THE PROVIDENCE GAS COMPANY
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1999
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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
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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)
401-272-5040
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Registrant's telephone number, including area code
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common Stock, $1.00 par value; 1,243,598 shares outstanding at
--------------------------------------------------------------
August 12, 1999.
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THE PROVIDENCE GAS COMPANY
FORM 10-Q
JUNE 30, 1999
PART I: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Income for the
three, nine and twelve months ended
June 30, 1999 and 1998 I-1
Consolidated Balance Sheets as of
June 30, 1999, June 30, 1998 and
September 30, 1998 I-2
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1999 and 1998 I-3
Consolidated Statements of Capitalization as of
June 30, 1999, June 30, 1998 and
September 30, 1998 I-4
Notes to Consolidated Financial Statements I-5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations I-9
Item 6 Exhibits and Reports on Form 8-K II-1
Signature II-2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM I. FINANCIAL STATEMENTS
- -----------------------------
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIODS ENDED JUNE 30
-----------------------------
(Unaudited)
-----------
THREE MONTHS NINE MONTHS TWELVE MONTHS
--------------------- ------------------------ ------------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
(thousands, except per share amounts)
Operating revenues $ 29,538 $ 31,155 $160,079 $164,041 $180,064 $195,772
Cost of gas sold 11,225 13,758 75,923 83,242 84,329 99,400
-------- -------- -------- -------- -------- --------
Operating margin 18,313 17,397 84,156 80,799 95,735 96,372
-------- -------- -------- -------- -------- --------
Operating expenses:
Operation and maintenance 10,170 10,981 34,835 34,500 46,148 46,895
Depreciation and amortization 4,063 3,449 12,278 10,360 15,401 13,459
Taxes:
State gross earnings 893 922 4,800 4,867 5,296 5,722
Local property and other 2,125 1,992 6,233 5,966 7,996 7,763
Federal income (210) (591) 7,052 6,684 4,710 5,212
-------- -------- -------- -------- -------- --------
Total operating expenses 17,041 16,753 65,198 62,377 79,551 79,051
-------- -------- -------- -------- -------- --------
Operating income 1,272 644 18,958 18,422 16,184 17,321
Other, net 357 219 694 523 755 478
-------- -------- -------- -------- -------- --------
Income before interest expense 1,629 863 19,652 18,945 16,939 17,799
-------- -------- -------- -------- -------- --------
Interest expense:
Long-term debt 1,794 1,716 5,027 4,688 6,701 6,193
Other 83 187 759 1,180 944 1,566
Interest capitalized (120) (39) (289) (193) (350) (261)
-------- -------- -------- -------- -------- --------
1,757 1,864 5,497 5,675 7,295 7,498
-------- -------- -------- -------- -------- --------
Net income (loss) (128) (1,001) 14,155 13,270 9,644 10,301
Dividends on preferred stock (69) (105) (278) (383) (382) (522)
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to
common stock $ (197) $ (1,106) $ 13,877 $ 12,887 $ 9,262 $ 9,779
======== ======== ======== ======== ======== ========
Net income (loss) per
common share - basic $ (.16) $ (.89) $ 11.16 $ 10.36 $ 7.45 $ 7.86
======== ======== ======== ======== ======== ========
Net income (loss) per
common share - diluted $ (.16) $ (.89) $ 11.16 $ 10.36 $ 7.45 $ 7.86
======== ======== ======== ======== ======== ========
Weighted average number of
shares outstanding:
Basic 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ======== ========
Diluted 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
I-1
THE PROVIDENCE GAS COMPANY
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CONSOLIDATED BALANCE SHEETS
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(thousands)
(Unaudited)
-----------
June 30, June 30, September 30,
1999 1998 1998
------------------------------------
ASSETS
- ------
Gas plant, at original cost $337,115 $307,516 $313,549
Less - Accumulated depreciation and
plant acquisition adjustments 135,000 121,573 123,885
-------- -------- --------
202,115 185,943 189,664
-------- -------- --------
Current assets:
Cash and temporary cash investments 971 7,629 798
Accounts receivable, less allowance of
$3,612 at 6/30/99, $3,558 at 6/30/98
and $2,137 at 9/30/98 16,571 17,507 9,938
Unbilled revenues 1,579 1,334 1,610
Materials, supplies and fuels 1,201 1,006 1,177
Prepaid and refundable taxes 3,059 4,418 4,417
Prepayments 1,666 662 1,663
-------- -------- --------
25,047 32,556 19,603
-------- -------- --------
Deferred charges and other assets 19,762 12,338 15,378
-------- -------- --------
Deferred environmental costs 7,757 3,844 3,969
-------- -------- --------
Total assets $254,681 $234,681 $228,614
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying
statement) $185,895 $177,197 $164,462
-------- -------- --------
Current liabilities:
Notes payable 3,000 - 9,720
Current portion of long-term debt 3,015 3,650 3,050
Accounts payable 9,482 4,502 7,332
Accrued compensation 1,617 1,033 1,225
Accrued environmental expense 5,000 - -
Accrued interest 1,262 1,419 1,457
Accrued taxes 5,126 6,466 2,537
Accrued vacation 1,951 1,859 1,597
Accrued workers compensation 563 502 530
Customer deposits 2,794 3,148 2,998
Deferred revenue (note 3) 1,259 - -
Other 2,322 1,755 2,247
-------- -------- --------
37,391 24,334 32,693
-------- -------- --------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 22,926 21,273 21,351
Unamortized investment tax credits 2,079 2,236 2,197
Accrued environmental expense - 1,750 1,750
Accrued pension 5,881 6,612 5,681
Other 509 1,279 480
-------- -------- --------
31,395 33,150 31,459
-------- -------- --------
Commitments and contingencies
Total capitalization and liabilities $254,681 $234,681 $228,614
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
I-2
THE PROVIDENCE GAS COMPANY
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30
---------------------------------
(Unaudited)
1999 1998
-------------------
(thousands)
Cash provided by (used for)-
Operating Activities:
Net income $ 14,155 $ 13,270
Items not requiring cash:
Depreciation and amortization 12,278 10,456
Change as a result of regulatory actions (1,413) 1,500
Deferred Federal income taxes 1,575 675
Amortization of investment tax credits (118) (118)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (6,633) 13,441
Unbilled revenues 31 1,324
Deferred gas costs - (2)
Inventories (24) 160
Prepaid and refundable taxes 1,358 (1,125)
Prepayments (3) 304
Accounts payable 2,150 (6,112)
Accrued compensation 392 (739)
Accrued interest (195) 227
Accrued taxes 2,471 3,937
Accrued vacation, accrued workers
compensation, customer deposits
and other 480 501
Accrued pension 200 (21)
Deferred charges and other (2,120) 517
Deferred environmental costs (538) 131
-------- --------
Net cash provided by
operating activities 24,046 38,326
-------- --------
Investing Activities:
Expenditures for property, plant and
equipment, net (24,252) (18,065)
-------- --------
Financing Activities:
Issuance of mortgage bonds 15,000 15,000
Payments on long-term debt (2,442) (2,435)
Decrease in notes payable (6,720) (20,410)
Redemption of preferred stock (1,600) (1,600)
Cash dividends on common shares (3,581) (3,582)
Cash dividends on preferred shares (278) (383)
-------- --------
Net cash provided by (used in) financing
activities 379 (13,410)
-------- --------
Increase in cash and temporary
cash investments 173 6,851
Cash and temporary cash investments at
beginning of period 798 778
-------- --------
Cash and temporary cash investments at
end of period $ 971 $ 7,629
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest (net of amount capitalized) $ 5,463 $ 5,292
Income taxes (net of refunds) $ 2,953 $ 2,251
Schedule of non-cash investing activities:
Capital lease obligations for equipment $ 115 $ -
The accompanying notes are an integral part of
these consolidated financial statements.
I-3
THE PROVIDENCE GAS COMPANY
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CONSOLIDATED STATEMENTS OF CAPITALIZATION
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(thousands)
(Unaudited)
-----------
June 30, June 30, September 30,
1999 1998 1998
------------------------------------
Common stockholder's investment:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 as of 6/30/99,
as of 6/30/98 and 9/30/98 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,619 37,543 37,590
Retained earnings 53,103 48,616 42,807
-------- -------- --------
Total common equity 91,966 87,403 81,641
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 32 shares as of
6/30/99 and 48 shares as of 6/30/98 3,200 4,800 4,800
and 9/30/98 -------- -------- --------
Long-term debt:
First Mortgage Bonds 90,728 84,600 77,328
Other long-term debt 2,093 2,713 2,573
Capital leases 923 1,331 1,170
-------- -------- --------
Total long-term debt 93,744 88,644 81,071
Less current portion 3,015 3,650 3,050
-------- -------- --------
Long-term debt, net 90,729 84,994 78,021
-------- -------- --------
Total capitalization $185,895 $177,197 $164,462
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
I-4
THE PROVIDENCE GAS COMPANY
Notes to Consolidated Financial Statements
1. Accounting Policies
-------------------
It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein when read
with the annual report for 1998 filed on Form 10-K are adequate to make the
information presented not misleading.
2. Reclassifications
-----------------
Certain prior period amounts have been reclassified for consistent
presentation with the current period.
3. Rates and Regulation
--------------------
The Registrant is subject to the regulatory jurisdiction of the Rhode Island
Public Utilities Commission (RIPUC) with respect to rates and charges, standards
of service, accounting and other matters. In August 1997, the RIPUC approved
the Price Stabilization Plan Settlement Agreement (the Plan or Energize RI)
among the Registrant, the Rhode Island Division of Public Utilities and Carriers
(the Division), the Energy Council of Rhode Island, and the George Wiley Center.
Effective October 1, 1997 through September 30, 2000, Energize RI provides firm
customers with a price decrease of approximately four percent in addition to a
three-year price freeze. Under Energize RI, the Gas Charge Clause mechanism has
been suspended for the entire term. Also, in connection with the Plan, the
Registrant wrote off approximately $1.5 million of previously deferred gas costs
in October 1997. Energize RI also provides for the Registrant to make
significant capital investments to improve its distribution system and support
economic development. Specific capital improvement projects funded under
Energize RI are estimated to total approximately $26 million over its three-year
term. In addition, under Energize RI, the Registrant provides funding for the
Low-Income Assistance Program at an annual level of $1 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 allowing the Registrant to provide
unbundled service offerings for up to 10 percent per year of firm deliveries.
As part of Energize RI, the Registrant will reclassify and amortize
approximately $4.0 million of environmental costs. These costs and all
environmental costs incurred during the term of the Plan will be amortized over
a 10-year period.
Under Energize RI, the Registrant may earn up to 10.9 percent annually on its
average common equity, which is capped at $81.0 million, $86.2 million and
$92.0 million in fiscal 1998, 1999, and 2000, respectively. In 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.
I-5
As part of Energize RI, the Registrant is permitted to file annually with the
Division for the recovery 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 between the Registrant and
the Division 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.
In fiscal 1998, the Registrant did not earn its allowed rate of return
primarily as a result of the extremely warm winter weather and the loss of non-
firm margin. The Registrant believed the causes of these two events were beyond
its reasonable control and thus considered them as Changes. In March 1999, the
Registrant reached an agreement with the Division, which allowed it to recover
$2.45 million in revenue losses attributable to Changes experienced by the
Registrant in fiscal 1998. The RIPUC has reviewed the Changes agreement to
ensure consistency with the terms of Energize RI and affirmed the agreement at
its May 28, 1999 open meeting.
During the third quarter of fiscal 1999, the Registrant recognized into
revenue $2.45 million for the Changes recovery, and deferred approximately
$1.45 million of revenue under the provisions of the earnings cap of Energize
RI. As of June 30, 1999, the deferred revenue account, substantially relating to
the earnings cap, had a balance of approximately $1.3 million.
4. Gas Supply
----------
As part of the Price Stabilization Plan Settlement Agreement described above
in Rates and Regulations, the Registrant entered into a full requirements gas
---------------------
supply contract with Duke Energy Trading and Marketing, L.L.C., (DETM), a joint
venture of Duke Energy Corporation and Mobil Corporation, for a term of three
years. Under the contract, DETM guarantees to meet the Registrant's supply
requirements; however, the Registrant must purchase all of its gas supply
exclusively from DETM. In addition the Registrant transferred responsibility
for its pipeline capacity resources, storage contracts and liquefied natural gas
(LNG) capacity to DETM.
In addition to providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover the Registrant's non-firm sales customers'
needs and to make up the supply imbalances of transportation customers. DETM
will also provide various other services to the Registrant's transportation
service customers including enhanced balancing, standby and the storage and
peaking services available under the Registrant's approved Firm Transportation
(FT-2) storage service effective December 1, 1997. DETM will receive the
supply-related revenues from these services in exchange for providing the supply
management inherent in these services.
Included in the DETM contract are a number of other important features.
The Registrant has retained the right to continue to make portfolio changes to
reduce supply costs. To the extent the Registrant makes such changes, the
Registrant must keep DETM whole for the value lost over the remainder of the
contract period. The outsourcing of day-to-day supply management relieves the
Registrant of the need to perform certain upstream supply management functions
which will make it possible for the Registrant to take on the additional supply
management workload required by the further unbundling of firm sales customers
without major staffing additions.
The Registrant has entered into an agreement replacing its existing
service contract with Algonquin LNG, Inc. (ALNG), a subsidiary of Duke Energy
Corporation. ALNG is the owner and operator of a LNG tank located in Providence,
Rhode Island. The Registrant relies upon this service to provide gas supply into
its distribution system during the winter period. The service provided for in
the agreement, subject to the successful completion of construction, is expected
to begin on November 1, 1999. Under the terms of the agreement, ALNG will
replace and expand the vaporization capability at the tank and make other
necessary improvements to modernize the tank and ensure its reliable operation
in the future. The Registrant will receive enhanced gas supply capability and
will no longer be responsible for compressing boil-off from the LNG tank before
delivery into its distribution system. Under the terms of the agreement, the
Registrant will receive approximately
I-6
$2.6 million from ALNG. Of the $2.6 million, approximately $900,000 represents
reimbursement to the Registrant for costs incurred, as well as those that will
result, related to the project including labor, engineering and legal expenses.
The remaining portion of the payment, or approximately $1.7 million, will be
paid to DETM under the Registrant's contract with DETM as reimbursement for the
additional costs that DETM will incur when the ALNG storage capacity is released
to DETM as provided for in the gas supply contract described above.
In June 1999, the Federal Energy Regulatory Commission (FERC) issued an order
in Docket Number CP99-113 approving ALNG's project described above. In that
order FERC also approved the new 10-year contract between ALNG and the
Registrant for service from the tank. Also approved was the Registrant's
parallel filing, PR99-8, requesting regulatory authorization to charge ALNG for
transportation of gas vaporized for other ALNG customers and transported by the
Registrant to the Algonquin pipeline on behalf of those customers.
5. 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 June 30, 1999, the Registrant was aware of five sites at which future costs
may be incurred.
Plympton Sites
- --------------
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.
Providence Site
- ---------------
During 1995, the Registrant began a study at its primary gas distribution
facility located in Providence, Rhode Island. This site formerly contained a
manufactured gas plant operated by the Registrant. As of June 30, 1999,
approximately $2.8 million had been spent primarily on studies and the
formulation of remediation work plans 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 began in June and will continue for a duration of
approximately six months. During this remediation period, the remaining one-
third of the property will also be investigated and remediated if necessary.
The Registrant has compiled a preliminary range of costs, based on removal and
off-site disposal of contaminated soil, ranging from $5.0 million to $7.0
million. However, because of the uncertainties associated with environmental
assessment and remediation activities, the
I-7
future cost of remediation could be higher than the range noted. Based on the
proposals for remediation work, the Registrant accrued $5.0 million at June 30,
1999 for anticipated future remediation costs at this site.
Westerly 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 coal tar waste at this site. As a result, the
Registrant completed a site characterization test. Based on the findings of that
test, the Registrant concluded that remediation would be required. As of
June 30, 1999, the Registrant had removed an underground oil storage tank and
regulators containing mercury disposed of on the site, as well as some localized
contamination. The costs associated with the site characterization test and
partial removal of soil contaminants were shared equally with the former owner
of the property. The Registrant is currently engaged in negotiations to transfer
the property back to the previous owner, who would continue to remediate the
site. The purchase and sale agreement is anticipated to be signed during the
current fiscal year, at which time the previous owner will assume responsibility
for removal of coal tar waste on the site. The Registrant remains responsible
for clean up of any mercury released into adjacent water. Contamination from
scrapped meters and regulators, which was discovered in 1997, was reported to
the DEM and the Rhode Island Department of Health and the Registrant has
completed the necessary remediation. Costs incurred by the Registrant to
remediate this site were approximately $100,000.
Allens Avenue Site
- ------------------
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 operator of the property has been similarly
notified. Both parties have been designated as PRPs. A work plan has been
created and approved by DEM. An investigation has begun in order to determine
the extent of the problem and the Registrant's responsibility. The Registrant
has entered into a cost sharing agreement with the current operator of the
property, under which the Registrant will be held responsible for approximately
20 percent of the costs related to the investigation. Costs incurred to date by
the Registrant for this investigation have been approximately $100,000. Until
the results of the investigation are known, the Registrant can not offer any
conclusions as to its responsibility.
General
- -------
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 Rates and Regulations,
effective October 1, 1997, all environmental investigation and remediation costs
incurred through September 30, 1997, as well as all costs incurred during the
three-year term of the Plan, will be amortized over a ten-year period.
Additionally, it is the Registrant's practice to consult with the RIPUC on a
periodic basis when, in management's opinion, significant amounts might be
expended for environmental-related costs. As of June 30, 1999, the Registrant
has incurred environmental assessment and remediation costs of $3.6 million and
has accrued an estimated $5.0 million in future costs and has amortized $850,000
of these costs.
Management has begun discussions with other parties who may assist the
Registrant in paying the costs associated with the remediation of the above
sites. Management believes that its program for managing environmental issues,
combined with rate recovery and financial contributions from others, will likely
avoid any material adverse effect on its results of operations or its financial
condition as a result of the ultimate resolution of the above sites.
I-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The Providence Gas Company (the Registrant) and its subsidiary and their
representatives may from time to time make written or oral statements, including
statements contained in the Registrant's filings with the Securities and
Exchange Commission (SEC), which constitute or contain "forward-looking"
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations, and releases. All
statements other than statements of historical facts included in this Form 10-Q
regarding the Registrant's financial position, strategic initiatives and
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 availability and terms of capital; the business abilities and
judgment of personnel; the ability of the Registrant and its suppliers and
customers to modify or redesign their computer systems to work properly in the
Year 2000; the Registrant's 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.
RESULTS OF OPERATIONS
The Registrant's operating revenues, operating margin and net income (loss)
applicable to common stock for the three, nine and twelve months ended June 30,
1999 and for comparable periods ended June 30, 1998 are as follows:
(thousands)
Three Months Nine Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Operating revenues $29,538 $31,155 $160,079 $164,041 $180,064 $195,772
======= ======= ======== ======== ======== ========
Operating margin $18,313 $17,397 $ 84,156 $ 80,799 $ 95,735 $ 96,372
======= ======= ======== ======== ======== ========
Net income (loss)
applicable to
common stock $ (197) $(1,106) $ 13,877 $ 12,887 $ 9,262 $ 9,779
======= ======= ======== ======== ======== ========
Operating Margin
- ----------------
During the latest quarter, operating margin increased approximately $900,000
or 5.3 percent compared to the same quarter last year.
The Registrant experienced weather for the current quarter that was 5.1
percent warmer than the same quarter last year. The warmer temperatures resulted
in decreased margin of approximately $500,000 compared to the same quarter last
year. Offsetting the warmer than normal weather, the Registrant was permitted to
recover $2.45 million in 1998 revenue losses attributable to exogenous changes,
reduced by approximately $1.4 million of revenues deferred under the provision
of the earnings cap in the Energize RI program, which has resulted in
approximately $1.0 million of additional margin in the current quarter. Also,
the Registrant recognized $200,000 of additional margin as a result of actual
rate reductions of pipeline fixed costs as provided for in the pipeline cost
tracker feature of the Duke Energy Trading and Marketing, L.L.C. contract.
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During the current nine-month period, weather was 1.4 percent warmer when
compared to the same nine-month period last year. Due to the warmer weather,
the Registrant's margin decreased approximately $400,000. In comparison to the
prior year period, margin increased as a result of a one-time write-off of
$1.5 million in fiscal year 1998 of previously deferred gas costs in connection
with Energize RI. Offsetting the warmer weather for the current nine-month
period, was the $2.45 million of 1998 exogenous changes recovery, which was
negotiated with the Rhode Island Division of Public Utilities and Carriers,
reduced by $1.45 million of deferred revenue, in order to arrive at a net
increase in margin of $1.0 million. Lastly, the Registrant's customer growth has
resulted in approximately $600,000 of additional margin.
The Registrant experienced weather that was 1.8 percent warmer for the twelve
months ended June 30, 1999 as compared to the same period last year. The warmer
temperatures decreased margin by $1.3 million compared to the prior year.
Offsetting the warmer than normal weather was approximately $1.0 million of
margin recognized under Energize RI as a net result of recording 1998 exogenous
changes awarded of $2.45 million, reduced by $1.45 million of deferred revenue.
Also offsetting the warmer weather was $600,000 of increased margin due to
customer growth.
Additionally, the last three months of fiscal year 1997 included the impact on
margin resulting from the use of seasonal gas cost factors. As a result of no
longer using these seasonal gas cost factors since October 1, 1997, margin
decreased approximately $1.4 million in total for the twelve-month period.
Operating and Maintenance Expenses
- ----------------------------------
Overall operating and maintenance expenses decreased approximately $800,000 or
7.4 percent versus the comparable three-month period ended June 30 last year.
The primary contribution to the decrease was the current one-time reimbursement
of previously incurred and anticipated expenses under a newly-approved contract
with Algonquin LNG, Inc.
Operating and maintenance expenses have increased approximately $300,000 or
1.0 percent for the nine-month period ended June 30, 1999 as compared to the
same period last year. During the nine months ended June 30, 1999, the decrease
noted above has been more than offset by increases due to recruiting qualified
employees in a tight labor market and consulting and other costs related to
technology initiatives.
During the twelve-month period ended June 30, 1999, as compared to the twelve-
month period ended June 30, 1998, operating and maintenance expenses decreased
approximately $700,000 or 1.6 percent. Expenses impacting the nine-month period
were also responsible for the twelve-month increase.
Depreciation and Amortization Expense
- -------------------------------------
Depreciation and amortization expense increased approximately $600,000 or
17.8 percent for the three months ended June 30, 1999, approximately $1.9
million or 18.5 percent for the nine months ended June 30, 1999 and
approximately $1.9 million or 14.4 percent for the twelve months ended June 30,
1999, versus the same periods last year. These increases are the result of
increased capital spending; technology projects; Year 2000 costs, which were
capitalized under the RIPUC order in accordance with the provisions of Energize
RI; and the amortization of environmental costs.
Taxes
- -----
Taxes increased approximately $500,000 or 20.9 percent for the three months
ended June 30, 1999 and $600,000 or 3.2 percent for the nine months ended
June 30, 1999. For the twelve months ended June 30, 1999, taxes decreased
approximately $700,000 or 3.7 percent. The changes are primarily due to
fluctuations in Federal income and state gross earnings taxes as a result of
varying levels of pretax income and operating revenues. Additionally, local
property taxes have increased as a result of capital spending.
Interest Expense
- ----------------
Interest expense decreased approximately $100,000 or 5.7 percent for the
three months ended June 30, 1999, $200,000 or 3.1 percent for the nine months
ended June 30, 1999, and approximately $200,000 or 2.7 percent during the twelve
months ended June 30, 1999, versus the same periods last year. Long-term
interest expense decreased, as a result of the
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Registrant's Series S First Mortgage Bond issuance in April 1998, which
refinanced higher cost long-term debt, but this decrease was more than offset by
the Series T First Mortgage Bond issuance in February 1999, which refinanced
short-term borrowings to maintain an appropriate capitalization ratio.
Future Outlook
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Under Energize RI, the Registrant may earn up to 10.9 percent annually on its
average common equity which is capped at $81.0 million, $86.2 million, and
$92.0 million in fiscal 1998, 1999 and 2000, respectively. In 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 Rhode Island Public Utilities Commission (RIPUC).
As part of Energize RI, the Registrant is permitted to file annually with the
Rhode Island Division of Public Utilities and Carriers (Division) for the
recovery of exogenous changes (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 between the Registrant and the Division
regarding either the nature or quantification of the Changes are to be resolved
by the RIPUC. The impact of any Changes will be debited or credited to a
regulatory asset or liability account throughout the term of Energize RI and
will be recovered or refunded at the expiration of the Plan through a method to
be determined.
In fiscal 1998, the Registrant did not earn its allowed rate of return
primarily as a result of the extremely warm winter weather and the loss of non-
firm margin. The Registrant believed the causes of these two events were beyond
its reasonable control and thus considered them as Changes. In March 1999, the
Registrant reached an agreement with the Division which allowed it to recover
$2.45 million in revenue losses attributable to Changes experienced by the
Registrant in fiscal 1998. The RIPUC has reviewed the Changes agreement to
ensure consistency with the terms of Energize RI and affirmed the agreement at
its May 28, 1999 open meeting.
During the third quarter of fiscal 1999, the Registrant recognized into
revenue $2.45 million for the Changes recovery, and deferred approximately
$1.45 million of revenue under the provisions of the earnings cap of Energize
RI. As of June 30, 1999, the deferred revenue account, substantially relating to
the earnings cap, had a balance of approximately $1.3 million.
At the conclusion of the latest transportation service enrollment period on
March 1, 1999, an additional 210 customers had signed up for Business Choice.
The program now has approximately 1,700 firm transportation customers with
annual deliveries of almost 6 billion cubic feet per year which is approximately
25 percent of the Registrant's total annual firm deliveries. There are
14 marketers serving the Registrant's customers and transporting on the system.
On April 1, 1999, the Registrant filed with the RIPUC a proposal for
enhancements to the Business Choice program. The proposed changes do not
generate additional revenue for the Registrant but rather affect the terms and
conditions under which transportation service is offered.
During April and May 1999, the Algonquin LNG tank in Providence was completely
emptied in order to allow access for internal inspection and, if necessary,
repair. As a result, 335,000 million cubic feet of LNG was vaporized from the
tank into the Registrant's distribution system. Since the vaporized gas had a
heat energy content approximately 30 percent higher than the pipeline supplies
normally used, the Registrant's customers' metered volumes were lower because a
smaller volume of gas produced the same energy requirement.
The Registrant anticipates receiving a capital contribution of approximately
$4.6 million which will be received from the parent by the end of the fourth
quarter, in order to fund working capital requirements.
LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities decreased approximately $14.3 million for the nine months ended
June 30, 1999 compared to the same period last year. On a comparative basis, the
current year cash flow decreased as a result of the prior year reflecting
receipt of funds in the first quarter of fiscal 1998 from the sale of the
Registrant's working gas in storage to Duke Energy Trading and Marketing, L.L.C.
This decrease in operating cash flow was offset by a temporary increase in
accounts payable this year related to the timing of such gas supply payments.
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Capital expenditures for the nine months ended June 30, 1999 of $24.3 million
reflected an increase of $6.2 million or 34.2 percent when compared to
$18.1 million for the same period last year. This spending increase was due
primarily to the Registrant's technology expenditures related to Year 2000 and
system enhancements. Capital expenditures for the remainder of fiscal year 1999
and fiscal year 2000 are expected to total approximately $39.8 million.
During the current nine months, the Registrant's cash used for financing
activities decreased $13.8 million. The Registrant issued $15 million in Series
T First Mortgage Bonds on February 8, 1999. The proceeds were used to reduce
borrowings under its lines of credit as well as for general corporate purposes.
The Series T bonds are for a 30 year term at an interest rate of 6.5 percent.
The Registrant estimates savings of approximately $1.8 million over the life of
the new debt. The Registrant has received an order from the Division which
permits the amortization of the Series M bond repurchase premium over the life
of the Series T bonds.
YEAR 2000 UPDATE
The Registrant's company-wide Year 2000 (Y2K) Project is proceeding on
schedule. The Project addresses the problem arising from the use in software
programs and computing infrastructure of two-digit years to define the
applicable year, rather than four-digit years, and from time-sensitive software
that may recognize a date using "00" as the last two digits of the year 1900,
rather than the year 2000.
Readiness
The Registrant recognizes that the products and services that the Registrant
provides to its customers are essential, and senior management has made Year
2000 readiness a top priority. The Registrant's Year 2000 Project Office has
been working with two international consulting firms to ensure the continuity of
mission critical business systems and processes before and beyond the Year 2000.
The Registrant has organized the Project around the following four major areas:
1. Information Technology (IT) Systems
The Registrant continues to implement its technology plan, 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 functions of customer inquiry, service orders and
billing. Migration also includes the replacement of business applications such
as financial, human resources, and procurement with an Enterprise Resource
Planning (ERP) system. These new business applications have been represented to
be Year 2000 ready by their respective vendors. Validation testing of these
systems for Year 2000 readiness has been completed. Both the CIS and ERP systems
have been successfully placed into operation. The Human Resources (HR) module of
the ERP system has not been put into operation. Although the project is
progressing well, full implementation of the HR module is expected on or about
October 1, 1999.
The Registrant completed an inventory and assessment of its existing IT
systems and IT infrastructure in March 1999. The Registrant has completed the
implementation phase to achieve Year 2000 readiness. The Registrant has created
a Year 2000 test lab to test many of its IT systems. All mission critical and
important systems are remediated and tested for Year 2000 readiness, except for
two systems associated with metering and billing for certain commercial
transportation customers. One vendor has indicated that the Y2K-ready release
of the computer applications will not be available until September 1999. The
vendor for the other computer application has delivered Y2K-ready code as of the
date of this report and the application is currently undergoing validation
testing.
The Registrant has implemented procurement policies as part of its efforts to
ensure Year 2000 readiness. These policies address any future changes to the
Registrant's IT systems environment and its future acquisitions of IT systems.
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2. Embedded Systems
Embedded microprocessors are found in equipment deployed in the Registrant's
distribution and facility operations. The distribution area includes, but is
not limited to, the monitoring, storage, measurement and control of the flow of
natural gas. The facility area includes, but is not limited to, back-up power
supply, HVAC and security at the Registrant's offices.
The Registrant has successfully completed the assessment, remediation and
testing of all mission critical embedded systems including the Registrant's
Supervisory Control and Data Acquisition gas distribution system.
3. Upstream/Downstream
The Registrant has contacted all of its major suppliers and none of them have
indicated concern for potential business disruption.
The Registrant's major suppliers critical to the delivery of natural gas to
its system, including interstate pipelines, Duke Energy Trading and Marketing,
New England Electric System and Bell Atlantic, have indicated that they are
following a comprehensive program on a timely schedule designed to achieve Year
2000 readiness. While the Registrant cannot guarantee Y2K readiness of these
and other suppliers, the information received from them indicates that they
expect to fulfill their obligations to the Registrant on and after January 1,
2000. The Registrant will continue to monitor the status of all critical
suppliers throughout 1999. Any risk areas that surface as a result of these
assessments will be addressed in contingency planning.
The Registrant is actively participating with the Rhode Island Y2K Association
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 is also communicating its Year 2000 readiness to customers in
bill stuffers, on its website and in state-sponsored "town meetings" throughout
its service territory. On February 17, 1999 the Registrant provided testimony
to the RIPUC regarding the Registrant's Year 2000 readiness.
4. Contingency Planning
The Registrant has contingency plans in place for response to certain
emergency operational situations. In addition, the Registrant has completed
over fifty workshops to develop actionable contingency plans which will
specifically address risks to the top seventy-two business processes related to
the Year 2000 computer problem. Such contingency plans may include using manual
procedures and arranging for alternative suppliers. The Registrant has
developed Year 2000 contingency plans for 96 percent of its critical business
processes. The remaining plans will be completed in the fourth quarter and
there will be continued refinement to the plans throughout 1999.
Year 2000 Costs
The Registrant expects to capitalize Year 2000 expenses and will amortize
these costs over a five-year amortization period consistent with the regulatory
treatment approved by the RIPUC under the Energize RI program. Additionally, it
is the Registrant's practice to communicate with the RIPUC on a periodic basis
when, in management's opinion, significant amounts might be expended for Year
2000 costs.
As of June 30, 1999, the Registrant had deferred Year 2000 costs of
approximately $5.0 million. Costs for these activities, together with
previously deferred Year 2000 costs, are expected to range from $5.0 million to
$6.0 million. These estimated costs include external contractors and service
providers and the balance of the unrecovered legacy CIS system that was
replaced, as well as the purchase of computer hardware and software. These
estimates do not include Year 2000 costs for implementing the new CIS and ERP
systems pursuant to the Registrant's ongoing technology plan.
Additionally, the Registrant does not separately track the internal costs
incurred for the Year 2000 project. Such costs are principally the related
payroll costs for the information systems group.
I-13
These cost estimates and the dates on which the Registrant plans to complete
contingency planning are based on management's current best estimates which were
derived utilizing numerous assumptions of future events, including the continued
availability of technological and certain other resources, the accuracy of third
party assurances and other factors. There can be no guarantee that these
estimates will be achieved, and actual results may differ from those discussed
above.
Risk Assessment
No amount of preparation and testing can guarantee Year 2000 readiness.
However, the Registrant believes that it has taken and will take appropriate
preventative measures designed to minimize disruption before, during and after
January 1, 2000.
A disruption in the extraction or processing, transmission or storage of gas
or its distribution due to Year 2000 problems experienced by the Registrant's
gas suppliers could prevent those suppliers from delivering a sufficient amount
of gas to enable the Registrant to serve certain customer segments. Even if the
flow of gas is not disrupted, customers may not be able to receive gas if
electrical service is disrupted.
Because of the difficulty of assessing Year 2000 readiness of these suppliers
and others outside the control of the Registrant, the Registrant considers
potential disruptions by these third parties to present the "reasonably likely
worst case scenario." The Registrant's inability to serve its customers could
result in increased costs, loss of revenue and potential claims.
This Year 2000 update contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to risks and uncertainties and actual results may differ
materially from those described herein.
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PROVIDENCE GAS COMPANY
----------------------
PART II. OTHER INFORMATION
- ------- -----------------
Item 6 (a). Exhibits
- ---------------------
10a. Employment agreement dated October 1, 1998 between Peter J. Gill,
Vice President of Information Technology and the Registrant.
Item 6 (b). Reports on Form 8-K
- --------------------------------
On June 9, 1999, the Registrant filed a report on Form 8-K regarding an
agreement for recovery of exogenous changes which allowed the Registrant to
recover $2.45 million.
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THE PROVIDENCE GAS COMPANY
--------------------------
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of results
for the period reported, but such results are not necessarily indicative of
results to be expected for the year, due to the seasonal nature of the
Registrant's gas operations. All accounting policies and practices have been
applied in a manner consistent with prior periods.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Providence Gas Company
(Registrant)
BY: /s/ KENNETH W. HOGAN
----------------------------
KENNETH W. HOGAN
Vice President, Chief Financial
Officer and Treasurer
Date: August 12, 1999
---------------
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