FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________________
Commission file number 0-1160
----------------------------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(401) 272-5040
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___.
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $1.00 par value; 1,243,598 shares outstanding at August 14, 1998.
- -------------------------------------------------------------------------------
THE PROVIDENCE GAS COMPANY
FORM 10-Q
JUNE 30, 1998
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1998 and 1997 I-1
Consolidated Balance Sheets as of June 30, 1998,
June 30, 1997 and September 30, 1997 I-2
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1998
and 1997 I-3
Consolidated Statements of Capitalization
as of June 30, 1998, June 30, 1997
and September 30, 1997 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-9
PART II: OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
THREE MONTHS NINE MONTHS TWELVE MONTHS
------------------ ------------------ ------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
(Thousands, except per share amounts)
Operating revenues $31,155 $40,679 $164,041 $178,942 $195,772 $210,490
Cost of gas sold 13,758 20,910 83,242 101,199 99,400 118,340
-------- -------- -------- -------- -------- --------
Operating margin 17,397 19,769 80,799 77,743 96,372 92,150
-------- -------- -------- -------- -------- --------
Operating expenses:
Operation and
maintenance 10,981 11,264 34,500 34,740 46,895 45,805
Depreciation and
amortization 3,449 3,141 10,360 9,306 13,459 12,240
Taxes -
State gross earnings 922 1,097 4,867 5,168 5,722 6,076
Local property and
other 1,992 1,921 5,966 5,636 7,763 7,406
Federal income (591) 198 6,684 5,961 5,212 4,626
-------- -------- -------- -------- -------- --------
Total operating
expenses 16,753 17,621 62,377 60,811 79,051 76,153
-------- -------- -------- -------- -------- --------
Operating income 644 2,148 18,422 16,932 17,321 15,997
Other, net 219 165 523 416 478 473
-------- -------- -------- -------- -------- --------
Income before
interest expense 863 2,313 18,945 17,348 17,799 16,470
-------- -------- -------- -------- -------- --------
Interest expense:
Long-term debt 1,716 1,505 4,688 4,537 6,193 6,064
Other 187 397 1,180 1,223 1,566 1,438
Interest capitalized (39) (57) (193) (152) (261) (182)
-------- -------- -------- -------- -------- --------
1,864 1,845 5,675 5,608 7,498 7,320
-------- -------- -------- -------- -------- --------
Net income (loss) (1,001) 468 13,270 11,740 10,301 9,150
Dividends on preferred
stock (105) (139) (383) (487) (522) (661)
-------- -------- -------- -------- -------- --------
Net income(loss)
applicable to common
stock $ (1,106) $ 329 $ 12,887 $ 11,253 $ 9,779 $ 8,489
======== ======== ======== ======== ======== ========
Earnings per
common share $ (.89) $ .26 $ 10.36 $ 9.05 $ 7.86 $ 6.83
======== ======== ======== ======== ======== ========
Dividends paid per
common share $ .96 $ .96 $ 2.88 $ 2.88 $ 3.84 $ 3.84
======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ======== ========
PAGE I-1
THE PROVIDENCE GAS COMPANY
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands)
(Unaudited)
-------------------------------------
June 30, June 30, September 30,
1998 1997 1997
---------- ---------- -------------
ASSETS
- ------
Gas plant, at original cost $307,516 $283,309 $290,614
Less - Accumulated depreciation and
utility plant acquisition adjustments 117,729 106,629 108,478
-------- -------- --------
189,787 176,680 182,136
-------- -------- --------
Current assets:
Cash and temporary cash investments 7,629 1,059 778
Accounts receivable, less
allowance of $3,558 at 6/30/98, $2,912 at
6/30/97 and $1,739 at 9/30/97 17,507 28,364 13,120
Unbilled revenues 1,334 687 2,658
Deferred gas costs -- 1,389 7,151
Inventories, at average cost -
Liquefied natural gas, propane and under-
ground storage 8 11,526 18,001
Materials and supplies 998 1,103 1,166
Prepaid and refundable taxes 4,418 4,755 3,293
Prepayments 662 772 966
-------- -------- --------
32,556 49,655 47,133
-------- -------- --------
Deferred charges and other assets 12,338 12,262 12,874
-------- -------- --------
Total assets $234,681 $238,597 $242,143
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying statement) $177,197 $161,724 $157,012
-------- -------- --------
Current liabilities:
Notes payable -- 9,605 20,410
Current portion of long-term debt 3,650 2,649 3,707
Accounts payable 4,502 17,257 16,114
Accrued taxes 6,466 6,168 2,529
Accrued vacation 1,859 1,907 1,658
Customer deposits 3,148 3,419 3,430
Other 4,709 4,732 4,639
-------- -------- --------
24,334 45,737 52,487
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes 21,273 20,085 20,598
Unamortized investment tax credits 2,236 2,393 2,354
Other 9,641 8,658 9,692
-------- -------- --------
33,150 31,136 32,644
-------- -------- --------
Commitments and contingencies -- -- --
Total capitalization and liabilities $234,681 $238,597 $242,143
======== ======== ========
PAGE I-2
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
-----------
1998 1997
--------- ---------
(Thousands)
Cash provided by (used for)
Operating Activities:
- --------------------
Net income $ 13,270 $ 11,740
Items not requiring cash:
Depreciation and amortization 10,456 9,402
Changes as a result of regulatory action 1,500 --
Deferred Federal income taxes 675 183
Amortization of investment tax credits (118) (117)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 13,441 (14,363)
Unbilled revenues 1,324 1,646
Deferred gas costs (2) 11,739
Inventories 160 4,316
Prepaid and refundable taxes (1,125) (1,541)
Prepayments 304 693
Accounts payable (6,112) 777
Accrued taxes 3,937 4,301
Accrued vacation, customer deposits
and other (11) (556)
Deferred charges and other 496 1,946
-------- --------
Net cash provided by operations 38,195 30,166
-------- --------
Investing Activities:
- --------------------
Expenditures for property, plant and
equipment, net (17,934) (12,585)
-------- --------
Financing Activities:
- --------------------
Issuance of mortgage bonds 15,000 --
Proceeds from other long-term debt -- 1,345
Payments on long-term debt (2,435) (1,924)
Decrease in notes payable, net (20,410) (11,195)
Redemption of preferred stock (1,600) (1,600)
Cash dividends on preferred shares (383) (487)
Cash dividends on common shares (3,582) (3,584)
-------- --------
Net cash used for financing activities (13,410) (17,445)
-------- --------
Increase in cash and temporary cash
investments 6,851 136
Cash and temporary cash investments
at the beginning of period 778 923
-------- --------
Cash and temporary cash investments
at the end of period $ 7,629 $ 1,059
======== ========
Supplemental disclosures of cash flow information:
Cash paid year-to-date-
Interest (net of amount capitalized) $ 5,292 $ 5,471
Income taxes (net of refunds) $ 2,251 $ 2,215
Schedule of noncash investing and
financing activities:
Equipment financed through capital leases $ -- $ 232
Equipment financed through other
long-term debt $ -- $ 1,330
PAGE I-3
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CAPITALIZATION
-----------------------------------------
(THOUSANDS)
-----------
(Unaudited)
-----------
June 30, June 30, September 30,
1998 1997 1997
-------- --------- -------------
Common stock equity:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 at 6/30/98,
6/30/97, and 9/30/97 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,543 37,657 37,685
Retained earnings 48,616 43,611 39,311
-------- -------- --------
Total common stock equity 87,403 82,512 78,240
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 48 shares at 6/30/98,
and 64 shares at
6/30/97 and 9/30/97 4,800 6,400 6,400
-------- -------- --------
Long-term debt:
First mortgage bonds 84,600 71,200 71,200
Other long-term debt 2,713 2,675 3,207
Capital leases 1,331 1,586 1,672
-------- -------- --------
Total long-term debt 88,644 75,461 76,079
Less current portion 3,650 2,649 3,707
-------- -------- --------
Long-term debt, net 84,994 72,812 72,372
-------- -------- --------
Total capitalization $177,197 $161,724 $157,012
======== ======== ========
PAGE I-4
THE PROVIDENCE GAS COMPANY
Notes to Consolidated Financial Statements
Accounting Policies
- -------------------
It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein when read
with the annual report for 1997 filed on Form 10-K are adequate to make the
information presented not misleading.
Rates and Regulation
- --------------------
The Registrant is subject to the regulatory jurisdiction of the Rhode Island
Public Utilities Commission (RIPUC) with respect to rates and charges, standards
of service, accounting and other matters. In August 1997, the RIPUC approved
the Price Stabilization Plan Settlement Agreement, (the Plan or Energize RI)
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 RI provides
customers with an initial price decrease of approximately four percent and a
three-year price freeze. In connection with the price decrease, the Registrant
will write-off and not recover $1.5 million of previously deferred gas costs.
Under Energize RI, the Gas Charge Clause (GCC) will be suspended for the entire
three-year term of the Plan. Any excess or deficiency between amounts billed
and actual gas costs incurred will be retained or borne by the Registrant.
Energize RI also requires the Registrant to make significant capital investments
to improve its distribution system. Capital investments required by Energize RI
are estimated to total approximately $26 million over its three-year term. In
addition, 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. Energize RI also calls for the
Registrant to fund the Low Income Assistance Program at an annual level of $1.0
million. Finally, Energize RI continues the process of unbundling by requiring
the Registrant to provide unbundled service offerings for up to 10 percent per
year of firm system throughput.
As part of Energize RI, the Registrant will amortize over a ten year period
approximately $4.0 million of environmental costs previously charged to the
accumulated depreciation reserve. All environmental costs incurred during the
term of Energize RI will also be amortized over a ten year period.
Under Energize RI 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 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 determined by all parties and approved by the RIPUC.
I-5
The Integrated Resource Plan (IRP) was terminated as a result of Energize RI.
In addition to the funding for the demand side management program and low income
weatherization and assistance 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. As part of
the performance-based ratemaking mechanism, the Registrant was allowed to record
approximately $3.0 million in non-firm margin, subject to the Registrant's
ability to generate sufficient gas cost savings for customers. In both fiscal
1997 and 1996, the Registrant achieved enough savings to earn $3.0 million in
non-firm margin in each of those years. As a result of Energize RI, the
Registrant will only retain the actual margin earned from non-firm customers.
Gas Supply
- ----------
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 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 has purchased all
working gas in storage including both LNG and contract storage as of October 1,
1997. Gas inventories purchased were valued at approximately $18 million. 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 of firm sales customers without major staffing additions.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean-
up certain sites. To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.
I-6
At June 30, 1998, the Registrant is aware of four sites at which future costs
may be incurred.
The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRP's. With respect to one
of the Plympton sites, the Registrant has joined with other PRP's in entering
into an Administrative Consent Order with the Massachusetts Department of
Environmental Protection. The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.
During 1995, the Registrant 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 June 30, 1998,
approximately $2.0 million has been spent primarily on studies at this site. In
accordance with state laws, such a 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 this site. The Registrant
has completed the study which indicated that remediation will be required for
two-thirds of the property. The remediation will begin in August of 1998 and
will continue for a duration of three to six months. During the remediation
process the remaining one-third of the property will also be investigated and
remediated if necessary. At June 30, 1998, the Registrant has compiled a
preliminary range of costs based on a thermal desorption remediation process,
ranging from $1.7 million to $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 range noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at June
30, 1998 for anticipated future remediation costs at this site.
Tests conducted following the discovery in 1996 of an abandoned underground
oil storage tank at the Registrant's Westerly, Rhode Island operations center
confirmed the existence of contaminants at this site. The Registrant is
currently conducting tests at this site, the costs of which are being shared
equally with the prior owner, to determine the nature and extent of the
contamination. Due to the early stages of investigation, management cannot
offer any conclusions as to whether any remediation will be required at this
site. In addition, in the first quarter of 1997, contamination from scrapped
meters and regulators was discovered at this site. The Registrant has reported
this to the DEM and the Rhode Island Department of Health and is in the process
of remediation. It is anticipated that remediation will cost $50,000.
Accordingly, the Registrant has accrued $50,000 at June 30, 1998 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. Due to the magnitude of the Registrant's environmental
investigation and remediation expenditures, the Registrant sought current
recovery for these amounts. As a result, in accordance with the Price
Stabilization Plan Settlement Agreement described in "Rates and Regulation",
--------------------
which became 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. As of June 30, 1998, the
Registrant has charged environmental
I-7
remediation costs of $2.4 million and an estimated $1.7 million to the
accumulated depreciation reserve and has amortized $.3 million of these 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.
New Accounting Pronouncements
- -----------------------------
In October 1997, the Registrant adopted the Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share", which is 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 the weighted average number of common shares outstanding
for the period. Basic earnings per share and diluted earnings per share are the
same for all periods presented. Earnings per share for the prior periods
presented have been unchanged when calculated under SFAS No. 128.
Effective October 1, 1997, the Registrant adopted 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 June 30, 1998. SOP 96-1 did not have an impact on
the Registrant's financial position or results of operations upon adoption.
Also see "Environmental Matters".
---------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS 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 fiscal years 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
This statement will not affect the financial position or results of
operations of the Registrant.
I-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The Providence Gas Company (the Registrant) and its subsidiary and their
representatives may from time to time make written or oral statements, including
statements contained in the Registrant's filings with the Securities and
Exchange Commission (SEC), which constitute or contain "forward-looking"
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations, and releases. All
statements other than statements of historical facts included in this quarterly
report regarding the Registrant's financial position and strategic initiatives
and addressing industry developments are forward-looking statements. Where, in
any forward looking statement, the Registrant, or its management, expresses an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can
be no assurance that the statement of expectation or belief will result or be
achieved or accomplished. Factors which could cause actual results to differ
materially from those anticipated include, but are not limited to: general
economic, financial and business conditions; changes in 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 acquire and implement computer software that will be Year
2000 capable as well as Year 2000 readiness by key customers, vendors and
service providers; 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.
RESULTS OF OPERATIONS
The Registrant's operating revenues, operating margin and net income
applicable to common stock for the three, nine and twelve months ended June 30,
1998 and for comparable periods ended June 30, 1997 are as follows:
(thousands where applicable)
Three Months Nine Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
1998 1997 1998 1997 1998 1997
------- ------- -------- -------- -------- --------
Operating revenues $31,155 $40,679 $164,041 $178,942 $195,772 $210,490
======= ======= ======== ======== ======== ========
Operating margin $17,397 $19,769 $ 80,799 $ 77,743 $ 96,372 $ 92,150
======= ======= ======== ======== ======== ========
Net income (loss)
applicable to
common stock $(1,106) $ 329 $ 12,887 $ 11,253 $ 9,779 $ 8,489
======= ======= ======== ======== ======== ========
Operating Margin
- ----------------
During the latest quarter, the Registrant experienced weather that was 26.0
percent warmer than the same quarter last year. The warmer temperatures resulted
in decreased margin of approximately $1.1 million compared to the same quarter
last year. Offsetting the warmer than normal weather is $1.9 million of margin
generated by Energize RI, which became effective October 1, 1997. This
additional margin resulted from freezing the Gas Charge Clause ("GCC") mechanism
used previously to adjust for the over or underrecovery of gas costs which was
approximately $2.3 million and was offset by the funding of the Integrated
Resource Plan ("IRP") programs
I-9
of approximately $400,000. The implementation this year of Energize RI changed
how the Registrant records its gas costs resulting in higher margin reflected in
the first half of the fiscal year and lower margin in the second half. While
this change does not impact annual earnings, it reduced margin in the quarter by
$1.3 million compared to the same period last year. An additional $1.5 million
decrease in margin in the current quarter in comparison to the same quarter last
year is a result of not recording the performance-based ratemaking mechanism
under the Integrated Resource Plan (IRP) Settlement Agreement approved by the
RIPUC (Rhode Island Public Utilities Commission) which was terminated in
September 1997 as a result of Energize RI.
Additionally, non-firm margin decreased $0.6 million during the current
quarter of fiscal year 1998 when compared with the same quarter of fiscal 1997.
Prior to Energize RI, the Registrant was allowed to record approximately $3.0
million in non-firm margin under the terms of the IRP, subject to the
Registrant's ability to generate sufficient gas cost savings for customers. As
a result of Energize RI, the Registrant retains the actual non-firm margin
earned. Due to an unfavorable pricing difference between natural gas and
alternate fuels, the Registrant experienced a decrease in non-firm sales and
transportation margin. This decrease is expected to continue during the
remainder of the fiscal year.
During the current year, weather has been 7.4 percent warmer than the same
period last year. The warmer temperatures resulted in decreased margin of
approximately $3.7 million compared to last year. Offsetting the warmer than
normal weather is $8.2 million of margin generated by Energize RI. The
additional margin which resulted from freezing the GCC mechanism used previously
to adjust for the over or underrecovery of gas costs was approximately $10.9
million and was offset by the write-off of $1.5 million of previously deferred
gas costs and funding of the IRP programs of approximately $1.2 million. When
compared to the same period last year when seasonal gas cost factors were being
used, operating margin has increased approximately $1.8 million. The effect of
this increase, however, will reverse in the subsequent quarter and will have no
impact on annual earnings.
Additionally, non-firm margin decreased $1.7 million during the current year
when compared with the prior year as explained above.
An additional $1.5 million decrease in margin during the current year in
comparison to the prior year is a result of not recording the performance-based
ratemaking mechanism under the IRP which was terminated in September 1997 as a
result of Energize RI.
The increase in operating margin for the twelve month periods presented is
primarily due to the reasons stated above.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses were stable for the periods
presented.
Depreciation and Amortization Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $300,000 or 9.8
percent for the three months ended, approximately $1.1 million or 11.3 percent
for the nine months ended and approximately $1.2 million or 10.0 percent for the
twelve months ended June 30, 1998, respectively, versus the same periods last
year. These increases are the result of capital spending and the amortization
of previously deferred environmental costs. Effective October 1, 1997 the
Registrant began amortizing environmental costs over a ten-year period in
accordance with Energize RI.
Taxes
- -----
Taxes decreased approximately $900,000 or 27.8 percent for the three months
ended, increased approximately $800,000 or 4.5 percent for the nine months ended
and increased approximately $600,000 or 3.3 percent for the twelve months ended
June 30, 1998, respectively, versus the same periods last year. The overall
change in taxes is primarily due to changes in Federal income taxes as a result
of the changes in pretax income this year compared to last year. Additionally,
local property and other taxes have increased as result of capital spending
during the past year.
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Interest Expense
- ----------------
Interest expense increased approximately $19,000 or 1.0 percent for the three
months ended, and increased approximately $100,000 or 1.2 percent for the nine
months ended and approximately $200,000 or 2.4 percent for the twelve months
ended June 30, 1998, respectively, versus the same periods last year. During
the prior year, interest expense was impacted by accrued interest on the over or
under recovery of gas costs that was due to or from ratepayers. Effective
October 1, 1997, the Registrant froze the GCC mechanism in connection with
Energize RI. During the three-year term of the Plan, the Registrant will no
longer accrue interest on the over or under collection of gas costs from
ratepayers.
Future Outlook
- --------------
A) Regulatory
Under Energize RI, 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. In the event the
Registrant earns in excess of 10.9 percent or less than seven 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 approved by the RIPUC.
The implementation this year of Energize RI changed how the Registrant
records its gas costs, resulting in higher margin reflected in the first half of
the fiscal year and lower margin in the second half. While this change does not
impact annual earnings, it reduced margin in the third quarter by $1.3 million
compared to last year's third quarter.
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 began a process of unbundling natural gas service in Rhode Island,
enabling customers to choose their gas suppliers. The Agreement went into effect
in June 1996. The initial step was available to approximately 120 of the largest
commercial and industrial customers. In August 1997, the RIPUC approved a plan,
called "Business Choice", to further unbundle services to an additional 3,400
medium and large commercial and industrial customers. The Registrant commenced
Business Choice in December 1997. At June 30, 1998, the Registrant had
approximately 1,000 firm transportation customers.
Energize RI continues the process of unbundling by requiring the Registrant
to provide unbundled service offerings for up to 10 percent per year of firm
system throughput.
Liquidity and Capital Resources
- -------------------------------
The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings.
Management believes its available financings are sufficient to meet these
seasonal needs.
During the current nine month period, the Registrant's cash flow from
operations increased approximately $8.0 million compared to the same period last
year. This increase is primarily due to the sale of the Registrant's working gas
in storage to Duke Energy Trading and Marketing as well as additional margin
generated by Energize RI. The additional cash flows resulting from Energize RI
have enabled the Registrant to avoid seasonal short-term borrowings during the
current fiscal year.
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Capital expenditures for the year to date period of $17.9 million increased
$5.3 million or 42.5 percent when compared to the $12.6 million last year. As a
result of Energize RI, the Registrant is committed to making significant capital
improvements to its distribution system during the Plan's three-year term. These
improvements will expand the distribution system into economically developing
areas of Rhode Island as well as accelerate the replacement of older mains and
services. Additionally, technology expenditures relating to the Registrant's
decision to move to a client server environment have also contributed to this
increase. Capital expenditures for the remainder of the fiscal year are expected
to be approximately $9.8 million. Anticipated capital expenditures during this
and the next two fiscal years are expected to total approximately $81.3 million.
To finance capital expenditures, the Registrant issued $15 million in First
Mortgage bonds in April 1998 at 6.82 percent. These bonds require semi-annual
interest payments and a lump sum repayment of principal in 20 years.
The Registrant continues to focus on addressing Year 2000 implications in its
technology systems, embedded technologies, and with its significant suppliers
and key customers.
Year 2000 readiness will in large part be achieved in the course of the
Registrant's implementation of its long range technology plan to migrate from a
mainframe environment to a client server environment. Pursuant to this plan
significant portions of the Registrant's software, including its customer
billing and financial reporting systems, are currently being replaced. The new
client server systems will lower operating costs, increase functionality and
provide flexibility, as well as be Year 2000 ready. The implementation date for
these systems is scheduled for the first quarter in calendar 1999.
The Registrant has partnered with a major engineering and consulting firm to
address embedded technology. The system identification phase of this assessment
is expected to be completed by September 1998.
Also, the Registrant will commence its assessment of Year 2000 readiness of
its significant suppliers and key customers no later than the end of calendar
1998 and will continue this assessment on an ongoing basis.
Failure of the Registrant or any of its significant vendors to complete any
necessary modifications and conversions in a timely manner could have a material
adverse impact on the operations of the Registrant.
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THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6 (a). Exhibits
- ---------------------
10. Redacted gas supply contract dated October 1, 1997 between Duke Energy
Trading and Marketing, LLC and the Registrant.
27. Financial Data Schedule
Item 6 (b). Reports on Form 8-K
- --------------------------------
No reports on Form 8-K were filed during the quarter for which this report is
filed.
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THE PROVIDENCE GAS COMPANY
--------------------------
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of results
for the period reported, but such results are not necessarily indicative of
results to be expected for the year, due to the seasonal nature of the
Registrant's gas operations. All accounting policies and practices have been
applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Providence Gas Company
(Registrant)
BY: /s/ Gary S. Gillheeney
---------------------------
GARY S. GILLHEENEY
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
Date: August 14, 1998
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