FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1997
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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
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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)
Registrant's telephone number, including area code 401-272-5040
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of class)
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 ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant, as of December 3, 1997: $0
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date:
Common Stock, $1.00 Par Value: 1,243,598 shares outstanding at
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December 3, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
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NONE
TABLE OF CONTENTS
PART I PAGE
Item 1 - Business
General I-1
Gas Supply I-2
Rates and Regulations I-3
Competition and Marketing I-5
Employees I-6
Special Factors Affecting the Gas Industry I-6
FERC Regulations I-7
Environmental Regulations I-8
Other Standards I-9
Item 2 - Properties I-10
Item 3 - Legal Proceedings I-10
Item 4 - Submission of Matters to a Vote of Security Holders I-10
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters II-1
Item 6 - Selected Financial Data II-2
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations II-3
Item 8 - Financial Statements and Supplementary Data II-11
Report of Independent Public Accountants II-32
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-33
PART III
Item 10 - Directors and Executive Officers of the Registrant III-1
Item 11 - Executive Compensation III-6
Item 12 - Security Ownership of Certain Beneficial Owners
and Management III-6
Item 13 - Certain Relationships and Related Transactions III-6
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Supplemental Schedules IV-3
Signatures IV-7
PART I
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ITEM 1. BUSINESS
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The Providence Gas Company (the Registrant or ProvGas) 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-K
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. The following are factors which could cause actual
results to differ materially from those anticipated, and include but are not
limited to: general economic, financial and business conditions; changes in, or
the failure to comply with, government regulations; 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; the ability of the Registrant to
modify or redesign its computer systems to work properly in the year 2000;
unanticipated environmental liabilities; the costs and effects of unanticipated
legal proceedings; the impacts of unusual items resulting from ongoing
evaluations of business strategies and asset valuations; and changes in business
strategy.
General
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The Registrant, a Rhode Island corporation, was organized in 1847 and became a
wholly-owned subsidiary of Providence Energy Corporation (Providence Energy)
through a reorganization on February 1, 1981. The outstanding shares of common
stock of Providence Energy are presently listed on the New York Stock Exchange.
The executive offices of the Registrant are located at 100 Weybosset Street,
Providence, Rhode Island 02903, telephone (401) 272-5040.
The Registrant is engaged in natural gas distribution, serving approximately
165,000 customers in Providence and Newport, Rhode Island, and in 23 other
cities and towns in Rhode Island. The service territory encompasses
approximately 370 square miles and has a population of approximately 817,000.
For the year ended September 30, 1997, residential sales accounted for
approximately 67% of total company firm sales, with commercial and industrial
sales representing, in the aggregate, approximately 33%. For the years ended
September 30, 1996 and 1995, residential sales represented approximately 60% and
48%, respectively, of the total sales, with commercial and industrial sales
representing, in the aggregate, approximately 40% and 52%, respectively, of firm
sales.
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The Registrant's gas distribution system consists of approximately 2,300 miles
of gas mains ranging in size from 2 to 36 inches in diameter, approximately
139,000 services (a service is a pipe connecting a gas main with piping on a
customer's premises), approximately 161,000 gas meters, and the necessary
pressure regulators. The Registrant has regulating and metering facilities at
eight points of delivery from Algonquin Gas Transmission Company (Algonquin) and
one from Tennessee Gas Pipeline Company, which the Registrant believes to be
adequate for receiving gas into its distribution system.
The natural gas industry is subject to numerous challenges, many of which
affect the Registrant in varying degrees. Significant industry challenges
affecting the Registrant include: the ability to adapt to the regulatory changes
occurring at the national level under the framework of the Federal Energy
Regulatory Commission (FERC) Order 636 and the ability to gain local approval
through the Rhode Island Public Utilities Commission (RIPUC) for new rates
tailored to customers' specific needs and market conditions.
Gas Supply
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The Registrant has entered into a full requirements contract with Duke Energy
Trading and Marketing, LLC (DETM) to provide all of its gas supply needs
beginning October 1, 1997 and continuing through September 30, 2000. DETM is a
joint venture of Duke Energy (60%) and Mobil (40%). DETM will provide all gas
supplies required by the Registrant, while the Registrant is committed to
purchase all supplies exclusively from DETM. Supplies required by the
Registrant's firm sales customers will be purchased at a single, fixed commodity
price for the entire contract period. In order to provide this service, DETM,
for the contract period, will take responsibility for the Registrant's pipeline
capacity resources not previously released, all storage contracts and all LNG
capacity. Under the contract, DETM will purchase all working gas in storage
including both LNG and contract storage as of October 1, 1997. All supply
resources assigned to DETM will revert back to the Registrant on October 1,
2000. The contract was entered into following a competitive bidding process.
As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover the Registrant's non-firm sales customer's
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 recently approved FT-2 storage
service effective December 1, 1997. DETM will receive the supply related
revenues from these services in exchange for providing the supply management
inherent in these services.
Included in the DETM contract are a number of other important features. The
Registrant has retained the right to continue to make portfolio changes to
reduce supply costs. To the extent the Registrant makes such changes the
Registrant must keep DETM whole for the value lost over the remainder of the
contract period. The contract relieves the Registrant of the need to perform
certain upstream supply management functions which will make it possible for the
Registrant to take on the additional supply management workload required by the
further unbundling
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of firm sales customers without major staffing additions.
During 1997, the Registrant purchased 84% of its gas supply in the production
area with transportation and storage provided by firm pipeline contracts.
Liquefied natural gas (LNG) provided 3% of gas supply requirements. The
remaining 13% was purchased in the market area, generally on an interruptible
basis. The Registrant maintains contracts sufficient to meet 100% of its firm
winter demand using firm supply and firm storage and pipeline transportation.
When not using capacity for its own sales, the Registrant released the
capacity or used it to make off-system sales. In fiscal 1997, the Registrant
received $7.2 million in revenue from released capacity, a 26% increase over the
$5.7 million of revenue generated in 1996. The revenues reduce the firm
customers' gas cost, making the Registrant more competitive.
Rates and Regulation.
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The Registrant is subject to the regulatory jurisdiction of the RIPUC with
respect to rates and charges, standards of service, accounting and other
matters. The standards set by the RIPUC affect all aspects of the Registrant's
business, including its ability to market to new customers and to meet
competition from other fuel suppliers. (see "Competition and Marketing.") In
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August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement, (the Plan or Energize R.I.) among the Registrant, the Rhode Island
Division of Public Utilities and Carriers (the Division), The Energy Council of
Rhode Island, and the George Wiley Center. Effective October 1, 1997 through
September 30, 2000, Energize R.I. provides customers with an initial price
decrease of approximately four percent and a three-year price freeze. Under
Energize R.I., the GCC will be suspended for the entire three-year term of the
Plan. Any excess or deficiency between amounts billed and actual incurred gas
costs will be retained or borne by the Registrant. Energize R.I. also requires
the Registrant to make significant capital investments to improve its
distribution system. Capital investments required by Energize R.I. are estimated
to total approximately $26 million over its three-year term. In addition, the
Registrant is required to fund the Demand Side Management Program Rebate
Assistance Program and the Low Income Weatherization Program at annual levels of
$.5 million and $.2 million, respectively. Energize R.I. also calls for the
Registrant to fund the Low Income Assistance Program at an annual level of $1.0
million. Finally, Energize R.I. also continues the process of unbundling by
requiring the Registrant to provide unbundled service offerings up to 10 percent
per year of firm system throughput.
As part of Energize R.I., the Registrant will amortize approximately $4.0
million of environmental costs previously charged to the accumulated
depreciation reserve over a ten year period. All environmental costs incurred
during the term of Energize R.I. will also be amortized over a ten year period.
Under Energize R.I. the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million and $92.0 million in
fiscal 1998, 1999, and 2000, respectively. In addition, the Registrant may not
earn less than a 7 percent return on common equity under the Plan. In the event
that the Registrant earns in
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excess of 10.9 percent or less than 7 percent, the Registrant will defer
revenues or costs through a deferred revenue account over the term of the Plan.
Any balance in the deferred revenue account at the end of the Plan will be
refunded to or recovered from customers in a manner determined by all parties
and approved by the RIPUC.
The IRP will be terminated as a result of Energize R.I.. In addition to the
funding for the demand side management program and low income weatherization
programs, the IRP provided for a performance-based ratemaking mechanism. The
Registrant was able to record its annual share of the performance-based
ratemaking mechanism in both 1997 and 1996, which resulted in a $1.5 million
increase to operating margin in each of those years.
Under the IRP, the Registrant was required to return all margins earned from
non-firm sales to firm customers through the GCC. As a result of Energize R.I.,
the Registrant will be able to retain all margins earned from non-firm
customers.
The following table sets forth the results of the Registrant's applications
before the RIPUC for rate increases since 1990.
Annualized Annualized Authorized
Date of Rate Increase Date Rates Rate Increase Return on
Application Requested Effective Granted (*) Common Equity
- ----------- ------------- ---------- ------------- -------------
5/17/90 $15,800,000 03/15/91 $9,176,000 12.8%
1/15/93 9,100,000(**) 11/14/93 694,000 11.2
2/16/95 14,880,000(***) 12/17/95 4,161,572(****) 10.9
(*) Although the RIPUC reviews and approves all changes in gas costs billed to
customers through the Gas Charge Clauses (GCC), such changes are not part of the
general rate filings described above. See Footnotes 1 and 10 in the Notes to
the Consolidated Financial Statements filed herewith as Item 8.
(**) Rate increase requested on January 15, 1993 of $9.1 million was
recalculated to $6,970,000 on September 14, 1993 due to cost of service
adjustments reflecting cost savings.
(***) Rate increase requested on February 16, 1995 of $14.9 million was revised
to $13,222,000 on July 19, 1995 due to lower projected costs.
(****) The allowed annualized revenue increase of $4,161,572 is comprised of an
initial award of $3,990,000 plus a revenue adjustment of $171,572 due to
approval of a reconsideration motion.
The Registrant has been working closely with the RIPUC to develop a new rate
structure that will allow the Registrant to offer unbundled services designed to
meet the needs of its largest customers, such that those customers would have
the option to purchase natural gas directly from suppliers and use the
Registrant to transport the gas. The Registrant believes that this rate
structure will foster a more competitive and flexible gas market in Rhode Island
and allow it to remain competitive by offering commercial/industrial businesses
value-added services at competitive prices.
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In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, the Division, The Energy Council of Rhode Island (TEC-RI) and a
consortium of oil heat organizations. The Agreement began 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
step was available to approximately 120 of the largest commercial and industrial
customers. In August 1997, the RIPUC approved a plan, "Business Choice", to
further expand the availability of unbundled services to an additional 3,400
large and medium commercial and industrial customers. The Registrant plans to
commence Business Choice in December 1997.
The Agreement also included changes to the Registrant's gas cost recovery
mechanism. Specifically, the agreement replaced the previous CGA with GCC
effective June 2, 1996. In addition to the commodity and related pipeline
transportation costs historically included in the CGA, the GCC provided for the
recovery of: (1) inventory financing costs; (2) working capital associated with
gas supply purchases; (3) bad debt expenses associated with the gas revenue
portion of customer bills; and (4) a substantial portion of LNG operating and
maintenance expenses, all of which were previously recovered in base rates.
Similar to the former CGA, the GCC provided for reconciliation of total gas
costs billed with the actual cost of gas incurred. Any excess or deficiency in
amounts billed as compared to costs incurred is deferred and either refunded to,
or recovered from, customers over a subsequent period. Under Energize R.I., the
GCC will be suspended, and as a result, the Registrant will retain or bear any
excess or deficiency between total gas costs billed and actual gas costs
incurred.
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 was 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 some of the
benefits and costs associated with the program. The FRM tools were 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 were flowed through the Variable Gas
Cost component of the GCC and could not exceed $800,000. The total
expenditures, net of sales proceeds made under the program in 1997 were
approximately $154,000. The program expired on September 30, 1997 and was not
extended since its objectives were met through Energize R.I., described above.
The Registrant held no open positions at September 30, 1997.
Competition and Marketing.
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The Registrant experienced modest customer growth in both the residential and
commercial/industrial markets. In all, the average annual number of customers
rose one percent to 165,000. This customer growth was achieved in an
underperforming local economy that is now showing signs of improvement. The
Providence Place Mall began construction in early 1997 and brings an estimated
3,000 construction jobs and more than 2,800 permanent jobs in sales, management
and maintenance. The Fixed Income Group of Fidelity Investments will bring to
Rhode Island 2,500 new jobs and a $75 million state-of-the-art facility, the
direct result of a creative package of land, lease and tax
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incentives offered by the State of Rhode Island. Also, the newly expanded T.F.
Green Airport, and the arrival of Southwest Airlines, have begun to
significantly improve the competitiveness of transportation options.
In 1998, the Registrant's core marketing efforts will continue to focus on
adding profitable new load and building loyalty with existing customers. The
Registrant will continue joint marketing with the local network of heating
contractors to promote heating conversions of customers on existing gas mains.
In addition, the Registrant will extend its coupon rebate program for high
efficiency heating equipment offered in combination with participating
manufacturers and local distributors.
As a result of the Rate Design Settlement Agreement approved in May 1996, the
Registrant was allowed to offer unbundled services to approximately 120 of its
largest customers. These customers are now able to purchase natural gas
directly from suppliers and use the Registrant to transport the gas. In
December 1997, the Registrant will commence Business Choice, a plan which will
further expand the availability of unbundled services to an additional 3,400
large and medium commercial and industrial customers. The Registrant believes
that this rate structure will foster a more competitive and flexible gas market
in Rhode Island and allow it to remain competitive by offering
commercial/industrial businesses value-added services at competitive prices.
In 1996, the Registrant implemented a Demand Side Management Program, which
furnishes rebates to customers installing new technologies, such as gas fired
air conditioning, cogeneration and gas motors. These technologies use
proportionately more natural gas during the summer months, when the distribution
system has available capacity. The DSM Program also allows for the utilization
of existing resources, such as mains, services and year-round supply contracts.
These programs will continue to be funded under Energize R.I.
Employees
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As of September 30, 1997, the Registrant had 530 full-time employees.
Approximately 275 production, distribution and customer service employees are
covered by a five-year collective bargaining agreement with Local 12431 of the
United Steelworkers of America, which became effective in January 1996.
The agreement was developed by a labor-management negotiations committee and
can be reopened for any reason at any time in order to allow for the committee
to deal with new issues as they arise, which results in increased flexibility in
the use of employees. This will result in increased job security and will
position the Registrant to reduce costs and increase levels of customer service.
The agreement calls for a general wage increase of 3.25% each year from 1997 to
2000.
Additionally, in March 1996, a 38 month Labor Agreement was ratified by Local
12431-02 of the United Steelworkers of America, which represents approximately
92 office and clerical employees. The agreement calls for a 8.44% wage increase
over 38 months.
Special Factors Affecting the Natural Gas Industry
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The natural gas industry is subject to numerous legislative and regulatory
requirements, standards and restrictions that are subject to change and that
affect the Registrant to varying degrees. Significant industry factors that
have affected or may affect the Registrant from time to time include: lack of
assurance that rate increases can be obtained from regulatory authorities in
adequate amounts on a timely basis; changes in the regulations governing the
Registrant's operations; reductions in the prices of oil and propane, which can
make those fuels less costly than natural gas in some markets; increases in the
price of natural gas; and competition with other gas sources for industrial
customers, including potential attempts to bypass the Registrant's facilities.
FERC Regulations
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In recent years the FERC has been attempting to increase competition with
regard to the transportation and sale of natural gas in interstate commerce.
Beginning in late 1985, FERC began promulgating orders allowing all industry
participants access to pipeline transportation on an open, nondiscriminatory
basis to the extent of available capacity.
Recent FERC orders are in furtherance of its policy to make gas transportation
and alternate supply sources more accessible to all parties, including local
distribution companies and their customers. Such open access allows the
Registrant to obtain its supply through a more competitive national gas pipeline
system, where and when capacity is available.
FERC Order 636 and other related orders (the Orders) have significantly changed
the structure and types of services offered by pipeline transportation
companies. The most significant components of the restructuring occurred in
November 1993. In response to these changes, the Registrant 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 was designed to be market responsive and diversified with
respect to contract lengths, source location, and other contract terms.
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 pipelines' customers, including
the Registrant. Based upon current information, the Registrant anticipates its
transition costs to be approximately $21.7 million, of which $16.2 million has
been included in the GCC and is currently being collected from customers. The
remaining minimum obligation of $5.5 million has been recorded in the
accompanying consolidated balance sheets (filed herewith as Item 8) along with a
regulatory asset anticipating future recovery through the GCC. As part of the
supply contract described in "Gas Supply", which is effective October 1, 1997,
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DETM will assume 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 cannot be estimated at
September 30, 1997.
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Environmental Regulations
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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 September 30, 1997, the Registrant was 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.
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 September
30, 1997, approximately $1.8 million has been spent primarily 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 study which indicates that remediation 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 September 30, 1997, the Registrant has compiled a preliminary
range of costs based on remediation alternatives, ranging from $1.7 million to
in excess of $5.0 million. However, because of the uncertainties associated
with environmental assessment and remediation activities, the future cost of
remediation could be higher than the alternatives noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at
September 30, 1997, for anticipated future remediation costs at this site.
Tests conducted following the discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center in
1996 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 1997, contamination from scrapped meters and regulators was
discovered at this
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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 $50,000 and $100,000. Accordingly, the
Registrant has accrued $50,000 at September 30, 1997 for anticipated future
remediation costs.
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 $2.3 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
September 30, 1997. Of the environmental investigation costs incurred,
approximately $0.9 million and $1.0 million were recorded in the years ended
September 30, 1997 and 1996, respectively, while the remainder were incurred in
prior years.
Due to the materiality of the Registrant's environmental investigation and
remediation expenditures, the Registrant sought new treatment of these amounts.
As a result, in accordance with the Price Stabilization Plan Settlement
Agreement described in "Rates and Regulation", which is effective October 1,
--------------------
1997, all environmental investigation and remediation costs incurred through
September 30, 1997, as well as all costs incurred during the three-year term of
the Plan, will be amortized over a ten-year period. Additionally, it is the
Registrant's practice to consult with the RIPUC on a periodic basis when, in
management's opinion, significant amounts might be expended for environmental-
related costs.
Management has begun discussions with other parties who may assist the
Registrant in paying any future costs at the above sites. Management believes
that its program for managing environmental issues, combined with rate recovery
and financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
Other Standards
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The Registrant is also subject to standards prescribed by the Secretary of
Transportation under the Natural Gas Pipeline Safety Act of 1968 with respect to
the design, installation, testing, construction and maintenance of pipeline
facilities. The enforcement of these standards has been delegated to the RIPUC
and management believes that the Registrant is in substantial compliance with
all present requirements imposed by such agency.
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ITEM 2. PROPERTIES
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In addition to the Registrant's gas distribution system and storage
facilities, which constitute the principal properties of the Registrant, the
Registrant owns several buildings and other facilities in Newport, Providence
and Westerly that house its offices and provide floor space for its distribution
and maintenance facilities.
Substantially all the foregoing properties are mortgaged as collateral for the
outstanding First Mortgage bonds of the Registrant.
ITEM 3. LEGAL PROCEEDINGS
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The Registrant is involved in legal and administrative proceedings in the
normal course of business, including certain proceedings involving material
amounts in which claims have been or may be made. However, management believes,
after review of insurance coverage and consultation with legal counsel, that the
ultimate resolution of the legal proceedings to which it is or can at the
present time be reasonably expected to be a party, will not have a materially
adverse effect on the Registrant's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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Not applicable. The Registrant is a wholly-owned subsidiary of Providence
Energy Corporation.
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ITEM 6. SELECTED FINANCIAL DATA
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THE PROVIDENCE GAS COMPANY
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SELECTED FINANCIAL DATA
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SUMMARY OF OPERATIONS
---------------------
FOR THE YEARS ENDED SEPTEMBER 30
--------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Thousands, except per share amounts)
Operating revenues $210,673 $210,601 $180,043 $219,143 $206,050
Cost of gas sold 117,357 118,051 98,985 133,315 124,677
-------- -------- -------- -------- --------
Operating margin 93,316 92,550 81,058 85,828 81,373
-------- -------- -------- -------- --------
Operating expenses,
excluding taxes 59,540 59,673 53,536 54,588 51,754
Taxes, other than income 13,456 12,831 11,597 12,413 12,468
Federal income taxes 4,489 4,418 3,027 4,369 3,507
-------- -------- -------- -------- --------
Total operating expenses 77,485 76,922 68,160 71,370 67,729
-------- -------- -------- -------- --------
Operating income 15,831 15,628 12,898 14,458 13,644
Other, net 371 976 798 409 (3)
-------- -------- -------- -------- --------
Income before interest
expense 16,202 16,604 13,696 14,867 13,641
Interest expense 7,431 7,294 7,181 6,121 6,546
-------- -------- -------- -------- --------
Net income 8,771 9,310 6,515 8,746 7,095
Dividends on preferred stock (626) (696) (696) (696) (696)
-------- -------- -------- -------- --------
Net income applicable to
common stock 8,145 8,614 5,819 8,050 6,399
Common dividends 4,777 4,627 4,577 4,501 4,427
-------- -------- -------- -------- --------
Income reinvested in
the corporation $ 3,368 $ 3,987 $ 1,242 $ 3,549 $ 1,972
======== ======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ========
Earnings per common share $ 6.55 $ 6.93 $ 4.68 $ 6.47 $ 5.15
======== ======== ======== ======== ========
Common dividends $ 3.84 $ 3.72 $ 3.68 $ 3.62 $ 3.56
======== ======== ======== ======== ========
OTHER FINANCIAL DATA
--------------------
SEPTEMBER 30
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Thousands, except per share amounts)
Gas plant-at original cost $290,614 $270,149 $253,438 $230,926 $213,218
Gas plant-net of depreciation 181,979 171,453 161,956 151,394 141,929
Total assets 242,143 237,515 214,727 221,177 141,868
Capitalization:
Long-term debt 72,372 72,455 74,482 60,078 62,163
Redeemable cumulative
preferred stock 6,400 8,000 8,000 8,000 8,000
Common Stockholder's
investment 78,240 74,844 71,020 69,841 64,861
Shares of common stock at
year-end 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
Book value per share $ 62.91 $ 60.18 $ 57.11 $ 56.16 $ 52.16
======== ======== ======== ======== ========
II-2
Item 7
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
- -------
The Registrant's current operating revenues and operating margin have increased
over last year while net income has decreased, as shown in the table below:
(000's)
Percent
1997 1996 Change Change
-------- -------- ------- --------
Operating revenues $210,673 $210,601 $ 72 0.0
Operating margin 93,316 92,550 766 0.8
Net income 8,771 9,310 (539) (5.8)
RESULTS OF OPERATIONS - 1997 VS 1996
Operating Revenue and Operating Margin
- --------------------------------------
During the current year, the Registrant experienced normal weather as opposed to
colder-than-normal weather in 1996, which resulted in 1997 temperatures that
were 5.2 percent warmer than 1996. The decrease in heating load due to the
warmer temperatures resulted in decreased margin of approximately $1.7 million,
which was offset by increased margin of $0.7 million as a result of load growth
and an increase in the customer base of 1,601 or 1.0 percent. Primarily as a
result of the warmer temperatures experienced in 1997, residential sales
decreased 565 million cubic feet (MMcf) or 4.0 percent. The Registrant's
commercial and industrial firm sales decreased approximately 1,598 MMcf, or 16.9
percent as a result of warmer weather and customer migrations from sales service
to transportation service in connection with unbundling natural gas service in
Rhode Island. In 1996, approximately 120 of the largest commercial and
industrial customers were eligible for unbundled service offerings. In December
1997, an additional 3,400 large and medium commercial and industrial customers
are eligible. This migration of customers to transportation does not have a
material effect on margin.
The decrease due to weather was also offset by increases in margin of $0.8
million as a result of the rate increase effective December 17, 1995 and $0.4
million as the result of an increase in revenues associated with the phase-in of
post-retirement expenses related to Statement of Financial Accounting Standards
(SFAS) No. 106. The remaining increase in margin was due to improved operating
efficiencies in the tracking and delivery of gas.
Interruptible and other volumes remained consistent with last year. Operating
margin from interruptible and other sales did not affect the Registrant's
operating margin or results of operations because the Rhode Island Public
Utilities Commission (RIPUC) required the Registrant to return any margins
earned from these non-firm customers to firm customers through the Gas Charge
Clause (GCC). Beginning October 1, 1997, under the Price Stabilization Plan
Agreement discussed in Note 9 to the accompanying financial statements, the
Registrant will retain all margins
II-3
earned from these non-firm sales.
The Registrant's transportation volumes increased approximately 1,345 MMcf as
the result of the unbundling process described above. As the deregulation
process continues, the Registrant expects transportation revenues and volumes
will continue to increase as customers migrate from sales to transportation.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses have decreased approximately $1.0
million, or 2.0 percent, versus last year. The Registrant has a $0.8 million
decrease in outside services due to expenditures made in the prior year to
develop new energy service offerings as well as expenses related to the
Integrated Resource Plan (IRP). This decrease was offset by an increase in the
Registrant's labor of $0.8 million related to cost of living and negotiated
union contract increases. This increase in labor was offset by an increase in
capitalized labor and administrative expenses of $0.7 million. This increase was
the result of increased capital projects in 1997 as well as an increase in
expenses allocated to capital projects. The Registrant also incurred increased
post-retirement benefit expenses of $0.3 million as the result of the continued
phasing of these expenses into the Registrant's rates in 1997. The remaining
decrease of $0.6 million relates primarily to cost controls instituted by the
Registrant.
The Registrant continually reviews its operating expenses in order to keep
expenses as low as possible. However, the Registrant's expenses will vary based
on weather and other factors.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense increased approximately $0.8 million, or
7.3 percent, primarily as the result of increased capital additions, 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 have increased approximately $0.7 million, or 4.0 percent, primarily as a
result of increased property taxes due to increased capital spending as well as
increased property tax rates in 1997.
Other, net
- ----------
Other, net decreased approximately $0.6 million. The decrease was primarily due
to regulatory changes of $0.9 million in 1996 as the result of the rate decision
effective December 17, 1995 offset by increases in the allowance for funds used
during construction of $0.2 million as the result of increased capital spending.
Interest Expense
- ----------------
Interest expense for 1997 was stable when compared to 1996. Interest expense
increased approximately $0.2 million primarily as the result of an increase in
interest on long-term debt due to the issuance of Series R
II-4
bonds in December of 1995.
RESULTS OF OPERATIONS - 1996 VS 1995
Operating Revenue and Operating Margin
- --------------------------------------
During 1996, the Registrant has experienced colder-than-normal weather resulting
in temperatures averaging 16.8% colder than 1995. The increase in heating load
due to the colder temperatures represented approximately $5.7 million in
increased operating margin. As a result of the colder temperatures experienced
during 1996, residential sales, which provide the Registrant with its greatest
source of revenues, increased 1,687 million cubic feet (MMcf), or 13.5% over
1995. Also contributing to the increase was a net increase in the average annual
number of customers during 1996 over 1995 of 1,643 or 1%. This increase
contributed approximately $300,000 of operating margin.
Additionally, the Rhode Island Public Utilities Commission (RIPUC) approved a
rate increase effective December 17, 1995. Operating margin for 1996 increased
approximately $3.2 million versus 1995 as a result of the rate increase. As a
result of the RIPUC's approval in February 1996 of the Integrated Resource
Plan's (IRP) performance-based ratemaking mechanism, the Registrant recorded an
increase in operating margin of $1.5 million in 1996 as a result of gas cost
savings achieved for the twelve-month plan period which ended June 1996. These
savings were somewhat offset by a one-time charge to operating and maintenance
expenses of $800,000 to fund a low income assistance program as discussed below.
The IRP settlement agreement covers a three-year period. The Registrant's
ability to record up to $1.5 million in operating margin annually is dependent
upon achieving certain levels of gas cost savings for each plan year. Also see
Liquidity and Capital Resource discussion.
Interruptible and other volumes decreased approximately 2,300 MMcf versus 1995,
primarily as a result of a decrease in non-firm sales of approximately 1,200
MMcf and a decrease in sales for resale of approximately 1,300 MMcf. These
decreases were offset by an increase in special contracts of approximately 200
MMcf. The decrease in interruptible and other sales did not have an impact on
the Registrant's operating margin or results of operations because the RIPUC
requires the Registrant to return any margins earned from these non-firm
customers to firm customers through the Gas Charge Clauses(GCC).
In addition, the Registrant's operating margin increased approximately $200,000
due to an increase in revenues to account for the phase-in of expenses
associated with Statement of Financial Accounting Standards (SFAS) No. 106.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses have increased approximately $4.6
million or 10.6% versus 1995. The Registrant had an increase of $1.1 million in
its uncollectible revenue provision due to the increased operating revenues
resulting from the colder-than-normal weather experienced during the year. As a
result of the Registrant's improved earnings, performance incentive compensation
expense increased approximately $700,000 in 1996 versus 1995. Also, there were
increased wage expenses of approximately $800,000 related to performance, cost
of
II-5
living and negotiated union contract increases, as well as overtime pay due to
the colder-than-normal weather. Additionally, in connection with the RIPUC's
approval of the IRP in February 1996, the Registrant had a one-time charge of
$800,000 to fund a low income assistance program, as well as $100,000 of costs
associated with the regulatory proceeding. Finally, approximately $200,000 of
expenses relating to the phase-in of SFAS No. 106 costs were incurred, as well
as expenses of approximately $600,000 for outside services associated with the
development of new energy service offerings. The remaining $300,000 is
attributable to increases in general operating costs.
The Registrant continually reviews its operating expenses in order to keep
expenses as low as possible. However, the Registrant's expenses will vary based
on weather and other factors.
Taxes
- -----
Taxes have increased approximately $2.6 million, or 17.9%, during 1996. The
increase in taxes, mainly Federal income and state gross earnings tax, resulted
from higher pretax income and higher operating revenues, respectively.
Interest Expense
- ----------------
Overall, interest expense for 1996 was stable when compared to 1995. A decrease
in weighted average short-term borrowings caused short-term interest expense to
decrease approximately $700,000 for the current year. The Registrant's long-term
interest expense for the current year has increased approximately $800,000 as a
result of the Series R First Mortgage Bond issuance in December 1995.
Future Outlook
- --------------
In August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement (the Plan or Energize R.I.) among the Registrant, the Rhode Island
Division of Public Utilities and Carriers (the Division), The Energy Council of
Rhode Island (TEC-RI) and the George Wiley Center. Effective October 1, 1997
through September 30, 2000, Energize R.I. provides customers with an initial
price decrease of approximately four percent and a three-year price freeze.
Under Energize R.I., the GCC will be suspended for the entire term. Any excess
or deficiency between amounts billed and actual gas costs incurred will be
retained or borne by the Registrant. Energize R.I. also requires the Registrant
to make significant capital investments to improve its distribution system.
Capital investments required by Energize R.I. are estimated to total
approximately $26 million over its three-year term. Similar to the Integrated
Resource Plan approved by the RIPUC in February 1996, which is superseded by
Energize R.I., the Registrant is required to fund the Demand Side Management
Rebate Assistance Program and the Low Income Weatherization Program at annual
levels of $.5 million and $.2 million, respectively. In addition, Energize R.I.
calls for the Registrant to fund the Low Income Assistance Program at an annual
level of $1.0 million. Energize R.I. also continues the process of unbundling
by requiring the Registrant to provide unbundled service offerings up to 10
percent per year of firm system throughput.
As part of Energize R.I., the Registrant will amortize approximately $4.0
II-6
million of environmental costs previously charged to the accumulated
depreciation reserve over a ten-year period. All environmental costs incurred
during the term of Energize R.I. will also be amortized over a ten-year period.
Under Energize R.I. the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million and $92.0 million in
fiscal 1998, 1999 and 2000, respectively. In addition the Registrant may not
earn less than a 7 percent return on common equity. In the event that the
Registrant earns in excess of 10.9 percent or less than 7 percent, the
Registrant will defer revenues or costs through a deferred revenue account. 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 and
approved by RIPUC.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the
Registrant, the Division, 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 step was available to approximately 120 of the
largest commercial and industrial customers. In August 1997, the RIPUC approved
a plan, Business Choice, to further expand the availability of unbundled
services to an additional 3,400 medium and large commercial and industrial
customers. The Registrant plans to commence Business Choice in December 1997.
As described in Note 1 to the consolidated financial statements, the Registrant
complies with the provisions of Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71).
In the event the Registrant determines that it no longer meets the criteria for
following SFAS No. 71, the accounting impact would be an extraordinary, noncash
charge to operations of an amount that could be material.
Criteria that give rise to the discontinuance of SAFS No. 71 include: (1)
increasing competition that restricts the Registrant's ability to establish
prices to recover specific costs and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. The Registrant periodically reviews these criteria to ensure the
continuing application of SFAS No. 71 is appropriate. Based on a current
evaluation of the various factors and conditions that are expected to impact
future cost recovery, the Registrant believes that its regulatory assets are
probable of future recovery.
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share", effective for financial statements issued for
periods ending after December 15, 1997. SFAS No. 128 replaces the presentation
of primary earnings per share with the presentation of basic earnings per share
on the face of the income statement. Basic earnings excludes dilution and is
calculated by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Earnings per share
calculated under SFAS no. 128 would have been unchanged for the periods
presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
II-7
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 131, which is effective for financial statements
for periods beginning after December 15, 1997, requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. These statements require additional disclosure only and
will not affect the financial position or results of operations of the
Registrant.
Effective October 1, 1997, the Registrant will adopt the provisions of Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities". This Statement
provides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
The Registrant has recorded environmental remediation liabilities of
approximately $1.7 million at September 30, 1997. SOP 96-1 is not expected to
have a material impact on the Registrant's financial position or results of
operations upon adoption.
Liquidity and Capital Resources
- -------------------------------
During 1997, the Registrant experienced a substantial increase in its net cash
provided by operations primarily due to a decrease in deferred gas costs as the
result of the timing of the recovery of incurred gas costs through the GCC, as
discussed in Note 1 of the accompanying financial statements. This increase was
offset by a decrease in cash flow due to increased inventories of approximately
$2.2 million. On October 1, 1997, these inventories will be transferred at book
value to Duke Energy Trading and Marketing, L.L.C. (DETM) under the terms of the
Registrant's new gas supply contract described in Note 7 to the accompanying
consolidated financial statements.
Capital expenditures for 1997 of $20.2 million, which includes $2.4 million of
equipment financed through long-term debt and capital leases, were stable when
compared to 1996 capital expenditures of $20.3 million. As a result of Energize
R.I. discussed in Note 9 to the accompanying financial statements, the
Registrant is committed to making significant capital improvements to its
distribution system during its three-year term. These improvements will be made
by expanding the distribution system into economically developed areas of Rhode
Island as well as accelerating the replacement of mains and services. The
Registrant anticipated its capital expenditures over the next three years to
total approximately $75 million.
During 1997, the Registrant entered into notes with five-year maturities in the
amount of $3.3 million in order to finance capital expenditures. The notes have
interest rates ranging from 4.9 to 7.5 percent. The Registrant meets seasonal
cash requirements and finances its capital expenditures on an interim basis
through short-term borrowings. As of September 30, 1997, the Registrant had
lines of credit totaling $53.0 million with borrowings outstanding of $20.4
million.
II-8
The Registrant, like most owners of computer software, will be required to
modify or replace significant portions of its software so that it will function
properly in the year 2000. The Registrant has performed a Year 2000 impact
assessment and is currently pursuing viable options, including renovation and
replacement of existing systems, to ensure that its computer software
applications and hardware will be Year 2000 compliant.
In February 1997, the Registrant redeemed 16,000 shares of its preferred stock
at the par value totaling $1.6 million in accordance with the annual sinking
fund requirement.
During the next two years, the Registrant intends to make a debt offering of $15
million to finance its capital expenditures and energy service offerings.
The Registrant's parent company's ability to pay dividends is largely dependent
upon receipt of dividends from the Registrant. Approximately $19 million of the
Registrant's retained earnings were available for dividends at the end of fiscal
1997 under the most restrictive terms of the Registrant's First Mortgage Bond
Indenture.
In August 1997, the RIPUC approved Energize R.I., which provides customers with
an initial price decrease of approximately four percent and a three-year price
freeze.
In addition, Energize R.I. suspends the GCC, which results in the Registrant
retaining or bearing any excess or deficiency between gas costs billed and gas
costs incurred. Energize R.I. requires the Registrant to make significant
capital investments to improve its distribution system. Capital investments
required by Energize R.I. are expected to total $26 million during its term.
Energize R.I. also requires the Registrant to provide funding of the Low-Income
Assistance Program, the DSM Rebate Program, and the Low-Income Weatherization
Program at an annual level of $1 million, $0.5 million, and $0.2 million,
respectively.
Under Energize R.I., the Registrant is allowed to earn a 10.9 percent return an
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999, and 2000, respectively.
As a result of Energize R.I., the three-year Settlement Agreement regarding the
IRP approved by the RIPUC in February 1996 was terminated. The Settlement
Agreement called for (1) $0.5 million of annual funding associated with the DSM
Rebate Program; (2) $0.2 million of annual funding associated with a Low-Income
Weatherization Program; and (3) a performance-based ratemaking mechanism. In
1997 and 1996, the Registrant was able to record its annual share of the
performance-based ratemaking mechanism under this agreement which resulted in
$1.5 million of operating margin in each of those years.
The savings to fund the rate decrease and freeze under Energize R.I. were
generated by ongoing cost control initiatives and a full requirements contract
with DETM. Under the contract, which runs from October 1, 1997 through September
30, 2000, supplies required by the Registrant's firm sales customers will be
purchased at a single, fixed commodity price for
II-9
the entire contract period.
In order to provide this service, DETM will take responsibility for the
Registrant's pipeline capacity resources, storage contracts, and liquefied
natural gas capacity. Under the contract, DETM will provide all gas supplies
required by the Registrant while the Registrant must purchase all supplies
exclusively from DETM. All non-firm gas supply will be provided at market
prices.
II-10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30
------------
1997 1996
---- ----
(Thousands of Dollars)
ASSETS
------
Gas plant, at original cost (notes 1, 4, 7, and 10) $290,614 $270,149
Less - Accumulated depreciation and utility plant
acquisition adjustments 108,478 98,563
-------- --------
182,136 171,586
-------- --------
Current assets:
Cash and temporary cash investments (notes 1 and 8) 778 923
Accounts receivable, less allowance of $1,739 in 1997
and $2,983 in 1996 (notes 1, 3 and 7) 13,120 14,001
Unbilled revenues (note 1) 2,658 2,333
Deferred gas costs (notes 1 and 7) 7,151 13,128
Inventories, at average cost -
Liquefied natural gas, propane and underground storage 18,001 15,794
Materials and supplies 1,166 1,151
Prepaid and refundable taxes (note 2) 3,293 3,215
Prepayments 966 1,465
-------- --------
47,133 52,010
-------- --------
Deferred charges and other assets
(notes 1, 3, 6, 7, 9 and 10) 12,874 13,919
-------- --------
Total assets $242,143 $237,515
======== ========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization (see accompanying statement) $157,012 $155,299
-------- --------
Current liabilities:
Notes payable (notes 5 and 8) 20,410 20,800
Current portion of long-term debt (note 4) 3,707 2,023
Accounts payable (notes 6 and 7) 16,114 16,480
Accrued taxes (note 10) 2,529 1,867
Accrued vacation 1,658 1,673
Customer deposits 3,430 3,956
Other 4,639 5,036
-------- --------
52,487 51,835
-------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 20,598 19,903
Unamortized investment tax credits (note 2) 2,354 2,510
Other (notes 6, 7 and 10) 9,692 7,968
-------- --------
32,644 30,381
-------- --------
Commitments and contingencies (note 7) - -
Total capitalization and liabilities $242,143 $237,515
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
II-11
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE FISCAL YEARS ENDED
--------------------------
SEPTEMBER 30
------------
1997 1996 1995
---- ---- ----
(Thousands, except per share amounts)
Operating revenues $210,673 $210,601 $180,043
Cost of gas sold 117,357 118,051 98,985
-------- -------- --------
Operating margin 93,316 92,550 81,058
-------- -------- --------
Operating expenses:
Operation and maintenance 47,135 48,116 43,486
Depreciation and amortization 12,405 11,557 10,050
Taxes -
State gross earnings 6,023 6,061 5,005
Local property and other 7,433 6,770 6,592
Federal income (note 2) 4,489 4,418 3,027
-------- -------- --------
Total operating expenses 77,485 76,922 68,160
-------- -------- --------
Operating income 15,831 15,628 12,898
Other, net (notes 1 and 10) 371 976 798
-------- -------- --------
Income before interest expense 16,202 16,604 13,696
-------- -------- --------
Interest expense:
Long-term debt 6,042 5,889 5,086
Other 1,609 1,498 2,197
Interest capitalized (220) (93) (102)
-------- -------- --------
7,431 7,294 7,181
-------- -------- --------
Net income 8,771 9,310 6,515
Preferred dividends (note 4) (626) (696) (696)
-------- -------- --------
Net income applicable to common stock $ 8,145 $ 8,614 $ 5,819
======== ======== ========
Earnings per common share (note 13) $ 6.55 $ 6.93 $ 4.68
======== ======== ========
Weighted average common shares outstanding
(note 13) 1,243.6 1,243.6 1,243.6
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
II-12
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE FISCAL YEARS ENDED SEPTEMBER 30
---------------------------------------
1997 1996 1995
---- ---- ----
(Thousands of Dollars)
Cash provided by (used for)
Operating Activities:
- --------------------
Net income $ 8,771 $ 9,310 $ 6,515
Items not requiring cash:
Depreciation and amortization 12,533 11,686 10,026
Charges as a result of regulatory action - (1,453) -
Deferred Federal income taxes 622 1,968 2,010
Amortization of investment tax credits (156) (158) (158)
Changes in assets and liabilities which provided (used) cash:
Accounts receivable 881 (194) 3,857
Unbilled revenues (325) 304 240
Deferred gas costs 5,977 (11,932) 14,153
Inventories (2,222) (5,542) 1,310
Prepaid and refundable taxes (186) 2,064 (869)
Prepayments 499 (137) 130
Accounts payable (366) 2,584 (4,143)
Accrued taxes 662 62 (194)
Accrued vacation, customer deposits and other (938) 1,494 569
Deferred charges and other 2,529 1,236 (1,658)
-------- -------- --------
Net cash provided by operations 28,281 11,292 31,788
-------- -------- --------
Investment activities:
- ---------------------------
Expenditures for property, plant and equipment, net (20,214) (20,346) (19,124)
-------- -------- --------
Financing activities:
- --------------------
Issuance of mortgage bonds - 15,000 -
Redemption of preferred stock (1,600) - -
Issuance of long-term debt 1,345 - -
Payments on long-term debt (2,164) (1,954) (2,081)
Increase (decrease) in notes payable, net (390) 1,463 (5,363)
Cash dividends on preferred shares (note 4) (626) (696) (696)
Cash dividends on common shares (4,777) (4,627) (4,577)
-------- -------- --------
Total (8,212) 9,186 (12,717)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (145) 132 (53)
Cash and cash equivalents at beginning of year 923 791 844
-------- -------- --------
Cash and cash equivalents at end of year $ 778 $ 923 $ 791
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for -
Interest (net of amount capitalized) $ 7,305 $ 6,561 $ 6,456
Income taxes (net of refunds) $ 2,215 $ 2,367 $ 1,414
Schedule of noncash investing activities
Capital lease obligations for equipment $ 437 $ - $ -
Other long-term debt for equipment $ 1,983 $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
II-13
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
SEPTEMBER 30
------------
1997 1996
---- ----
(Thousands of Dollars)
Stockholder's investment: (notes 4 and 6)
Common stock, $1 Par, Authorized - 2,500,000 shares
Outstanding - 1,243,598 shares in 1997 and 1996 $ 1,244 $ 1,244
Amount paid in excess of par 37,685 37,657
Retained earnings 39,311 35,943
-------- --------
78,240 74,844
-------- --------
Cumulative preferred stock (notes 4 and 8):
Redeemable 8.7% series, $100 par
Authorized - 80,000 shares
Outstanding - 64,000 shares in 1997 and
80,000 shares in 1996 6,400 8,000
-------- --------
Long-term debt (notes 4, 7 and 8):
First Mortgage Bonds, secured by utility property -
Series M, 10.25%, due July 31, 2008 10,000 10,000
Series N, 9.63%, due May 30, 2020 10,000 10,000
Series O, 8.46%, due September 30, 2022 12,500 12,500
Series P, 8.09%, due September 30, 2022 12,500 12,500
Series Q, 5.62%, due November 30, 2003 11,200 12,800
Series R, 7.50%, due December 15, 2025 15,000 15,000
Other long-term debt 3,207 -
Capital Leases 1,672 1,678
-------- --------
76,079 74,478
Less-current portion 3,707 2,023
-------- --------
72,372 72,455
-------- --------
Total capitalization $157,012 $155,299
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
II-14
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CHANGES
----------------------------------
IN COMMON STOCKHOLDER'S INVESTMENT
----------------------------------
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997
--------------------------------------------
Shares Amount
Issued and Outstanding Paid in
---------------------- Excess Retained
Number Amount of Par Earnings
-------------------------------------------
(Thousands)
Balance, September 30, 1994 1,244 $1,244 $37,883 $30,714
Add (deduct):
Net income - - - 6,515
Cash dividends on common shares
($3.68 per share) - - - (4,577)
Cash dividends on preferred
shares ($8.70 per share) - - - (696)
Accrual for stock
compensation plans - - (87) -
Amortization of deferred
compensation - - 24 -
------- ------- ------- -------
Balance, September 30, 1995 1,244 1,244 37,820 31,956
Add (deduct):
Net income - - - 9,310
Cash dividends on common shares
($3.72 per share) - - - (4,627)
Cash dividends on preferred
shares ($8.70 per share) - - - (696)
Accrual for stock
compensation plans - - (227) -
Amortization of deferred
compensation - - 64 -
------- ------- ------- -------
Balance, September 30, 1996 1,244 1,244 37,657 35,943
Add (deduct):
Net income - - - 8,771
Cash dividends on common shares
($3.84 per share) - - - (4,777)
Cash dividends on preferred
shares ($8.70 per share) - - - (626)
Accrual for stock
compensation plans - - (110) -
Amortization of deferred
compensation - - 138 -
------- ------- ------- -------
Balance, September 30, 1997 1,244 $ 1,244 $37,685 $39,311
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
II-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of
The Providence Gas Company and its wholly-owned subsidiary (the Registrant or
ProvGas). Revenues from the natural gas distribution business are reflected in
the accompanying consolidated statements of income to arrive at operating
income. Results of nonutility operations are presented after operating income in
the accompanying consolidated statements of income. All significant intercompany
transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements. The preparation
of financial statements in conformity with Generally Accepted Accounting
Principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Regulation. The Registrant is subject to regulation by the Rhode Island
Public Utilities Commission (RIPUC). The accounting policies of ProvGas conform
to GAAP as applied in the case of regulated public utilities and are in
accordance with the regulator's accounting requirements and rate making
practices.
Operating Revenues. Operating revenues consist principally of gas sales. The
Registrant records accrued utility revenues based on estimates of gas volumes
consumed and not billed at the end of an accounting period in order to match
revenues with related costs.
Lease Accounting. The Registrant leases water heaters and other appliances to
customers under finance leases. These leases are recorded on the accompanying
balance sheet at the gross investment in the leases less unearned income.
Unearned income is recognized in such a manner as to produce a constant periodic
rate of return on the net investment in the finance leases.
Gas Plant. Gas plant is stated at the original cost of construction. In
accordance with the uniform system of accounts prescribed by the RIPUC, the
difference between the original cost of gas plant acquired and the cost to
ProvGas is recorded as a Utility Plant Acquisition Adjustment and is being
amortized over periods ranging from 1 to 24 years.
Impairment of Long-Lived Assets. Statement of Financial Accounting Standards
No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", which became effective for the
Registrant in 1997, established accounting standards for the impairment of long-
lived assets. SFAS No. 121 also required that regulatory assets which
II-16
are no longer probable of recovery through future revenues be charged to
earnings. SFAS No. 121 did not have an impact on the Registrant's financial
position or results of operations upon adoption.
Depreciation. Depreciation is provided on the straight-line basis at rates
designed to amortize the cost of depreciable plant over its estimated useful
life. The composite depreciation rate expressed as a percentage of the average
depreciable gas plant in service was approximately 3.85 percent for 1997 and
1996 and 3.75 percent for 1995 and 1994.
The Registrant retires property units by charging original cost, cost of
removal, including environmental investigation and remediation costs, and
salvage value to accumulated depreciation.
Gas Charge Clause. In May 1996, the RIPUC approved a Rate Design Settlement
Agreement. The Agreement included changes to the Registrant's gas cost recovery
mechanism. Specifically, the Agreement replaced the previous Cost of Gas
Adjustment Clause (CGA) with Gas Charge Clauses (GCC) effective June 2, 1996.
In addition to the commodity and related pipeline transportation costs
historically included in the CGA, the GCC provides for the recovery of: (1)
inventory financing costs; (2) working capital associated with gas supply
purchases; (3) bad debt expenses associated with the gas revenue portion of
customer bills; and (4) a substantial portion of liquefied natural gas operating
and maintenance expenses, all of which were previously recovered in base rates.
Similar to the former CGA, the GCC provides for reconciliation of total gas
costs billed with the actual cost of gas incurred. Any excess or deficiency in
amounts billed as compared to costs incurred is deferred and either refunded to,
or recovered from, customers over a subsequent period.
As a result of the Price Stabilization Plan described in Note 9, the GCC will
be suspended for the period of October 1, 1997 through September 30, 2000. Any
excess or deficiency in amounts billed as compared to costs incurred, will be
retained or borne by the Registrant.
Allowance for Funds Used During Construction. The Registrant capitalizes
interest and an allowance for equity funds in accordance with established
policies of the RIPUC. The rates used are based on the actual cost of debt and
the allowed equity return. Interest capitalized is shown as a reduction of
interest expense and the equity allowance is included in other, net.
Deferred Charges and Other Assets. The Registrant defers and amortizes
certain costs in a manner consistent with authorized or probable rate making
treatment. Deferred financing costs are amortized over the life of the security
while the remaining deferred charges and other assets are amortized over a
recovery period specified by the RIPUC.
Deferred Charges include the following:
- --------------------------------------
(thousands)
1997 1996
-------- --------
II-17
Cost of fuel assistance program $ 808 $ 1,271
Pension costs 7,272 6,823
Unamortized debt expense 1,901 2,109
Post-retirement benefits 691 1,041
Deferred rate case expense 164 242
Pipeline interconnection costs - 309
Other deferred charges 2,038 2,124
------- -------
Total $12,874 $13,919
======= =======
Temporary Cash Investments. Temporary cash investments are short-term, highly
liquid investments with original maturities to the Registrant of not more than
90 days.
Reclassifications. Certain prior year amounts have been reclassified for
consistent presentation with the current year.
2. FEDERAL INCOME TAXES
The Registrant records income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which
requires deferred taxes to be provided for all temporary differences.
The following is a summary of the provision for Federal income taxes for the
three years ended September 30:
(thousands of dollars) 1997 1996 1995
- ------------------------------------------------------------
Current $ 3,898 $ 2,821 $ 1,288
Deferred 622 1,968 2,010
------- ------- -------
Total Federal income tax
provision $ 4,520 $ 4,789 $ 3,298
======= ======= =======
Income tax is charged to the
following:
Charged to operating expenses $ 4,489 $ 4,418 $ 3,027
Included in other, net 31 371 271
------- ------- -------
Total Federal income tax
provision $ 4,520 $ 4,789 $ 3,298
======= ======= =======
The effective Federal income tax rates and the reasons for their differences
from the statutory Federal income tax rates are as follows:
1997 1996 1995
---- ---- ----
Statutory Federal income tax rates 34.0% 34.0% 34.0%
Reversing temporary differences (.2) .3 (.1)
Amortization of investment tax credits (.4) (.4) (.6)
Other .6 .1 .3
---- ---- ----
Effective Federal income tax rate 34.0% 34.0% 33.6%
==== ==== ====
II-18
The Registrant's deferred tax assets and liabilities for each of the two
years in the period ended September 30 are the result of the following temporary
differences:
1997 1996
---- ----
(thousands of dollars)
Long-term deferred taxes
- ------------------------
Tax assets
Unamortized ITC $ 828 $ 883
Other 316 370
Tax liabilities
Property related (20,942) (19,527)
Pension costs (222) (519)
Deferred charges (578) (1,110)
-------- --------
Net deferred tax liability included in
accompanying consolidated balance
sheets $(20,598) $(19,903)
======== ========
Prepaid taxes
- -------------
Tax assets
Accounts receivable reserves $ 424 $ 1,255
Property tax reserves (245) (400)
Alternative minimum tax 672 876
Other 787 822
Tax liabilities
Employee severance 56 56
Other (111) (79)
-------- --------
Net prepaid taxes 1,583 2,530
Prepaid gross earnings tax and other 1,710 685
-------- --------
Net prepaid and refundable taxes
included in accompanying consolidated
balance sheets $ 3,293 $ 3,215
======== ========
Investment tax credits are amortized through credits to other, net over the
estimated lives of related property.
3. LEASE RECEIVABLES
The Registrant presently finances the installation of water heaters and other
appliances for its customers under one to three year finance agreements.
Previously, the Registrant leased water heaters and appliances to customers
under 10-year sales-type leases.
II-19
Future minimum lease payments to be received are:
- ------------------------------------------------
(thousands of dollars)
1998 $ 529
1999 491
2000 397
2001 342
------
1,759
Amount representing interest 312
------
Amount representing principal $1,447
======
4. CAPITALIZATION
A. Long-Term Debt
In December 1995, the Registrant issued $15 million of First Mortgage Bonds.
These First Mortgage Bonds are designated as Series R (7.5%) and will mature in
December 2025. The net proceeds provided by this indebtedness were used to pay
down the Registrant's short-term debt.
The terms of the various indentures, as supplemented, under which the First
Mortgage Bonds were issued, contain restrictions which provide that dividends
may not be paid on common stock of the Registrant under certain conditions.
Approximately $19 million of the Registrant's retained earnings were available
for dividends under the most restrictive terms of the Registrant's First
Mortgage Bond indenture.
The Registrant's First Mortgage Bonds are secured by a lien on substantially all
of the tangible and real property.
As of September 30, 1997, the annual sinking fund requirements and maturities of
long-term debt for the next five fiscal years are $2,509,000.
B. Other Long-term Debt
During 1997, the Registrant financed equipment purchases of approximately
$3,328,000 through the issuance of long-term notes to IBM Credit Corporation.
The notes have five-year terms and interest rates ranging from 4.9 to 7.5
percent. As of September 30, 1997, the maturities of these long-term notes over
the next five years are $686,000 in 1998, $639,000 in 1999, $675,000 in 2000,
$713,000 in 2001, and $490,000 in 2002.
C. Redeemable Preferred Stock
The Registrant's preferred stock, which consists of 64,000 shares of $100 par
value, has an 8.7% cumulative annual dividend rate payable on a quarterly basis,
and has no voting power or privileges unless there is a default in the payment
of dividends or sinking fund obligation. The stock is subject to a cumulative
annual sinking fund requirement of 16,000 shares per year at par ($1,600,000)
plus accrued or unpaid dividends which commenced in February 1997. Accordingly,
16,000 shares were redeemed by the
II-20
Registrant at par value in February 1997.
5. NOTES PAYABLE
The Registrant meets seasonal cash requirements and finances its construction
program on an interim basis through short-term bank borrowings. As of September
30, 1997, the Registrant had lines of credit totaling $53,000,000 with
borrowings outstanding of $20,410,000. The Registrant pays a fee for its
committed lines of credit rather than maintaining compensating balances. The
weighted average interest rate for borrowings outstanding at the end of the
years was 5.79% in 1997, 5.65% in 1996 and 5.98% in 1995.
6. Employee Benefits
A. Retirement Plans
The Registrant has two pension plans providing retirement benefits for
substantially all of its employees. The benefits under the plans are based on
years of service and the employee's final average compensation. It is the
Registrant's policy to fund at least the minimum required contribution.
The following table sets forth the funding status of the pension plans and
amounts recognized in the Registrant's consolidated balance sheets at September
30, 1997 and 1996 (in thousands):
1997 1996
- -----------------------------------------------------------------------
Accumulated benefit obligation, including
vested benefit obligation of $(37,961) as of
September 30, 1997 and $(36,288) as
of September 30, 1996 $(44,889) $(42,403)
======== ========
Projected benefit obligation for service
rendered to date $(60,143) $(57,003)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 76,348 62,941
-------- --------
Excess of plan assets over projected
benefit obligation 16,205 5,938
Unrecognized net gain (23,731) (13,144)
Unrecognized prior service cost 2,820 3,100
Unrecognized net transition asset
being recognized over 15 years
from October 1, 1985 (409) (545)
-------- --------
Net accrued pension cost included in other
deferred credits and accounts payable at
September 30, 1997 and 1996 $ (5,115) $ (4,651)
======== ========
II-21
Net pension cost for fiscal years 1997, 1996 and 1995 included the following
components (in thousands):
1997 1996 1995
- -------------------------------------------------------------------------------
Service cost $ 1,818 $1,702 $ 1,535
Interest cost on benefit obligations 4,569 4,246 3,857
Annual return on plan assets (16,428) (7,473) (10,293)
Net amortization and deferral 10,506 2,085 5,708
-------- ------ -------
Net periodic pension cost 465 560 807
Adjustments due to regulatory
action (465) (427) (408)
-------- ------ -------
Net periodic pension cost recognized $ - $ 133 $ 399
========= ====== =======
The discount rate and rate of increase in future compensation levels used for
all years presented in determining the projected benefit obligation were 8
percent and 6 percent, respectively. The expected long-term rate of return on
assets was 9 percent.
The Registrant recovers pension costs in rates when such costs are funded.
Therefore, the amount by which funding differs from pension expense, determined
in accordance with GAAP, is deferred and recorded as a regulatory asset or
liability.
B. Post-retirement Benefits Other Than Pensions
The Registrant currently offers retirees who have attained age 55 and worked 5
years for the Registrant, healthcare and life insurance benefits during
retirement (the Plan). These benefits are similar to the benefits offered to
active employees. Although retirees are not required to make contributions to
the Plan currently, future contributions may be required if the cost of the Plan
exceeds certain limits.
Since 1993, the post-retirement benefit costs for active employees are recorded
on an accrual basis, ratably over their service periods. Benefits of
$10,526,000 earned prior to 1993 have been deferred as an unrecognized
transition obligation, which the Registrant will amortize over a 20-year period.
The Registrant funds its post-retirement benefit obligations to a Voluntary
Employee Benefit Association (VEBA) Trust. Contributions to the VEBA Trust to
fund such obligations totaled $1,372,000 in 1997, $1,454,000 in 1996 and
$1,561,000 in 1995.
The Registrant recovers its post-retirement benefit obligations in rates to the
extent allowed by the RIPUC. The RIPUC generally allows such costs to be
recovered if amounts are funded into tax favored investment funds, such as the
VEBA Trust. Accordingly, the Registrant will fully recover its 1997, 1996 and
1995 post-retirement benefit obligations because such amounts were funded into
the VEBA Trust. In addition, in September 1996, the RIPUC approved a ratable
recovery of the cumulative unrecovered difference of $1,041,000 during 1997,
1998 and 1999. Of the total post-retirement benefit obligations, $1,718,000,
$1,454,000, $1,231,000 and were included in rates during 1997, 1996 and 1995,
respectively.
The Plan's costs and accumulated post-retirement benefit obligation for 1997,
1996 and 1995 are calculated by the Registrant's actuaries using assumptions and
estimates which include:
II-22
1997 1996 1995
- ----------------------------------------------------------------------
Healthcare cost annual growth rate 10.2% 11.4% 12.6%
Healthcare cost annual growth rate - long-term 6.0 6.0 6.0
Expected long-term rate of return (union) 8.5 8.5 8.5
Expected long-term rate of return (non-union) 5.5 5.5 5.5
Discount rate 8.0 8.0 8.0
The healthcare cost annual growth rate significantly impacts the estimated Plan
obligation and annual expense. For example, in 1997, a one percent change in
the above rates would change the obligation by $799,000 and would change the
annual expense by $85,000.
The obligations and assets of the Plan at September 30, 1997 and 1996 are (in
thousands):
1997 1996
- --------------------------------------------------------------------------------
Accumulated post-retirement
benefit obligation:
Current retirees $ (6,626) $ (6,975)
Active employees-eligible for
benefits (1,361) (889)
Active employees (3,761) (3,876)
-------- ---------
Total post-retirement benefit
obligation (11,748) (11,740)
Plan assets at fair value 4,704 3,106
-------- ---------
Unfunded post-retirement benefit
obligation (7,044) (8,634)
Unrecognized transition
obligation 8,421 8,947
Unrecognized net (gain) or loss (1,360) (313)
-------- ---------
Prepaid post-retirement
benefit obligations included
in the Registrant's consolidated
balance sheets $ 17 $ -
======== =========
The Registrant's actuarial determined Plan
costs for 1997, 1996 and 1995 include:
1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 228 $ 222 $ 230
Interest cost 896 896 909
Actual return on plan assets (278) (98) (28)
Amortization and deferral 526 434 450
------ -------- ---------
Total annual plan costs $1,372 $ 1,454 $ 1,561
====== ======== =========
C. Supplemental Retirement Plans
The Registrant provides certain supplemental retirement plans for key employees.
The projected benefit obligation is approximately $1,375,000 which is being
accrued over the service period of
II-23
these key employees. The supplemental retirement plans are unfunded. The
Registrant expensed $612,000, $310,000 and $150,000 related to these benefits in
1997, 1996 and 1995, respectively.
D. Performance and Equity Incentive Plan
During 1992, the Board of Directors of Providence Energy, with subsequent
approval of Providence Energy's common shareholders, adopted the Providence
Energy Corporation Performance and Equity Incentive Plan (the Plan). The Plan
provides that up to 225,000 shares of common stock may be granted to key
employees including employees of the Registrant, at no cost to the employees.
Key employees who receive common shares, are entitled to receive dividends, but
assumption of full beneficial ownership vests on the fifth anniversary of the
grant date provided the participant is still employed by Providence Energy
Corporation or one of its subsidiaries. Vesting may be accelerated under certain
circumstances. The Plan also provides for cash compensation to key employees.
The executive compensation incentive awards paid by the Registrant under this
Plan totaled approximately $439,000 for 1997, $381,000 for 1996 and $248,000 for
1995. Amounts paid in cash are charged to expense when earned. However,
amounts paid in restricted stock are deferred and amortized to expense over the
five-year vesting period.
Of the $248,000 1995 award, $167,000 was paid in cash during fiscal 1996. Of
the $381,000 1996 award, $269,000 was paid in cash during fiscal 1997. Of the
$439,000 1997 award, $297,000 will be paid in cash during 1998. Grant shares
totaling 5,989, 4,491 and 5,371 were purchased by the Registrant for key
employees during 1997, 1996 and 1995, respectively.
E. Restricted Stock Incentive Plan
The Restricted Stock Incentive Plan provides that up to 60,000 shares of common
stock may be granted to employees of Providence Energy and its subsidiaries,
including the Registrant, with at least three months of service, who are not
officers or covered by a collective bargaining agreement, at no cost to the
employee. All participants are entitled to receive dividends, however, full
beneficial ownership vests on the third anniversary of the date of the grant
provided that the participant is still employed by Providence Energy or one of
its subsidiaries. Vesting may be accelerated under certain circumstances.
Awards under the Restricted Stock Incentive Plan to employees of the Registrant
totaled approximately $146,000 in 1996 consisting of 7,954 shares. There were
no awards under the Restricted Stock Incentive Plan in 1997. All amounts
awarded under the Restricted Stock Incentive Plan are deferred and amortized to
expense over a three-year period.
7.COMMITMENTS AND CONTINGENCIES
II-24
A. Legal Proceedings
The Registrant is involved in legal and administrative proceedings in the normal
course of business, including certain proceedings involving material amounts in
which claims have been or may be made. However, management believes, after
review of insurance coverage and consultation with legal counsel, that the
ultimate resolution of the legal proceedings to which it is or can at the
present time be reasonably expected to be a party, will not have a materially
adverse effect on the Registrant's results of operations or financial
conditions.
B. Leases
The Registrant has a capital lease with Algonquin Gas Transmission Company
(Algonquin) for storage space in a liquefied natural gas (LNG) tank. The
capital lease arrangement also provides that Algonquin lease from the
Registrant, for a corresponding term at an annual amount of $150,000, the land
on which the tank is situated. The Registrant also leases certain information
systems equipment under capital leases.
Property under Capital Leases:
- ------------------------------
(thousands of dollars) 1997 1996
- --------------------------------------------------------
Gas plant $ 6,116 $ 6,116
Information systems 1,988 1,551
Accumulated depreciation (6,484) (6,072)
------- -------
$ 1,620 $ 1,595
======= =======
Commitments for Capital Leases:
- -------------------------------
LNG Computer
(thousands of dollars) Storage Equipment Total
- ----------------------------------------------------------------
1998 $ 136 $ 492 $ 628
1999 136 484 620
2000 136 297 433
2001 135 111 246
2002 - 35 35
------- ------ ------
$ 543 $ 1,419 1,962
======= =======
Amount representing interest 290
------
Amount representing principal $1,672
======
C. OPERATING LEASES
The Registrant also leases facilities and equipment under operating leases with
a total future obligation of $354,000 as of September 30, 1997.
D. GAS SUPPLY
As part of the Price Stabilization Plan Settlement Agreement described in Note
9, the Registrant has entered into a full requirements gas supply contract with
Duke Energy Trading and Marketing L.L.C. (DETM) for a term of three years.
Under the
II-25
contract, DETM guarantees to meet the Registrant's supply requirements. The
Registrant, however, must purchase all of its gas supply exclusively from DETM.
Under the contract, the Registrant will transfer responsibility for its pipeline
capacity resources, storage contracts, and LNG capacity to DETM. As a result,
the Registrant's gas inventories at September 30, 1997 of approximately $18
million will be sold for book value to the supplier on October 1, 1997.
As a result of Federal Energy Regulatory Commission (FERC) Order 636 and other
related orders (the 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. The remaining minimum obligation of
$5.5 million has been recorded in the accompanying consolidated balance sheet
along with a regulatory asset anticipating future recovery. As part of the above
supply contract, DETM will assume 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 cannot be
estimated at September 30, 1997.
E. 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
paragraphs, the Registrant believes it is in substantial compliance with such
laws and regulations.
At September 30, 1997, the Registrant was 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 in Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRPs. With respect to one of
the Plympton sites, the Registrant has joined with other PRPs in entering into
an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.
II-26
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 September
30, 1997, approximately $1.8 million has been spent primarily on studies at this
site. In accordance with state laws, such a voluntary study is monitored by
Rhode Island Department of Environmental Management (DEM). The purpose of this
study was to determine the extent of environmental contamination at the site.
The Registrant has completed the study, which indicated that remediation will be
required. The Registrant has several remediation options for the site and is
currently negotiating with DEM and contractors to arrive at the best
alternative. At September 30, 1997, the Registrant has compiled a preliminary
range of costs based on remediation alternative, ranging from $1.7 million to in
excess of $5.0 million. However, because of the uncertainties associated with
environmental assessment and remediation activities, the future cost of
remediation could be higher than the alternatives noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at
September 30, 1997, for anticipated future remediation costs at this site.
Tests conducted following the discovery of an abandoned underground oil storage
tank at the Registrant's Westerly, Rhode Island operations center in 1996
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 fact that the testing is in its early stages,
management cannot conclude as to whether any remediation will be required at
this site. In addition, in 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 $50,000 and
$100,000. Accordingly, the Registrant has accrued $50,000 at September 30, 1997
for anticipated future remediation costs.
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 $2.3 million and an estimated $1.7 million for environmental
remediation costs have been charged to the accumulated depreciation reserve at
September 30, 1997. Of the environmental investigation costs incurred,
approximately $0.9 million and $1.0 million were recorded in the years ended
September 30, 1997 and 1996, respectively, while the remainder were incurred in
prior years.
Due to the materiality of the Registrant's environmental investigation and
remediation expenditures, the Registrant sought new treatment of these amounts.
As a result, included in the Price Stabilization Plan Settlement Agreement
described in Note
II-27
9, which is 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.
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.
Effective October 1, 1997, the Registrant will adopt the provisions of Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities". This Statement
provides authoritative guidance for recognition, measurement, display, and
disclosure of environmental remediation liabilities in financial statements. SOP
96-1 is not expected to have a material impact on the Registrant's financial
position or results of operation upon adoption.
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.
F. FUEL ASSISTANCE PROGRAM
The Registrant participates in the State of Rhode Island's Fuel Assistance
Program, the Percentage of Income Payment Plan. As a result, the Registrant has
agreed to accept partial payment on certain customer accounts from various state
agencies. As of September 30, 1997, $629,000 was due from the State of Rhode
Island related to gas consumed by customers over the last two years.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for the following financial instruments:
Cash, Cash Equivalents and Short-Term Debt
- ------------------------------------------
The carrying amount approximates fair value due to the short-term maturity of
these instruments.
Long-Term Debt and Preferred Stock
- ----------------------------------
The fair value of long-term debt and preferred stock is estimated based on
currently quoted market prices for similar types of issues.
The carrying amounts and estimated fair values of the Registrant's financial
instruments at September 30, 1997 and 1996 are as follows (in thousands):
II-28
1997 1996
------- -------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
Cash and cash equivalents $ 778 $ 778 $ 923 $ 923
Short-term debt 20,410 20,410 20,800 20,800
Long-term debt 76,079 84,039 74,478 77,924
Preferred stock 6,400 7,030 8,000 8,395
The difference between the carrying amount and the fair value of the
Registrant's preferred stock and long-term debt, if they were settled at amounts
reflected above, would be recovered in the Registrant's rates over a prescribed
amortization period. Accordingly, any settlement should not result in a material
impact on the Registrant's financial position or results of operations.
9. RATE CHANGES
A. Price Stabilization Plan Settlement Agreement
In August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement (Energize R.I. or the Plan) among the Registrant, the Rhode Island
Division of Public Utilities and Carriers (the Division), The Energy Council of
Rhode Island, and the George Wiley Center. Effective for the period from
October 1, 1997 to September 30, 2000, Energize R.I. provides customers with a
price decrease of approximately four percent in addition to a three-year price
freeze. Under Energize R.I., the GCC will be suspended for the entire term.
Energize R.I. also requires the Registrant to make significant capital
investments to improve its distribution system. Capital investments required by
Energize R.I. are estimated to total approximately $26 million over its three-
year term. In addition, Energize R.I. requires the Registrant to fund the Low-
Income Assistance Program at an annual level of $1 million, the Demand Side
Management Rebate Program at an annual level of $500,000 and the Low-Income
Weatherization Program at an annual level of $200,000. Energize R.I. also
continues the process of unbundling by requiring the Registrant to provide
unbundled service offerings up to 10 percent per year of firm system throughput.
As part of Energize R.I., the Registrant will amortize approximately $4 million
of environmental costs previously charged to the accumulated depreciation
reserve. These costs and all environmental costs incurred during the term of the
Plan will be amortized over a 10-year period. In addition, as part of the Plan,
the Registrant will write-off approximately $1.5 million of previously deferred
revenues in October 1997.
Under Energize R.I., the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999, and 2000, respectively. In addition, the Registrant may
not earn less than a seven percent return on average common equity under the
Plan. In the event that the Registrant earns in excess of 10.9 percent
II-29
or less than seven percent, the Registrant will defer revenues or costs through
a deferred revenue account over the term of the Plan. Any balance in the
deferred revenue account at the end of the Plan will be refunded to or recovered
from customers in a manner to be determined by all parties and approved by the
RIPUC.
B. Rate Increase
In February 1995, the Registrant filed for rate relief requesting an approximate
eight percent general rate increase. The major issues contributing to the rate
request were an increase in depreciation due to capital spending, an increase in
working capital needs, and an increase in capital expenditures.
On November 17, 1995, the RIPUC issued its decision on the rate request made by
the Registrant in February 1995. In its decision, the RIPUC authorized the
Registrant to increase its rates to recover additional annual revenues in the
amount of $3,990,000. Subsequent to the issuance of the rate decision, the
RIPUC approved the Registrant's motion to reconsider a revenue adjustment of
$171,572. That approval increased the overall rate increase to $4,161,572.
10. HEDGING
On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program
Settlement Agreement (the "Settlement Agreement")between the Registrant and the
Division. The Agreement allowed the Registrant to use options, including calls,
puts and collars, in order to reduce the impact of changes in the price of
natural gas. The total expenditures for the purchase and exercise of Financial
Risk Management (FRM) tools and the net proceeds from the sale of FRM tools were
flowed through the Variable Gas Cost component of the GCC and could not exceed
$800,000. The total expenditures made under the program in 1997, net of sales
proceeds, were approximately $154,000.
The Registrant did not hold any open contracts at September 30, 1997. The
Settlement Agreement expired on September 30, 1997. The Settlement Agreement was
not extended since its objectives were met through the Price Stabilization Plan
Settlement Agreement described in Note 9.
11. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces the presentation of primary earnings
per share with the presentation of basic earnings per share on the face of the
income statement. Basic earnings per share excludes dilution and is calculated
by dividing income available to common stockholders by weighted average number
of common shares outstanding for the period. Earnings per share calculated under
SFAS No. 128 would have been unchanged for the periods presented.
II-30
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SAFS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 131, which is effective for financial statements
for periods beginning after December 15, 1997, requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. These statements require additional disclosure only and
will not affect the financial position or results of operations of the
Registrant.
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited quarterly financial information for the two years
ended September 30, 1997 and 1996. Quarterly variations between periods are
caused primarily by the seasonal nature of gas sales and the availability of
gas.
(thousands, except per share amounts)
Quarter Ended
---------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30
-------- -------- -------- ---------
Fiscal 1997
- ----------------------------------------------------------------------
Operating revenues $61,673 $76,590 $40,679 $31,731
Operating income (loss) 6,216 8,568 2,148 (1,101)
Net income (loss)
applicable to
common stock 4,284 6,640 329 (3,108)
Net income (loss) per share
applicable to
common stock* 3.44 5.34 .26 (2.49)
Fiscal 1996
- ----------------------------------------------------------------------
Operating revenues $57,270 $79,261 $42,522 $31,548
Operating income (loss) 6,289 9,376 898 (935)
Net income (loss)
applicable to common
stock 4,880 7,419 (921) (2,764)
Net income (loss) per share
applicable to
common stock* 3.92 5.97 (.74) (2.22)
* Calculated on the basis of weighted average shares outstanding during the
quarter.
II-31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of Providence Gas Company:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of Providence Gas Company (a Rhode
Island corporation and wholly-owned subsidiary of Providence Energy Corporation)
as of September 30, 1997 and 1996, and the related consolidated statements of
income, changes in common stockholders' investment and cash flows for each of
the three years in the period ended September 30, 1997. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Providence
Gas Company as of September 30, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index to the financial statements are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Boston, Massachusetts
November 4, 1997
II-32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
II-33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The following information is furnished with respect to the executive officers of
the Registrant:
Year Office
Name and Age Office First Held
- ------------ --------------- -----------
James H. Dodge (57) Chairman, President and Chief
Executive Officer 1992
James DeMetro (49) Senior Vice President, Energy
Services 1996
Gary S. Gillheeney (42) Senior Vice President, Chief
Financial Officer and
Treasurer 1996
Robert W. Owens (49) Senior Vice President, Gas
Distribution 1996
Alycia L. Goody (45) Vice President, General Counsel
and Secretary 1994
James A. Grasso (43) Vice President, Public and
Government Affairs 1997
William D. Mullin (49) Vice President, Economic
Development and Operations 1996
Bruce G. Wilde (51) Vice President, Administration
and Assistant Secretary 1996
Gary L. Beland (47) Assistant Vice President,
Gas Supply 1996
Peter J. Gill (38) Controller and Assistant
Treasurer 1996
Timothy S. Lyons (36) Assistant Vice President,
Pricing and Regulation 1996
Mr. Dodge was elected President and Chief Executive Officer in August 1990
after the retirement of Louis R. Hampton. Mr. Dodge subsequently became Chairman
of the Board in January 1992. Prior to his employment with the Registrant, he
was President and Chief Executive Officer of Vermont Gas Systems, Inc. Vermont
Gas Systems, Inc. is a regulated public utility which sells natural gas to a
portion of the population of the State of Vermont.
Mr. DeMetro was elected Senior Vice President, Energy Services in February of
1996. For four years prior thereto, Mr. DeMetro served the Registrant as Vice
President, Energy Services. For more than five years prior thereto, Mr. DeMetro
served the Brooklyn Union Gas Company, a regulated natural gas utility, in
various management
III-1
positions, most recently as Manager, Rates and Regulation.
Mr. Gillheeney was elected Senior Vice President and Chief Financial Officer
in February 1996 and Treasurer in January 1994. For more than two years prior to
February 1996, Mr. Gillheeney served the Registrant as Vice President, Financial
and Information Services, as well as Treasurer. For more than five years prior
thereto, Mr. Gillheeney served the Registrant in various management positions,
most recently as Assistant Treasurer and Controller.
Mr. Owens was elected Senior Vice President, Gas Distribution in February
1996. For more than two years prior thereto, Mr. Owens served the Registrant as
Vice President, Operations. For more than five years prior thereto, Mr. Owens
served the Registrant in various management positions, most recently as Vice
President, Treasurer and Chief Financial Officer.
Ms. Goody was elected Vice President, General Counsel and Secretary in
December 1994. For two years prior thereto, Ms. Goody served Providence Energy
Corporation and ProvGas as General Counsel and Corporate Secretary. For four
years prior to that, Ms. Goody served the Registrant as Corporate Counsel.
Mr. Grasso was elected Vice President, Public and Government Affairs in May of
1997. For three years prior thereto, Mr. Grasso served as Director of Public and
Government Relations of PanEnergy Corporation and Algonquin Gas Transmission
Company. For ten years prior thereto, Mr. Grasso served as Manager of Land,
Public and Government Relations of Algonquin Gas Transmission Company.
Mr. Mullin was elected Vice President, Economic Development and Operations in
February 1996. For more than two years prior thereto, Mr. Mullin served the
Registrant as Vice President, Corporate Relations. For five years prior
thereto, he served the Registrant in various management positions, most recently
as Vice President, Operations.
Mr. Wilde was elected Vice President, Administration in February 1996 and
Assistant Secretary in May 1994. For more than a year prior to his election as
Vice President, Administration, Mr. Wilde served the Registrant as Vice
President, Human Resources. For more than five years prior thereto, Mr. Wilde
served the Registrant in various management positions, most recently as
Assistant Vice President for Personnel.
Mr. Beland was elected Assistant Vice President, Gas Supply in February 1996.
For two years prior thereto, Mr. Beland served as Director of Gas and
Transportation Services. For more than five years prior thereto, Mr. Beland
served the Niagra Mohawk Power Corp., a regulated natural gas utility, in
various management positions, most recently as Manager, Gas Supply Planning.
Mr. Gill was elected Controller and Assistant Treasurer in February 1996. For
two years prior thereto, Mr. Gill served the Registrant as Director of Planning.
For four years prior thereto, Mr. Gill served the Registrant as Director of
Budgeting.
III-2
Mr. Lyons was elected Assistant Vice President, Pricing and Regulation in
February of 1996. For two years prior thereto, Mr. Lyons served the Registrant
as Director of Pricing. For two years prior thereto, Mr. Lyons served the
Registrant as Director of Rates. Prior to his employment with the Registrant,
Mr. Lyons served Boston Gas, a regulated natural gas utility as Director of
Rates and Revenue Analysis.
III-3
DIRECTORS OF THE REGISTRANT
- ---------------------------
The following information is furnished with respect to the Directors of the
Registrant.
Name Director Since Expiration of Term
---- -------------- ------------------
Gilbert R. Bodell, Jr. 1980 1998
James H. Dodge 1991 2000
John H. Howland 1993 1999
Douglas H. Johnson 1993 1999
William Kreykes 1996 1999
Paul F. Levy 1995 1998
Romolo A. Marsella 1993 1999
M. Anne Szostak 1995 1998
Kenneth W. Washburn 1975 2000
W. Edward Wood 1995 1998
Gilbert R. Bodell, Jr. is Chairman and former President, Frontier
Manufacturing Company (textile); former Vice President, Valley Lace Co. and
Esten Dyeing and Finishing Co.
James H. Dodge has been Chairman since January 1992 and President and Chief
Executive Officer of the Registrant since August 1990; from 1984 through August
1990: President and Chief Executive Officer of Vermont Gas Systems, Inc. (a
regulated natural gas utility) and affiliated companies.
John H. Howland is President and Chief Executive Officer, Original Bradford
Soap Works, Inc. (textiles).
Douglas H. Johnson is President and Managing Partner, M. Van Leesten
Associates, Inc. (business and urban planning consultants) since October 1991;
from 1980 to October 1991: President and Chief Executive Officer, Peerless
Precision, Inc. (aerospace manufacturing company).
William Kreykes is President and Chief Executive Officer, Lifespan Corporation
since December 1994; from October 1990 to December 1994: President and Chief
Executive Officer, Rhode Island Hospital.
Paul F. Levy is Adjunct Professor, Massachusetts Institute of Technology; from
1992 to 1995, Visiting Lecturer; from 1987 to 1992: Executive Director,
Massachusetts Water Resources Authority (a public authority).
III-4
Romolo A. Marsella is President, Marsella Development Corporation (real estate
development).
M. Anne Szostak is Senior Vice President, Fleet Financial Group; from 1991 to
1995: Chairman of the Board, Fleet Bank of Maine; from 1991 to 1994: President
and Chief Executive Officer, Fleet Bank of Maine; and from 1988 to 1991: Vice
President, Fleet Financial Group.
Kenneth W. Washburn is Chairman and President, Union Wadding company
(manufacturers of non-woven textiles).
W. Edward Wood is President and Chief Executive Officer, Coaxial
Communications of Central Ohio and Coaxial Communications of Southern Ohio
(Effective January 1998). From 1991 to 1997: President, BDS Management Group
(management and consulting services to a variety of private businesses); from
November 1990 to May 1991: Chief of Staff to Governor-elect and Governor of
Rhode Island: from January to November 1990; Chief of Staff, Phoenix Associates
III (private investment group).
III-5
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
For the information called for by this item, reference is made to pages 7 to
14 of the Providence Energy Corporation's proxy statement filed December 16,
1997 with the Securities and Exchange Commission for the annual meeting of
shareholders to be held January 15, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Not applicable. All of the Registrant's voting securities are held by
Providence Energy Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Not applicable.
III-6
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
THE PROVIDENCE GAS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules
----------------------------------
Consolidated Balance Sheets--September 30, 1997 and 1996
Consolidated Statements of Income for the years ended September 30, 1997, 1996
and 1995
Consolidated Statements of Cash Flows for the years ended September 30, 1997,
1996 and 1995
Consolidated Statements of Capitalization--September 30, 1997 and 1996
Consolidated Statements of Changes in Common Stockholder's Investment for the
years ended September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Schedule II. Reserves for the years ended September 30, 1997, 1996 and 1995.
Schedules I to XIII not listed above are omitted as not applicable
or not required under Regulation S-X.
(b) Reports on Form 8-K
-------------------
No reports were filed on Form 8-K during the latest quarter of the
Registrant's fiscal year ended September 30, 1997.
(c) Exhibits
--------
The following exhibits are filed as part of this report:
3.1 Charter (incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No.2-72726)).
3.2 Bylaws. (Filed as Exhibit 3.2 to the Report on Form 10-K of the Registrant
in Form 10-K for the year ended September 30, 1993, incorporated herein by
this reference.)
4.1 Indenture dated as of August 1, 1981 from The Providence Gas Company to
St. Louis Union Trust Company, Trustee, filed as Exhibit 4.1 to
Registration Statement of The Providence Gas Company on Form S-1
(Registration No. 2-72726), incorporated herein by this reference.
4.2 First Supplemental Indenture dated as of May 1, 1986 from The Providence
Gas Company to Centerre Trust Company of St. Louis, Trustee (filed as
Exhibit 4 (b) to Registration Statement of The Providence Gas Company on
Form S-3 (Registration No. 33-5023), incorporated herein by this
reference).
4.3 First Mortgage Indenture dated as of January 1, 1922, as supplemented by
First through Twelfth Supplemental Indentures,
IV-1
(incorporated by reference to Exhibit 10.10 in the Registrant's
Registration Statement on Form S-1 (Registration No. 2-72726)).
4.4 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures dated as of
August 1, 1988, June 1, 1990 and November 1, 1992, respectively
(incorporated by reference to Exhibit 4 to the report of Providence Energy
Corporation (Commission File No. 1-10032) to the Securities and Exchange
Commission on Form 10-Q for the quarter ended March 31, 1993).
4.5 Seventeenth Supplemental Indenture dated as of November 1, 1993.(Filed as
Exhibit 4.5 to the report of the Registrant in Form 10-K for the year
ended September 30, 1993, incorporated herein by this reference.)
4.6 Eighteenth Supplemental Indenture dated as of December 1, 1995. (Filed as
exhibit 4.6 to the report of the Registrant in Form 10-K for the year
ended September 30, 1995, incorporated herein by this reference.)
10.1 Material contracts listed in Exhibits 10 (a) through 10 (ff) (excluding
Exhibits 10 (x), 10 (y), 10 (cc) and 10 (dd)) to Registration Statement of
Providence Energy Corporation on Form S-2 (Registration No. 33-24125),
incorporated herein by this reference.
10.2 Management contract dated October 29, 1997 between James H. Dodge,
Chairman, President and Chief Executive Officer of the Registrant.
10.3 Management contract dated October 29, 1997 between James DeMetro, Senior
Vice President, Energy Services of the Registrant.
10.4 Management contract dated October 29, 1997 between Robert W. Owens, Senior
Vice President, Gas Distribution of the Registrant.
10.5 Management contract dated October 29, 1997 between Gary S. Gillheeney,
Senior Vice President, Chief Financial Officer and Treasurer of the
Registrant.
10.6 Management contract dated October 29, 1997 between Alycia L. Goody, Vice
President, General Counsel and Secretary of the Registrant.
10.7 Management contract dated October 29, 1997 between William D. Mullin, Vice
President, Economic Development and Operations of the Registrant.
10.8 Management contract dated October 29, 1997 between Bruce G. Wilde, Vice
President, Administration and Assistant Secretary of the Registrant.
22 Subsidiaries of the Registrant.
IV-2
Supplemental Schedule
Schedule II
PROVIDENCE GAS COMPANY
----------------------
RESERVES FOR THE YEARS ENDED
----------------------------
SEPTEMBER 30, 1997, SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
-------------------------------------------------------------
(Thousands of Dollars)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/96 to Operations Add (Deduct) Created 9/30/97
------- ------------- ------------ -------- -------
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,974 $ 4,872 $ -- $ 6,156 $ 1,690
Allowance for lease
receivables -
current --
other 9 94 -- 54 49
------- ------- ------- ------- -------
Total $ 2,983 $ 4,966 $ -- $ 6,210 $ 1,739
======= ======= ======= ======= =======
Allowance for lease
receivables -
long-term $ 403 $ 138 $ -- $ 140 $ 401
======= ======= ======= ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $19,903 $ 695 $ -- $ -- $20,598
------- ------- ------- ------- -------
Unamortized investment
tax credit 2,510 -- -- 156 2,354
------- ------- ------- ------- -------
Other-
Liability and
damage reserve 561 281 -- 221 621
Other 7,407 1,267 915(B) 518 9,071
------- ------- ------- ------- -------
Total other 7,968 1,548 915 739 9,692
------- ------- ------- ------- -------
Total deferred
credits and
reserves $30,381 $ 2,243 $ 915 $ 895 $32,644
======= ======= ======= ======= =======
IV-3
SCHEDULE II (cont'd)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/95 to Operations Add (Deduct) Created 9/30/96
------- ------------- ------------ ------- -------
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,916 $4,884 $ -- 3,826 $ 2,974
Allowance for lease
receivables -
current 313 -- -- 313 --
other 80 17 -- 88 9
------- ------ ------ ------ ------
Total $ 2,309 $4,901 $ -- $4,227 $ 2,983
======= ====== ====== ====== =======
Allowance for lease
receivables -
long-term $ 651 $1,179 $ -- $1,427 $ 403
======= ====== ====== ====== =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $17,892 $1,968 $ 43(C) $ -- $19,903
------- ------ ------ ------ -------
Unamortized investment
tax credit 2,668 -- -- 158 2,510
------- ------ ------ ------ -------
Other-
Liability and
damage reserve 334 520 -- 293 561
Other 5,140 1,303 1,727(B) 763 7,407
------- ------ ------ ------ -------
Total other 5,474 1,823 1,727 1,056 7,968
------- ------ ------ ------ -------
Total deferred
credits and
reserves $26,034 $3,791 $1,770 $1,214 $30,381
======= ====== ====== ====== =======
IV-4
SCHEDULE II (cont'd)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/94 to Operations Add (Deduct) Created 9/30/95
------- ------------- ------------ ------- --------
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,606 $3,113 $ -- $3,803 $ 1,916
Allowance for lease
receivables -
current 347 -- -- 34 313
other 80 -- -- -- 80
------- ------ ------- ------ -------
Total $ 3,033 $3,113 $ -- $3,837 $ 2,309
======= ====== ======= ====== =======
Allowance for lease
receivables -
long-term $ 951 $ -- $ (200) $ 100 $ 651
======= ====== ======= ====== =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $14,786 $2,010 $ 1,096(C) $ -- $17,892
------- ------ ------- ------ -------
Unamortized investment
tax credit 2,826 -- -- 158 2,668
------- ------ ------- ------ -------
Other-
Liability and
damage reserve 421 400 -- 487 334
Other 5,735 621 408(A) 1,624 5,140
------- ------ ------- ------ -------
Total other 6,156 1,021 408 2,111 5,474
------- ------ ------- ------ -------
Total deferred
credits and
reserves $23,768 $3,031 $ 1,504 $2,269 $26,034
======= ====== ======= ====== =======
(A) Includes adjustment to the regulatory pension liability.
(B) Principally an accrual for environmental investigation and remediation
costs in addition to adjustment to the regulatory pension liability.
C) Represents adjustment to the regulatory asset and liability for FAS No. 109
activity.
IV-5
Date December 23, 1997
--------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JAMES H. DODGE Chairman, President, and CEO 12-23-97
- ---------------------------- (Principal Executive Officer) --------
James H. Dodge
/s/ GARY S. GILLHEENEY Senior Vice President, 12-23-97
- ---------------------------- Chief Financial Officer and --------
Gary S. Gillheeney Treasurer
/s/ GILBERT R. BODELL, JR. Director 12-23-97
- ---------------------------- --------
Gilbert R. Bodell, Jr.
/s/ JOHN H. HOWLAND Director 12-23-97
- ---------------------------- --------
John H. Howland
/s/ DOUGLAS H. JOHNSON Director 12-23-97
- ---------------------------- --------
Douglas H. Johnson
/s/ WILLIAM KREYKES Director 12-23-97
- ---------------------------- --------
William Kreykes
/s/ PAUL F. LEVY Director 12-23-97
- ---------------------------- --------
Paul F. Levy
/s/ ROMOLO A. MARSELLA Director 12-23-97
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Romolo A. Marsella
/s/ M. ANNE SZOSTAK Director 12-23-97
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M. Anne Szostak
/s/ KENNETH W. WASHBURN Director 12-23-97
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Kenneth W. Washburn
/s/ W. EDWARD WOOD Director 12-23-97
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W. Edward Wood
IV-6