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, 1998
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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 ___
---
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 22, 1998: $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
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Par Value: 1,243,598 shares outstanding at December 22, 1998.
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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-4
Employees I-5
Special Factors Affecting the
Natural Gas Industry I-5
FERC Regulations I-6
Environmental Regulations I-6
Other Standards I-8
Item 2 - Properties I-9
Item 3 - Legal Proceedings I-9
Item 4 - Submission of Matters to a Vote of Security Holders I-9
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-4
Item 12 - Security Ownership of Certain Beneficial Owners
and Management III-4
Item 13 - Certain Relationships and Related Transactions III-4
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Supplemental Schedule IV-3
Signatures IV-6
PART I
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ITEM 1. BUSINESS
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The Providence Gas Company (the Registrant) and its subsidiary and their
representatives may from time to time make written or oral statements, including
statements contained in the Registrant's filings with the Securities and
Exchange Commission (SEC), which constitute or contain "forward-looking"
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations, and releases. All
statements other than statements of historical facts included in this Form 10-K
regarding the Registrant's financial position, 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
or regulatory policies; 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 ProvGas' suppliers and customers to modify or redesign
their computer systems to work properly by the Year 2000; ProvGas' ability to
grow its business through customer growth; 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
166,000 customers in Providence and Newport, Rhode Island, and 23 other cities
and towns in Rhode Island. The service territory encompasses approximately 730
square miles and has a population of approximately 817,000. For the year ended
September 30, 1998, residential sales accounted for approximately 57% of total
firm deliveries, with commercial and industrial sales representing, in the
aggregate, approximately 43%. For the years ended September 30, 1997 and 1996,
residential sales represented approximately 58% and 59%, respectively, with
commercial and industrial sales representing, in the aggregate, approximately
42% and 41%, respectively, of firm deliveries.
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 142,000 services (a service is a pipe connecting a gas main with
piping on a customer's premises), approximately 166,000 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.
I-1
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, L.L.C. (DETM) to provide all of its gas supply
needs beginning October 1, 1997 and continuing through September 30, 2000. DETM
provides 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 are purchased at a single, fixed commodity
price for the entire contract period. In order to provide this service, DETM,
for the contract period, takes responsibility for the Registrant's pipeline
capacity resources not previously released, all storage contracts and all
Liquified Natural Gas (LNG) capacity. As a result, the Registrant's gas
inventories of approximately $18 million as of September 30, 1997 were sold at
book value to DETM on October 1, 1997. All supply resources assigned to DETM
will revert back to the Registrant on October 1, 2000.
As well as providing supply for firm customers at a fixed price, DETM
provides gas at market prices to cover the Registrant's non-firm sales
customers' needs and to make up the supply imbalances of transportation
customers. DETM also provides 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 firm
transportation storage service in effect since December 1, 1997. DETM receives
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 makes 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.
As a result of 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 Gas Charge Clause (GCC) and collected from customers
through September 30, 1997. At September 30, 1997, the remaining minimum
obligation of $5.5 million has been recorded in the accompanying Consolidated
Balance Sheets along with a regulatory asset anticipating future recovery. As
part of the above supply contract, DETM assumed liability for these transition
costs during the contract's three-year term. At the end of the three-year term
of the contract, the Registrant will assume any remaining liability, which is
not expected to be material.
I-2
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. 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 (TEC-RI), and the George Wiley Center. Effective
October 1, 1997 through September 30, 2000, Energize RI provides customers with
a price decrease of approximately four percent in addition to a three-year price
freeze. Under Energize RI, the GCC will be suspended for the entire term.
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 the three-year term. In
addition, Energize RI requires the Registrant to fund the Low-Income Assistance
Program at an annual level of $.1 million, the Demand Side Management Program at
an annual level of $.5 million and the Low-Income Weatherization Program at an
annual level of $.2 million. Energize RI also continues the process of
unbundling by requiring the Registrant to provide unbundled service offerings
for up to 10 percent per year of firm deliveries.
As part of Energize RI, the Registrant will amortize approximately $4.0
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. Also, in
connection with the Plan, the Registrant wrote off approximately $1.5 million of
previously deferred gas costs in October 1997.
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
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 to the Plan and to be approved by the RIPUC.
As part of Energize RI, the Registrant is permitted to file with the
Division for the recovery of the impact of exogenous Changes (Changes) which may
occur during the three-year term of the Plan. Changes are defined as
"...significant increases or decreases in the Registrant's costs or revenues
which are beyond the Registrant's reasonable control." Any disputes regarding
either the nature or quantification of the Changes are to be resolved by the
RIPUC. The impact of any such Changes will be debited or credited to a
regulatory asset or liability account throughout the term of Energize RI and
will be recovered or refunded at the expiration of the Plan through a method to
be determined.
During 1998, due to the extremely warm temperatures, the Registrant
experienced a margin loss of approximately $4.0 million. The Registrant also
experienced a non-firm margin loss of approximately $2.2 million due to adverse
market prices of natural gas versus alternate fuels. The Registrant believes
the causes of these two events were beyond its control and thus considers them
as Changes. In 1999, the Registrant intends to file with the Division for
recovery of a portion of these losses.
I-3
In 1998, the Registrant did not earn its allowed rate of return primarily as
a result of the extremely warm weather and the loss of non-firm margin. Under
the Plan's design, which assumed normal weather, the Registrant should have had
earnings in year one of the Plan in excess of 10.9 percent. The earnings in
excess of 10.9 percent were to be deferred in the deferred revenue account to
fund capital investments and other Plan commitments in the remaining two years
of the Plan. Absent favorable recovery for the Changes as discussed above,
and/or other factors such as colder than normal weather, the Registrant's
ability to earn a 10.9 percent return on average common equity in future Plan
years is substantially impaired.
In a decision issued September 1, 1998, the Division rejected allegations
made in a complaint brought by Aurora Natural Gas that the Registrant provided
advance information and undue preference in pricing to its marketing affiliate,
Providence Energy Services, Inc. As part of its investigation, the Division
ordered marketer refunds of approximately $.3 million. The Division ordered
this refund based on its belief that an unfair rate was charged to customers who
did not have operational telemeters in place when they began transporting gas.
The Registrant intends to pursue all available options in order to reverse this
decision.
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 approximately 166,000. This increase was achieved
in a local economy which is just now beginning to prosper. Seasonally adjusted
unemployment stood at 4.9 percent in September 1998, down from 5.2 percent
twelve months earlier, and slightly above the national average of 4.6 percent.
Also, there is considerable new construction throughout the state, especially in
Providence, where the Providence Place Mall is expected to be completed by
August 1999, and six new hotels have been proposed. A recent University of
Rhode Island study predicts economic stability in the state for the immediate
future.
In addition to funding investments related to system integrity, Energize RI
provides opportunities for the Registrant to expand sales. For example, high
pressure service to Quonset/Davisville Industrial Port & Commerce Park, a key
area for State economic development, provides tremendous opportunities for sales
growth as commercial and industrial businesses locate within the park. In
addition, Demand Side Management (DSM), an equipment rebate program, provides
opportunities to expand sales to nontraditional applications, such as air
conditioning and fuel cells. The Registrant has redirected its sales and
marketing efforts to leverage Energize RI, as well as other opportunities to
promote sales growth within its service territory.
In response to the large increase of both state-owned and private fleet
vehicles powered by natural gas, the Registrant invested approximately $.3
million to renovate its Providence "quick-fill" station for natural gas vehicles
- - one of three stations the Registrant operates in the state. Fleet operators
throughout the region are expressing greater interest in alternative-fuel
vehicles. One of these operators is the Rhode Island Public Transit Authority,
which recently launched a major program to replace a large number of its 200
diesel buses with buses that operate solely on natural gas. A new Rhode Island
law provides substantial tax incentives which, along with the Federal Department
of Energy's designation of Providence as a "clean city", should increase use and
awareness of the benefits of natural gas vehicles.
I-4
In May 1996, the RIPUC approved a Rate Design Settlement Agreement (the
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 phase of unbundling
was made 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.
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
deliveries. At the conclusion of the latest enrollment period on October 1,
1998, an additional 530 customers had signed up for Business Choice. The
program now has approximately 1,500 firm transportation customers with annual
deliveries of over 5 billion cubic feet per year which is approximately 25
percent of the Registrant's total annual firm deliveries. There are 14
different marketers serving the Registrant's customers and transporting on the
system.
In 1996, the Registrant implemented a Demand Side Management (DSM) 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.
This DSM Program will continue to be funded under Energize RI.
Employees
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As of September 30, 1998, the Registrant had 544 full-time employees.
Approximately 269 production, distribution and customer service employees are
covered by a five-year collective bargaining agreement with Local 12431-01 of
the United Steelworkers of America, which became effective in January 1996.
The bargaining 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. The original agreement called for a general
wage increase of 3.25 percent each year from 1997 to 2000.
In April 1998 the contract with Local 12431-01 was renegotiated and extended
to January 2002. This negotiation provides for a 3.5% wage increase in January
1999, January 2000, and January 2001.
Additionally, in March 1996, a 38 month Labor Agreement was ratified by
Local 12431-02 of the United Steelworkers of America, which represents
approximately 90 office and clerical employees. The agreement called for an
average increase of 2.9 percent for 1998.
In April 1998 the contract with Local 12431-02 was renegotiated and extended
to May 2002. This negotiation provides for a 3.5% wage increase in June 1999,
June 2000, and June 2001.
Special Factors Affecting the Natural Gas Industry
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General
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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:
I-5
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; and increases in the price of natural gas.
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. The Registrant anticipates 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. At September 30, 1997, 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. As part of the supply contract with DETM,
which was effective October 1, 1997, DETM assumed liability for these transition
costs during the contract's three-year term. At the end of the three-year term
of the contract, the Registrant will assume any remaining liability, which is
not expected to be material.
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 in 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, 1998, the Registrant was aware of five sites at which
future costs may be incurred.
I-6
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.
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 September 30, 1998,
approximately $2.0 million was 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 the site. The Registrant
has completed the study which indicated that remediation will be required for
two-thirds of the property. The remediation is expected to begin in February
1999 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 September 30, 1998, the Registrant compiled a preliminary range of costs,
based on removal and off-site disposal or recycling of contaminated soil,
ranging from $1.8 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 range noted.
Based on the proposals for remediation work, the Registrant has accrued $1.8
million at September 30, 1998, 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 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 1997, contamination from scrapped meters and regulators
was discovered at this site. The Registrant has reported this to DEM and the
Rhode Island Department of Health and is in the process of remediation. It is
anticipated that remediation will cost approximately $10,000. Accordingly, the
Registrant has accrued $10,000 at September 30, 1998 for anticipated future
remediation costs.
In November 1998 the Registrant received a letter of responsibility from DEM
relating to possible contamination on previously-owned property on Allens Avenue
in Providence. The current owner of the property has been similarly notified.
The Registrant lacks sufficient information at this time to determine the
validity of the claim, the amount of the clean-up costs or any defenses which
may be available with respect to such claim.
In prior rate cases filed with the RIPUC, the Registrant requested that
environmental investigation and remediation costs be recovered by inclusion in
its depreciation factors consistent with the rate recovery treatment for all
types of cost of removal. Due to the magnitude of the Registrant's
I-7
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,"
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 September 30, 1998, the
Registrant charged environmental assessment and remediation costs of $2.6
million and an estimated $1.8 million to the accumulated depreciation reserve
and has amortized $.4 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.
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.
I-8
ITEM 2. PROPERTIES
- ------------------
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
- -------------------------
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
- -----------------------------------------------------------
Not applicable.
I-9
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ---------------------------------------------------------------------
MATTERS
-------
Not applicable. The Registrant is a wholly-owned subsidiary of Providence
Energy Corporation.
II-1
ITEM 6. SELECTED FINANCIAL DATA
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THE PROVIDENCE GAS COMPANY
--------------------------
SELECTED FINANCIAL DATA
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SUMMARY OF OPERATIONS
---------------------
FOR THE YEARS ENDED SEPTEMBER 30
--------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Thousands, except per share amounts)
Operating revenues $184,026 $210,673 $210,601 $180,043 $219,143
Cost of gas sold 91,648 117,357 118,051 98,985 133,315
-------- -------- -------- -------- --------
Operating margin 92,378 93,316 92,550 81,058 85,828
-------- -------- -------- -------- --------
Operating expenses,
excluding taxes 59,296 59,540 59,673 53,536 54,588
Taxes, other than income 13,092 13,456 12,831 11,597 12,413
Federal income taxes 4,342 4,489 4,418 3,027 4,369
-------- -------- -------- -------- --------
Total operating expenses 76,730 77,485 76,922 68,160 71,370
-------- -------- -------- -------- --------
Operating income 15,648 15,831 15,628 12,898 14,458
Other, net 584 371 976 798 409
-------- ------- ------- ------- -------
Income before interest
expense 16,232 16,202 16,604 13,696 14,867
Interest expense 7,473 7,431 7,294 7,181 6,121
-------- ------- ------- ------- -------
Net income 8,759 8,771 9,310 6,515 8,746
Dividends on preferred stock (487) (626) (696) (696) (696)
-------- ------- ------- ------- -------
Net income applicable to
common stock 8,272 8,145 8,614 5,819 8,050
Common dividends 4,776 4,777 4,627 4,577 4,501
-------- -------- -------- -------- --------
Income reinvested in
the corporation $ 3,496 $ 3,368 $ 3,987 $ 1,242 $ 3,549
======== ======== ======== ======== ========
Weighted average common
shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ========
Earnings per common share $ 6.65 $ 6.55 $ 6.93 $ 4.68 $ 6.47
======== ======== ======== ======== ========
Common dividends $ 3.84 $ 3.84 $ 3.72 $ 3.68 $ 3.62
======== ======== ======== ======== ========
OTHER FINANCIAL DATA
--------------------
SEPTEMBER 30
------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Thousands, except per share amounts)
Gas plant-at original cost $313,549 $290,614 $270,149 $253,438 $230,926
Gas plant-net of depreciation 193,451 181,979 171,453 161,956 151,394
Total assets 228,614 242,143 237,515 214,727 221,177
Capitalization:
Long-term debt 78,021 72,372 72,455 74,482 60,078
Redeemable cumulative preferred
stock 4,800 6,400 8,000 8,000 8,000
Common Stockholder's investment 81,641 78,240 74,844 71,020 69,841
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 $ 65.65 $ 62.91 $ 60.18 $ 57.11 $ 56.16
======== ======== ======== ======== ========
II-2
Item 7
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
- -------
The Registrant's current operating revenues, operating margin and net income
have decreased over last year, as shown in the table below:
(000's)
Percent
1998 1997 Change Change
-------- -------- --------- --------
Operating revenues $184,026 $210,673 $(26,647) (12.6)
Operating margin 92,378 93,316 (938) (1.0)
Net income 8,759 8,771 (12) (.1)
RESULTS OF OPERATIONS - 1998 VS 1997
Operating Margin
- ----------------
During the current year, the Registrant experienced weather that was 8.0
percent warmer than last year. The warmer temperatures resulted in decreased
margin of approximately $4.0 million compared to last year. Offsetting the
warmer than normal weather was $7.2 million of margin generated under the Price
Stabilization Plan Settlement Agreement (Energize RI or the Plan), which became
effective October 1, 1997. The components of this additional margin include
$10.4 million associated with adjusting the Gas Charge Clause (GCC) mechanism,
offset by the funding of the Low-Income and Demand Side Management programs of
$1.7 million and the write-off of $1.5 million of previously deferred gas costs.
In the prior year, the Registrant funded the Demand Side Management and Low-
Income Weatherization programs under the Integrated Resource Plan (IRP) for $.7
million.
Additionally, non-firm margin decreased approximately $2.2 million when
compared with last year. Prior to Energize RI, the Registrant was allowed to
recover 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.
As part of Energize RI, the performance-based ratemaking mechanism
(Mechanism) under the IRP was terminated in September 1997. In 1997, the
Registrant recorded $1.5 million in additional margin as a result of this
Mechanism. Thus, a decrease in margin from 1997 to 1998 occurred because this
Mechanism was no longer available in 1998.
In a decision issued September 1, 1998, the Rhode Island Division of Public
Utilities and Carriers (Division) rejected allegations made in a complaint
brought by Aurora Natural Gas that the Registrant provided advance information
and undue preference in pricing to its marketing affiliate, Providence Energy
Services, Inc. As part of the Division's investigation, the Division ordered
marketer refunds of approximately $.3 million. The Division ordered this refund
based on its belief that an unfair rate was charged to customers who did not
have operational telemeters in place when they began transporting gas. The
Registrant intends to pursue all available options in order to reverse this
decision.
II-3
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses decreased approximately $1.3
million or 2.8 percent versus last year. This decrease is primarily attributable
to a decrease in the Registrant's bad debts. The decrease in bad debts was
attributable to improved collection experience and the implementation of new
credit policies, as well as decreased operating revenues from warmer than normal
weather. The Registrant's other operating and maintenance expenses were
essentially flat due to cost management.
The Registrant continually reviews its operating expenses in order to keep
expenses as low as possible; however, expenses can vary from year to year.
Depreciation and Amortization Expense
- -------------------------------------
Depreciation and amortization expense increased approximately $1.1 million
or 8.7 percent versus last year. This increase is the result of increased
capital spending for Energize RI commitments as well as 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. Due to expected future increases in environmental
expenditures, which were projected under Energize RI, the Registrant will have
increased environmental amortization expense in future years.
Taxes
- -----
Taxes decreased approximately $.5 million or 2.8 percent versus last year.
The overall change in taxes is primarily due to a decrease in gross earnings tax
as a result of the warmer weather experienced this year as compared to last
year. The decrease was partially offset by an increase in local property taxes
as a result of capital spending.
Other, net
- ----------
Other, net has increased approximately $.2 million or 57.4 percent versus
last year. The increase consists of approximately $.2 million of interest
income earned on Federal income tax refunds resulting from amended tax returns.
Interest Expense
- ----------------
Interest expense for 1998 was flat when compared to 1997. The Registrant's
long-term interest expense increased by approximately $.3 million as a result of
the Series S First Mortgage Bond issuance in April 1998. Offsetting the
increase was a decrease in weighted average short-term borrowings, as a result
of the Series S First Mortgage Bond issuance, which caused short-term interest
expense to decrease.
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 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 to be determined by all parties to the Plan and to be
approved by the Rhode Island Public Utilities Commission (RIPUC).
II-4
The implementation of Energize RI this year changed how the Registrant
recorded its gas costs, resulting in higher margin reflected in the first half
of the fiscal year and lower margin in the second half. This change did not
impact annual earnings.
As part of Energize RI, the Registrant is permitted to file with the
Division for the recovery of the impact of exogenous Changes (Changes) which may
occur during the three-year term of the Plan. Changes are defined as
"...significant increases or decreases in the Registrant's costs or revenues
which are beyond the Registrant's reasonable control." Any disputes regarding
either the nature or quantification of the Changes are to be resolved by the
RIPUC. The impact of any such Changes will be debited or credited to a
regulatory asset or liability account throughout the term of Energize RI and
will be recovered or refunded at the expiration of the Plan through a method to
be determined.
During 1998, due to the extremely warm temperatures, the Registrant
experienced a margin loss of approximately $4.0 million. The Registrant also
experienced a non-firm margin loss of approximately $2.2 million due to adverse
market prices of natural gas versus alternate fuels. The Registrant believes
the causes of these two events were beyond its control and thus considers them
as Changes. In fiscal 1999, the Registrant intends to file with the Division for
recovery of a portion of these losses.
In 1998, the Registrant did not earn its allowed rate of return primarily as
a result of the extremely warm weather and the loss of non-firm margin as
previously discussed in "Operating Margin". Under the Plan's design, which
assumed normal weather, the Registrant should have had earnings in year one of
the Plan in excess of 10.9 percent. The earnings in excess of 10.9 percent were
to be deferred in the deferred revenue account to fund capital investments and
other Plan commitments in the remaining two years of the Plan. Absent favorable
recovery for the Changes discussed above, and/or other factors such as colder
than normal weather, the Registrant's ability to earn a 10.9 percent return on
average common equity in future Plan years is substantially impaired.
In May 1996, the RIPUC approved a Rate Design Settlement Agreement (the
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 phase of unbundling
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.
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
deliveries. At the conclusion of the latest enrollment period on October 1,
1998, an additional 530 customers had signed up for Business Choice. The
program now has approximately 1,500 firm transportation customers with annual
deliveries of over 5 billion cubic feet per year which is approximately 25
percent of the Registrant's total annual firm deliveries. There are 14
different marketers serving the Registrant's customers and transporting on the
system.
II-5
B) Business Opportunities
In addition to funding investments related to system integrity, Energize RI
provides opportunities for the Registrant to expand sales. For example, high
pressure service to Quonset/Davisville Industrial Port & Commerce Park, a key
area for State economic development, provides tremendous opportunities for sales
growth as commercial and industrial businesses locate within the park. In
addition, Demand Side Management, an equipment rebate program, provides
opportunities to expand sales to nontraditional applications, such as air
conditioning and fuel cells. The Registrant has redirected its sales and
marketing efforts to leverage Energize RI, as well as other opportunities to
promote sales growth within its service territory.
C) New Accounting Pronouncements
Please refer to Footnote 10 of the accompanying Consolidated Financial
Statements.
RESULTS OF OPERATIONS - 1997 VERSUS 1996
Operating Margin
- ----------------
During 1997, 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 $.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
were eligible. This migration of customers to transportation did not have a
material effect on margin.
The decrease due to weather was also offset by increases in margin of $.8
million as a result of the rate increase effective December 17, 1995 and $.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
No. 106.
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 RIPUC
required the Registrant to return any margins earned from these non-firm
customers to firm customers through the GCC. Beginning October 1, 1997, under
Energize RI as discussed in Note 9 to the accompanying Consolidated Financial
Statements, the Registrant will retain all margins 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 unbundling
process continues, the Registrant expects transportation revenues and volumes
will continue to increase as customers migrate from sales to transportation.
II-6
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses have decreased approximately
$1.0 million, or 2.0 percent, versus 1996. The Registrant had an $.8 million
decrease in outside services due to expenditures made in 1996 to develop new
energy service offerings as well as expenses related to the IRP. This decrease
was offset by an increase in the Registrant's labor of $.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
$.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 $.3
million as the result of the continued phasing of these expenses into the
Registrant's rates in 1997. The remaining decrease of $.6 million relates
primarily to cost management by the Registrant.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense increased approximately $.8 million,
or 7.3 percent, primarily as the result of 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 increased approximately $.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 $.6 million. The decrease was primarily
due to regulatory changes of $.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 $.2 million as the result of increased capital
spending.
Interest Expense
- ----------------
Interest expense for 1997 was flat when compared to 1996. Interest expense
increased approximately $.2 million primarily as the result of an increase in
interest on long-term debt due to the issuance of Series R First Mortgage Bonds
in December of 1995.
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 year, the Registrant's cash flow from operations
increased approximately $13.1 million compared to the same period last year.
This increase was primarily due to the sale of the Registrant's working gas in
storage to Duke Energy Trading and Marketing, L.L.C. as well as the impact of
Energize RI changes.
II-7
Capital expenditures for 1998 of approximately $27.5 million increased
$7.3 million or 35.8 percent when compared to the $20.2 million last year. As
part of Energize RI, the Registrant's spending increased as a result of making
significant capital improvements to its distribution system. 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.
Additional expenditures relating to the Registrant's decision to move to a
client server environment, as well as to computerize existing paper records of
its distribution system, have also contributed to this increase. Anticipated
capital expenditures during the next two fiscal years are expected to total
approximately $57.1 million.
To finance capital expenditures, the Registrant issued $15 million of Series
S First Mortgage Bonds in April 1998 at a rate of 6.82 percent. These bonds
require semi-annual interest payments and a lump sum repayment of principal in
20 years.
To reduce its long-term borrowing costs, the Registrant repurchased $6.4
million of Series M First Mortgage Bonds in September 1998. The cost to
repurchase was comprised of $6.4 million in principal and $1.4 million in
premium. The Registrant is planning to issue $15 million in First Mortgage
Bonds to cover the cost of the repurchase as well as for general corporate
purposes. The future bond issuance is anticipated to be for a 30 year term at
an interest rate expected to be less than 7.0 percent. The Registrant estimates
savings of approximately $1.8 million over the life of the new debt based on a
projected interest rate of 6.75 percent. The Registrant has received an order
from the Division which permits the amortization of the bond premium over the
life of the new debt.
YEAR 2000 DISCLOSURE
Many companies' software programs and computing infrastructure use two-digit
years to define the applicable year, rather than four-digit years, and have
time-sensitive software that may recognize a date using "00" as the last two
digits of the year 1900, rather than the year 2000. This could result in the
computer or embedded hardware shutting down or performing incorrect
computations. On July 29, 1998, the Securities and Exchange Commission issued an
Interpretation entitled "Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisers, Investment Companies, and Municipal
Securities Issuers", calling for extensive detailed reporting and disclosure of
a company's progress in addressing the Year 2000 impact. Pursuant to this
Interpretation, the Registrant is providing the following disclosure.
READINESS
The Registrant recognizes that the products and services that the Registrant
provides to its customers are essential. The Year 2000 computer problem poses a
significant challenge to the Registrant's ability to continue to provide these
products and services. Senior management has made Year 2000 readiness a top
priority, and in response to that challenge, has established a Year 2000 Project
Office to ensure the continuity of mission critical business systems and
processes before and beyond the Year 2000. The Registrant has hired two
international consulting firms to assist the Registrant in the areas of
assessment, strategy, staffing and the selection and execution of a recognized
methodology to assess Year 2000 readiness. The Project Office oversees work in
the following four areas:
II-8
1. Information Technology (IT) Systems
-----------------------------------
The Registrant continues to implement its technology plan developed in 1992
which includes the migration from a mainframe centric to a client server centric
environment. The migration includes the replacement of the Customer Information
System (CIS) which supports the business function of customer inquiry, service
orders and billing. The Plan also includes the replacement of its business
applications such as financial, human resources and procurement with an
Enterprise Resource Planning (ERP) system. These new systems have been
represented by the suppliers to be Year 2000 ready. The migration to CIS and
ERP, including testing of these new systems, is expected to be completed by June
30, 1999.
The Registrant has completed an inventory of its remaining IT systems and is
in the process of assessing these systems. The Registrant is preparing
procurement policies as part of its efforts to ensure Year 2000 readiness for
any future changes to its IT systems environment or future acquisitions of IT
systems.
2. Embedded Systems
----------------
The Registrant is working with an international management consulting and
engineering firm with industry-specific experience to address the Year 2000
readiness of embedded microprocessors deployed in its distribution and facility
operations. The distribution area covers, but is not limited to, the
monitoring, storage, measurement and control of the flow of natural gas. The
facility area covers, but is not limited to, back-up power supply, heat and air
conditioning, and security at the Registrant's offices.
The Registrant has completed reviewing 99 percent of its embedded components
inventory. This inventory has been loaded into the Registrant's database and
has been matched against the consultant's proprietary database to assess which
components are Year 2000 ready. The consultant's proprietary database contains
important information collected by the consultant through its industry network.
To date, the consultant's database immediately identified 69 percent of the
components. Ninety-four percent of the identified components were determined to
be compliant and six percent were determined to be non-compliant. The
components associated with the Registrant's mission critical systems have been
identified in the database, and many of these components are compliant.
Remediation planning is underway to address the remaining components. The
Registrant will work closely with the consultants to assess the segment of
components that could not be matched or identified in the consultant's
proprietary database. This work includes direct follow-up with the
manufacturers of those components. This assessment is expected to be completed
by December 1998 at which point the Registrant can better evaluate the impact of
any system failure. Remediation and testing of mission critical systems is
scheduled to be completed by June 30, 1999 and remediation and testing of all
other embedded systems is planned to be completed by September 30, 1999.
3. Upstream/Downstream
-------------------
The Registrant has developed a communication plan to keep its shareholder,
customers, employees, and other major constituencies informed about the
Registrant's plans and the state of readiness concerning the Year 2000 computer
problem. The Registrant has developed a plan to address the readiness of its
major suppliers which includes a combination of written requests, telephone
interviews, and leveraging of customer groups and site visits. The Registrant is
actively participating with the Rhode Island Y2K (Year 2000) Group which acts as
a communication forum for key customers as well as the other essential suppliers
of services such as: telecommunications, water and electric. The Registrant
expects to have its assessment of its supply chain completed by January 31,
1999. The Registrant's strategy includes the continual monitoring of any risk
areas that surface as a result of that assessment.
II-9
4. Contingency Planning
--------------------
The Registrant has contingency plans in place for response to certain
emergency operational situations. However, the Registrant intends to begin
developing actionable contingency plans pertinent to the Year 2000 computer
problem following substantial completion of the assessment of its systems and
third party relationships. Representatives from the Registrant are participating
in industry consortiums related to contingency planning. The planning will
factor the results of the risk assessments in the three areas mentioned above,
taking into account the major business processes of the Registrant. The
Registrant expects its Year 2000 contingency plans to be finalized and in place
by June 30, 1999.
YEAR 2000 COSTS
The Registrant expects to complete its comprehensive budget for all phases
of its Year 2000 effort by January 31, 1999. The Registrant will capitalize
Year 2000 costs with a five-year amortization period as part of the regulatory
treatment approved by the RIPUC under the Registrant's Energize RI program. As
of September 30, 1998, the Registrant has deferred Year 2000 costs of $2.5
million. The Registrant estimates the cost of the assessment phase of its Year
2000 effort to be less than $1 million. The Registrant does not yet have a cost
estimate applicable to remediation at this time.
POTENTIAL RISKS
The Registrant must complete its migration to a client server environment
and must complete the implementation of CIS and ERP and the upgrade of its
System Control and Data Acquisition software application. Although the
Registrant expects to achieve these goals in a timely manner, the Registrant
cannot guarantee these results. A delay in completing these projects or the
inability of any of these systems to perform their respective fundamental
functions would result in the Registrant experiencing significant business
disruption.
The majority of the Registrant's natural gas supply is delivered over third-
party interstate transmission lines from the Gulf coast to Rhode Island. These
interstate transmission lines use many compressor stations to move the gas.
These compressor stations are controlled and monitored remotely, each station
using hundreds of embedded components. If these embedded systems reach critical
failure without manual backup, the Registrant will experience an indeterminate
amount of gas supply loss. Although the Registrant expects the natural gas
delivery systems to operate in the Year 2000, the Registrant cannot guarantee
this will occur. If the loss of gas supply exceeds the Registrant's access to
its reserves in storage and its liquefied natural gas capability, the Registrant
will not be able to serve certain customer segments. The Registrant's inability
to serve its customers would result in a loss of revenue and potential claims.
II-10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30
------------
1998 1997
---- ----
(Thousands of Dollars)
ASSETS
------
Gas plant, at original cost (notes 1, 4, 7 and 9) $313,549 $290,614
Less - Accumulated depreciation and
plant acquisition adjustments (notes 1 and 9) 119,916 108,478
-------- --------
193,633 182,136
-------- --------
Current assets:
Cash and temporary cash investments (notes 1 and 8) 798 778
Accounts receivable, less allowance of
$2,137 in 1998 and $1,739 in 1997 (notes 1 and 3) 9,938 13,120
Unbilled revenues (note 1) 1,610 2,658
Deferred gas costs (notes 1,7 and 9) - 7,151
Inventories, at average cost -
Liquefied natural gas, propane and underground
storage 11 18,001
Materials and supplies 1,166 1,166
Prepaid and refundable taxes (note 2) 4,417 3,293
Prepayments 1,663 966
-------- --------
19,603 47,133
-------- --------
Deferred charges and other assets
(notes 1, 3, 6 and 9) 15,378 12,874
-------- --------
Total assets $228,614 $242,143
======== ========
CAPITALIZATION AND LIABILITIES
-------------------------------
Capitalization (see accompanying statement) $164,462 $157,012
-------- --------
Current liabilities:
Notes payable (notes 5 and 8) 9,720 20,410
Current portion of long-term debt (note 4) 3,050 3,707
Accounts payable (notes 6, 7 and 8) 7,332 16,114
Accrued taxes 2,537 2,529
Accrued vacation 1,597 1,658
Customer deposits 2,998 3,430
Other 4,769 4,639
-------- --------
32,003 52,487
-------- --------
Deferred credits and reserves:
Accumulated deferred Federal income taxes (note 2) 21,351 20,598
Unamortized investment tax credits (note 2) 2,197 2,354
Other (notes 6 and 7) 8,601 9,692
-------- --------
32,149 32,644
-------- --------
Commitments and contingencies (notes 7 and 9) - -
Total capitalization and liabilities $228,614 $242,143
======== ========
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
------------
1998 1997 1996
------------ ------------ ------------
(Thousands, except per share amounts)
Operating revenues $184,026 $210,673 $210,601
Cost of gas sold 91,648 117,357 118,051
-------- -------- --------
Operating margin 92,378 93,316 92,550
-------- -------- --------
Operating expenses:
Operation and maintenance 45,813 47,135 48,116
Depreciation and amortization 13,483 12,405 11,557
Taxes -
State gross earnings 5,363 6,023 6,061
Local property and other 7,729 7,433 6,770
Federal income (note 2) 4,342 4,489 4,418
-------- -------- --------
Total operating expenses 76,730 77,485 76,922
-------- -------- --------
Operating income 15,648 15,831 15,628
Other, net (notes 1 and 2) 584 371 976
-------- -------- --------
Income before interest expense 16,232 16,202 16,604
-------- -------- --------
Interest expense:
Long-term debt 6,362 6,042 5,889
Other 1,365 1,609 1,498
Interest capitalized (254) (220) (93)
-------- -------- --------
7,473 7,431 7,294
-------- -------- --------
Net income 8,759 8,771 9,310
Dividends on preferred stock(note 4) (487) (626) (696)
-------- -------- --------
Net income applicable to
common stock $ 8,272 $ 8,145 $ 8,614
======== ======== ========
Net income per common share $6.65 $6.55 $6.93
(note 11) ======== ======== ========
Weighted average common
shares outstanding (note 11) 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
---------------------------------------
1998 1997 1996
------ ------ ------
(Thousands of Dollars)
Cash provided by (used for)
Operating Activities:
- --------------------
Net income $ 8,759 $ 8,771 $ 9,310
Items not requiring cash:
Depreciation and amortization 13,611 12,533 11,686
Charges as a result of regulatory action 1,500 - (1,453)
Deferred Federal income taxes 1,063 622 1,968
Amortization of investment tax credits (157) (156) (158)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 21,010 881 (194)
Unbilled revenues 1,048 (325) 304
Deferred gas costs (2) 5,977 (11,932)
Inventories (11) (2,222) (5,542)
Prepaid and refundable taxes (1,434) (186) 2,064
Prepayments (697) 499 (137)
Accounts payable (3,282) (366) 2,584
Accrued taxes 8 662 62
Accrued vacation, customer
deposits and other (363) (938) 1,494
Deferred charges and other 373 2,529 1,236
-------- ------- --------
Net cash provided by operations 41,426 28,281 11,292
-------- ------- --------
Investment activities:
- -----------------------
Expenditures for property, plant and
equipment, net (27,453) (20,214) (20,346)
-------- -------- --------
Financing activities:
- --------------------------
Issuance of mortgage bonds 15,000 - 15,000
Redemption of preferred stock (1,600) (1,600) -
Issuance of long-term debt - 1,345 -
Payments on long-term debt (3,645) (2,164) (1,954)
Premium payment on bonds (1,392) - -
Repurchase of mortgage bonds (6,363) - -
Increase (decrease) in notes payable, net (10,690) (390) 1,463
Cash dividends on preferred shares (note 4) (487) (626) (696)
Cash dividends on common shares (4,776) (4,777) (4,627)
-------- -------- -------
Net cash provided (used) by financing activities (13,953) (8,212) 9,186
-------- -------- -------
Increase (decrease) in cash and
cash equivalents 20 (145) 132
Cash and cash equivalents at beginning
of year 778 923 791
-------- -------- --------
Cash and cash equivalents at end of year $ 798 $ 778 $ 923
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for -
Interest (net of amount capitalized) $ 6,998 $ 7,305 $ 6,561
Income taxes (net of refunds) $ 4,198 $ 2,215 $ 2,367
Schedule of noncash investing activities
Equipment financed through capital leases $ - $ 437 $ -
Equipment financed through other
long-term debt $ - $ 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
------------
1998 1997
-------- --------
(Thousands)
Common stock equity (notes 4 and 6):
Common stock, $1 Par, Authorized - 2,500 shares
Outstanding - 1,244 shares in 1998 and 1997 $ 1,244 $ 1,244
Amount paid in excess of par 37,590 37,685
Retained earnings 42,807 39,311
-------- --------
81,641 78,240
-------- --------
Cumulative preferred stock (notes 4 and 8):
Redeemable 8.7% series, $100 Par
Authorized - 80 shares
Outstanding - 48 shares in 1998 and
64 shares in 1997 4,800 6,400
-------- --------
Long-term debt (notes 4, 7 and 8):
First Mortgage Bonds, secured by property -
Series M, 10.25%, due July 31, 2008 2,728 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 9,600 11,200
Series R, 7.50%, due December 15, 2025 15,000 15,000
Series S, 6.82%, due April 20, 2018 15,000 -
Other long-term debt 2,573 3,207
Capital Leases 1,170 1,672
-------- --------
81,071 76,079
Less-current portion 3,050 3,707
-------- --------
78,021 72,372
-------- --------
Total capitalization $164,462 $157,012
======== ========
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, 1998
--------------------------------------------
Shares Amount
Issued and Outstanding Paid in
---------------------- Excess Retained
Number Amount of Par Earnings
-------------------------------------------
(Thousands)
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
Add (deduct):
Net income - - - 8,759
Cash dividends on common shares
($3.84 per share) - - - (4,776)
Cash dividends on preferred
shares ($8.70 per share) - - - (487)
Accrual for stock
compensation plans - - (266) -
Amortization of deferred
compensation - - 171 -
------- ------- ------- -------
Balance, September 30, 1998 1,244 $1,244 $37,590 $42,807
======= ======= ======= =======
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).
Revenues from the natural gas distribution business are reflected in the
accompanying Consolidated Statements of Income to arrive at operating income.
Results of nonregulated 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 the Registrant 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 are generated principally from natural gas activities.
The Registrant records accrued natural gas distribution revenues based on
estimates of gas volumes delivered and not billed at the end of an accounting
period in order to match revenues with related costs.
LEASE ACCOUNTING
Previously, the Registrant leased water heaters and other appliances to
customers under finance leases. These leases are recorded on the accompanying
Consolidated Balance Sheets 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 the Registrant
is recorded as a Plant Acquisition Adjustment and is being amortized over
periods ranging from 1 to 24 years.
The Registrant capitalizes the costs of all technology investments with the
exception of system maintenance costs unless deferral is approved by its
regulator.
II-16
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (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 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.
DEPRECIATION
Depreciation is provided on the straight-line basis at rates approved by
the RIPUC which are 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 1998, 1997 and 1996.
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 CLAUSES
In May 1996, the RIPUC approved a Rate Design Settlement Agreement (the
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 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 liquefied natural gas 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 was deferred and either refunded to, or recovered
from, customers over a subsequent period. As a result of the Price Stabilization
Plan Settlement Agreement described in Note 9, the GCC will be suspended for the
period from 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 during this period.
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 in the accompanying Consolidated Statements of Income.
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 related
security while the remaining deferred regulatory charges and other assets are
amortized over a recovery period specified by the RIPUC.
II-17
Deferred Charges and Other Assets include the following:
(thousands of dollars) 1998 1997
- ------------------------------------- ------- -------
Pension costs $ 6,270 $ 7,272
Unamortized debt expense 3,204 1,901
Year 2000 costs 2,518 -
Cost of fuel assistance program 895 808
Post-retirement benefits 346 691
Deferred rate case expense (note 9) 183 164
Goodwill, net 95 106
Other deferred charges 1,867 1,932
------- -------
Total $15,378 $12,874
======= =======
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 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) 1998 1997 1996
- ------------------------------ ------- ------- -------
Current $3,336 $3,898 $2,821
Deferred 1,063 622 1,968
------ ------ ------
Total Federal income tax
provision $4,399 $4,520 $4,789
====== ====== ======
Income tax is charged to the
following:
Charged to operating
expenses $4,342 $4,489 $4,418
Included in other,
net 57 31 371
------ ------ ------
Total Federal income tax
provision $4,399 $4,520 $4,789
====== ====== ======
The effective Federal income tax rates and the reasons for their differences
from the statutory Federal income tax rates are as follows:
1998 1997 1996
----- ----- -----
Statutory Federal income tax
rates 34.0% 34.0% 34.0%
Reversing temporary differences (.3) (.2) .3
Amortization of investment
tax credits (.4) (.4) (.4)
Other .1 .6 .1
----- ----- -----
Effective Federal income tax
rate 33.4% 34.0% 34.0%
===== ===== =====
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:
1998 1997
----------- -----------
(thousands of dollars)
Long-term deferred taxes
- ------------------------
Tax assets
Unamortized ITC $ 774 $ 828
Other 424 316
Tax liabilities
Property related (21,801) (20,942)
Pension costs (237) (222)
Deferred charges (511) (578)
-------- --------
Net deferred tax liability included in
accompanying Consolidated Balance
Sheets $(21,351) $(20,598)
======== ========
Prepaid taxes
- -------------
Tax assets
Accounts receivable reserves $ 921 $ 424
Property tax reserves (136) (245)
Alternative minimum tax - 672
Other 540 787
Tax liabilities
Employee severance 56 56
Other (108) (111)
-------- --------
Net prepaid taxes 1,273 1,583
Prepaid gross earnings tax and other 3,144 1,710
-------- --------
Net prepaid and refundable taxes
included in accompanying
Consolidated Balance Sheets $ 4,417 $ 3,293
======== ========
Investment tax credits are amortized through credits to other, net over the
estimated lives of related property.
3. LEASE RECEIVABLES
Previously, the Registrant financed the installation of water heaters and
other appliances for its customers under one to three-year finance agreements.
Additionally, 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)
- ----------------------
1999 $ 450
2000 450
2001 340
------
1,240
Amount representing interest 197
------
Amount representing principal $1,043
======
4. CAPITALIZATION
A. FIRST MORTGAGE BONDS
In December 1995, the Registrant issued $15 million of Series R First
Mortgage Bonds. These First Mortgage Bonds bear interest at the rate of 7.5
percent and mature in December 2025. The net proceeds provided by this
indebtedness were used to pay down the Registrant's short-term debt.
In April 1998, the Registrant issued $15 million of Series S First
Mortgage Bonds. These First Mortgage Bonds bear interest at the rate of 6.82
percent and mature in April 2018. The net proceeds provided by this
indebtedness were used to finance capital expenditures and pay down short-term
debt.
The Registrant's First Mortgage Bonds are secured by a lien on substantially
all of the Registrant's tangible and real property.
As of September 30, 1998, the annual sinking fund requirements and
maturities of long-term debt for each of the next five fiscal years are
$1,873,000.
In September 1998, the Registrant repurchased $6.4 million of Series M First
Mortgage Bonds. The cost of repurchase was comprised of $6.4 million in
principal and $1.4 million in premium. The premium will be amortized over the
life of new debt which the Registrant expects to issue in 1999. The
Registrant received an order from the RI Division of Public Utilities and
Carriers (Division) which permits the amortization of the bond premium over the
life of the new debt.
The terms of the various supplemental 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 $15 million of the Registrant's retained earnings
were available for dividends under the most restrictive terms of the
Registrant's First Mortgage Bond indenture.
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, 1998, the maturities of these long-term notes over
the next five years are $632,000 in 1999, $670,000 in 2000, $708,000 in 2001,
$485,000 in 2002 and $74,000 in 2003.
II-20
C. REDEEMABLE PREFERRED STOCK
The Registrant's preferred stock, which consists of 80,000 shares of $100
par value, has an 8.7 percent cumulative annual dividend rate payable on a
quarterly basis, and has no voting power or privileges. 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 Registrant at par value in both
February 1998 and February 1997.
5. NOTES PAYABLE
The Registrant meets seasonal cash requirements and finances capital
expenditures on an interim basis through short-term bank borrowings. As of
September 30, 1998, the Registrant had lines of credit totaling $53,000,000 with
borrowings outstanding of $9,720,000. The Registrant pays a fee for its lines of
credit rather than maintaining compensating balances. The weighted average
short-term interest rate for borrowings outstanding at the end of the year was
5.48 percent in 1998, 5.79 percent in 1997, and 5.65 percent in 1996.
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, 1998 and 1997 (in thousands):
1998 1997
- ------------------------------------------------------------ ---------
Accumulated benefit obligation, including
vested benefit obligation of ($45,865) as of
September 30, 1998 and $(37,961) as
of September 30, 1997 $(54,675) $(44,889)
======== ========
Projected benefit obligation for service
rendered to date $(71,194) $(60,143)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 74,752 76,348
-------- --------
Excess of plan assets over projected
benefit obligation 3,558 16,205
Unrecognized (gain) (9,958) (23,731)
Unrecognized prior service cost 2,540 2,820
Unrecognized net transition asset
being recognized over 15 years
from October 1, 1985 (272) (409)
-------- --------
Net accrued pension cost included in other
deferred credits and accounts payable at
September 30, 1998 and 1997 $ (4,132) $ (5,115)
======== ========
II-21
Net pension cost for fiscal years 1998, 1997 and 1996 included the following
components (in thousands):
1998 1997 1996
- --------------------------------------------------------------------
Service cost $ 1,980 $ 1,818 $ 1,702
Interest cost on benefit obligations 4,881 4,569 4,246
Annual return on plan assets (1,334) (16,428) (7,473)
Net amortization and deferral (6,510) 10,506 2,085
------- -------- -------
Net periodic pension cost (983) 465 560
Adjustments due to regulatory
action 983 (465) (427)
------- -------- -------
Net periodic pension cost recognized
in earnings $ - $ - $ 133
======= ======== =======
In 1998, the discount rate and rate of increase in future compensation
levels used in determining the projected benefit obligation were 6.75 percent
and 5 percent, respectively. The expected long-term rate of return on assets was
9 percent in 1998.
In 1997 and 1996, the discount rate and rate of increase in future
compensation levels used 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 in 1997 and 1996.
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 five years for the Registrant, healthcare and life insurance benefits
during retirement (the Benefit Plan). These benefits are similar to the benefits
offered to active employees. Although retirees are not required to make
contributions to the Benefit Plan currently, future contributions may be
required if the cost of the Benefit 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. Total contributions of $1,308,000 in
1998, $1,372,000 in 1997 and $1,454,000 in 1996 were made to the VEBA Trust.
The Registrant recovers its post-retirement benefit obligation 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 fully recovered its 1998, 1997 and 1996
post-retirement benefit obligations because such obligations 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, $1,654,000,
$1,718,000, and $1,454,000 were included in rates during 1998, 1997 and 1996,
respectively.
II-22
The Benefit Plan's costs and accumulated post-retirement benefit obligation
for 1998, 1997 and 1996 are calculated by the Registrant's actuaries using
assumptions and estimates which include:
1998 1997 1996
------ ---- ----
Healthcare cost annual growth rate 9.0% 10.2% 11.4%
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 6.75 8.0 8.0
The healthcare cost annual growth rate significantly impacts the estimated
Benefit Plan obligation and annual expense. For example, in 1998, a one percent
change in the above rates would change the obligation by $773,000 and would
change the annual expense by $86,000.
The obligations and assets of the Benefit Plan at September 30, 1998 and
1997 are (in thousands):
1998 1997
- ---------------------------------------------------------------
Accumulated post-retirement
benefit obligation:
Current retirees $ (6,444) $ (6,626)
Active employees-eligible for
benefits (1,469) (1,361)
Active employees (4,973) (3,761)
-------- ---------
Total post-retirement benefit
obligation (12,886) (11,748)
Plan assets at fair value 5,684 4,704
-------- ---------
Unfunded post-retirement benefit
obligation (7,202) (7,044)
Unrecognized transition
obligation 7,895 8,421
Unrecognized net (gain) or loss (693) (1,360)
-------- ---------
Prepaid accrued post-retirement
benefit obligations included
in the Registrant's Consolidated
Balance Sheets $ - $ 17
======== =========
The Registrant's actuarially determined Benefit Plan costs for 1998,
1997 and 1996 include the following:
1998 1997 1996
-------- -------- ---------
Service cost $ 243 $ 228 $ 222
Interest cost 945 896 896
Actual return on plan assets (406) (278) (98)
Amortization and deferral 526 526 434
-------- -------- ---------
Total annual plan costs $ 1,308 $ 1,372 $ 1,454
======== ======== =========
C. SUPPLEMENTAL RETIREMENT PLANS
The Registrant provides certain supplemental retirement plans for key
employees. The projected benefit obligation is approximately $1,837,000 which is
being accrued over the service period of these key employees. The supplemental
retirement plans are unfunded. The Registrant accrued and expensed $61,000,
$612,000 and $310,000 related to these benefits in 1998, 1997 and 1996,
respectively.
II-23
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 received 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 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 $459,000 for 1998, $439,000 for 1997 and
$381,000 for 1996. 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 $459,000 1998 award, $310,000 will be paid in cash during fiscal
1999. Of the $439,000 1997 award, $297,000 was paid in cash during 1998. Of the
$381,000 1996 award, $269,000 was paid in cash during 1997. Grant shares
totaling 7,230, 5,989, and 4,491 were purchased by the Registrant and reissued
to key employees during 1998, 1997, and 1996, respectively.
E. RESTRICTED STOCK INCENTIVE PLAN
The Restricted Stock Incentive Plan provides that up to 60,000 shares of
Providence Energy common stock may be granted to employees of 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 the Registrant. Vesting may be accelerated under certain
circumstances.
Awards under the Restricted Stock Incentive Plan totaled approximately
$90,000 in 1998 consisting of 4,230 shares and 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.
F. 1998 PERFORMANCE SHARE PLAN
Effective October 1, 1998, the Board of Directors adopted a Performance
Share Plan to encourage executives' interest in longer-term performance by
keying incentive payouts to the total return performance of Providence Energy
Corporation's (Providence Energy) common stock in relation to that of other
companies in the E.D. Jones gas distribution group of approximately 30 companies
and to the change in Providence Energy's Stock price over three-year performance
periods. The number of shares earned will range from 50 percent to 150 percent
of awarded shares, if based on the relative total shareholder return method, and
50 percent to 100 percent, if based on the increase in the stock price of
Providence Energy's common stock during the three-year period. These levels were
developed to bring total compensation levels for the Registrant and its parent
company, Providence Energy Corporation, more in line with survey data for the
relevant labor market. No shares will be earned unless Providence Energy
shareholders have earned a minimum annual return over the three-year period
II-24
equal to the total annual return for thirty-year Treasury notes during such
period. Dividends will not be paid on the shares until they are earned. Awards
will be paid half in cash and half in Providence Energy common stock.
7. COMMITMENTS AND CONTINGENCIES
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 condition.
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 and other
equipment under capital leases.
Property under Capital Leases:
- ------------------------------
(thousands of dollars) 1998 1997
- --------------------------------------------------------
Gas plant $ 6,116 $ 6,116
Information systems 1,988 1,988
Accumulated depreciation (6,937) (6,484)
------- -------
$ 1,167 $ 1,620
======= =======
Commitments for Capital Leases:
- -------------------------------
LNG Computer
(thousands of dollars) Storage Equipment Total
- ----------------------------------------------------------------
1999 $ 136 $ 484 $ 620
2000 136 297 433
2001 135 111 246
2002 - 35 35
------- ------- ------
$ 407 $ 927 $1,334
======= ======= ======
C. OPERATING LEASES
The Registrant also leases facilities and equipment under operating leases
with a total future obligation of approximately $578,000 as of September 30,
1998.
D. GAS SUPPLY
As part of the Price Stabilization Plan Settlement Agreement described in
Note 9, the Registrant 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 contract, DETM guarantees to meet the Registrant's supply
requirements; however, the Registrant must purchase all of its gas supply
exclusively from DETM. Under the contract, the Registrant transferred
responsibility for its pipeline capacity resources, storage contracts and LNG
capacity to DETM. As a result, the Registrant's gas inventories of approximately
$18 million at September 30, 1997 were sold at book value to DETM on October 1,
1997.
II-25
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. At September 30, 1997, the remaining
minimum obligation of $5.5 million has been recorded in the accompanying
Consolidated Balance Sheets along with a regulatory asset anticipating future
recovery. As part of the above supply contract, DETM assumed liability for these
transition costs during the contract's three-year term. At the end of the three-
year term of the contract, the Registrant will assume any remaining liability,
which is not expected to be material.
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, the Registrant
believes it is in substantial compliance with such laws and regulations.
At September 30, 1998, the Registrant was aware of five 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.
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 September 30, 1998,
approximately $2.0 had 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 the site. The Registrant
has completed the study which indicated that remediation will be required for
two-thirds of the property. The remediation is expected to begin in February
1999 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.
II-26
At September 30, 1998, the Registrant compiled a preliminary range of
costs, based on removal and off-site disposal or recycling of contaminated soil,
ranging from $1.8 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 range noted.
Based on the proposals for remediation work, the Registrant has accrued $1.8
million at September 30, 1998, 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 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 1997, contamination from scrapped meters and regulators was
discovered at this site. The Registrant has reported this to DEM and the Rhode
Island Department of Health and is in the process of remediation. It is
anticipated that remediation will cost approximately $10,000. Accordingly, the
Registrant has accrued $10,000 at September 30, 1998 for anticipated future
remediation costs.
In November 1998 the Registrant received a letter of responsibility from
DEM relating to possible contamination on previously-owned property on Allens
Avenue in Providence. The current owner of the property has been similarly
notified. The Registrant lacks sufficient information at this time to determine
the validity of the claim, the amount of the clean-up costs or any defenses
which may be available with respect to such claim.
In prior rate cases filed with the RIPUC, the Registrant requested that
environmental investigation and remediation costs be recovered by inclusion in
its depreciation factors consistent with the rate recovery treatment for all
types of cost of removal. Due to the magnitude of the Registrant's environmental
investigation and remediation expenditures, the Registrant sought current
recovery for these amounts. As a result, in accordance with the Price
Stabilization Plan Settlement Agreement described in Note 9, 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 September 30, 1998, the Registrant has charged
environmental assessment and remediation costs of $2.6 million and an estimated
$1.8 million to the accumulated depreciation reserve and has amortized $.4
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.
II-27
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, Accounts Payable 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 are as follows:
1998 1997
---- ----
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------- -----------------
Cash and cash equivalents $ 798 $ 798 $ 778 $ 778
Accounts payable 7,332 7,332 16,114 16,114
Short-term debt 9,720 9,720 20,410 20,410
Long-term debt 81,071 93,707 76,079 84,039
Preferred stock 4,800 5,040 6,400 7,030
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 likely 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
In August 1997, the RIPUC approved the Price Stabilization Plan Settlement
Agreement (Energize RI or the Plan) among the Registrant, 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 RI provides
customers with a price decrease of approximately four percent in addition to a
three-year price freeze. Under Energize RI, the GCC will be suspended for the
entire term. 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
the three-year term. In addition, Energize RI 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 $.5 million and the Low-
Income Weatherization Program at an annual level of $.2 million. Energize RI
also continues the process of unbundling by requiring the Registrant to provide
unbundled service offerings up to 10 percent per year of firm deliveries.
As part of Energize RI, 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. Also, in
connection with the Plan, the Registrant wrote-off approximately $1.5 million of
previously deferred gas costs in October 1997.
II-28
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 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 to be determined by all parties to the Plan and approved
by the RIPUC.
As part of Energize RI, the Registrant is permitted to file with the
Division for the recovery of the impact of exogenous Changes (Changes), which
may occur during the three-year term of the Plan. Changes are defined as
"...significant increases or decreases in the Registrant's costs or revenues
which are beyond the Registrant's reasonable control." Any disputes regarding
either the nature or quantification of the Changes are to be resolved by the
RIPUC. The impact of any such Changes will be debited or credited to a
regulatory asset or liability account throughout the term of Energize RI and
will be recovered or refunded at the expiration of the Plan through a method to
be determined.
During 1998, due to the extremely warm temperatures, the Registrant
experienced a margin loss of approximately $4.0 million. The Registrant also
experienced a non-firm margin loss of approximately $2.2 million due to adverse
market prices of natural gas versus alternate fuels. The Registrant believes the
causes of these two events were beyond its control and thus considers them as
Changes. In fiscal 1999, the Registrant intends to file with the Division for
recovery of a portion of these losses.
In 1998, the Registrant did not earn its allowed rate of return primarily
as a result of the extremely warm weather and the loss of non-firm margin as
previously discussed in "Operating Margin" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations. Under the Plan's
design, which assumed normal weather, the Registrant should have had earnings in
year one of the Plan in excess of 10.9 percent. The earnings in excess of 10.9
percent were to be deferred in the deferred revenue account to fund capital
investments and other Plan commitments in the remaining two years of the Plan.
Absent favorable recovery for the Changes as discussed above, and/or other
factors such as colder than normal weather, the Registrant's ability to earn a
10.9 percent return on average common equity in future Plan years is
substantially impaired.
10. NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the Registrant adopted the provisions of 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.
II-29
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 $1.8 million at September 30, 1998. SOP 96-1 did not have an
impact on the Registrant's financial position or results of operations upon
adoption. Also see Note 7E "Environmental Matters".
In June 1997, the Financial Accounting Standards Board (FASB) 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 the Registrant's fiscal year ending September 30, 1999, 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 the Registrant's fiscal year ending September 30,
1999, 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 on 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 the Registrant's fiscal year ending September
30, 2000. 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 a company's election, before January
1, 1998).
The Registrant has not yet quantified the impact of adopting SFAS No. 133
on the consolidated financial statements and has not determined the timing of or
method of adoption of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". It applies to all nongovernmental entities and is
effective for the Registrant's financial statements for the fiscal year ending
September 30, 2000. The provisions of this SOP should be applied to internal-use
software costs incurred in fiscal years subsequent to December 15, 1998 for all
projects, including those projects in progress upon initial application of the
SOP.
II-30
The SOP establishes accounting standards for the determination of capital
or expense treatment of expenditures for computer software developed or obtained
for internal use based upon the stage of development. The SOP defines the three
stages as (1) Preliminary Project, (2) Application Development and (3) Post-
Implementation/Operation. As a general rule, the Preliminary Project and Post-
Implementation/Operation phase expenditures are expensed and Application
Development expenditures are capitalized.
The Registrant will adopt the SOP upon the effective date and assess its
impact at that time.
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited quarterly financial information for the two
years ended September 30, 1998. 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 1998
- --------------------------------------------------------------------
Operating revenues $59,200 $73,686 $31,155 $19,985
Operating income (loss) 6,214 11,564 644 (2,774)
Net income (loss)
applicable to
common stock 4,298 9,695 (1,106) (4,615)
Net income (loss) per
share applicable to
common stock * 3.46 7.79 (.89) (3.71)
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)
* 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 The Providence Gas Company:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of The Providence Gas Company (a Rhode
Island corporation and a wholly-owned subsidiary of Providence Energy
Corporation) as of September 30, 1998 and 1997, and the related consolidated
statements of income, changes in common stockholder's investment and cash flows
for each of the three years in the period ended September 30, 1998. 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 The
Providence Gas Company as of September 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998, 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 is presented for purposes of complying with
the Securities and Exchange Commission's rules and is 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
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
November 6, 1998
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 (58) Chairman, President, and Chief
Executive Officer 1992
James DeMetro (50) Senior Vice President, Energy
Services 1996
Gary S. Gillheeney (43) Senior Vice President, Chief
Financial Officer, and
Treasurer 1996
Robert W. Owens (50) Senior Vice President, Gas
Distribution 1996
Peter J. Gill (39) Vice President, Information
Technology 1998 **
Alycia L. Goody (46) Vice President, General Counsel,
and Secretary 1994
James A. Grasso (44) Vice President, Public and Government
Affairs, and Assistant Secretary 1998 **
Timothy S. Lyons (37) Vice President,Marketing and
Regulatory Affairs 1998
William D. Mullin (50) Vice President, Economic
Development and Operations 1996 *
Bruce G. Wilde (52) Vice President, Administration
and Assistant Secretary 1996 *
Gary L. Beland (48) Assistant Vice President, 1996
Gas Supply
Sharon A. Dufour (33) Controller 1998 **
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. Mr Dodge currently serves as a member of
the Board of Capital Properties, Inc., a non-affiliated real estate leasing
company.
Mr. DeMetro was elected Senior Vice President, Energy Services in February
1996. For four years prior thereto, Mr. DeMetro served the Registrant as Vice
President, Energy Services.
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, with his last position as Assistant Treasurer and Controller.
III-1
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, with his last position as
Vice President, Treasurer and Chief Financial Officer.
Mr. Gill was elected Vice President, Information Technology in September
1998, effective October 1, 1998. For more than two years prior thereto, Mr.
Gill served as Controller and Assistant Treasurer. 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.
Ms. Goody was elected Vice President, General Counsel and Secretary in
December 1994. For two years prior thereto, Ms. Goody served the Registrant as
General Counsel and Corporate Secretary.
Mr. Grasso was elected Vice President, Public and Government Affairs and
Assistant Secretary in September 1998, effective October 1, 1998. For one year
prior thereto, Mr. Grasso served as Vice President, Public and Government
Affairs. 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. Lyons was elected Vice President, Marketing and Regulatory Affairs in
April 1998. For more than two years prior thereto, Mr. Lyons served as
Assistant Vice President, Pricing and Regulation. 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.
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, with his last
position 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, with his last position 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 Niagara Mohawk Power Corp., a regulated natural gas utility, in
various management positions, with his last position as Manager, Gas Supply
Planning.
Ms. Dufour was elected Controller in September 1998, effective October 1,
1998. For two years prior thereto, Ms. Dufour served as Director of Financial
Information and Budgeting Services. For two years prior thereto, Ms. Dufour
served as Director of Financial Information.
* Subsequent to September 30, 1998, William D. Mullin and Bruce G. Wilde
resigned from the Registrant.
** Effective October 1, 1998.
III-2
DIRECTORS OF THE REGISTRANT
- ---------------------------
For information called for by this item, reference is made to pages 2
through 6 of Providence Energy Corporation's proxy statement filed December
16, 1998 with the Securities and Exchange Commission for the annual meeting of
shareholders to be held January 14, 1999.
III-3
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
For the information called for by this item, reference is made to pages 7 to 14
of Providence Energy Corporation's proxy statement filed December 16, 1998 with
the Securities and Exchange Commission for the annual meeting of shareholders to
be held January 14, 1999.
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
- --------------------------------------------------------
For information called for by this item, reference is made to page 6 of
Providence Energy Corporation's proxy statement filed December 16, 1998 with the
Securities and Exchange Commission for the annual meeting of shareholders to be
held January 14, 1999.
III-4
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, 1998 and 1997
Consolidated Statements of Income for the years ended September 30, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
1997 and 1996
Consolidated Statements of Capitalization--September 30, 1998 and 1997
Consolidated Statements of Changes in Common Stockholder's Investment for the
years ended September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Schedule II. Reserves for the years ended September 30, 1998, 1997 and 1996.
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, 1998.
(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 First Mortgage Indenture dated as of January 1, 1922, as supplemented by
First through Twelfth Supplemental Indentures, (incorporated by reference
to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1
(Registration No. 2-72726)).
4.2 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).
4.3 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.)
IV-1
4.4 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.)
4.5 Nineteenth Supplemental Indenture dated as of April 1, 1998.
10.1 Redacted gas supply contract dated October 1, 1997 between Duke Energy
Trading and Marketing, L.L.C. and the Registrant. (Filed as Exhibit 10 to
Form 10-Q of the Registrant for the quarter ended June 30, 1998,
incorporated herein by this reference.)
21 Subsidiary of the Registrant.
IV-2
Supplemental Schedule
Schedule II
PROVIDENCE GAS COMPANY
----------------------
RESERVES FOR THE YEARS ENDED
-----------------------------
SEPTEMBER 30, 1998, SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
-------------------------------------------------------------
(Thousands of Dollars)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/97 to Operations Add (Deduct) Created 9/30/98
-------- ------------- ------------ ------- -------
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,690 $ 4,618 $ -- $4,260 $ 2,048
Allowance for lease
receivables -
current 49 40 -- -- 89
-------- -------- -------- ------ -------
Total $ 1,739 $ 4,658 $ -- $4,260 $ 2,137
======== ======== ======== ====== =======
Allowance for lease
receivables -
long-term $ 401 $ 72 $ -- $ 101 $ 372
======== ======== ======== ====== =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $ 20,598 $ 753 $ -- $ -- $21,351
-------- -------- ------- ------ -------
Unamortized investment
tax credit 2,354 -- -- 157 2,197
-------- -------- ------- ------ -------
Other-
Liability and
damage reserve 621 (22) -- 120 479
Other 9,071 549 (984)(A) 514 8,122
-------- -------- ------- ------ -------
Total other 9,692 527 (984) 634 8,601
-------- -------- ------- ------ -------
Total deferred
credits and
reserves $ 32,644 $ 1,280 $ (984) $ 791 $32,149
======== ======== ======= ====== =======
IV-3
SCHEDULE II (cont'd)
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 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-4
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
======== ======== ====== ====== =======
(A) Principally an adjustment due to the regulatory pension liability.
(B) Principally an accrual for environmental investigation and remediation costs
in addition to an adjustment to the regulatory pension liability.
(C) Represents adjustment to the regulatory asset and liability for SFAS No. 109
activity.
IV-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/JAMES H. DODGE
-----------------------------------------------
James H. Dodge, Chairman, President and CEO
Date December 22, 1998
------------------------------------------------
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
- ------------------------
James H. Dodge (Principal Executive Officer) 12/22/98
--------
/s/ GARY S. GILLHEENEY Senior Vice President, 12/22/98
- ------------------------ --------
Gary S. Gillheeney Chief Financial Officer and
Treasurer
/s/ GILBERT R. BODELL, JR. Director 12/22/98
- ------------------------- --------
Gilbert R. Bodell, Jr.
/s/ JOHN H. HOWLAND Director 12/22/98
- ------------------------- --------
John H. Howland
/s/ DOUGLAS H. JOHNSON Director 12/22/98
- ------------------------- --------
Douglas H. Johnson
/s/ WILLIAM KREYKES Director 12/22/98
- ------------------------- --------
William Kreykes
/s/ PAUL F. LEVY Director 12/22/98
- ------------------------- --------
Paul F. Levy
/s/ ROMOLO A. MARSELLA Director 12/22/98
- ------------------------- --------
Romolo A. Marsella
/s/ M. ANNE SZOSTAK Director 12/22/98
- ------------------------- --------
M. Anne Szostak
/s/ KENNETH W. WASHBURN Director 12/22/98
- ------------------------- --------
Kenneth W. Washburn
/s/ W. EDWARD WOOD Director 12/22/98
- ------------------------- --------
W. Edward Wood
IV-6