presented.
PAGE I-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
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"
information 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
quarterly report regarding the Registrant's financial position and strategic
initiatives and 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. Factors which could cause actual results
to differ materially from those anticipated include but are not limited to:
general economic, financial and business conditions; 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; the
business abilities and judgment of personnel; unanticipated environmental
liabilities; changes in, or the failure to comply with, government regulations;
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 months, six months and twelve months ended March 31, 1997 and comparable
periods ended March 31, 1996 are as follows:
(thousands where applicable)
Three Months Six Months Twelve Months
Ended March 31 Ended March 31 Ended March 31
1997 1996 1997 1996 1997 1996
------- ------- -------- -------- -------- --------
Operating revenues $76,590 $79,261 $138,263 $136,531 $212,333 $203,891
======= ======= ======== ======== ======== ========
Operating margin $31,974 $33,097 $ 57,974 $ 59,223 $ 91,301 $ 89,239
======= ======= ======== ======== ======== ========
Net income applicable
to common stock $ 6,640 $ 7,419 $ 10,924 $ 12,299 $ 7,239 $ 9,396
======= ======= ======== ======== ======== ========
PAGE I-8
Operating Revenues and Operating Margin
- ---------------------------------------
During the quarter ended March 31, 1997, weather was 5.2 percent warmer than
normal as opposed to 5.1 percent colder than normal in the corresponding period
of the prior year. This resulted in decreased operating margin of $1.8 million
from the quarter ended March 31, 1996 to the quarter ended March 31, 1997. This
decrease was offset by an increase in margin of $0.2 million as a result of an
increase in revenues for post-retirement expenses approved in September 1996.
The Registrant's operating revenues for the quarter ended March 31, 1997
decreased $1.1 million as a result of the warmer than normal weather. The
decrease in revenue as a result of the weather was offset by an increase in
revenue as a result of an increase in revenue for post-retirement expenses
approved in September 1996. In addition, revenue also increased as a result of
higher gas costs during the most recent quarter. The increased gas costs did not
have a material effect on margin as the Registrant recovers actual gas costs
from its customers through the Gas Charge Clause (GCC).
For the six months ended March 31, 1997, weather was 3.1 percent warmer than
normal as opposed to 5.1 percent colder than normal for the six months ended
March 31, 1996. This resulted in decreased margin of approximately $2.4
million. This decrease was offset by rate increases effective December 17,
1995. These rate increases accounted for increased margin of approximately $0.8
million. In addition, margin increased approximately $0.3 million as a result
of additional revenues for post-retirement expenses discussed above. Revenues
for the most recent fiscal year to date have increased $4.5 million over the
corresponding period of the prior year as a result of higher gas costs in the
first six months of fiscal year 1997. The Company recovers actual gas costs
through the GCC. In addition, the Registrant had higher revenues due to the
approved rate increase effective December 17, 1995. These increases were offset
due to decreases as the result of the warmer than normal weather.
Weather for the twelve month period ended March 31, 1997 was 7.3 percent warmer
than the corresponding period from the prior year, which resulted in decreased
margin of $2.3 million. This decrease was offset by an increase of
approximately $1.9 million due to increased rates that became effective December
17, 1995 and $0.3 million as the result of additional revenues for post-
retirement expenses. In addition, the Company had an increase in margin of $1.5
million as a result of the RIPUC's approval in February 1996 of the Integrated
Resource Plan's (IRP) performance-based ratemaking mechanism.
Operation and Maintenance Expense
- ---------------------------------
Operation and maintenance expenses for the quarter ended March 31, 1997
decreased approximately $600,000 or 4.4 percent from the same quarter last year.
This decrease was due to a decrease in uncollectible expenses of $700,000 as the
result of improved
PAGE I-9
collection efforts by the Registrant. This decrease was offset by an increase
in labor of $300,000 as the result of performance, cost of living and negotiated
union contract increases.
Operation and maintenance expenses for the six months ended March 31, 1997
decreased approximately $1.1 million or 4.4 percent from the corresponding
period of the prior year for the reasons described above in addition to
decreased legal expenses in the first quarter of the fiscal year.
Operation and maintenance expenses for the twelve months ended March 31, 1997
increased approximately $1.5 million or 3.4 percent over the corresponding
period for the prior year. This is mainly due to $600,000 of expenses in the
third and fourth quarter of fiscal 1996 for outside services associated with the
development of new energy service offerings and $800,000 related to a one-time
funding to a low income assistance program in connection with the IRP agreement.
In addition, this increase was also due to an increase in labor offset by
decreases in the Registrant's legal expenses.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased approximately $400,000 or 13.0 percent
for the three months ended March 31, 1997, approximately $600,000 or 10.7
percent for the six months ended March 31, 1997 and $1.5 million or 14.2 percent
for the twelve months ended March 31, 1997. These increases are due to
increased capital spending, including technology related assets with shorter
depreciable lives, as well as an increase in depreciation rates that became
effective with the rate increase on December 17, 1995.
Taxes
- -----
Taxes for the current quarter decreased approximately $100,000 or 1.3 percent.
This decrease was primarily the result of a $400,000 decrease in Federal taxes
due to the decreased operating margin in the current quarter. This decrease was
offset by an increase of $200,000 in local property and other taxes, which is
due to increases in capital spending as well as property tax rates. Taxes for
the six months ended March 31, 1997 increased $100,000 or 0.8 percent primarily
for the reasons noted above. In addition, state gross earnings tax increased
approximately $200,000 as the result of increased revenues for the period.
Taxes for the twelve months ended March 31, 1997 increased approximately
$500,000 or 2.8 percent. State gross earnings tax increased approximately
$400,000 due to increased revenues for the period. Local property and other
taxes increased approximately $500,000 as the result of increased capital
spending as well as property tax rates. These increases were partially offset
by a decrease in Federal income taxes of approximately $400,000 due to a
decrease in taxable income for the period.
PAGE I-10
Other, net
- ----------
Other, net for the quarter ended March 31, 1997 remained consistent with the
corresponding period of the prior year. Other, net decreased approximately
$500,000 during the six months ended March 31, 1997. This decrease is due to
regulatory adjustments made in the first quarter of fiscal 1996 including a one-
time gain for the regulatory change in accounting for property taxes offset by
an increase in the Registrant's allowance for funds used during construction as
a result of increased capital spending.
Other, net decreased approximately $800,000 for the twelve month period ended
March 31, 1997, as a result of the regulatory adjustments.
Interest Expense
- ----------------
Interest expense for the quarter ended March 31, 1997 remained consistent with
the corresponding quarter of the prior year. Interest expense for the six
months ended March 31, 1997 decreased $13,000 or 0.3% from the same period last
year. This decrease was the result of a decrease in short-term borrowing rates
in the first quarter offset by an increase in long-term interest due to the
issuance of Series R First Mortgage Bonds in December of 1995. Interest expense
for the twelve months ended March 31, 1997 decreased $84,000 or 1.1% from the
same period last year. This decrease in other interest was the result of an
undercollection of gas costs under the Gas Charge Clause during the current
twelve month period. In the prior period, the Registrant had overcollected gas
costs and therefore incurred interest expense on this overcollection while the
Registrant received interest on the undercollected amounts in the current
period. In addition, the decrease in interest was also due to an increase in
capitalized interest due to increased capital spending. These decreases were
offset by an increase in interest on long-term debt as the result of Series R
First Mortgage Bonds issued in December of 1995.
Future Outlook
- --------------
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, the Division of Public Utilities and Carriers (Division), The Energy
Council of Rhode Island (TEC-RI) and a consortium of oil heat organizations.
The Agreement begins a process of unbundling natural gas service in Rhode Island
enabling customers to choose their gas suppliers. The Agreement went into
effect June 2, 1996. This initial program is available to approximately 120 of
the largest commercial and industrial customers.
In April 1997, the Registrant filed a plan for the second phase of unbundling
with the RIPUC. Under this filing, the Registrant evaluated the services
offered in the first
PAGE I-11
phase of the unbundling as well as proposed to further expand the availability
of unbundled services to an additional 3,400 medium and large commercial and
industrial customers. The Registrant hopes to implement such services in
November 1997.
As the industry is changing, the Registrant is evaluating regulatory filing
alternatives.
On October 8, 1996, the RIPUC approved a one year Pilot Hedging Program
Agreement between the Registrant and the Division. The objective of the pilot
program is to mitigate the impact of natural gas price escalation through
utilization of Financial Risk Management (FRM) tools, to develop a more balanced
gas supply cost approach and finally, to study in more detail the benefits and
costs associated with the program. The FRM tools will be limited to the use of
options, including calls, puts and collars, under the pilot program. The total
expenditures for the purchase and exercise of the FRM tools and the net proceeds
from the sale of FRM tools will be flowed through the Variable Gas Cost
component of the GCC and, under the terms of the Agreement, cannot exceed
$800,000. The Registrant began trading FRM tools in the second quarter of 1997.
The Registrant is exposed to credit risk in the event of nonperformance by
counter parties to these options, as well as nonperformance by the counter
parties of the transactions against which they are hedged. The Registrant
believes that the credit risk associated with options is no greater than that
associated with the primary contracts which they hedge and that elimination of
the risk of increases in natural gas prices relating to the hedged gas
purchases lowers the Registrant's overall business risk.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings. For
example, during the six months ended March 31, 1997, the Registrant's accounts
receivable and unbilled revenue have increased $38.5 million. These
fluctuations are the result of higher monthly sales during the latest quarter
and a moratorium on residential shut-offs during the heating season, as well as
an underrecovery of gas costs. Because of these increases, which negatively
impact cash flow, the Registrant must borrow to maintain an appropriate level of
liquidity. Management believes its available financings are sufficient to meet
these seasonal needs.
The Registrant experienced a decrease in its net cash provided by operations
during the latest quarter as compared to last year, primarily as the result
PAGE I-12
of the warmer than normal weather during the period as well as an underrecovery
of gas costs in the first six months of fiscal 1997.
In February 1997, the Registrant redeemed 16,000 shares of its preferred stock
at the par value of $1,600,000 as a result of the annual sinking fund
requirement.
Capital expenditures for the six months ended March 31, 1997 of $8.8 million
increased when compared to $8.6 million last year. In addition, the Registrant
financed $0.7 million of equipment through capital leases and other long-term
debt. The increase in capital expenditures was due to increased spending for
technology to redesign and integrate the Registrant's customer-related
information systems. Capital expenditures for the remainder of the fiscal year
are expected to be approximately $12.4 million of which $1.4 million is expected
to be financed through long-term notes. Anticipated capital expenditures for
the next three years are expected to total between $50 million to $60 million.
In February 1996, the Registrant received approval of a three-year Settlement
Agreement between itself and the Division regarding the Integrated Resource Plan
(IRP), which was filed with the RIPUC in July 1994. The purpose of the IRP is
to optimize the utilization of production transmission and distribution
resources so that customers receive high quality services at the lowest possible
cost.
The Settlement Agreement provides for: (1) funding associated with Demand Side
Management programs, which are designed to provide equipment rebates for
specific load building programs; (2) funding associated with a low income
weatherization program, which is designed to assist low income customers through
the installation of conservation measures; and (3) a performance-based
ratemaking incentive. The Settlement Agreement also contains a general
agreement that the Registrant's strategy and steps included in its supply plan
are reasonable.
An analysis of gas cost savings will be performed in June of each year for the
duration of the IRP, at which time any annual share of the performance-based
ratemaking incentive will be recorded.
PAGE I-13
PROVIDENCE GAS COMPANY
----------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The annual meeting of shareholders for the Registrant's parent company,
Providence Energy Corporation, was held on January 16, 1997 and the following
nominees to the Registrant's Board of Directors were elected as Directors for
terms expiring at the time of the 1998 annual meeting by the following vote:
Mr. James H. Dodge 4,272,233 FOR 99,809 WITHHELD
Mr. Kenneth W. Washburn 4,266,288 FOR 105,754 WITHHELD
Additionally, Providence Energy Corporation's 1997 Non-Employee Director
Restricted Stock Plan was approved by a vote of 3,849,406 for, to 358,852
against with 162,982 withheld.
Item 6 (a). Exhibits
- ---------------------
27. Financial Data Schedule
Item 6 (b). Reports on Form 8-K
- --------------------------------
No reports on Form 8-K were filed during the quarter for which this report is
filed.
PAGE 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 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/Gary S. Gillheeney
---------------------------
GARY S. GILLHEENEY
Senior Vice President,
Treasurer and CFO
Date: May 14, 1997
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PAGE II-2