FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 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 _________________
Commission file number 0-1160
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THE PROVIDENCE GAS COMPANY
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(Exact name of registrant as specified in its charter)
Rhode Island 05-0203650
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
100 Weybosset Street, Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 401-272-5040
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of class)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of December 21, 1999: $0
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
Common Stock, $1.00 Par Value: 1,243,598 shares outstanding at December 21,
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1999.
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DOCUMENTS INCORPORATED BY REFERENCE
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NONE
TABLE OF CONTENTS
PART I PAGE
Item 1 - Business
General I-1
Gas Supply I-2
Rates and Regulations I-3
Competition and Marketing I-4
Employees I-5
Special Factors Affecting the
Natural Gas Industry I-5
General I-5
FERC Regulations I-6
Environmental Regulations I-6
Other Standards I-8
Item 2 - Properties I-8
Item 3 - Legal Proceedings I-8
Item 4 - Submission of Matters to a Vote of Security Holders I-8
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters II-1
Item 6 - Selected Financial Data II-2
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations II-3
Item 8 - Financial Statements and Supplementary Data II-10
Report of Independent Public Accountants II-33
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-34
PART III
Item 10 - Directors and Executive Officers of the Registrant III-1
Item 11 - Executive Compensation III-4
Item 12 - Security Ownership of Certain Beneficial Owners
and Management III-4
Item 13 - Certain Relationships and Related Transactions III-4
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Supplemental Schedule IV-3
Signatures IV-6
For defined terms, acronyms, and abbreviations, see the List of Defined Terms,
which is included in Part II, Item 8, as pages II-31 and II-32.
PART I
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ITEM 1. BUSINESS
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The Providence Gas Company 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, which constitute or contain "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995 or by
the SEC in its rules, regulations, and releases.
All statements other than statements of historical facts included in this
Form 10-K including without limitation statements regarding the Registrant's
financial position, strategic initiatives, the effect of ProvEnergy's proposed
merger with Southern Union Company, and statements addressing industry
developments are forward-looking statements. Where, in any forward looking
statement, the Registrant, or its management, expresses an expectation or belief
as to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following are some of the factors which could cause actual results to differ
materially from those anticipated: general economic, financial, and business
conditions; changes in government regulations, the actions taken or decisions
rendered by any regulatory body, and the impact such changes, actions, or
decisions might have on the Registrant, including the regulatory approvals or
the timeliness of such approvals on ProvEnergy's proposed merger with Southern
Union Company; competition in the energy services sector; regional weather
conditions; the availability and cost of natural gas and oil; development and
operating costs; the success and costs of advertising and promotional efforts;
the availability and terms of capital; the business abilities and judgment of
personnel; the ability of the Registrant and its suppliers and customers to
modify or redesign their computer systems to work properly in the Year 2000;
unanticipated environmental liabilities; the Registrant's ability to grow its
business through acquisitions and/or significant customer growth; the costs and
effects of unanticipated legal proceedings; the impacts of unusual items
resulting from ongoing evaluations of business strategies and asset valuations;
and changes in business strategy.
General
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The Registrant, a Rhode Island corporation, was organized in 1847 and
became a wholly-owned subsidiary of Providence Energy Corporation (Providence
Energy) through a reorganization on February 1, 1981. The outstanding shares of
common stock of Providence Energy are presently listed on the New York Stock
Exchange.
The executive offices of the Registrant are located at 100 Weybosset
Street, Providence, Rhode Island 02903, telephone (401) 272-5040.
The Registrant is engaged in natural gas distribution, serving
approximately 168,000 customers in Providence and Newport, Rhode Island, and 23
other cities and towns in Rhode Island. The service territory encompasses
approximately 730 square miles and has a population of approximately 818,000.
For the year ended September 30, 1999, residential sales accounted for
approximately 57% of total firm deliveries, with commercial and industrial sales
representing, in the aggregate, approximately 43%. For the years ended September
30, 1998 and 1997, residential sales represented approximately 57% and 58%,
respectively, with commercial and industrial sales representing, in the
aggregate, approximately 43% and 42%, respectively, of firm deliveries.
The Registrant's gas distribution system consists of approximately 2,300
miles of gas mains ranging in size from 2 to 36 inches in diameter,
approximately 143,000 services (a service is a pipe connecting a gas main with
piping on a customer's premises), approximately 169,000 gas meters, and the
necessary pressure regulators. The Registrant has regulating and metering
facilities at eight points of delivery from Algonquin Gas Transmission Company
and one from Tennessee Gas Pipeline Company, which the Registrant believes to be
adequate for receiving gas into its distribution system.
I-1
The natural gas industry is subject to numerous challenges, many of which
affect the Registrant in varying degrees. Significant industry challenges
affecting the Registrant include: the ability to adapt to the regulatory changes
occurring at the national level under the framework of the FERC Order 636 and
the ability to gain local approval through the RIPUC for new rates tailored to
customers' specific needs and market conditions.
Gas Supply
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The Registrant has entered into a full requirements gas supply contract
with DETM, a joint venture of Duke Energy Corporation and Mobil Corporation, for
a term of three years commencing October 1, 1997. 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, under
the contract, the Registrant transferred responsibility for its pipeline
capacity resources, storage contracts, and LNG capacity to DETM. As a result,
the Registrant' gas inventories of approximately $18 million at September 30,
1997 were sold at book value to DETM on October 1, 1997.
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 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 gas supply 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.
This 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, a subsidiary of Duke Energy Corporation. Algonquin 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 in
the first quarter of fiscal 2000. Under the terms of the agreement, Algonquin
replaced and expanded the vaporization capability at the tank. The Registrant
will receive approximately $2.6 million from Algonquin. Of the $2.6 million,
approximately $.9 million represents reimbursement received by the Registrant in
1999 for costs incurred 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 Algonquin
storage capacity is released to DETM as provided for in the gas supply contract
described above. This payment is expected 60 days after the in-service date of
the project.
In June 1999, the FERC issued an order in Docket Number CP99-113 approving
Algonquin's project described above. In that order FERC also approved the new
10-year contract between Algonquin and the Registrant for service from the tank.
Also approved was the Registrant's parallel filing, PR99-8, requesting
regulatory authorization to charge Algonquin for transportation of gas vaporized
for other Algonquin customers and transported by the Registrant to the Algonquin
pipeline on behalf of those customers.
I-2
As a result of FERC Order 636 and other related orders, pipeline
transportation companies have incurred significant costs, collectively known as
transition costs. The majority of these costs will be reimbursed by the
pipeline's customers, including the Registrant. The Registrant estimates its
transition costs to be approximately $21.7 million, of which $16.2 million has
been included in the GCC and collected from customers through September 30,
1997. As part of the above supply contract, DETM assumed liability for these
transition costs during the contract's three-year term. At the end of the three-
year term of the contract, the Registrant will assume any remaining liability,
which is not expected to be material.
Rates and Regulation
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The Registrant is subject to the regulatory jurisdiction of the RIPUC with
respect to rates and charges, standards of service, accounting and other
matters. In August 1997, the RIPUC approved a rate stabilization plan called
Energize RI. The parties to the plan were the Registrant, 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
three-year price freeze and an initial price decrease of approximately 4.0
percent. Under Energize RI, the GCC 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 funds which allow the Registrant to make significant capital
investments to improve its distribution system and support economic development.
It is anticipated that Energize RI will provide approximately $26 million over
its three-year term to fund specific capital improvements. In addition, under
Energize RI, the Registrant provides funding for the Low-Income Assistance
Program at an annual level of $1.0 million, the Demand Side Management Rebate
Program at an annual level of $.5 million and the Low-Income Weatherization
Program at an annual level of $.2 million. Energize RI also continues the
process of unbundling by 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 has reclassified and is amortizing
approximately $4.0 million of prior environmental costs. These costs and all
environmental costs incurred during the term of the Plan will be amortized over
a 10-year period, in accordance with the levels authorized in Energize RI.
Under Energize RI, the Registrant may earn up to 10.9 percent, but not less
than 7.0 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 the event that the Registrant earns in excess of 10.9 percent
or less than 7.0 percent, the Registrant will defer revenues or costs through a
deferred revenue account over the term of the Plan. Any balance in the deferred
revenue account at the end of the Plan will be refunded to or recovered from
customers in a manner to be determined by all parties to the Plan and approved
by the RIPUC.
As part of Energize RI, the Registrant is permitted to file annually with
the Division for the recovery of exogenous changes which may occur during the
three-year term of the Plan. Exogenous 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 exogenous
changes are to be resolved by the RIPUC. The impact of any such exogenous
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 deemed them to be exogenous 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 exogenous changes
I-3
experienced by the Registrant in fiscal 1998. The RIPUC reviewed the exogenous
changes agreement to ensure consistency with the terms of Energize RI and
affirmed the agreement at its May 28, 1999 open meeting.
During fiscal 1999, the Registrant recognized into revenue $2.45 million
for the exogenous changes recovery, and at year-end has deferred approximately
$.5 million of revenue under the provisions of the earnings cap of Energize RI.
The Registrant intends to file for recovery of exogenous changes
experienced in 1999 which resulted from factors similar to 1998. Absent further
exogenous recovery and/or other factors such as colder than normal weather, the
Registrant's ability to earn a 10.9 percent return on average common equity in
the final year of Energize RI is substantially impaired.
In a decision issued September 1, 1998, the Division rejected allegations
made in a complaint brought by Aurora Natural Gas that the Registrant provided
advance information and undue preference in pricing to its marketing affiliate,
ProvEnergy Services in violation of the Division's regulations. As part of its
investigation, the Division ordered marketer refunds of approximately $.3
million. The Division ordered this refund based on its belief that an unfair
rate was charged to customers who did not have operational telemeters in place
when they began service under the transportation tariff. The Registrant filed a
Request for Reconsideration and Rehearing, and on December 15, 1998 the Division
issued a Reconsideration Order that rescinded the fines stemming from five of
the original 23 violations of the Regulations for Utility Interaction with Gas
Marketers. The Division further offered the Registrant an opportunity to
demonstrate its claim that the ordered refunds would place FT-2 marketers in a
better position than marketers who served FT-1 customers.
On May 6, 1999, the Registrant and Aurora jointly submitted a Stipulation
and Settlement to the Division that: (i) Aurora's complaint in this proceeding
is dismissed; (ii) the prior orders of the Division in the proceeding are
dismissed; (iii) no refunds by the Registrant are required or appropriate in
connection with the proceeding; and (iv) the Registrant does not contest the
payment of $18,000 to the Division in connection with this proceeding. Following
a June 16, 1999 hearing on the Stipulation, the Division issued an order on
September 23, 1999 approving the Stipulation and Settlement provided that the
Registrant's ratepayers are held harmless from the financial transactions
stemming from the settlement, that the Registrant withdraw its appeal in
Providence County Superior Court, and that the Division's prior orders be
vacated as described in the order. The Registrant and Aurora accepted the
Division's order. This decision resulted in the reversal of the reserve
established under the original order.
Competition and Marketing
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The Registrant experienced modest customer growth in both the residential
and commercial/industrial markets. In all, the average annual number of
customers rose one percent to approximately 168,000. This increase was achieved
in a local economy which is just now beginning to improve. Seasonally adjusted
unemployment stood at 3.8 percent in September 1999, down from 4.8 percent
twelve months earlier, and slightly below the national average of 4.2 percent.
Also, there has been considerable new construction throughout the state in 1999.
New construction contracts in Rhode Island through September 1999 have increased
by 17% on an annual basis compared to the 1998 annual average. Recent economic
forecasts by the New England Economic Project predict economic stability in the
state for the immediate future.
Energize RI provides opportunities for the Registrant to expand sales. For
example, high pressure service to Quonset/Davisville Industrial Port & Commerce
Park, a key area for State economic development, provides tremendous
opportunities for sales growth as commercial and industrial businesses locate
within the park. In addition, the DSM program, an equipment rebate program,
provides opportunities to expand sales to nontraditional applications, such as
air conditioning and fuel cells. The Registrant has redirected its sales and
marketing efforts to leverage Energize RI, as well as other opportunities to
promote sales growth within its service territory.
I-4
In response to the large increase of both state-owned and private fleet
vehicles powered by natural gas, the Registrant invested approximately $.3
million to renovate its Providence "quick-fill" station for natural gas
vehicles-one of three stations the Registrant operates in the state. Fleet
operators throughout the region are expressing greater interest in alternative-
fuel vehicles. One of these operators is the Rhode Island Public Transit
Authority, which recently launched a major program to replace a large number of
its 200 diesel buses with buses that operate solely on natural gas. A new Rhode
Island law provides substantial tax incentives which, along with the Federal
Department of Energy's designation of Providence as a "clean city", should
increase use and awareness of the benefits of natural gas vehicles.
On August 31, 1999, the Registrant's settlement agreement for enhancements
to its Business Choice program was approved in Docket 2902 and became effective
September 1, 1999. Specifically, there will now be rolling enrollment for
transportation service, which will allow customers to execute transportation
agreements throughout the year, rather than during limited enrollment periods.
The program now has approximately 1,700 firm transportation customers with
annual deliveries of over 5 billion cubic feet per year, which is approximately
25 percent of the Registrant's total annual firm deliveries. There are 14
marketers serving the Registrant's customers and transporting on the system.
Additional enhancements to the Business Choice program were filed with the RIPUC
under a supplemental settlement agreement in Docket 2902 on October 8, 1999 and
were approved on October 27, 1999. These enhancements do not generate additional
revenue.
In 1996, the Registrant implemented a DSM Program, which furnishes rebates
to customers installing new technologies, such as gas fired air conditioning,
cogeneration and gas motors. These technologies use proportionately more natural
gas during the summer months, when the natural gas distribution system has
available capacity. The DSM program also allows for the utilization of existing
resources, such as mains, services and year-round supply contracts. This DSM
Program will continue to be funded under Energize RI.
Employees
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As of September 30, 1999, the Registrant had 517 full-time employees.
Approximately 274 production, distribution and customer service employees are
covered by a five-year collective bargaining agreement with Local 12431-01 of
the United Steelworkers of America, which became effective in January 1996.
The bargaining agreement was developed by a labor-management negotiations
committee and can be reopened for any reason at any time in order to allow for
the committee to deal with new issues as they arise, which results in increased
flexibility in the use of employees. The original agreement called for a general
wage increase of 3.25 percent each year from 1997 to 2000.
In April 1998 the contract with Local 12431-01 was renegotiated and
extended to January 2002. This negotiation provides for a 3.5% wage increase in
January 1999, January 2000, and January 2001.
Additionally, in March 1996, a 38 month Labor Agreement was ratified by
Local 12431-02 of the United Steelworkers of America, which represents
approximately 83 office and clerical employees. The agreement called for an
average increase of 2.9 percent for 1998.
In April 1998 the contract with Local 12431-02 was renegotiated and
extended to May 2002. This negotiation provides for a 3.5% wage increase in June
1999, June 2000, and June 2001.
Special Factors Affecting the Natural Gas Industry
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General
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The natural gas industry is subject to numerous legislative and regulatory
requirements, standards and restrictions that are subject to change and that
affect the Registrant to varying degrees. Significant industry factors that have
I-5
affected or may affect the Registrant from time to time include the lack of
assurance that rate increases can be obtained from regulatory authorities in
adequate amounts on a timely basis; changes in the regulations governing the
Registrant's operations; reductions in the prices of oil and propane, which can
make those fuels less costly than natural gas in some markets; and increases in
the price of natural gas.
FERC Regulations
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In recent years the FERC has been attempting to increase competition with
regard to the transportation and sale of natural gas in interstate commerce.
Beginning in late 1985, FERC began promulgating orders allowing all industry
participants access to pipeline transportation on an open, nondiscriminatory
basis to the extent of available capacity.
Recent FERC orders are in furtherance of its policy to make gas
transportation and alternate supply sources more accessible to all parties,
including local distribution companies and their customers. Such open access
allows the Registrant to obtain its supply through a more competitive national
gas pipeline system, where and when capacity is available.
FERC Order 636 and other related orders have significantly changed the
structure and types of services offered by pipeline transportation companies.
The most significant components of the restructuring occurred in November 1993.
In response to these changes, the Registrant successfully negotiated new
pipeline transportation and gas storage contracts.
At the same time, a number of contracts with gas suppliers have been
negotiated to complement the transportation and storage contracts. The portfolio
of supply contracts was designed to be market responsive and diversified with
respect to contract lengths, source location, and other contract terms.
To meet the requirements of the orders, pipeline transportation companies
have incurred significant costs, collectively known as transition costs. The
majority of these costs will be reimbursed by the pipelines' customers,
including the Registrant as described in the "Gas Supply" section.
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Environmental Regulations
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Federal, state, and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact of
such standards and requirements, which are subject to change and can take effect
retroactively. The Registrant continues to monitor the status of these laws and
regulations. Such monitoring involves the review of past activities and current
operations, and may include expending funds to investigate or clean up certain
sites. To the best of its knowledge, subject to the following, the Registrant
believes it is in substantial compliance with such laws and regulations.
At September 30, 1999, the Registrant was aware of five sites at which
future costs may be incurred.
Plympton Sites (2)
The Registrant has been designated as a 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.
I-6
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 September 30, 1999,
approximately $3.0 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 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 1999 and is
anticipated to be completed during the next fiscal year. 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 $7.0 million to in
excess of $9.0 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 a net accrual of $6.1 million at September
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
September 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 fiscal 2000, at which time the previous owner will assume
responsibility for removal of coal tar waste on the site. The Registrant remains
responsible for cleanup 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 $.1 million.
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. Total estimated costs of
testing at this site are anticipated to be approximately $.2 million. Until the
results of the investigation are known, the Registrant cannot 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
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investigation and remediation expenditures, the Registrant sought current
recovery for these amounts. As a result, in accordance with the Price
Stabilization Plan Settlement Agreement described in Note 10, effective October
1, 1997, all environmental investigation and remediation costs incurred through
September 30, 1997, as well as all costs incurred during the three-year term of
the Plan, will be amortized over a 10-year period, in accordance with the levels
authorized in Energize RI. Additionally, it is the Registrant's practice to
consult with the RIPUC on a periodic basis when, in management's opinion,
significant amounts might be expended for environmental-related costs. As of
September 30, 1999, the Registrant has incurred environmental assessment and
remediation costs of $4.7 million and has a net accrual of $6.1 million for
future 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.
Other Standards
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The Registrant is also subject to standards prescribed by the Secretary of
Transportation under the Natural Gas Pipeline Safety Act of 1968 with respect to
the design, installation, testing, construction and maintenance of pipeline
facilities. The enforcement of these standards has been delegated to the RIPUC
and management believes that the Registrant is in substantial compliance with
all present requirements imposed by such agency.
ITEM 2. PROPERTIES
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In addition to the Registrant's gas distribution system and storage
facilities, which constitute the principal properties of the Registrant, the
Registrant owns several buildings and other facilities in Newport, Providence
and Westerly that house its offices and provide floor space for its distribution
and maintenance facilities.
Substantially all the foregoing properties are mortgaged as collateral for
the outstanding First Mortgage Bonds of the Registrant.
ITEM 3. LEGAL PROCEEDINGS
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The Registrant is involved in legal and administrative proceedings in the
normal course of business, including certain proceedings involving material
amounts in which claims have been or may be made. However, management believes,
after review of insurance coverage and consultation with legal counsel, that the
ultimate resolution of the legal proceedings to which it is or can at the
present time be reasonably expected to be a party, will not have a materially
adverse effect on the Registrant's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
I-8
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ---------------------------------------------------------------------
MATTERS
-------
Not applicable. The Registrant is a wholly-owned subsidiary of Providence
Energy Corporation.
II-1
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
THE PROVIDENCE GAS COMPANY
SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30
(Thousands, except per share amounts)
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
Operating revenues $ 179,339 $ 184,326 $ 210,673 $ 210,601 $ 180,043
Cost of gas sold 82,586 91,648 117,357 118,051 98,985
---------- ---------- ---------- --------- ---------
Operating margin 96,753 92,678 93,316 92,550 81,058
---------- ---------- ---------- --------- ---------
Operating expenses, excluding taxes 62,048 59,296 59,540 59,673 53,536
Taxes, other than income 13,561 13,092 13,456 12,831 11,597
Federal income taxes 4,728 4,342 4,489 4,418 3,027
---------- ---------- ---------- --------- ---------
Total operating expenses 80,337 76,730 77,485 76,922 68,160
---------- ---------- ---------- --------- ---------
Operating income 16,416 15,948 15,831 15,628 12,898
Other, net 935 284 371 976 798
---------- ---------- ---------- --------- ---------
Income before interest expense 17,351 16,232 16,202 16,604 13,696
Interest expense 7,556 7,473 7,431 7,294 7,181
---------- ---------- ---------- --------- ---------
Net income 9,795 8,759 8,771 9,310 6,515
Dividends on preferred stock 348 487 626 696 696
---------- ---------- ---------- --------- ---------
Net income applicable to common stock 9,447 8,272 8,145 8,614 5,819
Common dividends 4,775 4,776 4,777 4,627 4,577
---------- ---------- ---------- --------- ---------
Earnings reinvested in the corporation $ 4,672 $ 3,496 $ 3,368 $ 3,987 $ 1,242
========== ========== ========== ========= =========
Weighted average common shares outstanding 1,243.6 1,243.6 1,243.6 1,243.6 1,243.6
========== ========== ========== ========= =========
Earnings per common share $ 7.60 $ 6.65 $ 6.55 $ 6.93 $ 4.68
========== ========== ========== ========= =========
Common dividends $ 3.84 $ 3.84 $ 3.84 $ 3.72 $ 3.68
========== ========== ========== ========= =========
OTHER FINANCIAL DATA
SEPTEMBER 30
(Thousands, except per share amounts)
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
Gas plant-at original cost $ 334,310 $ 313,549 $ 290,614 $ 270,149 $ 253,438
Gas plant-net of depreciation 218,717 193,451 181,979 171,453 161,956
Total assets 261,205 228,614 242,143 237,515 214,727
Capitalization:
Long-term debt 88,976 78,021 72,372 72,455 74,482
Redeemable cumulative preferred stock 3,200 4,800 6,400 8,000 8,000
Common Stockholder's investment 91,177 81,641 78,240 74,844 71,020
Shares of common stock at year-end 1,243.61 1,243.61 1,243.61 1,243.61 1,243.61
Book value per share $ 73.32 $ 65.65 $ 62.91 $ 60.18 $ 57.11
========== ========== ========== ========= ===========
II-2
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Summary
- -------
The Registrant's operating revenues, operating margin and net income for
the twelve months ended September 30 are as follows:
(000's)
Percent
1999 1998 Change Change
-------- -------- --------- -------
Operating revenues $179,339 $184,326 $(4,987) (2.7)
Operating margin 96,753 92,678 4,075 4.4
Net income 9,795 8,759 1,036 11.8
Results of operations - 1999 VS 1998
Operating Margin
During the current year, weather was 1.3 percent warmer than last year. The
warmer temperatures served to decrease margin by approximately $.3 million
compared to last year. Despite warmer than normal weather for the year, margin
earned increased as a result of a one-time write-off of $1.5 million in 1998 of
previously deferred gas costs in connection with Energize RI, which became
effective October 1, 1997. Offsetting the warmer weather for the year was $2.0
million of the $2.45 million 1998 exogenous changes recovery, as discussed in
Note 10 in the accompanying Consolidated Financial Statements. Also, the
Registrant's customer growth has resulted in approximately $.6 million of
additional margin, and non-firm margin increased $.4 million when compared with
last year.
During April and May 1999, the Algonquin LNG, Inc. tank in Providence was
completely emptied in order to allow access for internal inspection and repairs,
which were completed in September 1999. As a result, 335 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 quantity of energy.
This in turn adversely impacted margin.
Operating and Maintenance Expenses
The Registrant's operating and maintenance expenses decreased by
approximately $.3 million or .7 percent versus last year. This decrease was
partially attributable to cost control measures which were implemented in
response to warmer weather. These cost control measures were able to offset a
substantial portion of the cost of living and negotiated union contract salary
increases of approximately $.9 million, as well as inflationary increases in
general expenses of approximately $.5 million. Also contributing to the decrease
was a one-time reimbursement of approximately $.9 million for costs incurred
under a FERC-approved contract with Algonquin.
The Registrant continually reviews its operating expenses in order to keep
expenses as low as possible; however, expenses can vary from year to year.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $3.1 million
or 22.9 percent versus last year. This increase is the result of increased
capital spending for Energize RI commitments; technology projects; Year 2000
costs, which were capitalized as authorized under the provisions of Energize RI;
and the amortization of environmental costs. Effective October 1, 1997, the
Registrant began amortizing environmental and Year 2000 costs over 10-year
and 5-year periods, respectively, in accordance with the levels authorized in
II-3
Energize RI. The Registrant will have increased environmental amortization
expense in future years as its planned environmental remediation program
continues. Also, amortization expense for Year 2000 costs will increase in the
future as higher levels of costs have been incurred from those originally
anticipated.
Taxes
Taxes increased approximately $.9 million or 4.9 percent versus last year.
The increase in taxes is primarily due to local property taxes which have
increased as a result of capital spending and Federal income taxes which have
increased as a result of increased pretax income.
Other, Net
Other, net has increased approximately $.7 million versus last year.
Since February 1999, the Registrant has provided monitoring and
communication services to the PNGTS. Under its contract, the Registrant hosts
PNGTS' Supervisory Control and Data Acquisition System, continually monitoring
system operations and receiving and forwarding emergency phone calls. The
Registrant has recognized as other, net approximately $.2 million in fees for
the performance of these services. The contract is a one year renewable
contract, subject to termination by either party upon six months prior written
notice. PNGTS has notified the Registrant that they will put the contract to bid
for the contract year beginning February 17, 2000.
In a decision issued September 1, 1998, the Division rejected allegations
made in a complaint brought by Aurora Natural Gas that the Registrant provided
advance information and undue preference in pricing to its marketing affiliate,
ProvEnergy Services, in violation of the Division's regulations. As part of its
investigation, the Division ordered marketer refunds of approximately $.3
million. The Division ordered this refund based on its belief that an unfair
rate was charged to customers who did not have operational telemeters in place
when they began service under the transportation tariff. The Registrant filed a
Request for Reconsideration and Rehearing, and on December 15, 1998 the Division
issued a Reconsideration Order that rescinded the fines stemming from five of
the original 23 violations of the Regulations for Utility Interaction with Gas
Marketers. The Division further offered the Registrant an opportunity to
demonstrate its claim that the ordered refunds would place FT-2 marketers in a
better position than marketers who served FT-1 customers.
On May 6, 1999, the Registrant and Aurora jointly submitted a Stipulation
and Settlement to the Division that: (i) Aurora's complaint in this proceeding
is dismissed; (ii) the prior orders of the Division in the proceeding are
dismissed; (iii) no refunds by the Registrant are required or appropriate in
connection with the proceeding; and (iv) the Registrant does not contest the
payment of $18,000 to the Division in connection with this proceeding. Following
a June 16, 1999 hearing on the Stipulation, the Division issued an order on
September 23, 1999 approving the Stipulation and Settlement provided that the
Registrant's ratepayers are held harmless from the financial transactions
stemming from the settlement, that the Registrant withdraw its appeal in
Providence County Superior Court, and that the Division's prior orders are
vacated as described in the order. The Registrant and Aurora accepted the
Division's order. This decision resulted in the reversal of the reserve
established under the original order, which contributed to the increase in
other, net this year.
Interest Expense
Interest expense increased approximately $.1 million or 1.1 percent over
last year. Long-term interest expense increased as a result of the Registrant's
Series T First Mortgage Bond issuance in February 1999, which refinanced short-
term borrowings. The Series T issuance enabled the Registrant to secure a
favorable long-term financing rate. However, this increase was partially offset
by the Series S First Mortgage Bond issuance in April 1998, which refinanced
higher cost long-term debt.
II-4
Future Outlook
A) Regulatory
Under Energize RI, the Registrant may earn up to 10.9 percent, but not less
than 7.0 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 the event that the Registrant earns in excess of 10.9 percent
or less than 7.0 percent, the Registrant will defer revenues or costs through a
deferred revenue account over the term of the Plan. Any balance in the deferred
revenue account at the end of the Plan will be refunded to or recovered from
customers in a manner to be determined by all parties to the Plan and approved
by the RIPUC.
As part of Energize RI, the Registrant is permitted to file annually with
the Division for the recovery of exogenous changes which may occur during the
three-year term of the Plan. Exogenous 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 exogenous
changes are to be resolved by the RIPUC. The impact of any exogenous 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 resulting from the competitive price of oil in the industrial
market. The Registrant believed the causes of these two events were beyond its
reasonable control and thus deemed them to be exogenous 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 exogenous changes
experienced by the Registrant in fiscal 1998. The RIPUC reviewed the exogenous
changes agreement to ensure consistency with the terms of Energize RI and
affirmed the agreement at its May 28, 1999 open meeting.
During fiscal 1999, the Registrant recognized into revenue $2.45 million
for the exogenous changes recovery, and at year-end has deferred approximately
$.5 million of revenue under the provisions of the earnings cap of Energize RI.
The Registrant intends to file for recovery of exogenous changes
experienced in 1999 which resulted from factors similar to 1998. Absent further
exogenous recovery and/or other factors such as colder than normal weather, the
Registrant's ability to earn a 10.9 percent return on average common equity in
the final year of Energize RI is substantially impaired.
On August 31, 1999, the Registrant's settlement agreement for enhancements
to its Business Choice program was approved by the RIPUC in Docket 2902 and
became effective September 1, 1999. Specifically, there will now be rolling
enrollment for transportation service, which will allow customers to execute
transportation agreements throughout the year, rather than during limited
enrollment periods. The program now has approximately 1,700 firm transportation
customers with annual deliveries of over 5 billion cubic feet per year, which is
approximately 25 percent of the Registrant's total annual firm deliveries. There
are 14 marketers serving the Registrant's customers and transporting on the
system. Additional enhancements to the Business Choice program were filed with
the RIPUC under a supplemental settlement agreement in Docket 2902 on October 8,
1999 and were approved on October 27, 1999. These enhancements do not generate
additional revenue.
II-5
B) Business Opportunities
Energize RI provides opportunities for the Registrant to expand sales. For
example, high pressure service to Quonset/Davisville Industrial Port & Commerce
Park, a key area for State economic development, provides opportunities for
sales growth as commercial and industrial businesses locate within the park. In
addition, Demand Side Management, an equipment rebate program, provides
opportunities to expand sales to non-traditional applications, such as air
conditioning and fuel cells. The Registrant has redirected its sales and
marketing efforts to leverage Energize RI, as well as other opportunities to
promote sales growth within its service territory.
C) Merger Agreement
On November 15, 1999, ProvEnergy, the Registrant's parent company, and
Southern Union announced that their Boards of Directors had unanimously approved
a definitive merger agreement. See Note 2 in the accompanying Consolidated
Financial Statements for additional information.
D) New Accounting Pronouncements
Please refer to Note 11 of the accompanying Consolidated Financial
Statements.
Results of operations - 1998 VS 1997
Operating Margin
- ----------------
During 1998, the Registrant experienced weather that was 8.0 percent warmer
than 1997. The warmer temperatures resulted in decreased margin of approximately
$4.0 million compared to 1997. Offsetting the warmer than normal weather was
$7.2 million of margin generated under Energize RI. The components of this
additional margin included $10.4 million associated with adjusting the GCC
offset by the funding of the Low-Income and Demand Side Management programs of
$1.7 million and the write-off of $1.5 million of previously deferred gas costs.
In 1997, the Registrant funded the Demand Side Management and Low-Income
Weatherization programs under the IRP for $.7 million. Additionally, non-firm
margin decreased $2.2 million when compared with 1997 due to an unfavorable
pricing difference between natural gas and alternate fuels.
As part of Energize RI, the Mechanism under the IRP was terminated in
September 1997. In 1997, the Registrant recorded $1.5 million in additional
margin as a result of this Mechanism. Thus, a decrease in margin from 1997 to
1998 occurred because this Mechanism was no longer available in 1998.
Operating and Maintenance Expenses
- ----------------------------------
Overall, operating and maintenance expenses decreased approximately $1.3
million or 2.8 percent versus 1997. This decrease was primarily attributable to
a decrease in the Registrant's bad debts. The decrease in bad debts was
attributable to improved collection experience and the implementation of new
credit policies, as well as decreased operating revenues from warmer than normal
weather. The Registrant's other operating and maintenance expenses were
essentially flat as a result of additional cost management due to the warmer
weather.
Depreciation and Amortization Expense
- -------------------------------------
Depreciation and amortization expense increased approximately $1.1 million
or 8.7 percent versus 1997. This increase was the result of increased capital
spending for Energize RI commitments as well as the amortization of previously
deferred environmental costs. Effective October 1, 1997, the Registrant began
amortizing environmental costs over a 10-year period in accordance with the
levels approved in Energize RI.
II-6
Taxes
- -----
Taxes decreased approximately $.5 million or 2.8 percent versus 1997. The
overall change in taxes was primarily due to a decrease in gross earnings tax as
a result of the warmer weather experienced in 1998 as compared to 1997. The
decrease was partially offset by an increase in local property taxes as a result
of capital spending.
Other, net
- ----------
Other, net was essentially flat versus 1997.
Interest Expense
- ----------------
Interest expense for 1998 was flat when compared to 1997. The Registrant's
long-term interest expense increased by approximately $.3 million as a result of
the Series S First Mortgage Bond issuance in April 1998. Offsetting the increase
was a decrease in weighted average short-term borrowings as a result of the
Series S First Mortgage Bond issuance, which caused short-term interest expense
to decrease.
Liquidity and Capital Resources
The Registrant's cash flow from operating activities decreased
approximately $16 million for the fiscal year ended September 30, 1999 compared
to 1998. 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. under the terms of the parties' gas supply agreement. 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.
Capital expenditures for the fiscal year ended September 30, 1999 of $39.1
million reflect an increase of $9.1 million or 30.5 percent when compared to $30
million last year. This spending increase was due primarily to the Registrant's
technology expenditures related to Year 2000, system enhancements and
environmental remediation expenditures. Capital expenditures for fiscal years
2000 and 2001 are expected to be approximately $53.1 million in total.
During the current fiscal year, the Registrant's cash provided by financing
activities increased $25.3 million. The Registrant issued $15 million in Series
T First Mortgage Bonds on February 8, 1999. The Series T bonds are for a 30 year
term at an interest rate of 6.5 percent. 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. The proceeds were used to reduce
borrowings under its lines of credit as well as for general corporate purposes.
In September 1999, the Registrant received a capital contribution of $4.8
million from Providence Energy Corporation in order to fund working capital
requirements.
Year 2000 Update
The Registrant's Year 2000 Project is substantially complete. The Project
addresses the problem arising from the use in software programs and computing
infrastructures 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:
II-7
1. Information Technology 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 CIS which supports the business
functions of customer inquiry, service orders, and billing. The migration also
includes the replacement of business applications such as financial, human
resources, and procurement with a new client server based financial 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 client server based financial
system have been successfully placed into operation.
The Registrant completed an inventory and assessment of its existing IT
systems and IT infrastructure in March 1999. All mission critical and important
systems have been remediated and tested for Year 2000 readiness.
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.
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 and important embedded systems including their
Supervisory Control and Data Acquisition gas distribution system.
3. Upstream/Downstream
The Registrant has contacted all of its major suppliers, and none have
indicated concern for potential business disruption.
The Registrant's major suppliers critical to the delivery of natural gas to
its system include interstate pipelines, Duke Energy Trading and Marketing, New
England Electric System, and Bell Atlantic, which have indicated that they are
following comprehensive programs on a timely schedule designed to achieve Year
2000 readiness. While the Registrant cannot guarantee Year 2000 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 are being 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
and since then has filed quarterly updates with the RIPUC.
4. Contingency Planning
The Registrant has contingency plans in place for response to certain
emergency operational situations. In addition, the Registrant has completed over
50 workshops to develop actionable contingency plans which will specifically
address risks to the top 72 business processes related to the Year
II-8
2000 computer problem. Such contingency plans include using manual procedures
and arranging for alternative suppliers. The Registrant has developed Year 2000
contingency plans for all mission critical and important business processes. The
Registrant participated in a Year 2000 communications drill with other New
England Gas Association local distribution companies and its pipeline supplier,
Tennessee Pipeline Company. This planning will help provide mutual aid and
assistance if necessary.
Year 2000 Costs
The Registrant is capitalizing Year 2000 costs and will amortize these
costs over a five-year period consistent with the regulatory levels as
authorized by the RIPUC under the Energize RI program. As of September 30, 1999,
the Registrant has deferred Year 2000 costs of approximately $7.6 million and
has amortized $.3 million of these costs. Total costs for Year 2000 are expected
to range from $7.6 million to $8.0 million. These estimated costs include
external contractors and service providers and the balance of the unrecovered
legacy CIS system that has been replaced, as well as other costs associated with
the discontinuance of the operation of the mainframe. These estimates do not
include Year 2000 costs for implementing the new CIS and client server based
financial system 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. Internal costs, except for the
Year 2000 project manager, have been expensed as incurred.
These cost estimates are based on management's best current 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.
II-9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
THE PROVIDENCE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30
(Thousands of Dollars) 1999 1998
- ---------------------------------------------------------------------------------------
ASSETS
Gas plant, at original cost (notes 1, 5, 8, and 10) $334,310 $313,549
Less - accumulated depreciation and
plant acquisition adjustments (notes 1 and 10) 125,144 123,885
-------- --------
209,166 189,664
-------- --------
Current assets:
Cash and temporary cash investments (notes 1 and 9) 982 798
Accounts receivable, less allowance of
$1,999 in 1999 and $2,137 in 1998 (notes 1 and 4) 9,030 9,938
Unbilled revenues (note 1) 2,707 1,610
Inventories, at average cost -
Materials, supplies, and fuels 994 1,177
Prepaid and refundable taxes (note 3) 3,250 4,417
Prepayments 1,897 1,663
-------- --------
18,860 19,603
-------- --------
Deferred charges and other assets (notes 1, 4, 7 and 10) 23,460 15,378
-------- --------
Deferred environmental costs (notes 8 and 10) 9,719 3,969
-------- --------
Total assets $261,205 $228,614
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statement) $183,353 $164,462
-------- --------
Current liabilities:
Notes payable (notes 6 and 9) 11,800 9,720
Current portion of long-term debt (note 5) 3,393 3,050
Accounts payable (notes 7 and 9) 9,586 7,332
Accrued compensation (note 8) 1,542 1,225
Accrued environmental expense (notes 8 and 10) 6,145 -
Accrued interest 1,630 1,457
Accrued taxes 2,874 2,537
Accrued vacation 1,724 1,597
Accrued workers compensation 595 530
Customer deposits 2,923 2,998
Deferred revenue (note 1) 315 -
Other 2,838 2,247
-------- --------
45,365 32,693
-------- --------
Deferred credits, reserves, and other liabilities:
Accumulated deferred Federal income taxes (note 3) 23,128 21,351
Unamortized investment tax credits (note 3) 2,040 2,197
Accrued environmental expense (note 8) - 1,750
Accrued pension (note 7) 6,825 5,681
Other (note 6) 494 480
-------- --------
32,487 31,459
-------- --------
Commitments and contingencies (notes 8 and 10)
Total capitalization and liabilities $261,205 $228,614
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
II-10
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30
(Thousands, except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Operating revenues $ 179,339 $ 184,326 $ 210,673
Cost of gas sold 82,586 91,648 117,357
------------ ------------ ------------
Operating margin 96,753 92,678 93,316
------------ ------------ ------------
Operating expenses:
Operation and maintenance 45,483 45,813 47,135
Depreciation and amortization 16,565 13,483 12,405
Taxes -
State gross earnings 5,316 5,363 6,023
Local property and other 8,245 7,729 7,433
Federal income (note 3) 4,728 4,342 4,489
------------ ------------ ------------
Total operating expenses 80,337 76,730 77,485
------------ ------------ ------------
Operating income 16,416 15,948 15,831
Other, net (notes 1 and 3) 935 284 371
------------ ------------ ------------
Income before interest expense 17,351 16,232 16,202
------------ ------------ ------------
Interest expense:
Long-term debt 6,806 6,362 6,042
Other 1,138 1,365 1,609
Interest capitalized (388) (254) (220)
------------ ------------ ------------
7,556 7,473 7,431
------------ ------------ ------------
Net income 9,795 8,759 8,771
Dividends on preferred stock (note 5) 348 487 626
------------ ------------ ------------
Net income applicable to common stock $ 9,447 $ 8,272 $ 8,145
============ ============ ============
Net income per common share - basic (note 12) $ 7.60 $ 6.65 $ 6.55
============ ============ ============
Net income per common share - diluted (note 12) $ 7.60 $ 6.65 $ 6.55
============ ============ ============
Weighted average number of shares outstanding:
Basic 1,243.6 1,243.6 1,243.6
============ ============ ============
Diluted 1,243.6 1,243.6 1,243.6
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
II-11
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30
(Thousands of Dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Cash provided by (used for)
Operating Activities:
Net income $ 9,795 $ 8,759 $ 8,771
Items not requiring cash:
Depreciation and amortization 16,565 13,483 12,405
Charges as a result of regulatory action (2,357) 1,500 -
Deferred Federal income taxes 829 1,063 622
Amortization of investment tax credits (158) (157) (156)
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable 908 21,010 881
Unbilled revenues (1,097) 1,048 (325)
Deferred gas costs - (2) 5,977
Materials, supplies, and fuels 183 (11) (2,222)
Prepaid and refundable taxes 1,758 (1,434) (186)
Prepayments (234) (697) 499
Accounts payable 934 (3,282) (366)
Accrued compensation 317 (547) 150
Accrued interest 173 264 (83)
Accrued taxes 577 8 662
Accrued vacation, accrued workers
compensation, customer deposits, and other 930 (54) (1,181)
Accrued pension 1,144 (952) 1,060
Deferred charges and other (2,303) 3,945 1,323
----------- ----------- -----------
Net cash provided by operations 27,964 43,944 27,831
----------- ----------- -----------
Investment activities:
Expenditures for property, plant, and
equipment, net (39,104) (29,971) (19,764)
----------- ----------- -----------
Financing activities:
Issuance of mortgage bonds 15,000 15,000 -
Redemption of preferred stock (1,600) (1,600) (1,600)
Issuance of long-term debt - - 1,345
Payments on long-term debt (3,833) (3,645) (2,164)
Premium payment on bonds - (1,392) -
Repurchase of mortgage bonds - (6,363) -
Increase (decrease) in notes payable, net 2,080 (10,690) (390)
Cash dividends on preferred shares (note 5) (348) (487) (626)
Cash dividends on common shares (4,775) (4,776) (4,777)
Capital contribution received from parent 4,800 - -
----------- ----------- -----------
Net cash provided (used) by financing
activities 11,324 (13,953) (8,212)
----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents 184 20 (145)
Cash and cash equivalents at beginning
of year 798 778 923
----------- ----------- -----------
Cash and cash equivalents at end of year $ 982 $ 798 $ 778
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for -
Interest (net of amount capitalized) $ 7,069 $ 6,998 $ 7,305
Income taxes (net of refunds) $ 3,400 $ 4,198 $ 2,215
Schedule of noncash investing activities
Equipment financed through capital leases $ 131 $ - $ 437
Equipment financed through other
long-term debt $ - $ - $ 1,983
The accompanying notes are an integral part of these consolidated financial
statements.
II-12
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
SEPTEMBER 30
(Thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------
Common equity (notes 5 and 7):
Common stock, $1 Par, Authorized - 2,500 shares
Outstanding - 1,244 shares in 1999 and 1998 $ 1,244 $ 1,244
Amount paid in excess of par 42,454 37,590
Retained earnings 47,479 42,807
------------ ------------
91,177 81,641
------------ ------------
Cumulative preferred stock (notes 5 and 9):
Redeemable 8.7% series, $100 Par
Authorized - 80 shares
Outstanding - 32 shares in 1999 and
48 shares in 1998 3,200 4,800
------------ ------------
Long-term debt (notes 5, 8 and 9):
First Mortgage Bonds, secured by property -
Series M, 10.25%, due July 31, 2008 1,819 2,728
Series N, 9.63%, due May 30, 2020 10,000 10,000
Series O, 8.46%, due September 30, 2022 12,500 12,500
Series P, 8.09%, due September 30, 2022 12,500 12,500
Series Q, 5.62%, due November 30, 2003 8,000 9,600
Series R, 7.50%, due December 15, 2025 15,000 15,000
Series S, 6.82%, due April 20, 2018 15,000 15,000
Series T, 6.50%, due February 1, 2029 15,000 -
Other long-term debt 1,994 2,573
Capital leases 556 1,170
------------ ------------
92,369 81,071
Less-current portion 3,393 3,050
------------ ------------
Long-term debt, net 88,976 78,021
------------ ------------
Total capitalization $ 183,353 $ 164,462
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
II-13
THE PROVIDENCE GAS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON STOCKHOLDER'S INVESTMENT
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1999
Amount
Shares Paid in
------
Issued and Outstanding Excess Retained
----------------------
(Thousands) Number Amount of Par Earnings
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 1,244 $ 1,244 $ 37,657 $ 35,943
Add (deduct):
Net income - - - 8,771
Cash dividends on common shares
($3.84 per share) - - - (4,777)
Cash dividends on preferred
shares ($8.70 per share) - - - (626)
Accrual for stock
compensation plans - - (110) -
Amortization of deferred
compensation - - 138 -
----------- ----------- ----------- -----------
Balance, September 30, 1997 1,244 1,244 37,685 39,311
Add (deduct):
Net income - - - 8,759
Cash dividends on common shares
($3.84 per share) - - - (4,776)
Cash dividends on preferred
shares ($8.70 per share) - - - (487)
Accrual for stock
compensation plans - - (266) -
Amortization of deferred
compensation - - 171 -
----------- ----------- ----------- -----------
Balance, September 30, 1998 1,244 1,244 37,590 42,807
Add (deduct):
Net income - - - 9,795
Cash dividends on common shares
($3.84 per share) - - - (4,775)
Cash dividends on preferred
shares ($8.70 per share) - - - (348)
Accrual for stock
compensation plans - - (117) -
Amortization of deferred
compensation - - 181 -
Capital contribution received
from parent - - 4,800 -
----------- ----------- ----------- -----------
Balance, September 30, 1999 1,244 $ 1,244 $ 42,454 $ 47,479
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
II-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of The
Providence Gas Company and its wholly-owned subsidiary. Revenues from the
natural gas distribution business are reflected in the accompanying Consolidated
Statements of Income to arrive at operating income. Results of operations which
are not regulated are presented after operating income in the accompanying
Consolidated Statements of Income. All significant intercompany transactions
have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Regulation
The Registrant is subject to regulation by the RIPUC. The accounting
policies of the Registrant conform to GAAP as applied in the case of regulated
public utilities and are in accordance with the regulator's accounting
requirements and rate-making practices.
Operating Revenues
Operating revenues are generated principally from natural gas activities.
The Registrant records accrued natural gas distribution revenues based on
estimates of gas volumes delivered and not billed at the end of an accounting
period in order to match revenues with related costs.
Lease Accounting
Previously, the Registrant leased water heaters and other appliances to
customers under finance leases. These leases are recorded on the accompanying
Consolidated Balance Sheets at the gross investment in the leases less unearned
income. Unearned income is recognized in such a manner as to produce a constant
periodic rate of return on the net investment in the finance leases.
Gas Plant
Gas plant is stated at the original cost of construction. In accordance
with the uniform system of accounts prescribed by the RIPUC, the difference
between the original cost of gas plant acquired and the cost to the Registrant
is recorded as a Plant Acquisition Adjustment and is being amortized over
periods ranging from 1 to 24 years.
The Registrant capitalizes the costs of all technology investments with the
exception of system maintenance costs, which are expensed unless deferral is
approved by its regulator.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which became effective for the Registrant in 1997, established accounting
standards for the impairment of long-lived assets. SFAS No. 121 also required
that regulatory assets which are no longer probable of recovery through future
revenues be charged to earnings. SFAS No. 121 has not impacted the Registrant's
financial position or results of operations for the years presented.
Depreciation
Depreciation is provided on the straight-line basis at rates approved by
the RIPUC which are designed to amortize the cost of depreciable plant over its
estimated useful life. The composite depreciation rate expressed as a
II-15
percentage of the average depreciable gas plant in service was approximately
3.85 percent for 1999, 1998 and 1997.
The Registrant retires property units by charging original cost, cost of
removal, including environmental investigation and remediation costs, and
salvage value to accumulated depreciation. Due to the magnitude of
environmental investigation and remediation costs, these amounts have been
separately stated in the accompanying Consolidated Balance Sheets.
Gas Charge Clauses
In May 1996, the RIPUC approved a Rate Design Settlement Agreement. The
Agreement included changes to the Registrant's gas cost recovery mechanism.
Specifically, the Agreement replaced the previous CGA with the GCC effective
June 2, 1996. In addition to the commodity and related pipeline transportation
costs historically included in the CGA, the GCC provided for the recovery of:
(1) inventory financing costs; (2) working capital associated with gas supply
purchases; (3) bad debt expenses associated with the gas revenue portion of
customer bills; and (4) a substantial portion of liquefied natural gas operating
and maintenance expenses, all of which were previously recovered in base rates.
Similar to the former CGA, the GCC provided for reconciliation of total gas
costs billed with the actual cost of gas incurred. Any excess or deficiency in
amounts billed as compared to costs incurred was deferred and either refunded
to, or recovered from, customers over a subsequent period. As a result of the
Price Stabilization Plan Settlement Agreement described in Note 10, the GCC will
be suspended for the period from October 1, 1997 through September 30, 2000. Any
excess or deficiency in amounts billed as compared to costs incurred will be
retained or borne by the Registrant during this period.
Allowance for Funds Used During Construction
The Registrant capitalizes interest and an allowance for equity funds in
accordance with established policies of the RIPUC. The rates used are based on
the actual cost of debt and the allowed equity return. Interest capitalized is
shown as a reduction of interest expense and the equity allowance is included in
other, net in the accompanying Consolidated Statements of Income.
Deferred Charges and Other Assets
The Registrant defers and amortizes certain costs in a manner consistent
with authorized or probable rate-making treatment.
Deferred financing costs are amortized over the life of the related
security while the remaining deferred regulatory charges and other assets are
amortized over a recovery period specified by the RIPUC.
Deferred Charges and Other Assets include the following:
(thousands of dollars) 1999 1998
- ----------------------------------------------------
Year 2000 costs $ 7,315 $ 2,518
Pension costs 7,020 6,270
Unamortized debt expense 3,888 3,204
Exogenous recovery 2,450 -
Cost of fuel assistance program 817 895
Other deferred charges 1,970 2,491
------- -------
Total $23,460 $15,378
======= =======
Temporary Cash Investments
Temporary cash investments are short-term, highly liquid investments with
original maturities to the Registrant of not more than 90 days.
Reclassifications
Certain prior year amounts have been reclassified for consistent
presentation with the current year.
II-16
2. SUBSEQUENT EVENT - MERGER
On November 15, 1999, ProvGas' parent, Providence Energy Corporation, and
Southern Union announced that their Boards of Directors unanimously approved a
definitive merger agreement. ProvEnergy will serve as Southern Union's
headquarters for its New England operations. The agreement calls for Southern
Union to merge with ProvEnergy in a transaction valued at approximately $400
million, including assumption of debt. Under the terms of the agreement,
ProvEnergy's shareholders will receive $42.50 per share of ProvEnergy stock in
cash.
Upon completion of the merger, Southern Union will serve approximately 1.5
million gas, electric, oil, and propane customers in Rhode Island,
Massachusetts, Pennsylvania, Texas, Missouri, Florida, Connecticut, and Mexico.
ProvEnergy will operate as an autonomous division of Southern Union with
the headquarters remaining in Rhode Island, and pursuant to terms of the merger
agreement, there will be no material changes to the operations of ProvEnergy.
Southern Union will honor all of ProvEnergy's union contracts and no layoffs are
anticipated as a result of the transaction. ProvEnergy's Chairman and Chief
Executive Officer, James H. Dodge, will also become a member of Southern Union's
Board of Directors.
The transaction may require certain legal approvals, including the approval
of the holders of a majority of the outstanding ProvEnergy shares, the Division,
the RIPUC, the MDTE, the SEC, and FERC, as well as regulators in Texas,
Missouri, Pennsylvania, and Florida, where Southern Union currently has
operations.
3. FEDERAL INCOME TAXES
The Registrant records income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires deferred taxes to be provided for
all temporary differences.
The following is a summary of the provision for Federal income taxes for the
three years ended September 30:
(thousands of dollars) 1999 1998 1997
- ---------------------------------------------------------
Current $4,031 $3,336 $3,898
Deferred 829 1,063 622
------ ------ ------
Total Federal income tax
provision $4,860 $4,399 $4,520
====== ====== ======
Income tax is charged to the
following:
Operating expenses $4,728 $4,342 $4,489
Other, net 132 57 31
------ ------ ------
Total Federal income tax
provision $4,860 $4,399 $4,520
====== ====== ======
II-17
The effective Federal income tax rates and the reasons for their
differences from the statutory Federal income tax rates are as follows:
1999 1998 1997
---- ---- ----
Statutory Federal income tax
rates 34.0% 34.0% 34.0%
Reversing temporary differences (.7) (.3) (.2)
Amortization of investment
tax credits (.4) (.4) (.4)
Other
.3 .1 .6
---- ---- ----
Effective Federal income tax
rate 33.2% 33.4% 34.0%
==== ==== ====
The Registrant's deferred tax assets and liabilities for each of the two
years in the period ended September 30 are the result of the following temporary
differences:
(thousands of dollars) 1999 1998
- --------------------------------------------------------------
Long-term deferred taxes
- ------------------------
Tax assets
Unamortized ITC $ 719 $ 774
Other 241 424
Tax liabilities
Property related (21,571) (21,801)
Pension costs (125) (237)
Deferred charges ( 2,392) (511)
------- -------
Net deferred tax liability included in
accompanying Consolidated Balance
Sheets $(23,128) $(21,351)
======== ========
Prepaid taxes
- -------------
Tax assets
Accounts receivable reserves $ 1,287 $ 921
Property tax reserves 61 (136)
Other 615 540
Tax liabilities
Employee severance 56 56
Other (139) (108)
-------- --------
Net prepaid taxes 1,880 1,273
Prepaid gross earnings tax and other 1,370 3,144
-------- --------
Net prepaid and refundable taxes
included in accompanying
Consolidated Balance Sheets $ 3,250 $ 4,417
======== ========
Investment tax credits are amortized through credits to other, net over the
estimated lives of related property.
II-18
4. LEASE RECEIVABLES
Previously, the Registrant financed the installation of water heaters and
other appliances for its customers under one to three-year finance agreements.
Additionally, the Registrant leased water heaters and appliances to customers
under 10-year sales-type leases.
Future minimum lease payments to be received are:
(thousands of dollars)
- ----------------------
2000 $ 389
2001 295
------
684
Amount representing interest (99)
------
Amount representing principal $ 585
======
5. CAPITALIZATION
A. First Mortgage Bonds
In April 1998, the Registrant issued $15 million of Series S First Mortgage
Bonds. These First Mortgage Bonds bear interest at the rate of 6.82 percent and
mature in April 2018. The net proceeds provided by this indebtedness were used
to finance capital expenditures and pay down short-term debt.
In September 1998, the Registrant repurchased $6.4 million of Series M
First Mortgage Bonds. The cost of repurchase was comprised of $6.4 million in
principal and $1.4 million in premium. The premium will be amortized over 30
years, which is the life of the Series T First Mortgage Bonds, which the
Registrant issued in February 1999. The Registrant has received an order from
the Division which permits the amortization of the bond premium over the life of
this new debt.
The $15 million Series T First Mortgage Bonds bear interest at the rate of
6.5 percent and mature in February 2029. The proceeds received were used to
reduce borrowings under lines of credit as well as for general corporate
purposes.
The Registrant's First Mortgage Bonds are secured by a lien on substantially
all of the Registrant's tangible and real property.
As of September 30, 1999, the annual sinking fund requirements and
maturities for First Mortgage Bonds are as follows:
(thousands of dollars)
- ---------------------
2000 $ 2,509
2001 2,509
2002 1,601
2003 1,600
2004 and thereafter 81,600
-------
$89,819
=======
The terms of the various supplemental indentures, as supplemented, under
which the First Mortgage Bonds were issued, contain restrictions which provide
that dividends may not be paid on common stock of the Registrant under certain
conditions. Approximately $20 million of the Registrant's retained earnings were
available for dividends under the most restrictive terms of the Registrant's
First Mortgage Bond indenture.
B. Other Long-term Debt
During 1997, the Registrant financed equipment purchases of approximately
$3,328,000 through the issuance of long-term notes to IBM Credit Corporation.
The notes have five-year terms and interest rates ranging from 4.9 to 7.5
percent.
II-19
As of September 30, 1999, the maturities of these long-term notes over the next
five years are $663,000 in 2000, $704,000 in 2001, $480,000 in 2002, $69,000 in
2003, and $78,000 in 2004 and thereafter.
C. Redeemable Preferred Stock
The Registrant's preferred stock, which consists of 80,000 shares of $100
par value, has an 8.7 percent cumulative annual dividend rate payable on a
quarterly basis, and has no voting power or privileges. The stock is subject to
a cumulative annual sinking fund requirement of 16,000 shares per year at par
($1,600,000) plus accrued or unpaid dividends, which commenced in February 1997.
Accordingly, 16,000 shares were redeemed by the Registrant at par value in
February 1999 and February 1998. Under the agreement, in addition to the sinking
fund redemptions required, the Registrant has the option to redeem the final
16,000 shares of preferred stock on March 1, 2000. The Registrant intends to
exercise this option.
6. NOTES PAYABLE
The Registrant meets seasonal cash requirements and finances capital
expenditures on an interim basis through short-term bank borrowings. As of
September 30, 1999, the Registrant had lines of credit totaling $53,000,000 with
borrowings outstanding of $11,800,000. The Registrant pays a fee for its lines
of credit rather than maintaining compensating balances. The weighted average
short-term interest rate for borrowings outstanding at the end of the year was
5.50 percent in 1999, 5.48 percent in 1998, and 5.79 percent in 1997.
7. EMPLOYEE BENEFITS
A. Retirement Plans
The Registrant has two pension plans providing retirement benefits for
substantially all of its employees. The benefits under the plans are based on
years of service and the employee's final average compensation. It is the
Registrant's policy to fund at least the minimum required contribution.
The following table sets forth the funding status of the pension plans and
amounts recognized in the Registrant's Consolidated Balance Sheets at September
30, 1999 and 1998:
(thousands of dollars) 1999 1998
- ----------------------------------------------------------------------
Accumulated benefit obligation, including
vested benefit obligation of $(47,613) as of
September 30, 1999 and $(45,865) as
of September 30, 1998 $(56,747) $(54,675)
======== ========
Projected benefit obligation for service
rendered to date $(72,064) (71,194)
Plan assets at fair value (primarily listed
stocks, corporate bonds and U.S. bonds) 83,022 74,752
-------- --------
Excess of plan assets over projected
benefit obligation 10,958 3,558
Unrecognized (gain) (19,763) (9,958)
Unrecognized prior service cost 4,040 2,540
Unrecognized net transition asset
being recognized over 15 years
from October 1, 1985 (136) (272)
-------- --------
Net accrued pension cost included in
accrued pension and accounts payable at
September 30, 1999 and 1998 $ (4,901) $ (4,132)
======== ========
II-20
Net pension cost for fiscal years 1999, 1998, and 1997 included the following
components:
(thousands of dollars) 1999 1998 1997
- ---------------------------------------------------------------------
Service cost $ 2,277 $ 1,980 $ 1,818
Interest cost on benefit obligations 4,971 4,881 4,569
Actual return on plan assets (11,588) (1,334) (16,428)
Net amortization and deferral 5,109 (6,510) 10,506
-------- ------- --------
Net periodic pension cost 769 (983) 465
Adjustment due to regulatory
action (769) 983 (465)
-------- ------- --------
Net periodic pension cost recognized
in earnings $ - $ - $ -
======== ======= ========
In 1999, the discount rate and rate of increase in future compensation levels
used in determining the projected benefit obligation were 7.25 percent and 5
percent, respectively. The expected long-term rate of return on assets was 9
percent in 1999.
In 1998, the discount rate and rate of increase in future compensation levels
used in determining the projected benefit obligation were 6.75 percent and 5
percent, respectively. In 1997 the discount rate and rate of increase in future
compensation levels used in determining the projected benefit obligation were 8
percent and 6 percent, respectively. The expected long-term rate of return on
assets was 9 percent in 1998 and 1997.
The Registrant recovers pension costs in rates when such costs are funded.
Therefore, the amount by which funding differs from pension expense, determined
in accordance with GAAP, is deferred and recorded as a regulatory asset or
liability.
B. Post-retirement Benefits Other Than Pensions
The Registrant currently offers retirees who have attained age 55 and worked
five years for the Registrant, healthcare and life insurance benefits during
retirement. These benefits are similar to the benefits offered to active
employees. Although retirees are not required to make contributions for
healthcare and life insurance benefits currently, future contributions may be
required if the cost of healthcare and life insurance benefits during retirement
exceed certain limits.
Since 1993, the post-retirement benefit costs for active employees are
recorded on an accrual basis, ratably over their service periods. Benefits of
$10,526,000 earned prior to 1993 have been deferred as an unrecognized
transition obligation, which the Registrant is amortizing over a 20-year period.
The Registrant funds its post-retirement benefit obligations to a Voluntary
Employee Benefit Association Trust. Total contributions of $1,177,000 in 1999,
$1,308,000 in 1998, and $1,372,000 in 1997 were made to the VEBA Trust.
The Registrant recovers its post-retirement benefit obligation in rates to the
extent allowed by the RIPUC. The RIPUC generally allows such costs to be
recovered if amounts are funded into tax favored investment funds, such as the
VEBA Trust. Accordingly, the Registrant fully recovered its 1999, 1998, and 1997
post-retirement benefit obligations because such obligations were funded into
the VEBA Trust. In addition, in September 1996, the RIPUC approved a ratable
recovery of the cumulative unrecovered difference of $1,041,000 during 1997,
1998, and 1999. Of the total post-retirement benefit obligations, $1,523,000,
$1,654,000, and $1,718,000 were included in rates during 1999, 1998, and 1997,
respectively.
The healthcare and life insurance benefits' costs and accumulated post-
retirement benefit obligation for 1999, 1998, and 1997 are calculated by the
Registrant's actuaries using assumptions and estimates which include:
II-21
1999 1998 1997
-------------------
Healthcare cost annual growth rate 7.55% 9.0% 10.2%
Healthcare cost annual growth rate - long-term 4.75 6.0 6.0
Expected long-term rate of return (union) 8.5 8.5 8.5
Expected long-term rate of return (non-union) 5.5 5.5 5.5
Discount rate 7.25 6.75 8.0
The healthcare cost annual growth rate significantly impacts the estimated
benefit obligation and annual expense. For example, in 1999, a one percent
increase in the above rates would increase the obligation by $745,000 and the
annual expense by $77,000. Decreasing the assumed health care cost annual
growth rate by one percent would decrease the obligation by $596,000 and the
annual expense by $62,000.
The obligations and assets of the healthcare and life insurance benefits at
September 30, 1999 and 1998 are:
(thousands of dollars) 1999 1998
- ------------------------------------------------------------------
Accumulated post-retirement benefit
obligation as of the end of the
prior fiscal year $(12,886) $(11,748)
Service cost (273) (243)
Interest cost (848) (945)
Actuarial loss/(gain) and
assumption change 872 (660)
Expected benefits paid 724 710
-------- --------
Accumulated post-retirement benefit
obligation as of the end
of the fiscal year (12,411) (12,886)
-------- --------
Fair value of plan assets as of
the beginning of the year 5,684 4,704
Return on plan assets 627 377
Employer contributions 1,177 1,308
Expenses paid (13) (18)
Benefits paid (590) (687)
-------- --------
Fair value of plan assets
as of the end of the year 6,885 5,684
-------- --------
Unfunded post-retirement benefit
obligation (5,526) (7,202)
Unrecognized transition obligation 7,368 7,895
Unrecognized net (gain) or loss (1,842) (693)
-------- --------
Prepaid post-retirement
benefit obligation included
in the accompanying Consolidated
Balance Sheets $ - $ -
======== ========
The Registrant's actuarially determined healthcare and life insurance
benefits' costs for 1999, 1998, and 1997 include the following:
(thousands of dollars) 1999 1998 1997
- --------------------------------------------------------
Service cost $ 273 $ 243 $ 228
Interest cost 849 945 896
Actual return on plan assets (471) (406) (278)
Amortization and deferral 526 526 526
------ ------ ------
Total annual plan costs $1,177 $1,308 $1,372
====== ====== ======
II-22
C. Supplemental Retirement Plans
The Registrant provides certain supplemental retirement plans for key
employees. The projected benefit obligation is approximately $2,111,000 which
is being accrued over the service period of these key employees. The
supplemental retirement plans are unfunded. The Registrant accrued and expensed
$407,000, $61,000, and $612,000 related to these benefits in 1999, 1998, and
1997, respectively.
D. Performance and Equity Incentive Plan
During 1992, the Board of Directors of Providence Energy, with subsequent
approval of Providence Energy's common shareholders, adopted the Providence
Energy Corporation Performance and Equity Incentive Plan. This plan provides
that up to 225,000 shares of common stock, as well as cash awards, can be
granted to key employees, including employees of the Registrant, at no cost to
the employees. Key employees who receive common shares are entitled to receive
dividends, but full beneficial ownership vests on the fifth anniversary of the
date of grant provided the participant is still employed by Providence Energy or
one of its subsidiaries. Vesting may be accelerated under certain circumstances,
including a change in control. This plan also provides for cash compensation to
key employees.
The executive compensation incentive awards paid by the Registrant under this
Plan totaled approximately $715,000 for 1999, $459,000 for 1998, and $439,000
for 1997. Amounts paid in cash are charged to expense when earned. However,
amounts paid in restricted stock are deferred and amortized to expense over the
five-year vesting period.
Of the $715,000 1999 award, $483,000 will be paid in cash during 2000. Of the
$459,000 1998 award, $310,000 was paid in cash during 1999. Of the $439,000
1997 award, $297,000 was paid in cash during 1998. Grant shares totaling 7,566,
7,230, and 5,989 were purchased by the Registrant and reissued to key employees
during 1999, 1998, and 1997, respectively.
E. Restricted Stock Incentive Plan
The Restricted Stock Incentive Plan, which was discontinued in 1998, provided
that up to 60,000 shares of Providence Energy common stock may be granted to
employees of the Registrant with at least three months of service, who are not
officers or covered by a collective bargaining agreement, at no cost to the
employee. All participants were entitled to receive dividends; however, full
beneficial ownership vests on the third anniversary of the date of the grant
provided that the participant is still employed by the Registrant. Vesting may
be accelerated under certain circumstances.
The purchase of 4,230 shares for the Restricted Stock Incentive Plan for the
1997 award occurred in 1998 at a cost of approximately $90,000. All amounts
awarded under the Restricted Stock Incentive Plan are deferred and amortized to
expense over a three-year period.
F. 1998 Performance Share Plan
Effective October 1, 1998, the Board of Directors of ProvEnergy adopted a
Performance Share Plan to encourage executives' interest in longer-term
performance by keying incentive payouts to the total return performance of
Providence Energy Corporation's (Providence Energy) common stock in relation to
that of other companies in the Edward Jones and Company gas distribution group
of approximately 30 companies and to the change in Providence Energy's Stock
price over three-year performance periods. The number of shares earned will
range from 50 percent to 150 percent of awarded shares, if based on the relative
total shareholder return method, and 50 percent to 100 percent, if based on the
increase in the stock price of Providence Energy's common stock during the
three-year period. These levels were developed to bring total compensation
levels for the Registrant and its parent company, Providence Energy Corporation,
more in line with survey data for the relevant labor market. No shares will be
earned unless Providence Energy shareholders have earned a minimum annual return
over the three-year period equal to the total annual return for 30-year Treasury
notes during
II-23
such period. Upon the occurrence of a change in control, unless otherwise
prohibited, the opportunities under all outstanding awards shall be deemed to
have been fully earned for the entire performance period as of the effective
date of the change in control. Dividends will not be paid on the shares until
they are earned. Awards will be paid half in cash and half in Providence Energy
common stock. During 1999, 38,000 shares were granted under this plan.
8. COMMITMENTS AND CONTINGENCIES
A. Legal Proceedings
The Registrant is involved in legal and administrative proceedings in the
normal course of business, including certain proceedings involving material
amounts in which claims have been or may be made. However, management believes,
after review of insurance coverage and consultation with legal counsel, that the
ultimate resolution of the legal proceedings to which it is or can at the
present time be reasonably expected to be a party, will not have a materially
adverse effect on the Registrant's results of operations or financial condition.
B. Capital Leases
The Registrant has a capital lease with Algonquin for storage space in a
LNG tank. The capital lease arrangement also provides that Algonquin lease from
the Registrant, for a corresponding term at an annual amount of $150,000, the
land on which the tank is situated. The Registrant also leases certain
information systems and other equipment under capital leases.
Property under Capital Leases:
- ------------------------------
(thousands of dollars) 1999 1998
- -------------------------------------------------------
Gas plant $ 6,116 $ 6,116
Computer and other equipment 568 1,988
Accumulated depreciation (6,067) (6,937)
------- -------
$ 617 $ 1,167
======= =======
Commitments for Capital Leases:
- ------------------------------
*LNG Computer
(thousands of dollars) Storage Equipment Total
- ----------------------------------------------------------------
2000 $ 136 $ 144 $ 280
2001 136 144 280
2002 - 69 69
2003 - 34 34
2004 - 2 2
------ ------- ------
$ 272 $ 393 665
------ -------
Amount representing interest (109)
------
Amount representing principal $ 556
======
* This capital lease will be terminated once the terms of the contract with
Algonquin, which is described below, are met.
C. Operating Leases
The Registrant also leases facilities and equipment under operating leases
with total future payments as of September 30, 1999 as follows:
(thousands of dollars)
- ----------------------
2000 $205
2001 145
2002 61
----
$411
====
II-24
D. Gas Supply
As part of the Price Stabilization Plan Settlement Agreement described in
Note 10, the Registrant entered into a full requirements gas supply contract
with DETM, a joint venture of Duke Energy Corporation and Mobil Corporation, for
a term of three years commencing October 1, 1997. 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, under
the contract, the Registrant transferred responsibility for its pipeline
capacity resources, storage contracts, and LNG capacity to DETM. As a result,
the Registrant's gas inventories of approximately $18 million at September 30,
1997 were sold at book value to DETM on October 1, 1997.
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 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 gas supply 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.
This 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, a subsidiary of Duke Energy Corporation. Algonquin 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 in
the first quarter of fiscal 2000. Under the terms of the agreement, Algonquin
replaced and expanded the vaporization capability at the tank. The Registrant
will receive approximately $2.6 million from Algonquin. Of the $2.6 million,
approximately $.9 million represents reimbursement received by the Registrant in
1999 for costs incurred 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 Algonquin
storage capacity is released to DETM as provided for in the gas supply contract
described above. This payment is expected 60 days after the in-service date of
the project.
In June 1999, the FERC issued an order in Docket Number CP99-113 approving
Algonquin's project described above. In that order FERC also approved the new
10-year contract between Algonquin and the Registrant for service from the tank.
Also approved was the Registrant's parallel filing, PR99-8, requesting
regulatory authorization to charge Algonquin for transportation of gas vaporized
for other Algonquin customers and transported by the Registrant to the Algonquin
pipeline on behalf of those customers.
As a result of FERC Order 636 and other related orders, pipeline
transportation companies have incurred significant costs, collectively known as
transition costs. The majority of these costs will be reimbursed by the
pipeline's customers, including the Registrant. The Registrant estimates its
transition costs to be approximately $21.7 million, of which $16.2 million has
been included in the GCC and collected from customers through September 30,
1997.
II-25
As part of the above supply contract, DETM assumed liability for these
transition costs during the contract's three-year term. At the end of the
three-year term of the contract, the Registrant will assume any remaining
liability, which is not expected to be material.
E. Environmental Matters
Federal, state, and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years. The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively. The Registrant continues to monitor the status of these
laws and regulations. Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean
up certain sites. To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.
At September 30, 1999, the Registrant was aware of five sites at which
future costs may be incurred.
Plympton Sites (2)
The Registrant has been designated as a 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 September 30, 1999,
approximately $3.0 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 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 1999 and is
anticipated to be completed during the next fiscal year. 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 $7.0 million to in
excess of $9.0 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 a net accrual of $6.1 million at September
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
September 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
II-26
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 fiscal 2000, at which time the previous owner will assume
responsibility for removal of coal tar waste on the site. The Registrant
remains responsible for cleanup 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 $.1 million.
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. Total estimated costs of
testing at this site are anticipated to be approximately $.2 million. Until the
results of the investigation are known, the Registrant cannot 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 Note 10, effective October
1, 1997, all environmental investigation and remediation costs incurred through
September 30, 1997, as well as all costs incurred during the three-year term of
the Plan, will be amortized over a 10-year period, in accordance with the levels
authorized in Energize RI. Additionally, it is the Registrant's practice to
consult with the RIPUC on a periodic basis when, in management's opinion,
significant amounts might be expended for environmental-related costs. As of
September 30, 1999, the Registrant has incurred environmental assessment and
remediation costs of $4.7 million and has a net accrual of $6.1 million for
future 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.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for the following financial instruments:
Cash, Cash Equivalents, Accounts Payable, and Short-term Debt
- -------------------------------------------------------------
The carrying amount approximates fair value due to the short-term maturity of
these instruments.
Long-term Debt and Preferred Stock
- ----------------------------------
The fair value of long-term debt and preferred stock is estimated based on
currently quoted market prices for similar types of issues.
II-27
The carrying amounts and estimated fair values of the Registrant's financial
instruments at September 30 are as follows:
1999 1998
---- ----
Carrying Fair Carrying Fair
(thousands of dollars) Amount Value Amount Value
- ----------------------------------------------------------------------
Cash and cash equivalents $ 982 $ 982 $ 798 $ 798
Accounts payable 9,586 9,586 7,332 7,332
Short-term debt 11,800 11,800 9,720 9,720
Long-term debt 92,369 74,403 81,071 93,707
Preferred stock 3,200 3,223 4,800 5,040
The difference between the carrying amount and the fair value of the
Registrant's preferred stock and 1998 long-term debt, if they were settled at
amounts reflected above, would likely be recovered in the Registrant's rates
over a prescribed amortization period. Accordingly, any settlement should not
result in a material impact on the Registrant's financial position or results of
operations.
10. RATE CHANGES
In August 1997, the RIPUC approved Energize RI among the Registrant, 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 4.0 percent in addition to a
three-year price freeze. Under Energize RI, the GCC 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 $1.0 million, the Demand Side Management Rebate
Program at an annual level of $.5 million and the Low-Income Weatherization
Program at an annual level of $.2 million. Energize RI also continues the
process of unbundling by 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 has reclassified and is amortizing
approximately $4.0 million of prior environmental costs. These costs and all
environmental costs incurred during the term of the Plan will be amortized over
a 10-year period, in accordance with the levels authorized in Energize RI.
Under Energize RI, the Registrant may earn up to 10.9 percent, but not less
than 7.0 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 the event that the Registrant earns in excess of 10.9 percent
or less than 7.0 percent, the Registrant will defer revenues or costs through a
deferred revenue account over the term of the Plan. Any balance in the deferred
revenue account at the end of the Plan will be refunded to or recovered from
customers in a manner to be determined by all parties to the Plan and approved
by the RIPUC.
As part of Energize RI, the Registrant is permitted to file annually with
the Division for the recovery of exogenous changes which may occur during the
three-year term of the Plan. Exogenous 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 exogenous
II-28
changes are to be resolved by the RIPUC. The impact of any such exogenous
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 deemed them to be exogenous 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 exogenous changes
experienced by the Registrant in fiscal 1998. The RIPUC reviewed the exogenous
changes agreement to ensure consistency with the terms of Energize RI and
affirmed the agreement at its May 28, 1999 open meeting.
During fiscal 1999, the Registrant recognized into revenue $2.45 million
for the exogenous changes recovery, and at year-end has deferred approximately
$.5 million of revenue under the provisions of the earnings cap of Energize RI.
The Registrant intends to file for recovery of exogenous changes
experienced in 1999 which resulted from factors similar to 1998. Absent further
exogenous recovery and/or other factors such as colder than normal weather, the
Registrant's ability to earn a 10.9 percent return on average common equity in
the final year of Energize RI is substantially impaired.
11. NEW ACCOUNTING PRONOUNCEMENTS
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 in the first fiscal quarter for the Registrant's
fiscal year ending September 30, 2001. A company may also implement the
Statement as of the beginning of any fiscal quarter after issuance (that is,
fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at a company's election, before January 1, 1998).
The Registrant has not yet quantified the impact of adopting SFAS No. 133
on the financial statements and has not determined the timing of or method of
adoption of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". It applies to all non-governmental entities and is
effective for the Registrant's financial statements for the fiscal year ending
September 30, 2000. The provisions of this SOP should be applied to internal-use
software costs incurred in fiscal years subsequent to December 15, 1998 for all
projects, including those projects in progress upon initial application of the
SOP.
II-29
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 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 in fiscal 2000 and does not expect it to
have a material impact on the financial statements.
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited quarterly financial information for the two
years ended September 30, 1999 and 1998. Quarterly variations between periods
are caused primarily by the seasonal nature of gas sales.
(thousands, except per share amounts)
Quarter Ended
---------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30
---------------------------------------
Fiscal 1999
- ----------------------------------------------------------------------
Operating revenues $53,301 $77,908 $29,515 $18,615
Operating income (loss) 6,172 11,941 1,272 (2,969)
Net income (loss)
applicable to common
stock 4,464 10,037 (197) (4,857)
Net income (loss) per share
applicable to
common stock* 3.59 8.07 (.16) (3.91)
Fiscal 1998
- ----------------------------------------------------------------------
Operating revenues $59,200 $73,686 $31,155 $20,285
Operating income (loss) 6,214 11,564 644 (2,474)
Net income (loss)
applicable to
common stock 4,298 9,695 (1,106) (4,615)
Net income (loss) per
share applicable to
common stock* 3.46 7.79 (.89) (3.71)
* Calculated on the basis of weighted average shares outstanding during the
quarter.
II-30
LIST OF DEFINED TERMS
---------------------
ABBREVIATIONS, ACRONYMS and OTHER DEFINED TERMS:
AFUDC: Allowance for Funds Used During Construction
ALGONQUIN: Algonquin Gas Transmission Company
CGA: Cost of Gas Adjustment Clause
CIS: Customer Information System
DEM: Rhode Island Department of Environmental Management
DETM: Duke Energy Trading and Marketing, L.L.C.
DIVISION: Rhode Island Division of Public Utilities and Carriers
DSM: Demand Side Management
ENERGIZE RI OR THE PLAN: Price Stabilization Plan Settlement Agreement
FASB: Financial Accounting Standards Board
FERC: Federal Energy Regulatory Commission
GAAP: Generally Accepted Accounting Principles
GCC: Gas Charge Clause
HVAC: Heating, Ventilating and Air Conditioning systems
IRP: Integrated Resource Plan
IT: Information Technology
LDC: Local Distribution Company
LNG: Liquefied Natural Gas
MDTE: Massachusetts Department of Telecommunications and Energy
MECHANISM: Performanced-Based Ratemaking Mechanism
NORTH ATTLEBORO GAS: North Attleboro Gas Company
PBR: Performance Based Regulation
PNGTS: Portland Natural Gas Transmission System
PROVENERGY: Providence Energy Corporation
PROVENERGY SERVICES: Providence Energy Services, Inc.
PRP: Potentially Responsible Party
RIPUC: Rhode Island Public Utilities Commission
SCADA: Supervisory Control and Data Acquisition system
SEC: Securities and Exchange Commission
II-31
SFAS: Statement of Financial Accounting Standards
SOP: Statement of Position
SOUTHERN UNION: Southern Union Company
THE REGISTRANT: The Providence Gas Company
VEBA: Voluntary Employee Benefit Association
II-32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of The Providence Gas Company:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of The Providence Gas Company (a Rhode
Island corporation and a wholly-owned subsidiary of Providence Energy
Corporation) as of September 30, 1999 and 1998, and the related consolidated
statements of income, changes in common stockholder's investment and cash flows
for each of the three years in the period ended September 30, 1999. These
financial statements and the schedule referred to below are the responsibility
of the Registrant's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Providence Gas Company as of September 30, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index to the financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
November 2, 1999 (except for the information discussed in Note 2, as to which
the date is November 16, 1999)
II-33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not applicable.
II-34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The following information is furnished with respect to the
executive officers of the Registrant:
Year Office
Name and Age Office First Held
- ------------ ------ -----------
James H. Dodge (59) Chairman, President, and Chief
Executive Officer 1992
James DeMetro (51) Executive Vice President 1999
Robert W. Owens (51) Senior Vice President, Gas
Distribution 1996
Kenneth W. Hogan (54) Vice President, Chief
Financial Officer, and
Treasurer 1999
Peter J. Gill (40) Vice President, Information
Technology 1998
Susann G. Mark (52) Vice President, General Counsel,
and Secretary 1999
James A. Grasso (45) Vice President, Public and Government
Affairs, and Assistant Secretary 1998
Timothy S. Lyons (38) Vice President, Marketing, and
Regulatory Affairs 1998
Gary L. Beland (49) Assistant Vice President, 1996
Gas Supply
Sharon A. Dufour (34) Controller 1998
Mr. Dodge was elected President and Chief Executive Officer in August 1990
and subsequently became Chairman of the Board in January 1992. Mr. Dodge
currently serves as a member of the Board of Capital Properties, Inc., a
non-affiliated real estate leasing company.
Mr. DeMetro was elected Executive Vice President in February 1999. For
three years prior thereto Mr. DeMetro served as Senior Vice President, Energy
Services. For four years prior thereto, Mr. DeMetro served the Registrant as
Vice President, Energy Services.
Mr. Owens was elected Senior Vice President, Gas Distribution in February
1996. For more than two years prior thereto, Mr. Owens served the Registrant as
Vice President, Operations. For more than five years prior thereto, Mr. Owens
served the Registrant in various management positions, with his last position as
Vice President, Treasurer and Chief Financial Officer.
Mr. Hogan was elected Vice President, Chief Financial Officer, and
Treasurer in April 1999. For more than five years prior thereto, Mr. Hogan
served as Senior Vice President, Chief Financial Officer, and Secretary of
Valley Resources, Inc., a diversified energy company.
Mr. Gill was elected Vice President, Information Technology in September
1998, effective October 1, 1998. For more than two years prior thereto, Mr. Gill
served as Controller and Assistant Treasurer. For two years prior thereto, Mr.
Gill served the Registrant as Director of Planning.
III-1
Ms. Mark was elected Vice President, General Counsel, and Secretary of the
Registrant in May 1999. For one year prior thereto, Ms. Mark served as Vice
President, General Counsel, and Secretary of ProvEnergy. For one year prior to
that, Ms. Mark was a partner in the Business Law Group at Brown, Rudnick, Freed
& Gesmer and for eight years prior to that was a partner in the Corporate Law
Practice Group at Licht and Seminoff.
Mr. Grasso was elected Vice President, Public and Government Affairs and
Assistant Secretary in September 1998, effective October 1, 1998. For one year
prior thereto, Mr. Grasso served as Vice President, Public and Government
Affairs. For three years prior thereto, Mr. Grasso served as Director of Public
and Government Relations of PanEnergy Corporation and Algonquin Gas Transmission
Company.
Mr. Lyons was elected Vice President, Marketing and Regulatory Affairs in
April 1998. For more than two years prior thereto, Mr. Lyons served as Assistant
Vice President, Pricing and Regulation. For two years prior thereto, Mr. Lyons
served the Registrant as Director of Pricing. For two years prior thereto, Mr.
Lyons served the Registrant as Director of Rates.
Mr. Beland was elected Assistant Vice President, Gas Supply in February
1996. For two years prior thereto, Mr. Beland served as Director of Gas and
Transportation Services.
Ms. Dufour was elected Controller in September 1998, effective October 1,
1998. For two years prior thereto, Ms. Dufour served as Director of Financial
Information and Budgeting Services. For two years prior thereto, Ms. Dufour
served as Director of Financial Information.
III-2
DIRECTORS OF THE REGISTRANT
- ---------------------------
For information called for by this item, reference is made to pages 2
through 6 of Providence Energy Corporation's proxy statement filed December 21,
1999 with the Securities and Exchange Commission for the annual meeting of
shareholders to be held January 20, 2000.
III-3
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
For the information called for by this item, reference is made to pages 7 to 18
of Providence Energy Corporation's proxy statement filed December 21, 1999 with
the Securities and Exchange Commission for the annual meeting of shareholders to
be held January 20, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Not applicable. All of the Registrant's voting securities are held by
Providence Energy Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
For information called for by this item, reference is made to pages 6 through 7
of Providence Energy Corporation's proxy statement filed December 21, 1999 with
the Securities and Exchange Commission for the annual meeting of shareholders to
be held January 20, 2000.
III-4
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
THE PROVIDENCE GAS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules
----------------------------------
Consolidated Balance Sheets--September 30, 1999 and 1998
Consolidated Statements of Income for the years ended September 30, 1999, 1998,
and 1997
Consolidated Statements of Cash Flows for the years ended September 30, 1999,
1998, and 1997
Consolidated Statements of Capitalization--September 30, 1999 and 1998
Consolidated Statements of Changes in Common Stockholder's Investment for the
years ended September 30, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Schedule II. Reserves for the years ended September 30, 1999, 1998, and 1997.
Schedules I to XIII not listed above are omitted as not applicable
or not required under Regulation S-X.
(b) Reports on Form 8-K
-------------------
Although no reports were filed on Form 8-K during the latest quarter of the
Registrant's fiscal year ended September 30, 1999, the Registrant's parent
company, ProvEnergy, filed a report on Form 8-K on November 15, 1999 regarding
ProvEnergy's Agreement and Plan of Merger with Southern Union.
(c) Exhibits
--------
The following exhibits are filed as part of this report:
3.1 Charter (incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No. 2-72726)).
3.2 Bylaws. (Filed as Exhibit 3.2 to the Report on Form 10-K of the Registrant
in Form 10-K for the year ended September 30, 1993, incorporated herein by
this reference.)
4.1 First Mortgage Indenture dated as of January 1, 1922, as supplemented by
First through Twelfth Supplemental Indentures, (incorporated by reference
to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1
(Registration No. 2-72726)).
4.2 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures dated as of
August 1, 1988, June 1, 1990 and November 1, 1992, respectively
(incorporated by reference to Exhibit 4 to the report of Providence Energy
Corporation (Commission File No. 1-10032) to the Securities and Exchange
Commission on Form 10-Q for the quarter ended March 31, 1993).
4.3 Seventeenth Supplemental Indenture dated as of November 1, 1993.(Filed as
Exhibit 4.5 to the report of the Registrant in Form 10-K for the year ended
September 30, 1993, incorporated herein by this reference.)
4.4 Eighteenth Supplemental Indenture dated as of December 1, 1995. (Filed as
Exhibit 4.6 to the report of the Registrant in Form 10-K for the year ended
September 30, 1995, incorporated herein by this reference.)
4.5 Nineteenth Supplemental Indenture dated as of April 1, 1998. (Filed as
Exhibit 4.6 to the report of the Registrant in Form 10-K for the year ended
September 30, 1998, incorporated herein by this reference.)
IV-1
4.6 Twentieth Supplemental Indenture dated as of February 1, 1999.
4.7 Twenty-first Supplemental Indenture dated as of October 12, 1999.
10.1 Redacted gas supply contract dated October 1, 1997 between Duke Energy
Trading and Marketing, L.L.C. and the Registrant. (Filed as Exhibit 10 to
Form 10-Q of the Registrant for the quarter ended June 30, 1998,
incorporated herein by this reference.)
10.2 Liquefied Natural Gas Service Precedent Agreement dated December 11, 1998
between Algonquin LNG, Inc. and the Registrant. (Filed as Exhibit 10a to
Form 10-Q of the Registrant for the quarter ended December 31, 1998,
incorporated herein by this reference.)
10.3 Employment Agreement dated October 1, 1998 between Peter J. Gill, Vice
President, Information Technology and the Registrant. (Filed as Exhibit
10a to Form 10-Q of the Registrant for the quarter ended June 30, 1999,
incorporated herein by this reference.)
21 Subsidiary of the Registrant.
IV-2
Supplemental Schedule
Schedule II
PROVIDENCE GAS COMPANY
----------------------
RESERVES FOR THE YEARS ENDED
----------------------------
SEPTEMBER 30, 1999, SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
-------------------------------------------------------------
(Thousands of Dollars)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/98 to Operations Add (Deduct) Created 9/30/99
-------- ------------- ------------ ------- -------
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,048 $ 4,308 $ 127 (D) $ 4,485 $ 1,998
Allowance for lease
receivables -
current 89 4 (90)(D) 2 1
-------- ------------- ------------ ------- -------
Total $ 2,137 $ 4,312 $ 37 $ 4,487 $ 1,999
======== ============= ============ ======= =======
Allowance for lease
receivables - long-term $ 372 $ 72 $ (183)(D) $ 75 $ 186
======== ============= ============ ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $ 21,351 $ 829 $ 948 (F) $ - $23,128
-------- ------------- ------------ ------- -------
Unamortized investment
tax credit 2,197 - - 157 2,040
-------- ------------- ------------ ------- -------
Accrued pension 5,681 427 769 (A) 52 6,825
-------- ------------- ------------ ------- -------
Accrued environmental 1,750 - (1,750)(C) - -
-------- ------------- ------------ ------- -------
Liability and
damage reserve 480 126 73 (E) 185 494
-------- ------------- ------------ ------- -------
Total deferred
credits and
reserves $ 31,459 $ 1,382 $ 40 $ 394 $32,487
======== ============= ============ ======= =======
IV-3
SCHEDULE II (cont'd)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/97 to Operations Add (Deduct) Created 9/30/98
-------- ----------- ----------- ------- -------
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 1,690 $ 4,618 $ - $ 4,260 $ 2,048
Allowance for lease
receivables -
current 49 40 - - 89
-------- -------- ------- -------- --------
Total $ 1,739 $ 4,658 $ - $ 4,260 $ 2,137
======== ======== ======= ======== ========
Allowance for lease
receivables -
long-term $ 401 $ 72 $ - $ 101 $ 372
======== ======== ======= ======== ========
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $ 20,598 $ 1,063 $ (310)(F) $ - $ 21,351
-------- -------- ------- --------- --------
Unamortized investment
tax credit 2,354 - - 157 2,197
-------- -------- ------- --------- --------
Accrued pension 6,633 83 (984)(A) 51 5,681
-------- -------- ------- --------- --------
Accrued environmental 1,750 - - - 1,750
-------- -------- ------- --------- --------
Liability and
damage reserve 622 (22) - 120 480
-------- -------- ------- --------- --------
Total deferred
credits and
reserves $ 31,957 $ 1,124 $(1,294) $ 328 $ 31,459
======== ======== ======= ========= ========
IV-4
SCHEDULE II (cont'd)
Charges
for
Which
Additions Reserves
Balance Charged Other Were Balance
9/30/96 to Operations Add (Deduct) Created 9/30/97
------- ------------- ------------ ------- -------
RESERVES DEDUCTED FROM
ASSETS:
Accounts receivable
Allowance for
doubtful accounts $ 2,974 $ 4,872 $ - $ 6,156 $ 1,690
Allowance for lease
receivables -
current 9 94 - 54 49
------- ----------- ---------- ------- -------
Total $ 2,983 $ 4,966 $ - $ 6,210 $ 1,739
======= =========== ========== ======= =======
Allowance for lease
receivables -
long-term $ 403 $ 138 $ - $ 140 $ 401
======= =========== ========== ======= =======
DEFERRED CREDITS AND
RESERVES:
Accumulated deferred
income taxes $19,903 $ 622 $ 73 (F) $ - $20,598
------- ----------- ---------- ------- -------
Unamortized investment
tax credit 2,510 - - 156 2,354
------- ----------- ---------- ------- -------
Accrued pension 5,573 634 465 (A) 39 6,633
------- ----------- ---------- ------- -------
Accrued environmental 1,300 - 450 (B) - 1,750
------- ----------- ---------- ------- -------
Liability and
damage reserve 562 281 - 221 622
------- ----------- ---------- ------- -------
Total deferred
credits and
reserves $29,848 $ 1,537 $ 988 $ 416 $31,957
======= =========== ========== ======= =======
(A) Adjustment due to the regulatory pension liability.
(B) Accrual for environmental investigation and remediation costs.
(C) A reclassification of environmental liabilities from long-term to short-
term.
(D) Account reclassifications during system conversion.
(E) Reclassify amounts due to the Registrant to a receivable account.
(F) Represents offset for certain SFAS No. 109 activity in the regulatory asset
and liability accounts, as well as reclassifications among tax accounts
based on tax return as filed and estimated current year tax activity.
IV-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE PROVIDENCE GAS COMPANY
By /s/ JAMES H. DODGE
-----------------------------------------------
James H. Dodge, Chairman, President, and CEO
Date December 21, 1999
------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/JAMES H. DODGE Chairman, President, and CEO
- ------------------------
James H. Dodge (Principal Executive Officer) 12/21/99
--------
/s/KENNETH W. HOGAN Vice President, Chief Financial 12/21/99
- ------------------------ --------
Kenneth W. Hogan Officer, and Treasurer
/s/GILBERT R. BODELL, JR. Director 12/21/99
- ------------------------ --------
Gilbert R. Bodell, Jr.
/s/JOHN H. HOWLAND Director 12/21/99
- ------------------------ --------
John H. Howland
/s/DOUGLAS H. JOHNSON Director 12/21/99
- ------------------------ --------
Douglas H. Johnson
/s/WILLIAM KREYKES Director 12/21/99
- ------------------------ --------
William Kreykes
/s/PAUL F. LEVY Director 12/21/99
- ------------------------ --------
Paul F. Levy
/s/M. ANNE SZOSTAK Director 12/21/99
- ------------------------ --------
M. Anne Szostak
/s/KENNETH W. WASHBURN Director 12/21/99
- ------------------------ --------
Kenneth W. Washburn
/s/W. EDWARD WOOD Director 12/21/99
- ------------------------ --------
W. Edward Wood
IV-6