THE PROVIDENCE GAS COMPANY
FORM 10-Q/A
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 December 31, 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)
401-272-5040
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Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___.
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Common Stock, $1.00 par value; 1,243,598 shares outstanding at
--------------------------------------------------------------
February 12, 1999.
-------------------
This amendment to the quarterly report of Providence Gas Company on
Form 10-Q for the quarter ended December 31, 1998 is made in order
reflect the appropriate average revenue rate for unbilled volumes at
the end of the period. Restatements in Part I for Item 1 and Item 2
were required.
THE PROVIDENCE GAS COMPANY
FORM 10-Q/A
DECEMBER 31, 1998
PAGE
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income for the
three and twelve months ended
December 31, 1998 and 1997 I-1
Consolidated Balance Sheets as of
December 31, 1998, December 31, 1997
and September 30, 1998 I-2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1998 and 1997 I-3
Consolidated Statements of Capitalization as of
December 31, 1998, December 31, 1997
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-10
PART II: OTHER INFORMATION
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 DECEMBER 31
---------------------------------
(Unaudited)
-----------
THREE MONTHS TWELVE MONTHS
-------------------- --------------------
1998 1997 1998 1997
-------------------- --------------------
(thousands, except per share amounts)
Operating revenues $ 53,301 $ 59,200 $178,127 $208,200
Cost of gas sold 25,628 32,333 84,943 114,017
-------- -------- -------- --------
Operating margin 27,673 26,867 93,184 94,183
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 11,612 11,318 46,107 47,449
Depreciation and amortization 4,094 3,454 14,123 12,840
Taxes:
State gross earnings 1,599 1,756 5,206 6,009
Local property and other 1,890 1,879 7,740 7,623
Federal income 2,306 2,246 4,402 4,433
-------- -------- -------- --------
Total operating expenses 21,501 20,653 77,578 78,354
-------- -------- -------- --------
Operating income 6,172 6,214 15,606 15,829
Other, net 167 157 594 456
-------- -------- -------- --------
Income before interest expense 6,339 6,371 16,200 16,285
-------- -------- -------- --------
Interest expense:
Long-term debt 1,546 1,490 6,418 6,012
Other 301 526 1,140 1,786
Interest capitalized (76) (82) (248) (263)
-------- -------- -------- --------
1,771 1,934 7,310 7,535
-------- -------- -------- --------
Net income 4,568 4,437 8,890 8,750
Dividends on preferred stock (104) (139) (452) (591)
-------- -------- -------- --------
Net income applicable to
common stock $ 4,464 $ 4,298 $ 8,438 $ 8,159
======== ======== ======== ========
Net income per
common share - basic $ 3.59 $ 3.46 $ 6.79 $ 6.56
======== ======== ======== ========
Net income per
common share - diluted $ 3.59 $ 3.46 $ 6.79 $ 6.56
======== ======== ======== ========
Weighted average number of
shares outstanding:
Basic 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
======== ======== ======== ========
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)
-----------
December 31, December 31, September 30,
1998 1997 1998
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ASSETS
- ------
Gas plant, at original cost $321,119 $295,994 $313,549
Less - Accumulated depreciation and
plant acquisition adjustments 121,969 111,631 119,916
-------- -------- --------
199,150 184,363 193,633
-------- -------- --------
Current assets:
Cash and temporary cash investments 887 3,674 798
Accounts receivable, less allowance of
$2,404 at 12/31/98, $1,924 at 12/31/97
and $2,137 at 9/30/98 21,507 38,549 9,938
Unbilled revenues 11,073 10,809 1,610
Inventories, at average cost -
Liquefied natural gas, propane and
underground storage 11 - 11
Materials and supplies 951 1,077 1,166
Prepaid and refundable taxes 2,276 1,962 4,417
Prepayments 1,610 604 1,663
-------- -------- --------
38,315 56,675 19,603
-------- -------- --------
Deferred charges and other assets 15,517 12,484 15,378
-------- -------- --------
Total assets $252,982 $253,522 $228,614
======== ======== ========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization (see accompanying
statement) $165,834 $158,090 $ 164,462
-------- -------- ---------
Current liabilities:
Notes payable 14,300 32,310 9,720
Current portion of long-term debt 3,155 3,654 3,050
Accounts payable 22,358 12,546 7,332
Accrued taxes 3,891 4,889 2,537
Accrued vacation 1,594 1,545 1,597
Customer deposits 2,977 3,406 2,998
Other 4,193 4,273 4,769
-------- -------- ---------
52,468 62,623 32,003
-------- -------- ---------
Deferred credits and reserves:
Accumulated deferred Federal income
taxes 21,876 20,823 21,351
Unamortized investment tax credits 2,158 2,315 2,197
Other 10,646 9,671 8,601
-------- -------- ---------
34,680 32,809 32,149
-------- -------- ---------
Commitments and contingencies
Total capitalization and liabilities $252,982 $253,522 $ 228,614
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
I-2
THE PROVIDENCE GAS COMPANY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED DECEMBER 31
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(Unaudited)
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1998 1997
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(thousands)
Cash provided by (used for)-
Operating Activities:
Net income $ 4,568 $ 4,437
Items not requiring cash:
Depreciation and amortization 4,001 3,486
Change as a result of regulatory actions - 1,500
Deferred Federal income taxes 525 225
Amortization of investment tax credits (39) (39)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (11,569) (7,428)
Unbilled revenues (9,463) (8,151)
Deferred gas costs - 151
Inventories 215 89
Prepaid and refundable taxes 2,141 1,331
Prepayments 53 362
Accounts payable 14,326 1,932
Accrued taxes 1,354 2,360
Accrued vacation, customer deposits
and other (600) (503)
Deferred charges and other 844 230
-------- -------
Net cash provided by (used for)
operating activities 6,356 (18)
-------- -------
Investing Activities:
Expenditures for property, plant and
equipment, net (7,753) (5,713)
-------- -------
Financing Activities:
Payments on long-term debt (1,796) (1,940)
Increase in notes payable 4,580 11,900
Cash dividends on preferred stock (104) (139)
Cash dividends on common stock (1,194) (1,194)
-------- -------
Net cash provided by financing activities 1,486 8,627
-------- -------
Increase in cash and temporary cash investments 89 2,896
Cash and temporary cash investments at
beginning of period 798 778
-------- -------
Cash and temporary cash investments at
end of period $ 887 $ 3,674
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period-
Interest (net of amount capitalized) $ 1,964 $ 1,710
Income taxes (net of refunds) $ 4 $ -
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)
-----------
December 31, December 31, September 30,
1998 1997 1998
------------------------------------------
Common stockholder's investment:
Common stock, $1 par
Authorized - 2,500 shares
Outstanding - 1,244 as of 12/31/98,
12/31/97 and 9/30/98 $ 1,244 $ 1,244 $ 1,244
Amount paid in excess of par 37,478 37,546 37,590
Retained earnings 46,077 42,415 42,807
-------- -------- --------
Total common equity 84,799 81,205 81,641
-------- -------- --------
Cumulative preferred stock:
Redeemable 8.70% Series, $100 par
Authorized - 80 shares
Outstanding - 48 shares as of
12/31/98 and 9/30/98, and 4,800 6,400 4,800
-------- -------- --------
64 shares as of 12/31/97
Long-term debt:
First Mortgage Bonds 75,728 69,600 77,328
Other long-term debt 2,479 2,988 2,573
Capital leases 1,183 1,551 1,170
-------- -------- --------
Total long-term debt 79,390 74,139 81,071
Less current portion 3,155 3,654 3,050
-------- -------- --------
Long-term debt, net 76,235 70,485 78,021
-------- -------- --------
Total capitalization $165,834 $158,090 $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
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.
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 (TEC-RI), 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 (GCC) mechanism has been 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 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 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.
I-5
In fiscal 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. 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.
These factors continue to adversely affect the Registrant in fiscal 1999. 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 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 during the remainder of Energize RI is
substantially impaired.
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) 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. 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.
As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover the Registrant's non-firm sales 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. This 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 to amend its existing service
contract with Algonquin LNG, Inc. (ALNG), a subsidiary of Duke Energy. 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. The agreement, subject to regulatory approvals, 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 delivering that
form of gas supply into its distribution system. The Registrant will receive
$2.6 million from ALNG as reimbursement for costs associated with the project
including labor, engineering and legal expenses that will result as part of this
arrangement.
I-6
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 December 31, 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 December 31, 1998,
approximately $2.2 million 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 April 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 December 31, 1998, the Registrant compiled a preliminary range of costs,
based on removal and off-site disposal of contaminated soil, ranging from $3.4
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 $3.4 million at December 31,
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. 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
December 31, 1998, the Registrant has extracted the underground oil storage tank
and has removed 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 preliminary negotiations to sell the property back to the previous
owner, who would continue to remediate the site. In addition, in 1997,
contamination from scrapped meters and regulators was discovered at this site.
The Registrant reported this to the DEM and the Rhode Island Department of
Health and has completed the necessary remediation. Costs incurred by the
Registrant to remediate this site were approximately $.1 million.
I-7
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. The current operator conducted tests that support a finding that the
Registrant may be partially responsible for some of the contamination.
Additional investigation is underway to determine the extent of the problem and
the Registrant's responsibility.
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 December 31, 1998, the
Registrant has charged environmental assessment and remediation costs of $2.7
million and an estimated $3.4 million in future costs to the accumulated
depreciation reserve and has amortized $.6 million of these costs.
Management has begun discussions with other parties who may assist the
Registrant in paying any future costs at the above sites. Management believes
that its program for managing environmental issues, combined with rate recovery
and financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information". 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. This statement requires 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).
I-8
The Registrant has not yet quantified the impact of adopting SFAS No. 133
on its 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 Statement of Position (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.
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.
I-9
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
For the current quarter and twelve month period, the Registrant's
operating revenues, operating margin and net income applicable to common
stock have decreased over the comparable period presented, as shown in the
table below:
(000's)
Three Months Twelve Months
Ended December 31 Ended December 31
Percent Percent
1998 1997 Change Change 1998 1997 Change Change
---- ---- ------ ------- ---- ---- ------ ------
Operating
revenues $53,301 $59,200 $(5,899) (10.0) $178,127 $208,200 $(30,073) (14.4)
======= ======= ======= ===== ======== ======== ======== =====
Operating margin $27,673 $26,867 $ 806 3.0 $ 93,184 $ 94,183 $ (999) (1.1)
======= ======= ======= ===== ======== ======== ======== =====
Net income
applicable to
common stock $ 4,464 $ 4,298 $ 166 3.9 $ 8,438 $ 8,159 $ 279 3.4
======= ======= ======= ===== ======== ======== ======= =====
I-10
Operating Margin
- ----------------
Operating margin increased approximately $.8 million or 3.0 percent
compared to the same quarter last year and decreased approximately $1.0 million
or 1.1 percent for the twelve months ended December 31, 1998 versus the same
period last year.
During the latest quarter, the Registrant experienced weather that was 14
percent warmer than the same quarter last year. This warmer weather resulted in
decreased margin of approximately $2.5 million. This decrease was more than
offset by the write-off of $1.5 million of previously deferred gas costs in the
first quarter of fiscal 1998 in connection with Energize RI.
The Registrant experienced weather that was 15 percent warmer for the
twelve months ended December 31, 1998 versus the same period last year. The
warmer temperatures resulted in decreased margin of approximately $7.4 million
compared to last year. Offsetting the warmer than normal weather was $9.4
million of margin generated under Energize RI which became effective October 1,
1997. This additional margin includes $9.1 million associated with adjusting the
Gas Charge Clause (GCC) mechanism.
Additionally, non-firm margin decreased $1.6 million when compared with the
twelve months ended 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
Integrated Resource Plan (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 alternative 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. During the previous
twelve month period the Registrant recorded $1.5 million in additional margin as
a result of this Mechanism. Thus, a decrease in margin from the twelve months
ended this year to the same period last year occurred because this Mechanism was
no longer available.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses increased approximately $.3
million or 2.6 percent from the same quarter last year and decreased
approximately $1.3 million or 2.8 percent for the twelve months ended December
31, 1998 when compared to the same twelve month period last year.
The Registrant's operating and maintenance expense increase quarter over
quarter is primarily attributable to normal recurring pay increases.
The twelve month decrease is primarily attributable to a decrease in the
bad debt expense. 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 Company 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 Expenses
- --------------------------------------
Depreciation and amortization expense increased approximately $.6 million
or 18.5 percent compared to the same quarter last year and approximately $1.3
million or 10.0 percent for the twelve months ended December 31, 1998 versus the
same period last year. This increase was the result of increased capital
spending for Energize RI commitments including technology projects as well as
the amortization of previously deferred environmental costs. Effective October
1, 1997, ProvGas began amortizing environmental costs over a ten-year period in
accordance with Energize RI.
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Taxes
- -----
Taxes for the current quarter versus last year decreased approximately $.1
million or 1.5 percent and decreased approximately $.7 million or 4.0 percent
for the current twelve-month period versus last year. The decrease in taxes,
mainly State gross earnings and Federal income, was the result of lower
operating revenues and lower pretax earnings.
Other, net
- ----------
Other, net remained flat in the current quarter versus the same quarter
last year and increased approximately $.1 million for the twelve months ended
December 31, 1998 versus the same period last year. The majority of the increase
is attributable to interest income earned as a result of Federal income tax
refunds resulting from amending prior year tax returns.
Interest Expense
- ----------------
Interest expense decreased $.2 million or 8.4 percent during the latest
quarter compared to the same quarter last year and decreased approximately $.2
million or 3.0 percent during the latest twelve months compared to the same
twelve months last year. The Registrant's short-term borrowings decreased as a
result of the Series S First Mortgage Bond issuance in April 1998.
FUTURE OUTLOOK
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 approved by the Rhode
Island Public Utilities Commission (RIPUC).
As part of Energize RI, the Registrant is permitted to file with the RI
Division of Public Utilities and Carriers (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 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 weather and the loss of non-firm
margin. 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.
These factors continue to adversely affect the Registrant in fiscal 1999. 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 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 during the remainder of Energize RI is
substantially impaired.
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LIQUIDITY AND CAPITAL RESOURCES
During the current year, the Registrant's cash flow from operating
activities increased approximately $6.4 million for the quarter ended December
31, 1998 compared to the same period last year. This increase was primarily due
to a temporary increase in accounts payable for gas supply due to the timing of
payments made to Duke Energy Trading and Marketing, L.L.C. (DETM). Offsetting
this increase was the prior year receipt of funds in the first quarter of fiscal
1998 in relation to the sale of the Registrant's working gas in storage to DETM.
Capital expenditures for the quarter ended December 31, 1998 of $7.8
million increased $2.1 million or 36 percent when compared to $5.7 million for
the same period last year. This spending increase was due primarily to the
Registrant's continued efforts to move its information technology systems from a
mainframe to a client server environment. Anticipated capital expenditures for
the remainder of Energize RI are expected to total approximately $51.3 million.
During the current quarter, the Registrant's cash flow from financing
activities decreased $7.1 million due primarily to a temporary reduction in
short-term borrowings. This reduction is due to the increase in cash flow from
operating activities as discussed above. In September 1998, the Registrant
repurchased $6.4 million of Series M First Mortgage Bonds. The Registrant issued
$15 million in Series T First Mortgage Bonds on February 8, 1999, the proceeds
of which 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 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 is 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 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. It also includes the replacement of its 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. This
migration is expected to be completed by June 30, 1999.
The Registrant has completed an inventory and assessment of its remaining
IT systems and IT infrastructure. All mission critical systems are expected to
be remediated, upgraded or replaced and tested by June 30, 1999.
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.
I-13
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 completed the assessment of its embedded components.
Many of the components associated with the Registrant's mission critical systems
have been identified as Year 2000 ready. A remediation plan for mission critical
embedded systems has been completed and implementation of this plan is underway.
Remediation and testing of mission critical embedded systems is scheduled to be
completed by June 30, 1999. 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 plan to identify its major suppliers and
customers and will evaluate their Year 2000 readiness through a combination of
correspondence, telephone interviews, 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 has contacted its major suppliers critical to the delivery
of natural gas to its system, including interstate pipelines, DETM, New England
Electric System and Bell Atlantic. All suppliers have indicated that they are
following a comprehensive program on a timely schedule designed to (1) inventory
and identify equipment and systems that are date sensitive; (2) assess, test,
remediate, and/or replace such equipment and/or systems; (3) maintain continuity
of service through preparation and implementation of an appropriate contingency
plan; and (4) assess the Y2K program and compatibility of important upstream
suppliers. While the Registrant cannot guarantee Y2K readiness of these and
other suppliers, information received from them indicates that they expect to
fulfill their obligations to the Registrant on and after January 1, 2000. The
Registrant's plan to address the assessment of third parties provides for
contacting all other critical suppliers by March 31, 1999. The assessment of all
other suppliers will continue throughout 1999. Any risk areas that surface as a
result of these assessments will be addressed in contingency planning.
4. Contingency Planning
The Registrant has contingency plans in place for response to certain
emergency operational situations. The Registrant has begun conducting workshops
to develop actionable contingency plans which will address risks to its major
business processes due to the Year 2000 computer problem. Such contingency plans
may include using manual procedures and arranging for alternative suppliers. The
Registrant expects its Year 2000 contingency plans to be in place by June 30,
1999, with continued refinement throughout 1999.
Year 2000 Costs
The Registrant has developed a preliminary comprehensive budget for all
phases of its Year 2000 effort. The Registrant expects to capitalize Year 2000
costs incurred with 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 consult with the RIPUC on a
periodic basis when, in management's opinion, significant amounts might be
expended for Year 2000 costs.
As of December 31, 1998, the Registrant had deferred Year 2000 costs of
approximately $3.2 million which includes $.7 million for the assessment phase
of its Year 2000 effort. Remaining activities include project management and
consulting for the Year 2000 Project Office, contingency planning and testing of
the IT infrastructure and IT business systems. Costs for these activities,
together with previously deferred Year 2000 costs, are expected to range from $8
million to $11 million. These estimated costs include external contractors and
service providers, as well as the purchase of computer hardware and software.
I-14
These estimates do not include Year 2000 costs which may be incurred by
joint ventures or partnerships for which the Registrant does not have primary
operating responsibility or costs of implementing the new CIS and ERP systems
pursuant to its 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. Substantially all of these costs are currently included in the rates
being charged to the Registrant's customers under Energize RI, and therefore are
being expensed as they are incurred.
These cost estimates and the dates on which the Registrant plans to
complete Year 2000 modification and testing processes and 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.
The successful implementation of its CIS and ERP systems and the upgrade of
its Supervisory Control and Data Acquisition software applications prior to
January 1, 2000 are critical to enable the Registrant to avoid significant
business disruption in Year 2000. In addition, 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.
The Rhode Island Public Utilities Commission has opened a generic docket to
investigate the readiness of regulated utilities for the millennium. Hearings
are scheduled for February 17 and 18, 1999. The Registrant has been requested to
present information regarding its Year 2000 readiness.
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.
I-15
THE PROVIDENCE GAS COMPANY
--------------------------
PART II. OTHER INFORMATION
---------------------------
Item 6 (a). Exhibits
----------- --------
10a. Liquefied Natural Gas Service Precedent Agreement dated December 11,
1998 between Algonquin LNG, Inc. and the Registrant.
Item 6 (b). Reports on Form 8-K
----------- -------------------
No reports on Form 8-K were filed during the quarter for which this report
is filed.
II-1
THE PROVIDENCE GAS COMPANY
--------------------------
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of
results for the periods 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: December 17, 1999
-------------------
II-2