-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JHIC1EkBG1wirDCYj17KgQt5zvUYTn5lujawj0TEoHVGguJFh+0tQMypSJuiaKyz kqi43SUIZtnukW4cJ98+Ag== 0000319651-95-000016.txt : 19951227 0000319651-95-000016.hdr.sgml : 19951227 ACCESSION NUMBER: 0000319651-95-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951226 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENCE ENERGY CORP CENTRAL INDEX KEY: 0000319651 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 050389170 STATE OF INCORPORATION: RI FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10032 FILM NUMBER: 95604316 BUSINESS ADDRESS: STREET 1: 100 WEYBOSSET ST CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4012725010 MAIL ADDRESS: STREET 1: 100 WEYBOSSET STREET CITY: PROVIDENCE STATE: RI ZIP: 02903 10-K 1 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, 1995 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 1-10032 PROVIDENCE ENERGY CORPORATION (Exact name of registrant as specified in its charter) Rhode Island 05-0389170 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) (Identification No.) 100 Weybosset Street, Providence, Rhode Island 02903 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 401-272-9191 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1.00 Par Value AMERICAN STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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. [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant, as of December 26, 1995: $95,338,069 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: 5,691,825 shares outstanding at December 26, 1995. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual report to shareholders for the fiscal year ended September 30, 1995 are incorporated by reference into Part II. TABLE OF CONTENTS PART I PAGE Item 1 - Business General I-1 Operations of the Gas Companies I-1 Nonutility Operations I-8 Special Factors Affecting the Gas Industry I-9 Item 2 - Properties I-12 Item 3 - Legal Proceedings I-12 Item 4 - Submission of Matters to a Vote of Security Holders I-12 PART II Item 5 - Market for Registrant's Common Equity and Related Stockholders' Matters II-1 Item 6 - Selected Financial Data II-1 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations II-1 Item 8 - Financial Statements and Supplementary Data II-1 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-1 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-5 Item 13 - Certain Relationships and Related Transactions III-5 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1 Experts Consent IV-6 Supplemental Schedule IV-7 Signatures IV-10 PART I ITEM 1. BUSINESS General Providence Energy Corporation (the Registrant or the Company) was organized in 1981 as a Rhode Island business corporation. The Registrant's outstanding common shares are presently listed on the American Stock Exchange. The Registrant is the parent of two wholly-owned natural gas distribution utilities, The Providence Gas Company (ProvGas) and North Attleboro Gas Company (North Attleboro Gas), together referred to as the Gas Companies. The Registrant also conducts its nonutility operations through a wholly-owned nonutility subsidiary, Newport America Corporation (Newport America)-see nonutility operations. ProvGas, Rhode Island's largest natural gas distributor, was founded in 1847 and serves approximately 161,000 customers in Providence, Newport and 23 other cities and towns in Rhode Island. North Attleboro Gas serves over 3,000 customers in North Attleboro and Plainville, Massachusetts, towns adjacent to the northeastern Rhode Island border. The total natural gas service territory of the Gas Companies encompasses 410 square miles and has a population of approximately 850,000. The corporate offices of the Registrant are located at 100 Weybosset Street, Providence, Rhode Island 02903 (Telephone 401-272-9191). Operations of the Gas Companies Customers. The Gas Companies had an average annual number of customers of approximately 165,000 for the twelve months ended September 30, 1995, of which approximately 90% were residential and 10% were commercial and industrial. The net increase in the average annual number of customers during fiscal 1995 over fiscal 1994 was approximately 2,300 or 1.4 percent. This moderate increase was the result of new housing construction and conversions from other energy sources offset by shut-offs for non-payments and housing vacancies due to the stagnant economy. Gas Service. The gas services provided by the Gas Companies can be grouped into three categories -- firm, interruptible and transportation service. Firm service is provided to those residential, commercial and industrial customers that use natural gas throughout the year. Interruptible service is provided to those commercial and industrial customers that do not require assured gas service because they can utilize an alternative fuel or otherwise operate without gas service. Transportation service is a service where the Gas Companies transport to certain large customers gas owned by those customers or by third parties selling gas to those customers. I-1 The following table shows the distribution of gas to various customer classes, and the total gas sold and transported by year since 1991: 1995 1994 1993 1992 1991 Firm 76.4% 81.9% 83.9% 73.9% 66.2% Interruptible 17.6 15.8 14.7 23.1 19.5 Transportation 6.0 2.3 1.4 3.0 14.3 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== Total Gas Sold and Transported BCF(*) 28.1 28.7 27.1 29.1 29.0 ===== ===== ===== ===== ===== (*) Gas sales are denominated in billions of cubic feet of natural gas, (Bcf). Total gas sales include gas sold and transported by the Gas Companies. Firm Service. In recent years, the distribution of the Gas Companies' firm sales has been approximately 60% to residential and 40% to commercial and industrial customers. Firm sales represent the highest percentage of operating margin and represent the core of the Gas Companies' business. Interruptible Service. Interruptible customers consist of two types: seasonal customers that typically use gas only during the nonwinter months and dual-fuel customers that contract for gas service on a year round basis, but agree to service interruption during certain peak periods. By retaining the right to interrupt service to the dual-fuel customers, the Gas Companies can balance daily demand from firm customers with available gas supply and pipeline capacity. Interruptible customers may interrupt their gas service, as well, when it is more economical to utilize an alternative fuel. Accordingly, the amount of the Gas Companies' interruptible sales fluctuates depending upon the relative price of natural gas to alternative fuels. Interruptible sales produce substantially less margin to the Gas Companies than firm sales due to the more competitive nature of interruptible sales. Service rates charged to dual-fuel customers are based on the price that the customer would otherwise pay for its alternative fuel. Total margin, however, is generally not impacted by nonfirm sales due to a margin-sharing mechanism - see Rates and Regulation and Competition and Marketing. Transportation Service. Margin from the transportation of gas purchased by certain large customers from third parties is likely to represent an increasing percentage of the Gas Companies' future total margin due to the continuing regulatory developments affecting the natural gas industry - see Special Factors Affecting the Natural Gas Industry. In I-2 general, these developments now allow customers to buy gas directly from the producer-supplier rather than solely from the local gas distribution company. Customer-owned gas is transported to the customer's premises through a combination of the interstate pipelines and the Gas Companies' distribution systems. For a given quantity of gas, the Gas Companies' margin from transportation service is considerably less than their margin from firm sales, but is generally comparable to their margin from interruptible sales, depending upon the price of alternative fuels. To the extent that the Gas Companies' existing customers buy gas directly from producer-suppliers, the Gas Companies' revenue will decrease although nonfirm margin may not be impacted. Total margin is impacted by nonfirm sales and transportation sales under a margin-sharing mechanism- see Rates and Regulation. During fiscal 1995, the Registrant saw an increase in its transportation sales as compared to last year by 1,025 million cubic feet (MMcf) due to additional capacity available for transportation and competitive third party pricing. Gas Supply During 1995, the Registrant purchased 93% of its gas supply in the production area with transportation to market and storage provided by firm pipeline contracts. Liquefied natural gas (LNG) provided 2% of supply. The remaining 5% was purchased in the market area, generally on an interruptible basis. The Registrant maintains contracts sufficient to meet 100% of its firm winter demand using firm storage and firm pipeline transportation. When not using capacity for its own sales, the Registrant released the capacity or used it to make off-system sales. In fiscal 1995, the Registrant received $5.1 million in revenue from released capacity, a 148% increase over the $2.1 million was received in fiscal 1994. The revenues reduce the firm customer's gas cost, making the Registrant more competitive. In addition to managing its pipeline capacity, the Registrant has focused its attention on restructuring its supply portfolio to closely match its market requirements. A sophisticated planning model is used to support all major supply decisions and to identify specific areas in the supply and transportation portfolio where savings can be gained without jeopardizing the obligation to serve firm customers. During fiscal 1995, a number of supply contracts were put out for bid, renegotiated or terminated. For example, the Registrant restructured one if its major supply contracts from a 365 day supply contract to a 151 day winter-only contract resulting in significant savings. Over the next several years, the Registrant plans to restructure other contracts as their terms expire. Although the Registrant has significantly increased its storage capacities since the Federal Energy Regulatory Commission (FERC) Order 636 implementation, it continues to explore opportunities to add additional storage to its portfolio as a replacement for higher cost supplies as I-3 contracts expire. New storage will enhance the Registrant's ability to provide the flexibility needed to meet rapid shifts in temperature, manage market swings and stay competitive in the post FERC Order 636 environment. Rates and Regulation. ProvGas is subject to the regulatory jurisdiction of the Rhode Island Public Utilities Commission (RIPUC) with respect to rates and charges, standards of service, accounting and other matters. North Attleboro Gas Company is subject to similar regulatory jurisdiction by the Massachusetts Department of Public Utilities (MDPU). The standards set by these regulatory bodies affect all aspects of the Gas Companies' businesses, including their ability to market to new customers and to meet competition from other fuel suppliers -- see Competition and Marketing. In July 1994, ProvGas filed an Integrated Resource Plan (IRP) with the RIPUC. The purpose of the IRP is to optimize the utilization of production transmission and distribution resources such that customers receive high quality services at the lowest possible costs. Subsequent to year-end, ProvGas filed a three-year Settlement Agreement between itself and the Division of Public Utilities and Carriers regarding the IRP. The Settlement Agreement provides for: (1) funding associated with Demand Side Management programs, which are designed to provide equipment rebates for specific load building programs; (2) funding associated with a low income weatherization program, which is designed to assist low income customers through the installation of conservation measures; and (3) a performance-based ratemaking mechanism. In addition, the Settlement Agreement contains a general agreement that ProvGas' strategy and steps prepared in its supply plan are reasonable. The status of the Settlement Agreement is currently pending. In February 1995, ProvGas filed for rate relief requesting an approximate 8 percent general rate increase. The major factors contributing to the rate request were an increase in depreciation due to capital spending, an increase in working capital needs, and an increase in capital expenditures. On November 17, 1995, the RIPUC issued its decision on the rate request made by ProvGas. In its decision, the RIPUC authorized ProvGas to increase its rates to recover additional annual revenues in the amount of $3,990,000. Subsequent to the issuance of the rate decision, the RIPUC approved ProvGas' motion to reconsider a revenue adjustment of $171,572. That approval increases the overall rate increase to $4,161,572. Additionally, as a result of the order, ProvGas will record several adjustments to its first quarter 1996 financial statements. Specifically: a) ProvGas will begin calculating property tax expense for rate purposes based on the current year's expense plus an estimate of one year's increase in expense. Previously, ProvGas was required to estimate two year's increase in expense. As a result, ProvGas will reduce its regulatory liability for one year's property tax expense resulting in a one time gain of approximately $3,900,000 before tax. I-4 b) ProvGas will write-off and not recover the $1,600,000, before tax, of restructuring costs previously deferred. (See Footnote 8 to the Notes to the Consolidated Financial Statements contained in the Registrant's Annual Report to Shareholders filed herewith as Exhibit 13.) The RIPUC had previously allowed ProvGas recovery of similar costs, but determined that the costs of the 1994 reorganization should not be recovered in rates. c) ProvGas will write-off approximately $400,000, before tax, of previously deferred rate case expenses. (See Footnote 1 to the Notes to the Consolidated Financial Statements contained in the Registrant's Annual Report to Shareholders filed herewith as Exhibit 13.) d) ProvGas will write-off approximately $461,000, before tax, of construction expenditures previously capitalized. These costs were capitalized in accordance with generally accepted accounting principles and were based on Federal Energy Regulatory Commission guidance on accounting for such costs. The RIPUC agreed that such costs could be capitalized beginning in 1996, but did not allow recovery of previously capitalized costs. The net effect of the above adjustments will be recorded in ProvGas' first quarter financial statements, and based on management's current estimates will not have a material impact. The following table sets forth the results of ProvGas' applications before the RIPUC for revenue increases since 1981. Annualized Annualized Authorized Date of Revenue Increase Date Rates Revenue Increase Return on Application Requested Effective Allowed (*) Common Equity 5/17/90 $15,800,000 03/15/91 $9,176,000 12.8% 1/15/93 9,100,000 (**) 11/14/93 694,000 11.2 2/16/95 14,880,000 (***)12/17/95 4,161,572 (****) 10.9 (*) Although the RIPUC reviews and approves all changes in gas costs billed to customers through the Cost of Gas Adjustment (CGA) clause, such changes are not part of the general rate filings described above. See Footnotes 1 and 9 in Notes to the Consolidated Financial Statements contained in the Registrant's 1995 Annual Report to Shareholders filed herewith as Exhibit 13. (**) Rate increase requested on January 15, 1993 of $9.1 million was recalculated to $6,970,000 on September 14, 1993 due to cost of service adjustments reflecting cost savings. (***) Rate increase requested on February 16, 1995 of $14.9 million was revised to $13,222,000 on July 18, 1995 due to lower projected costs. I-5 (****) The allowed annualized revenue increase of $4,161,572 is comprised of an initial award of $3,990,000 plus a revenue adjustment of $171,572 due to a reconsideration motion. In May 1995, ProvGas filed a request for a new rate design with the RIPUC. The new request continues the movement towards equalized rates of return for each of the customer classes as well as allowing for the unbundling of certain services to ProvGas' largest customers. The rate design request is revenue neutral. A major focus of the rate design request is to improve the economic development climate and prospects for job creation in Rhode Island. This request in currently pending. ProvGas' cost of gas adjustment (CGA) clause contains a provision that enables the Company to retain margins associated with non-firm sales and transportation. Specifically, non-firm margins above a threshold are shared at the ratio of 66 2/3% to firm customers and 33 1/3% to ProvGas. The non-firm margin threshold is calculated annually based on the average of non-firm sales and transportation margins for the preceding three years. For fiscal 1995, ProvGas retained non-firm sales and transportation margins of approximately $200,000 based on realized margins of $3.0 million and a threshold of $2.4 million. In October 1995, North Attleboro Gas received approval of its fifth and final rate increase under the qualified five year phase-in plan. Under the terms of the agreement, a 32 percent increase was phased-in over five years effective November 1, 1991. See Footnote 9 to the Notes to the Consolidated Financial Statements contained in the Registrant's Annual Report to Shareholders filed herewith as Exhibit 13. Competition and Marketing. The Registrant experienced moderate growth in both residential and commercial/industrial markets. In all, the average annual number of customers rose 1.4 percent to 164,587. About half the residential homes on or near the Registrant's distribution lines use an alternate fuel for heating. In addition, there are about 28,000 housing units in the service territory that heat with high cost electricity, making them excellent potential conversion customers. In 1995, residential heating conversions increased to 765 homes. In 1996, the Registrant's core marketing efforts will focus on building loyalty with existing customers by offering incentives to encourage the addition of gas appliances and energy related services. The Registrant will continue joint marketing with the local network of heating contractors to promote heating conversions of customers on existing gas mains. The Registrant is working closely with the RIPUC to develop a new rate structure that will allow the Registrant to more effectively compete with alternate fuel providers. In addition, the Registrant has proposed I-6 to offer unbundled services designed to respond to the needs of its largest customers, such that those customers would have the option to purchase natural gas directly from suppliers and use the Registrant to transport the gas. This proposal will foster a more competitive and flexible gas market in Rhode Island. To remain competitive, the Registrant must be able to offer commercial/industrial businesses value- added services at competitive prices. For example, in 1995, the Registrant negotiated and received RIPUC approval for five special agreements that allowed the Registrant to offer unbundled services to several large manufacturing companies. Without this customized approach, these companies would have utilized other fuel and delivery alternatives, resulting in an annualized loss of operating margin of approximately $600,000. Emerging markets are expected to provide significant long-term opportunities for growth. The Registrant expects strong growth in natural gas internal combustion engines. These engines--used in large-scale air conditioning, industrial water pumps, and air compressors--are significantly less expensive to operate than comparable electric motors. The Registrant continues to be a leader in the promotion of natural gas vehicles. The Registrant opened the first public fueling station in New England and has 15 local companies and state agencies using the station. Natural gas fuel cell technology holds great promise for the future. These fuel cells convert natural gas into electricity through an electrochemical process, dramatically reducing emissions and noise normally associated with power generating equipment. In 1995, the Registrant helped the Newport Naval Education and Training Center become the third military facility in the country to operate this new technology and is now selling about 15 MMcf of natural gas annually to the center. The Registrant believes this extraordinarily efficient technology will become more common. The Registrant is developing energy-related alliances and partnerships outside of its traditional markets. In late 1995, the Registrant formed a strategic alliance with Catex Vitol Gas Inc., a large, Boston-based marketing and trading company with average natural gas sales of 1.4 Bcf per day. This alliance, the first for both companies, will provide coordinated management and marketing of natural gas services, including retail and wholesale sales to commercial and industrial customers throughout New England. The Registrant helped The Providence Housing Authority convert to gas fired hot water heaters by using the substantial annual savings from the conversion to pay off loans the Registrant provided. In 1995, the Registrant expanded this program in cooperation with the Federal Department of Housing and Urban Development to include federally subsidized housing in other areas of the state. I-7 Employees. As of September 30, 1995, the Gas Companies had 553 full- time employees. Approximately 275 distribution and customer service employees are covered by a collective bargaining agreement with Local 12431 of the United Steelworkers of America. Negotiations held subsequent to year-end have resulted in a new five year agreement to become effective in January 1996. The agreement may be opened by either party in year three or four, with a sixty day prior notice. The agreement calls for a general wage increase of 3.5 percent in 1996 and 3.25 percent each year from 1997 to 2000. Additionally, during 1995, a new bargaining unit, Local 12431 A of the United Steelworkers of America, was established to represent 98 office and clerical employees. Negotiations for a first labor agreement covering these employees will commence in early 1996. Gas Distribution Systems. The Gas Companies' distribution systems consist of approximately 2,400 miles of gas mains ranging in size from 2 to 36 inches in diameter, approximately 140,000 services, (a service is a pipe connecting a gas main with piping on a customer's premises), and approximately 161,000 active gas meters together with related facilities and equipment. The Gas Companies have regulating and metering facilities at nine points of delivery from Algonquin and one point of delivery from Tennessee, which the Gas Companies presently believe to be adequate for receiving gas into their distribution systems. Storage Facilities. The Registrant has contracts with a number of interstate pipelines for rights to store natural gas in underground storage facilities located on or near its systems. These contracts enable the Registrant to store up to 2,652 MMcf, which is available for firm delivery. Also, additional storage capabilities of 585 MMcf are available on an interruptible basis. The Registrant has an agreement with Algonquin for the storage of up to the equivalent of 1,300 MMcf of vaporized LNG in a tank owned by Algonquin and located on land leased to Algonquin by the Registrant. The agreement expires in September 2001, but the Registrant has an option to extend the agreement for an additional thirty years. The Registrant owns and operates an LNG storage and vaporization facility which has the capacity to store the equivalent of 200 MMcf of vaporized LNG. Nonutility Operations. As described earlier, the Registrant conducts its nonutility operations through a wholly-owned subsidiary, Newport America. These operations total less than two percent of the Registrant's consolidated assets and consolidated revenues. I-8 During fiscal 1995, Newport America had three wholly-owned subsidiaries engaged in various nonutility businesses. Prudence Corporation owns real estate for investment and rental purposes. S & M Appliance Service Company, whose nonutility assets were sold in August 1992, was a wholesale distributor of gas heating and air conditioning equipment with installation and service capabilities. Patience Realty Corporation was involved in operating a timeshare and condominium complex along the waterfront in Newport, Rhode Island (the Wellington Project). Special Factors Affecting the Natural Gas Industry General. The natural gas industry is subject to numerous legislative and regulatory requirements, standards and restrictions that are subject to change and that affect the Gas Companies to varying degrees. Significant industry factors that have affected or may affect the Gas Companies from time to time include: 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 Gas Companies' operations; reductions in the prices of oil and propane, which can make those fuels less costly than natural gas in some markets; increases in the price of natural gas; and competition with other gas suppliers for industrial customers, including potential attempts to bypass the Gas Companies' facilities. FERC Regulations. In recent years 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 that allow 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 Gas Companies to obtain its supply through a more competitive national gas pipeline system, where and when capacity is available. FERC Order 636 and other related orders (the Orders) have significantly changed the structure and types of services offered by pipeline transportation companies. The most significant components of the restructuring occurred in November 1993. In response to these changes, the Registrant has 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 is designed to be market responsive and is diversified with respect to contract lengths, source location, and other contract terms. On a periodic basis, the Registrant reviews all of its contracts to ensure a diverse, secure, flexible and economical supply portfolio is maintained. I-9 To meet the requirements of the Orders, the pipelines have incurred significant costs, collectively known as transition costs. The majority of these costs will be reimbursed by the pipelines' customers including the Registrant. Based upon current information, the Registrant anticipates its transition costs to net between $17 million and $19 million of which $12.6 million has been included in the CGA and is currently being collected from customers. The remaining minimum obligation of $4.4 million has been recorded in the accompanying consolidated balance sheets of the Registrant's 1995 Annual Report to Shareholders filed herewith as Exhibit 13 along with a regulatory asset anticipating future recovery through the CGA. The Registrant's ultimate liability may differ from the above estimates based on FERC settlements with the Registrant's pipeline transportation suppliers. FERC has approved settlements with three of its pipelines, which account for the bulk of the Registrant's transition costs. Negotiations are continuing on one additional pipeline, and based on the information available, the Registrant believes that its current range for transition costs is reasonable. Environmental Regulations 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, 1995, the Registrant was aware of three sites at which future costs may be incurred. The Registrant has been designated as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act of 1980 at two sites at Plympton, Massachusetts on which waste material is alleged to have been deposited by disposal contractors employed in the past either directly or indirectly by the Registrant and other PRPs. With respect to one of the Plympton sites, the Registrant has joined with other PRPs in entering into an Administrative Consent Order with the Massachusetts Department of Environmental Protection. The costs to be borne by the Registrant, in connection with both Plympton sites, are not anticipated to be material to the financial condition of the Registrant. During 1995, the Registrant voluntarily began a study at its primary gas distribution facility located in Providence. In accordance with state laws, such a voluntary study is monitored by the Rhode Island Department I-10 of Environmental Management. The purpose of this study is to determine the extent of environmental contamination at the site, if any. The study is continuing, and although results are not conclusive, preliminary findings indicate that clean-up may be required. The level of clean-up is likely to vary significantly depending upon the proposed future use of the site. In fact, if the site remains in its present use, only minimal clean-up may be required. As of September 30, 1995, the Registrant cannot estimate the future cost of investigation and clean-up as a result of the uncertainties discussed. As of September 30, 1995, approximately $590,000 had been spent on studies at this site. In its rate case filed in February 1995, 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. Accordingly, environmental investigation costs of approximately $841,000 have been charged to the accumulated depreciation reserve at September 30, 1995. Management believes that this rate recovery mechanism is appropriate for recovery of future costs. Should future developments warrant additional rate recovery mechanisms, management will seek such recovery. In addition to rate recovery, management has a program to ascertain the possibility of recovery under prior insurance coverage. Also, management has begun discussions with other parties who may assist the Registrant in paying future costs at the above sites. Management believes that its program for managing environmental issues combined with rate recovery, possible insurance 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 three sites. Other Standards. The Gas Companies are 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 MDPU and management believes that the Gas Companies are in substantial compliance with all present requirements imposed by these agencies. I-11 ITEM 2. PROPERTIES In addition to the Registrant's gas distribution system and storage facilities, which constitute the principal properties of the Registrant, the Registrant owns several buildings and other facilities in Newport, Providence and Westerly which 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 ProvGas. ITEM 3. LEGAL PROCEEDINGS The Registrant is involved in legal and administrative proceedings in the normal course of business, including certain proceedings involving material amounts in which claims have been or may be made. However, management believes, after review of insurance coverage and consultation with legal counsel, that the ultimate resolution of the legal proceedings to which it is or can at the present time be reasonably expected to be a party, will not have a materially adverse effect on the Registrant's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable I-12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK- HOLDERS' MATTERS The Registrant's common stock is listed on the American Stock Exchange and trades under the symbol "PVY". As of December 21, 1995, there were 6,338 holders of record of the Registrant's outstanding common stock. For the balance of the information called for by this item, reference is made to the materials under 'Dividends' and 'Common stock information' in the Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1995, which is filed herewith under Part IV as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA For the information called for by this item, reference is made to page 18 of the Registrant's Annual Report to shareholders (pages 21 through 28 of this Form 10-K) for the fiscal year ended September 30, 1995, which is filed herewith under Part IV as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Regarding the information that relates to this item, reference is made to pages 14 through 17, of the Registrant's Annual Report to Shareholders (pages 14 through 20 of this Form 10-K) for the fiscal year ended September 30, 1995, which is filed herewith under Part IV as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For the information called for by this item, reference is made to pages 19 through 31 of the Registrant's Annual Report to Shareholders (pages 23 through 49 of this Form 10-K) for the fiscal year ended September 30, 1995, which is filed herewith under Part IV as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable II-1 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 (55) Chairman, President and Chief Executive Officer 1992 James DeMetro (47) Vice President Energy Services 1992 Gary S. Gillheeney (40) Vice President Financial and Information Services, Treasurer and Assistant Secretary 1994 Alycia L. Goody (43) Vice President, General Counsel and Corporate Secretary 1994 Patricia O. Keene (50) Vice President Customer Activities 1994 William D. Mullin (47) Vice President Corporate Relations 1994 Robert W. Owens (47) Vice President Operations 1994 Bruce G. Wilde (49) Vice President Human Resources and Assistant Secretary 1994 Mr. Dodge was elected President and Chief Executive Officer of the Registrant and ProvGas in August 1990 after the retirement of Louis R. Hampton. Mr. Dodge subsequently became Chairman of the Board in January 1992. Prior to his employment with the Registrant, he was President and Chief Executive Officer of Vermont Gas Systems, Inc. Vermont Gas Systems, Inc. is a regulated public utility which sells natural gas to a portion of the population of the State of Vermont. Mr. DeMetro was elected Vice President Energy Services of the Registrant and ProvGas in March 1992. For more than five years prior thereto, Mr. DeMetro served the Brooklyn Union Gas Company, a regulated natural gas utility, in various management positions, most recently as Manager, Rates and Regulations. Mr. Gillheeney was elected Vice President Financial and Information Services, Treasurer and Assistant Secretary of the Registrant and ProvGas in January 1994. For more than five years prior thereto, Mr. Gillheeney served ProvGas in various management positions, most recently as Assistant Treasurer and Controller. III-1 Ms. Goody was elected Vice President General Counsel and Corporate Secretary of the Registrant and ProvGas in December 1994. For four years prior thereto, Ms. Goody served the Registrant and ProvGas as General Counsel and Corporate Secretary. For two more years prior to that, Ms. Goody served ProvGas as Corporate Counsel. Ms. Keene was elected Vice President Customers Activities of the Registrant in December 1994. For more than five years prior thereto, Ms. Keene served as General Manager for NYNEX in various capacities. Mr. Mullin was elected Vice President Corporate Relations of the Registrant and ProvGas in January 1994. For five years prior to his current position with the Registrant and ProvGas, he served ProvGas in various management positions, most recently as Vice President Operations. Mr. Owens was elected Vice President Operations of the Registrant and ProvGas in January 1994. For more than five years prior thereto, Mr. Owens served the Registrant and ProvGas in various management positions, most recently as Vice President, Treasurer and Chief Financial Officer. Mr. Wilde was elected Vice President Human Resources and Assistant Secretary of the Registrant and ProvGas in May 1994. For more than five years prior thereto, Mr. Wilde served ProvGas in various management positions, most recently as Assistant Vice President for Personnel. III-2 DIRECTORS OF THE REGISTRANT The following information is furnished with respect to the Directors of the Registrant: Name Director Since Expiration of Term Gilbert R. Bodell, Jr. 1980 1995 James H. Dodge 1991 1997 John H. Howland 1993 1996 Douglas H. Johnson 1993 1996 Dorothy G. Kramer 1976 1997 Paul F. Levy 1995 1998 Romolo A. Marsella 1993 1996 M. Anne Szostak 1995 1998 Kenneth W. Washburn 1975 1997 W. Edward Wood 1995 1998 Gilbert R. Bodell, Jr. is Chairman and former President, Frontier Manufacturing Company (textiles); former Vice President, Valley Lace Company and Esten Dyeing and Finishing Company, Inc. James H. Dodge has been Chairman since January 1992 and President and Chief Executive Officer of the Registrant since August 1990; from 1984 through August 1990: President and Chief Executive Officer of Vermont Gas Systems, Inc. (a regulated natural gas utility) and affiliated companies. John H. Howland is President and Chief Operating Officer, Original Bradford Soap Works, Inc. Douglas H. Johnson is Vice President and Managing Partner, Van Leesten & Johnson, Inc. (business and urban planning consultants); since October 1991; from 1980 to October 1991: President and Chief Executive Officer, Peerless Precision, Inc. (aerospace manufacturing company). III-3 Dorothy G. Kramer is a retired Senior Vice President, Treasurer and Corporate Secretary, Taco, Inc. (manufacturers of pumping, heat transfer and hydronic control equipment). Paul F. Levy is Adjunct Professor, Massachusetts Institute of Technology. From 1992 to 1995, Visiting Lecturer; from 1987 to 1992: Executive Director, Massachusetts Water Resources Authority (a public authority). Romolo A. Marsella is President, Marsella Development Corporation (real estate development). M. Anne Szostak is Senior Vice President, Fleet Financial Group; Chairman of the Board, Fleet Bank, Maine. From 1991 to 1994: President and Chief Executive Officer, Fleet Bank of Maine; and from 1988 to 1991: Vice President, Fleet Financial Group. Kenneth W. Washburn is Chairman and President, Union Wadding Company (manufacturers of non-woven textiles). W. Edward Wood is President, BDS Management Group (management and consulting services to a variety of private businesses); from November 1990 to May 1991: Chief of Staff to Governor-elect and Governor of Rhode Island; from January to November 1990: Chief of Staff, Phoenix Associates III (private investment group). ITEM 11. EXECUTIVE COMPENSATION For the information called for by this item, reference is made to pages 5 to 10 of the Registrant's proxy statement filed December 19, 1995 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 18, 1996. III-4 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For the information called for by this item, reference is made to page 12 of the Registrant's proxy statement filed December 19, 1995 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 18, 1996. Section 16 Compliance For the information called for by this item, reference is made to page 13 of the Registrant's proxy statement filed December 19, 1995 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 18, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For the information called for by this item, reference is made to page 4 of the Registrant's proxy statement filed December 19, 1995 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 18, 1996. III-5 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K PROVIDENCE ENERGY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES (a) Financial Statements and Schedules Consolidated Balance Sheets--September 30, 1995 and 1994 Consolidated Statements of Income for the years ended September 30, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1994 and 1993 Consolidated Statements of Capitalization--September 30, 1995 and 1994 Consolidated Statements of Changes in Common Stockholders' Investment for the years ended September 30, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Report of Independent Public Accountants Consent of Independent Public Accountants The financial statements and related notes listed above are incorporated by reference to Providence Energy Corporation's Annual Report to Shareholders (see pages 21 through 48 of this Form 10-K) for the year ended September 30, 1995, filed herewith as Exhibit 13. II. Reserves for the years ended September 30, 1995, 1994 and 1993. Schedules I to XIII not listed above are omitted as not applicable or not required under Regulation S-X. (b) Reports on Form 8-K No reports were filed on Form 8-K during the latest quarter of the Registrant's fiscal year ended September 30, 1995. IV-1 (c) Exhibits The following exhibits are filed as part of this report: 3.1 Articles of Incorporation, as amended (incorporated by reference to Exhibit 4(e) to the Registration Statement of the Registrant on Form S-2 (Registration No. 33-24125)). 3.2 Bylaws (incorporated by reference to Exhibit C to the Proxy Statement/Prospectus forming a part of the Registrant's Registration Statement on Form S-14 (Registration No. 2-69473), as amended at the annual meetings of the shareholders held January 14, 1985 and January 14, 1991, the text of such amendments being set forth in each case as Exhibit A to the proxy statement for such annual meeting, heretofore filed with the Securities and Exchange Commission and being incorporated herein by this reference). 4.1 Indenture dated as of August 1, 1981 from The Providence Gas Company to St. Louis Union Trust Company, Trustee, filed as Exhibit 4.1 to Registration Statement of The Providence Gas Company on Form S-1 (Registration No. 2-72726), incorporated herein by this reference. 4.2 First Supplemental Indenture dated as of May 1, 1986 from The Providence Gas Company to Centerre Trust Company of St. Louis, Trustee (filed as Exhibit 4 (b) to the Registration Statement of The Providence Gas Company on Form S-3 (Registration File No. 33-5023), incorporated herein by this reference). 4.2(a) Thirteenth Supplemental Indenture dated as of May 1, 1986 from The Providence Gas Company to Rhode Island Hospital Trust National Bank. 4.3 First Mortgage Indenture of The Providence Gas Company dated as of January 1, 1922, as supplemented by First through Twelfth Supplemental Indentures (incorporated by reference to Exhibit 10.10 to registration statement of The Providence Gas Company on Form S-1 (Registration No. 2-72726)). 4.4 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures of The Providence Gas Company dated as of August 1, 1988, June 1, 1990 and November 1, 1992, respectively (incorporated by reference to Exhibit 4 to the report of the Registrant to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1993). 4.5 Seventeenth Supplemental Indenture of The Providence Gas Company dated as of November 1, 1993. (Filed as Exhibit 4.5 to the report of The Registrant in Form 10-K for the year ended September 30, 1993 incorporated herein by this reference.) IV-2 4.6 Eighteenth Supplemental Indenture of The Providence Gas Company dated as of December 1, 1995. 10.1 Material contracts filed as Exhibit 10 (a) through 10 (ff) to Registrant Statement of the Registrant on Form S-2 (Registration No. 33-24125), incorporated herein by this reference. 10.2 Management contract dated December 19, 1994 between James H. Dodge, Chairman, President and Chief Executive Officer of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.2 to the report of the Registrant in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.3 1989 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit A to the Registrant's proxy statement for the annual meeting of shareholders held January 9, 1989, heretofore filed with the Securities and Exchange Commission). 10.4 1989 Stock Option Plan (incorporated by reference to Exhibit B to the Registrant's proxy statement for the annual meeting of shareholders held January 9, 1989, heretofore filed with the Securities and Exchange Commission). 10.5 Non-firm Margin Sharing Agreement. (Filed as Exhibit 10.5 to the report of the Registrant in Form 10-K for the year ended September 30, 1992, incorporated herein by this reference.) 10.6 Management contract dated December 19, 1994 between James DeMetro, Vice President Energy Services of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.6 to the report of the Registrant in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.7 Management contract dated December 19, 1994 between Robert W. Owens, Vice President Operations of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.7 to the report of the Registrant in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.8 Management contract dated December 19, 1994 between Gary S. Gillheeney, Vice President, Financial and Information Services, Treasurer and Assistant Secretary of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.8 to the report of the Registrant in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.9 Management contract dated December 19, 1994 between William D. Mullin, Vice President, Corporate Relations of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.9 to the report of the Registrant in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) IV-3 13 Portions of the Annual Report to shareholders for the fiscal year ended September 30, 1995. (Pages 14 through 35.) 22 Subsidiaries of the Registrant. IV-4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of Providence Energy Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Providence Energy Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated November 17, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index to financial statements is the responsibility of the Company's management and 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 audit 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 Boston, Massachusetts November 17, 1995 IV-5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of Providence Energy Corporation: As independent public accountants, we hereby consent to the incorporation by reference of our report dated November 17, 1995, included in this Form 10-K, into the Company's previously filed registration statements on Forms S-3, Registration No. 33-62318; S-3 Registration No. 33-70086; S-3, Registration No. 33-31768; S-8, Registration No. 33-31770; and S-8 Registration No. 33-43031. It should be noted that we have not audited any financial statements of the Company subsequent to September 30, 1995, or performed any audit procedures subsequent to the date of our report. Arthur Andersen LLP Boston, Massachusetts December 26, 1995 IV-6 Supplemental Schedule PROVIDENCE ENERGY CORPORATION Schedule II RESERVES FOR THE YEARS ENDED SEPTEMBER 30, 1995, SEPTEMBER 30, 1994 AND SEPTEMBER 30, 1993 (Thousands of Dollars) Charge for Which Additions Reserves Balance Charged Other Were Balance 9/30/94 to Operations Add (Deduct) Created 9/30/95 RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 2,671 $3,169 $ -- $3,845 $1,995 Allowance for lease receivables - current 367 4 -- 34 337 other 80 -- -- -- 80 Total $ 3,118 $3,173 $ -- $ 3,879 $2,412 ======= ====== ======= ======= ====== Allowance for lease receivables - long-term $ 951 $ -- $ (200) $ 100 $ 651 ======= ====== ======= ======= ====== DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $15,506 $2,142 $ 827 $(259)(C)$18,734 Unamortized investment tax credit 2,851 -- -- 160 2,691 Other- Liability and damage reserve 421 400 -- 487 334 Other 6,665 623 1,496(A) 2,701 6,083 Total other 7,086 1,023 1,496 3,188 6,417 Total deferred credits and reserves $25,443 $3,165 $ 2,323 $3,089 $27,842 ======= ====== ======= ====== ======= IV-7 Schedule II (cont'd) Charge for Which Additions Reserves Balance Charged Other Were Balance 9/30/93 to Operations Add (Deduct) Created 9/30/94 RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 2,026 $4,991 $ -- $4,346 $ 2,671 Allowance for lease receivables - current 390 11 -- 34 367 other 96 -- -- 16 80 Total $ 2,512 $5,002 $ -- $ 4,396 $ 3,118 ======= ====== ======= ======= ======= Allowance for lease receivables - long-term $ 778 $ 316 $ -- $ 143 $ 951 ======= ====== ======= ======= ======= DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $14,018 $7,033 $ -- $ 5,545 $15,506 Unamortized investment tax credit 3,010 -- -- 159 2,851 Other- Liability and damage reserve 296 145 -- 20 421 Other 5,188 1,232 2,785(B) 2,540 6,665 Total other 5,484 1,377 2,785 2,560 7,086 Total deferred credits and reserves $22,512 $8,410 $ 2,785 $ 8,264 $25,443 ======= ====== ======= ======= ======= IV-7(a) SCHEDULE II (cont'd) Charge for Which Additions Reserves Balance Charged Other Were Balance 9/30/92 to Operations Add (Deduct) Created 9/30/93 RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 2,275 $3,980 $ -- $4,229 $ 2,026 Allowance for lease receivables - current 417 17 -- 44 390 other -- 96 -- -- 96 Total $ 2,692 $4,093 $ -- $ 4,273 $ 2,512 ======= ====== ======= ======= ======= Allowance for lease receivables - long-term $ 760 $ 190 $ -- $ 172 $ 778 ======= ====== ======= ======= ======= DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $13,474 $ 544 $ -- $ -- $14,018 Unamortized investment tax credit 3,167 -- -- 157 3,010 Other- Liability and damage reserve 146 150 -- -- 296 Other 4,822 1,129 1,636 (A) 2,399 5,188 Total other 4,968 1,279 1,636 2,399 5,484 Total deferred credits and reserves $21,609 $1,823 $ 1,636 $ 2,556 $22,512 ======= ====== ======= ======= ======= (A) Includes advance payments on customers' service agreements and adjustments to the regulatory pension liability. (B) Principally a reserve for restructuring charges which was offset by a deferred regulatory asset. Also reported are advance payments on customer service agreements and adjustments to the regulatory pension liability. (C) Represents adjustments to the regulatory asset and liability for FAS No. 109 activity. IV-7(b) Exhibit 22. SUBSIDIARIES OF THE REGISTRANT The Providence Gas Company - Incorporated under the laws of Rhode Island. Newport America Corporation - Incorporated under the laws of Rhode Island. North Attleboro Gas Company - Incorporated under the laws of Massachusetts. IV-8 INCORPORATION BY REFERENCE INTO REGISTRATION STATEMENTS ON FORM S-8 For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13,1990) under the Securities Act of 1933, the Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Part II of Registrant's Registration Statements on Form S-8 Nos. 33-31769, 33-31770 and 33-43031: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the Securities being registered, the Registrant will, unless in the opinion of its counsel that matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act, will be governed by the final adjudication of such issue. IV-9 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. PROVIDENCE ENERGY CORPORATION By JAMES H. DODGE James H. Dodge, Chairman, President and CEO Date December 26, 1995 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 JAMES H. DODGE Chairman, President and CEO 12-22-95 James H. Dodge (Principal Executive Officer) GARY S. GILLHEENEY Vice President, Financial 12-22-95 Gary S. Gillheeney and Information Services, Treasurer and Assistant Secretary GILBERT R. BODELL, JR. Director 12-21-95 Gilbert R. Bodell, Jr. JOHN H. HOWLAND Director 12-21-95 John H. Howland DOUGLAS H. JOHNSON Director 12-19-95 Douglas H. Johnson DOROTHY G. KRAMER Director 12-21-95 Dorothy G. Kramer PAUL F. LEVY Director Paul F. Levy 12-21-95 ROMOLO A. MARSELLA Director 12-21-95 Romolo A. Marsella M. ANNE SZOSTAK Director M. Anne Szostak 12-21-95 KENNETH W. WASHBURN Director 12-21-95 Kenneth W. Washburn W. EDWARD WOOD Director W. Edward Wood 12-19-95 IV-10 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. PROVIDENCE ENERGY CORPORATION By James H. Dodge, Chairman, President and CEO Date 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 Chairman, President and CEO James H. Dodge (Principal Executive Officer) Vice President, Financial Gary S. Gillheeney and Information Services, Treasurer and Assistant Secretary Director Gilbert R. Bodell, Jr. Director John H. Howland Director Douglas H. Johnson Director Dorothy G. Kramer Director Paul F. Levy Director Romolo A. Marsella Director M. Anne Szostak Director Kenneth W. Washburn Director W. Edward Wood IV-10 EXHIBIT 13. PORTIONS OF ANNUAL REPORT OF REGISTRANT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary The Registrant's current operating revenues, operating margin and net income have decreased over the comparable periods presented, as shown in the table below: (000's) Percent 1995 1994 Change Change Operating revenues $183,992 $222,778 $(38,786) (17.4) Operating margin 83,048 87,674 (4,626) (5.3) Net income 6,127 8,089 (1,962) (24.3) RESULTS OF OPERATION - 1995 VS 1994 Operating Revenues and Operating Margin The Registrant experienced the second warmest heating season in 42 years with temperatures averaging 10.5 percent warmer- than-normal. Overall, 1995 was 14.5 percent warmer than 1994, thereby decreasing operating margin by almost $5 million. As a result of the severe warmer-than-normal temperatures experienced during 1995, residential sales, which provide the Registrant with its greatest source of revenues, decreased 1.4 billion cubic feet (Bcf) or 10 percent from 1994. Offsetting this decrease was a net increase in the average annual number of customers during 1995 over 1994 of approximately 2,300 or 1.4 percent. The moderate increase was the result of new housing construction and conversions from other energy sources offset by shut-offs for non-payment and housing vacancies due to the stagnant economy. Non-firm sales volumes increased approximately 400 million cubic feet (MMcf) or 9 percent. The increase in non-firm sales of approximately 1,000 MMcf was offset by a decrease in sales of gas for resale purposes of approximately 600 MMcf. The increase in non-firm sales generated approximately $200,000 in additional operating margin as a result of the Registrant's non-firm margin sharing agreement. The decrease in sales of gas for resale purposes did not have an impact on the Registrant's operating margin because the Rhode Island Public Utilities Commission (RIPUC) requires any margin earned from the sale of gas for resale purposes be returned to firm customers through the Cost of Gas Adjustment Clause (CGA). PAGE-14 Continuing efforts to be customer focused and to meet customer expectations resulted in the Registrant negotiating and receiving regulatory approval for five special agreements that allowed us to offer unbundled service to several large manufacturing companies. Without these agreements, these companies would have utilized other fuel and delivery alternatives, resulting in an annualized loss of operating margin of approximately $600,000. Operating and Maintenance Expenses Operating and maintenance expenses have decreased $1.9 million or four percent over the last fiscal year. This decrease is due to a lower uncollectible revenue provision resulting from the decrease in operating revenue and a slight improvement in the Registrant's collection of accounts receivable. The remainder of the decrease is primarily attributable to a reduction in labor and related expenses. The restructuring initiative that occurred at the Registrant in June 1994 and the impact of efficiency reviews as part of the continuous improvement programs has also contributed to the reduction in labor expenses. The Registrant continually reviews its operating expenses in order to keep expenses as low as possible. However, the Registrant's expenses can vary based on weather and other factors. As a result, the four percent decrease in expenses experienced in 1995 will not necessarily reoccur in future years. Taxes Taxes have decreased $2.1 million or 12.5 percent during the last year. This was mainly due to a reduction in Federal income taxes as a result of lower pre-tax income and a reduction in the state gross earnings tax as a result of lower operating revenues due to warmer-than-normal weather. Other Income Other income increased by approximately $669,000 over 1994. This was attributed to decreases in expenses related to our customer equipment leasing program along with decreases in promotional advertising. Interest Expense Interest expense increased approximately $1.1 million or 18.1 percent as compared to 1994. A significant increase in short- term interest rates plus a slight increase in overall weighted average short-term borrowings caused the increase in interest expense. PAGE-15 Future Outlook In August 1995, the Registrant and Catex Vitol Gas Inc. formed a strategic business alliance to jointly market natural gas and other energy services. This agreement is the first such business alliance for both companies. This alliance will provide coordinated management and marketing of natural gas services, including retail marketing and wholesale delivery to industrial and commercial customers throughout New England. Catex Vitol will contribute its experience in gas acquisition and transportation and its expertise in financial energy services. With this alliance, customers in Rhode Island and throughout New England will have greater access to energy products and services. The Registrant has proposed that the net profit earned by the Registrant as a result of this alliance be credited to the firm customer by inclusion in the Registrant's cost of gas adjustment clause. The net profit is not expected to have material impact on the Registrant's margin. The Registrant currently owns and operates North Attleboro Gas Company (North Attleboro Gas), a small gas distribution company with over 3,000 customers located in Massachusetts. The Registrant is currently assessing the long-term strategic fit of North Attleboro Gas. Our assessment of this operation is part of our periodic evaluation of the strategic fit and financial performance of all our major assets. The Registrant is considering various options for North Attleboro Gas, including a restructuring of operations, a request for a rate increase or the possible sale of North Attleboro Gas to another party. No decision has been made with respect to this matter and any decision will not likely result in a material change in the results of operations or the financial position of the Registrant. The Financial Accounting Standards Board (FASB) recently released Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which will be effective for the Registrant in fiscal 1997. Based on a preliminary review of this Statement, management does not believe SFAS No. 121 will have an impact on the Registrant's results of operations or financial position. The FASB has also released Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation". Although this Statement will increase footnote disclosures regarding the Registrant's stock plans, management does not believe SFAS No. 123 will have an impact on the Registrant's results of operations or financial position. PAGE-16 RESULTS OF OPERATIONS - 1994 VS 1993 Operating Revenues and Operating Margin On October 14, 1993, the RIPUC approved the Registrant's request to adopt a new rate design, including a declining block rate structure, seasonal gas cost accounting and higher customer charges, effective November 14, 1993. The declining block rate structure allows the Registrant to recover more fixed costs through rates immediately when a customer begins using natural gas. Also, the new block rate structure will help balance customer bills during the year and will help protect the Registrant and its customers during periods of extreme weather conditions in the winter months. This new block rate structure should result in a stabilization of earnings from year to year. In addition to the improved stability in earnings, the new rates are designed to increase annual operating margin by approximately $700,000. Other components of the rate award included an allowed return on equity of 11.2 percent. In 1994, for accounting and gas cost recovery purposes, the Registrant recorded the embedded cost of gas using seasonal gas cost factors of $4.26 per thousand cubic feet (Mcf) during November 1993 through April 1994 and $2.77 per Mcf during May 1994 through September 1994. The ultimate effect of the seasonal gas cost accounting will be that quarterly operating margin will decrease in the winter months and increase in the summer months when compared to the previous method. Assuming normal weather, annual earnings should not be affected by this change. Another significant attribute of the new rate design structure as compared to the previous method is a higher customer charge. The average monthly customer charge has been increased to recognize that a portion of the Registrant's costs are relatively fixed and should be recovered from customers regardless of gas consumption. The Registrant's volumetric charge has decreased in order to offset the increased customer charge. For the first time in 12 years, the Registrant experienced a colder-than-normal heating season. During 1994, temperatures averaged 4.7 percent colder-than-normal. In addition, 1994 weather was also 4.5 percent colder than 1993, thereby increasing operating margin by approximately $700,000. As a result of the colder temperatures experienced during 1994, residential sales, which provide the Company with its greatest source of revenues, increased 339 MMcf or 2.5 percent over 1993. Also affecting the increase was a net increase in the average annual number of customers during 1994 over 1993 of approximately 2,100 or 1.3 percent. The moderate increase PAGE-17 was the result of new housing construction and conversions from other energy sources offset by shut-offs for non-payment and housing vacancies due to the stagnant economy. Non-firm sales volumes increased approximately 1,000 MMcf or 28 percent reflecting an increase in sales to other natural gas utilities. Offsetting the above was a small decrease in off-system cogeneration sales (approximately 300 MMcf) due to the expiration of a short-term contract with a cogeneration customer located outside the Registrant's service territory. Both of these items, however, did not have a material impact on the Registrant's operating margin or results of operations because the RIPUC limits the amount of margin the Registrant can retain. Any margin earned, which is greater than or less than the RIPUC limits, is returned to or collected from customers through the CGA. Operating and Maintenance Expenses Overall, other operation and maintenance expenses increased approximately $2.4 million or 5.4 percent during 1994 as compared to 1993. The increase was the result of a higher uncollectible revenue provision, normal wage increases granted due to negotiated union contract terms, employee merit raises and expected one-time legal and related expenses associated with compliance with Federal Energy Regulatory Commission (FERC) Order 636. Additionally, the Registrant implemented a new accounting standard for accounting for post-retirement healthcare benefits which increased the annual expense by $167,000. This increase was fully recovered in rates. Furthermore, maintenance expenses increased, reflecting a higher level of service and system repair work, caused primarily by the colder-than-normal weather experienced during the peak heating season. Offsetting the above increases was a restructuring initiative that occurred at the Registrant in June 1994. The intent of the restructuring was to significantly improve the Registrant's customer services, lower operating expenses and increase operating efficiencies. The Registrant, during 1994, realized approximately $200,000 in savings as a result of the restructuring. Taxes Taxes increased approximately $850,000 or 5.3 percent during 1994. The increase in taxes, mainly Federal income and state gross receipts, were the result of higher pretax income and higher operating revenues, respectively. Offsetting the above increase was a decrease in property taxes resulting from an aggressive program over prior years to work with the local cities and towns to reduce the assessment on which the Registrant pays taxes. PAGE-18 During 1994, the Registrant adopted Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes", which requires an asset and liability approach to account for income taxes. There were significant adjustments incorporated into the consolidated balance sheet. However, there was no income statement impact as a result of the adoption of SFAS No. 109. For a more detailed explanation, see Footnote 2 to the Notes to the Consolidated Financial Statements filed herewith as Exhibit 13. Interest Expense Interest expense for 1994 decreased approximately $400,000 or 6.1 percent as compared to 1993. A small increase in short- term interest rates offset by a decline in weighted average borrowings caused a decrease in short-term interest expense. Long-term interest expense decreased as a result of the refinancing of higher cost debt and sinking fund payments. Liquidity and Capital Resources During 1995, the Registrant experienced a $12.6 million increase in its net cash provided by operations. Increases in non-cash expenses, such as deferred taxes and depreciation, and the collection of gas costs from the under-collection that existed in 1994, provided the major reasons for the increase in net cash provided by operations. On October 3, 1991, the Massachusetts Department of Public Utilities (MDPU) approved a settlement order reached between the Massachusetts Attorney General's Office and North Attleboro Gas Company. Due to the magnitude of the rate award (32 percent), the MDPU ordered North Attleboro Gas to phase-in the award over a five year period effective November 1, 1991. As a result, North Attleboro phased-in an annual revenue increase of $141,137 on November 1, 1994. The final revenue increase of $94,445 was phased-in on November 1, 1995. In December 1995, the Registrant issued $15 million of First Mortgage Bonds bearing an interest rate of 7.5 percent. These First Mortgage Bonds are designated as Series R and will mature in December 2025. The net proceeds received were used to paydown the Registrant's short-term debt. See Footnote 3 to the Notes to the Consolidated Financial Statements filed herewith as Exhibit 13. The Registrant meets seasonal cash requirements and finances its capital expenditures program on an interim basis through short-term borrowings. As of September 30, 1995, the Registrant had lines of credit totaling $66,000,000 ($48,500,000 committed) with borrowings outstanding of $22,337,000. PAGE-19 The Registrant's ability to pay dividends is largely dependent upon receipt of dividends from ProvGas. Approximately $14 million of ProvGas' retained earnings were available for dividends at the end of fiscal 1995 under the most restrictive terms of the Registrant's First Mortgage Bond indenture. The Registrant continued to offer a Dividend Reinvestment and Cash Stock Purchase Plan (the Plan) for its current shareholders. During 1995, 40.6 percent of the Registrant's shareholders participated in the Plan, with $1.3 million or 21.5 percent of declared dividends reinvested in new shares rather than paid in cash. Capital expenditures for 1995 of $19.6 million were stable when compared to $19.8 million in 1994. Total anticipated capital expenditures for the next three years are expected to total between $50 million to $60 million. In February 1995 ProvGas filed for rate relief requesting an approximate eight percent general rate increase. In November 1995, the RIPUC authorized ProvGas to increase its rates to recover additional annual revenues in the amount of $3,990,000. Subsequent to the issuance of the rate decision, the RIPUC approved the Registrant's motion to reconsider a revenue adjustment of $171,572. That approval increases the overall rate increase to $4,161,572. As part of this award, ProvGas is allowed to earn a 10.9% return on common equity. The major factors contributing to the rate request were an increase in depreciation due to capital spending, an increase in working capital needs and an increase in capital expenditures. Please see Footnote 11 to the Notes to the Consolidated Financial Statements filed herewith as Exhibit 13. COMMON STOCK INFORMATION Dividend Paid Quarter Ended High Low Per Share September 30, 1995 $16 3/8 $14 3/4 $.27 June 30, 1995 16 5/8 14 5/8 .27 March 31, 1995 17 1/2 14 3/4 .27 December 31, 1994 17 3/8 15 .27 September 30, 1994 17 1/2 15 1/8 .27 June 30, 1994 17 14 5/8 .27 March 31, 1994 19 1/8 16 3/8 .26 December 31, 1993 20 1/2 17 7/8 .26 PAGE-20 SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS For the Years Ended September 30 (thousands, except per share amounts) 1995 1994 1993 Operating revenues $183,992 $222,778 $209,315 Cost of gas sold 100,944 135,104 126,314 Operating margin 83,048 87,674 83,001 Other operating expenses, excluding taxes 54,838 55,838 52,921 Taxes, other than income 11,769 12,540 12,597 Federal income taxes 3,104 4,460 3,554 Total operating expenses 69,711 72,838 69,072 Operating income 13,337 14,836 13,929 Nonutility operations and other: Revenues - - - Operating costs - - - Other income 865 196 37 865 196 37 Income from continuing operations before interest expense 14,202 15,032 13,966 Interest expense 7,379 6,247 6,653 Income from continuing operations after interest expense 6,823 8,785 7,313 Preferred dividends of subsidiary (696) (696) (696) Net income 6,127 8,089 6,617 Common dividends 6,062 5,856 4,889 Earnings reinvested in the corporation $ 65 $ 2,233 $ 1,728 ======== ======== ======== Weighted average common shares outstanding 5,624.2 5,534.1 4,761.8 ======== ======== ======== Net income per common share $ 1.09 $ 1.46 $ 1.39 ======== ======== ======== Common dividends $ 1.08 $ 1.06 $ 1.02 ======== ======== ======== PAGE - 21 OTHER FINANCIAL DATA SEPTEMBER 30 1995 1994 1993 Total assets $227,127 $233,311 $224,550 Gas plant--at original cost 257,264 239,830 221,769 Gas plant--net of depreciation 169,792 159,012 149,272 Capitalization: Common stockholders' equity 78,524 77,156 73,368 Redeemable cumulative preferred stock 8,000 8,000 8,000 Long-term debt 74,482 60,079 62,163 Shares of common stock at year end 5,668 5,581 5,486 Book value per share $ 13.85 $ 13.82 $ 13.37 ======== ======== ======== PAGE-22 FINANCIAL AND OPERATING STATISTICS For the Years Ended September 30 1995 1994 1993 Operating Revenues (thousands of dollars): Residential $106,387 $130,888 $120,997 Commercial/ Industrial 61,491 76,174 72,974 Total Firm 167,878 207,062 193,971 Interruptible 14,026 14,471 14,336 Transportation 804 287 54 Other 1,284 958 954 Total operating revenues $183,992 $222,778 $209,315 ======== ======== ======== Gas Sold and Transported (MMcf): Residential 12,709 14,122 13,783 Commercial/ Industrial 8,772 9,360 8,926 Total Firm 21,481 23,482 22,709 Interruptible 4,950 4,547 3,985 Transportation 1,681 656 386 Total gas sold and transported 28,112 28,685 27,080 Company use and losses 919 1,182 1,187 Total sendout 29,031 29,867 28,267 ======== ======== ======== PAGE - 23 1995 1994 1993 Gas Purchased, Produced and Transported (MMcf): Pipeline natural gas-contract 16,591 22,880 18,044 Pipeline natural gas-spot purchases 7,935 3,533 7,936 Pipeline natural gas-transportation 1,681 656 386 Underground storage 2,270 1,697 879 Liquefied natural gas 554 1,101 1,022 Liquid propane and synthetic natural gas - - - Total 29,031 29,867 28,267 ======== ======== ======== Average Annual Number Of Customers: Residential 147,935 145,793 143,771 Commercial/ Industrial 16,509 16,337 16,264 Total Firm 164,444 162,130 160,035 Interruptible & transportation 143 141 123 Total 164,587 162,271 160,158 ======== ======== ======== Total number of customers at year-end 163,294 159,375 159,135 ======== ======== ======== Residential Heating: Average consumption per customer (Mcf) 103 117 116 Average revenue per customer $ 844 $ 1,068 $ 1,008 Average rate per Mcf $ 8.19 $ 9.10 $ 8.68 Average annual number of customers 116,826 114,461 112,497 Maximum daily sendout (MMcf) 202 206 185 Calendar degree days 5,111 5,977 5,718 1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet. Normal calendar degree days for fiscal years 1995 and 1994 are 5,709; 1993, 1992 and 1991 are 5,811; and 1990 is 5,938. PAGE - 24 SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS For the Years Ended September 30 (thousands, except per share amounts) 1992 1991 1990 Operating revenues $190,341 $169,086 $156,906 Cost of gas sold 111,568 101,707 91,306 Operating margin 78,773 67,379 65,600 Other operating expenses, excluding taxes 52,122 47,015 41,545 Taxes, other than income 11,497 11,031 10,281 Federal income taxes 2,774 440 1,709 Total operating expenses 66,393 58,486 53,535 Operating income 12,380 8,893 12,065 Nonutility operations and other: Revenues 554 4,877 7,496 Operating costs 573 4,891 7,207 Other income 306 1,576 332 287 1,562 621 Income from continuing operations before interest expense 12,667 10,455 12,686 Interest expense 6,837 7,764 7,721 Income from continuing operations after interest expense 5,830 2,691 4,965 Preferred dividends of subsidiary (696) (280) -- Net income 5,134 2,411 4,965 Common dividends 4,908 6,057 5,916 Earnings reinvested in the corporation $ 226 $ (3,646) $ (951) ======== ======== ======= Weighted average common shares outstanding 4,478.4 4,337.9 4,235.8 ======== ======= ======= Net income per common share $ 1.15 $ .56 $ 1.17 ======== ======== ======= Common dividends $ 1.10 $ 1.40 $ 1.40 ======== ======== ======= PAGE - 25 OTHER FINANCIAL DATA SEPTEMBER 30 1992 1991 1990 Total assets $197,459 $189,422 $182,258 Gas plant--at original cost 210,087 199,216 189,952 Gas plant--net of depreciation 144,767 139,741 135,331 Capitalization: Common stockholders' equity 54,491 52,302 53,975 Redeemable cumulative preferred stock 8,000 8,000 -- Long-term debt 60,958 42,885 49,148 Shares of common stock at year end 4,534 4,408 4,278 Book value per share $12.02 $ 11.87 $12.62 ====== ======== ======= PAGE - 26 FINANCIAL AND OPERATING STATISTICS For the Years Ended September 30 1992 1991 1990 Operating Revenues (thousands of dollars): Residential $104,658 $ 92,660 $ 105,418 Commercial/ Industrial 63,405 57,153 43,120 Total Firm 168,063 149,813 148,538 Interruptible 21,394 17,681 6,569 Transportation 74 735 833 Other 810 857 966 Total operating revenues $190,341 $169,086 $156,906 ======== ======== ======== Gas Sold and Transported (MMcf): Residential 13,166 11,534 14,452 Commercial/ Industrial 8,363 7,637 6,188 Total Firm 21,529 19,171 20,640 Interruptible 6,717 5,659 2,084 Transportation 869 4,127 5,026 Total gas sold and transported 29,115 28,957 27,750 Company use and losses 1,264 1,445 985 Total sendout 30,379 30,402 28,735 ======== ======== ======== Gas Purchased, Produced and Transported (MMcf): Pipeline natural gas-contract 20,150 21,051 15,060 Pipeline natural gas-spot purchases 7,374 3,210 5,848 Pipeline natural gas-transportation 869 4,127 5,026 Underground storage 594 1,038 1,305 Liquefied natural gas 1,329 975 1,488 Liquid propane and synthetic natural gas 63 1 8 Total 30,379 30,402 28,735 ====== ====== ====== PAGE - 27 1992 1991 1990 Average Annual Number Of Customers: Residential 143,114 143,207 139,718 Commercial/ Industrial 15,889 15,114 13,179 Total Firm 159,003 158,321 152,897 Interruptible & transportation 115 79 65 Total 159,118 158,400 152,962 ======== ======== ======== Total number of customers at year-end 157,087 159,234 155,028 ======== ======== ======== Residential Heating: Average consumption per customer (Mcf) 112 97 128 Average revenue per customer $ 870 $ 766 $ 920 Average rate per Mcf $ 7.80 $ 7.91 $ 7.21 Average annual number of customers 111,176 110,997 106,984 Maximum daily sendout (MMcf) 174 172 163 Calendar degree days 5,502 4,893 5,750 1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet. Normal calendar degree days for fiscal years 1995 and 1994 are 5,709; 1993, 1992 and 1991 are 5,811; and 1990 is 5,938. PAGE - 28 CONSOLIDATED BALANCE SHEETS September 30 (thousands of dollars) 1995 1994 ASSETS Gas plant, at original cost (notes 1,3,6 and 11) $257,264 $239,830 Less--Accumulated depreciation and utility plant acquisition adjustments 87,363 80,733 169,901 159,097 Nonutility property, net 1,958 2,033 Current assets: Cash and temporary cash investments (notes 1 and 7) 1,278 1,145 Accounts receivable, less allowance of $2,412 in 1995 and $3,118 in 1994 (notes 1 and 6)14,031 17,892 Unbilled revenues (note 1) 2,655 2,895 Deferred gas costs (notes 1 and 6) 1,193 15,819 Inventories, at average cost- Liquefied natural gas, propane and under- ground storage 10,116 11,255 Materials and supplies 1,540 1,679 Prepaid and refundable taxes (note 2) 5,933 4,030 Prepayments 1,366 1,499 38,112 56,214 Deferred charges and other assets (notes 1, 5, 6, 8 and 11) 17,156 15,967 Total assets $227,127 $233,311 ======== ======== CAPITALIZATION AND LIABILITIES Capitalization (see accompanying statement) $161,006 $145,235 Current liabilities: Notes payable (notes 4 and 7) 7,337 27,700 Current portion of long-term debt (note 3) 1,950 2,085 Accounts payable (notes 5 and 6) 14,102 18,324 Accrued taxes (note 11) 6,059 6,224 Accrued vacation 1,679 1,584 Customer deposits 3,981 3,580 Other 3,171 3,136 38,279 62,633 Deferred credits and reserves: Accumulated deferred Federal income taxes (note 2) 18,734 15,506 Unamortized investment tax credits (note 2) 2,691 2,851 Other (notes 5 and 8) 6,417 7,086 27,842 25,443 Commitments and contingencies (note 6) -- -- Total capitalization and liabilities $227,127 $233,311 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. PAGE - 29 CONSOLIDATED STATEMENTS OF INCOME For the Years Ended September 30 (thousands, except per share amounts) 1995 1994 1993 Operating revenues $183,992 $222,778 $209,315 Cost of gas sold 100,944 135,104 126,314 Operating margin 83,048 87,674 83,001 Operating expenses: Operation and maintenance 44,368 46,223 43,848 Depreciation and amortization 10,470 9,615 9,073 Taxes-- State gross receipts 5,005 6,326 5,752 Local property and other (note 11) 6,764 6,214 6,845 Federal income (note 2) 3,104 4,460 3,554 Total operating expenses 69,711 72,838 69,072 Operating income 13,337 14,836 13,929 Other income, net (note 1) 865 196 37 Income before interest expense 14,202 15,032 13,966 Interest expense: Long-term debt 5,086 4,987 5,172 Other 2,437 1,412 1,614 Interest capitalized (144) (152) (133) 7,379 6,247 6,653 Income after interest expense 6,823 8,785 7,313 Preferred dividends of subsidiary (note 3) (696) (696) (696) Net income $ 6,127 $ 8,089 $ 6,617 ======== ======== ======== Earnings per common share (note 12) $ 1.09 $ 1.46 $ 1.39 ======== ======== ======== Weighted average common shares outstanding (note 12) 5,624.2 5,534.1 4,761.8 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. PAGE - 30 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30 (thousands of dollars) 1995 1994 1993 Cash provided by - Operating Activities: Income after interest expense $ 6,823 $ 8,785 $ 7,313 Items not requiring cash: Depreciation and amortization 10,529 9,759 9,301 Deferred Federal income taxes 2,142 1,235 544 Amortization of investment tax credits (160) (159) (157) Changes in assets and liabilities which provided (used) cash: Accounts receivable 3,861 (654) (2,491) Unbilled revenues 240 (41) 510 Deferred gas costs 14,626 1,734 (9,853) Inventories 1,278 310 (4,032) Deferred capacity charges -- -- 1,343 Prepaid and refundable taxes (1,017) 2,407 337 Prepayments 133 (589) 305 Accounts payable (4,222) (934) 1,592 Accrued taxes (165) (71) 151 Refundable gas costs -- -- (1,795) Accrued vacation, customer deposits and other 563 237 632 Net cash provided by operations 34,631 22,019 3,700 Investment Activities: Expenditures for property, plant and equipment, net (19,597) (19,809) (13,882) Deferred charges and other (2,002) (958) (1,239) Total (21,599) (20,767) (15,121) Financing Activities: Issuance of common stock 1,303 1,555 17,149 Issuance of mortgage bonds -- 16,000 25,000 Payments on long-term debt (2,081) (465) (259) Decrease in notes payable (5,363) (12,100) (24,610) Cash dividends on preferred shares (696) (696) (696) Cash dividends on common shares (6,062) (5,856) (4,889) Total (12,899) (1,562) 11,695 Increase (decrease) in cash and cash equivalents 133 (310) 274 Cash and cash equivalents at beginning of year 1,145 1,455 1,181 Cash and cash equivalents at end of year $ 1,278 $ 1,145 $ 1,455 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during year for- Interest (net of amount capitalized) $ 6,663 $ 6,091 $ 6,999 Income taxes (net of refunds) $ 1,388 $ 856 $ 2,307 The accompanying notes are an integral part of these consolidated financial statements. PAGE - 31 CONSOLIDATED STATEMENTS OF CAPITALIZATION September 30 (thousands) 1995 1994 Common stockholders' investment (notes 3, 5 and 10): Common stock, $1 Par, Authorized--20,000 shares, Outstanding--5,668 shares in 1995 and 5,581 shares in 1994 $ 5,668 $ 5,581 Amount paid in excess of par 54,258 53,042 Retained earnings 18,598 18,533 78,524 77,156 Cumulative preferred stock of subsidiary (notes 3 and 7): Redeemable 8.7% Series, $100 par Authorized - 80 shares Outstanding - 80 shares as of 1995 and 1994 8,000 8,000 Long-term debt (notes 3, 6, and 7): First Mortgage Bonds, secured by utility property-- Series M, 10.25%, due July 31, 2008 10,000 10,000 Series N, 9.63%, due May 30, 2020 10,000 10,000 Series O, 8.46%, due September 30, 2022 12,500 12,500 Series P, 8.09%, due September 30, 2022 12,500 12,500 Series Q, 5.62%, due November 30, 2003 14,400 16,000 Debt refinanced subsequent to year-end (note 3) 15,000 -- Capital Leases 2,032 1,164 76,432 62,164 Less-current portion 1,950 2,085 74,482 60,079 Total capitalization $161,006 $145,235 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. PAGE - 32 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' INVESTMENT For the Three Years Ended September 30 Amount Shares Paid In Issued and Outstanding Excess Retained (thousands) Number Amount of Par Earnings Balance, September 30, 1992 4,534 $ 4,534 $ 35,385 $ 14,572 Add (deduct): Net income - - - 6,617 Cash dividends ($1.02 per share) - - - (4,889) Common stock offering 850 850 14,493 - Dividend reinvestment and cash stock purchase plan 83 83 1,417 - Employee benefit plans 13 13 202 - Stock options 6 6 101 - Preferred stock expenses - - (16) - Balance, September 30, 1993 5,486 5,486 51,582 16,300 Add (deduct): Net income - - - 8,089 Cash dividends ($1.06 per share) - - - (5,856) Dividend reinvestment and cash stock purchase plan 87 87 1,399 - Employee benefit plans 8 8 132 - Accrual for Executive Stock Compensation Plan - - (71) - Balance, September 30, 1994 5,581 5,581 53,042 18,533 Add (deduct): Net income - - - 6,127 Cash dividends ($1.08 per share) - - - (6,062) Dividend reinvestment and cash stock purchase plan and employee benefit plans 87 87 1,279 - Accrual for Executive Stock Compensation Plan - - (63) - Balance, September 30, 1995 5,668 $ 5,668 $ 54,258 $ 18,598 ======== ======== ========= ======== The accompanying notes are an integral part of these consolidated financial statements. PAGE - 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Consolidation. The consolidated financial statements include the accounts of Providence Energy Corporation and its wholly-owned subsidiaries (the Registrant or the Company). Revenues from the natural gas distribution business are reflected in the accompanying consolidated statements of income to arrive at operating income. Revenues and expenses of nonutility operations include sales of appliances as well as appliance rental and are presented after operating income in the accompanying consolidated statements of income. All significant intercompany transactions have been eliminated in consolidation. Regulation. The Providence Gas Company (ProvGas) is subject to regulation by the Rhode Island Public Utilities Commission (RIPUC). The accounting policies of ProvGas conform to generally accepted accounting principles as applied in the case of regulated public utilities and are in accordance with the regulators' accounting requirements and rate-making practices. North Attleboro Gas Company (North Attleboro) is subject to regulation by the Massachusetts Department of Public Utilities (MDPU). Operating Revenues. Operating revenues consist principally of gas sales. The gas companies record accrued utility revenues based on estimates of gas volumes consumed and not billed at the end of an accounting period in order to match revenues with related costs. Lease Accounting. The Company leases water heaters and other appliances to customers under finance leases. The Company recognizes the profits associated with these leases when the sale is made, after providing reserves for unearned income, doubtful accounts and warranty repairs. 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 ProvGas is recorded as a Utility Plant Acquisition Adjustment and is amortized over periods ranging from 1-24 years. Depreciation. Depreciation is provided on the straight-line basis at rates designed to amortize the cost of depreciable plant over its estimated useful life. The composite depreciation rate expressed as a percentage of the average depreciable gas plant in service was approximately 3.75 percent for all years presented. The Company retires property units by charging original cost, cost of removal; including environmental investigation and remediation costs; and salvage value to accumulated depreciation. Cost of Gas Adjustment. The Company has Cost of Gas Adjustment (CGA) clauses which allow for the adjustment of rates charged to customers in order to recover actual gas costs incurred, including demand and commodity charges. The CGA provides for reconciliation of total gas costs billed with PAGE - 34 the actual cost of gas recorded. Any excess or deficiency in amounts billed as compared to costs is deferred and either refunded to, or recovered from, the customers over a subsequent period. Allowance for Funds used During Construction. The Company capitalizes interest and an allowance for equity funds in accordance with established policies of the RIPUC and MDPU. 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 income. Deferred Charges and Other Assets. The Company 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 security while the remaining deferred charges and other assets are amortized over a recovery period specified by the respective Commissions. Deferred charges include the following: 1995 1994 Cost of fuel assistance program $ 1,836 $ 1,885 Restructuring program (note 11) 1,600 1,600 Pension costs 6,361 5,890 Deferred costs related to phase-in plan 601 649 Unamortized debt expense 2,217 2,422 Post-retirement benefits 1,041 708 Pipeline interconnection costs 625 921 Deferred rate case expense (note 11) 853 473 Other deferred charges 2,022 1,419 Total $ 17,156 $ 15,967 ======== ======== Temporary Cash Investments. Temporary cash investments are short-term, highly liquid investments with a maturity to the Company of not more than 90 days. Reclassifications. Certain prior amounts have been reclassified for consistent presentation with the current year. 2. FEDERAL INCOME TAXES In 1994, the Registrant adopted Statement of Financial Accounting Standards No. 109, (SFAS No. 109), "Accounting for Income Taxes", which requires an asset and a liability approach to accounting for income taxes. Under the provisions of SFAS No. 109, deferred taxes are provided for all temporary differences. PAGE - 35 When implementing SFAS No. 109, the Registrant reduced deferred taxes that were previously provided at higher rates than the current 34% tax rate. Additional deferred taxes and prepaid taxes were also provided for certain temporary differences previously not provided. These adjustments to deferred taxes will be returned to or collected from ratepayers in the future. Accordingly, the Registrant has recorded regulatory assets and liabilities corresponding to the tax adjustments. The implementation of SFAS No. 109 has had no impact on the Registrant's results of operations or cash flows. The following is a summary of the provision for Federal income taxes for the three years in the period ended September 30: (thousands of dollars) 1995 1994 1993 Current $ 1,300 $ 3,211 $ 2,487 Deferred 2,142 1,235 1,113 Total Federal income tax provision $ 3,442 $ 4,446 $ 3,600 ======= ======= ======= Income tax is charged (credited) to the following: Charged to operating expenses $ 3,104 $ 4,460 $ 3,554 Included in other income, net 338 (14) 46 Total Federal income tax provision $ 3,442 $ 4,446 $ 3,600 ======= ======= ======= The effective Federal income tax rates and the reasons for their differences from the statutory Federal income tax rates are as follows: 1995 1994 1993 Statutory Federal income tax rates 34.0% 34.0% 34.0% Effect of change of statutory rate to 35% - .3 - Reversing temporary differences (.1) (.4) (.7) Impact of equity allowance- AFUDC - - (.2) Amortization of investment tax credits (.6) (.4) (.5) Other .3 .1 .3 Effective Federal income tax rate 33.6% 33.6% 32.9% ==== ==== ==== PAGE - 36 The Registrant's deferred tax assets and liabilities for each of the two years in the period ended as of September 30 are the result of the following temporary differences: (thousands of dollars) Long-term deferred taxes 1995 1994 Tax assets Unamortized ITC $ 934 $ 989 Other 420 785 Tax liabilities Property related (17,992) (15,553) Pension costs (614) (659) Deferred charges (1,482) (1,068) Net deferred tax liability included in accompanying consolidated balance sheets $(18,734) $(15,506) ======== ======== Prepaid taxes Tax assets Accounts receivable reserves $ 814 $ 913 Property tax reserves 1,108 985 Alternative minimum tax -- 138 Other 1,194 1,275 Tax liabilities Employee severance (541) (409) Other (121) (86) Net prepaid taxes 2,454 2,816 Prepaid gross receipts tax and other 3,479 1,214 Net prepaid and refundable taxes included in accompanying consolidated balance sheets $ 5,933 $ 4,030 ======== ======== During 1994, the Registrant received permission from the Internal Revenue Service to change its tax year to a fiscal year ended September 30. Previously, the Registrant was a calendar year tax payer. Investment tax credits are amortized through credits to other income over the estimated lives of related property. 3. CAPITALIZATION A. Long-term Debt In December 1995, the Registrant issued $15 million of First Mortgage Bonds. These First Mortgage Bonds are designated as Series R (7.5%) and will mature in December 2025. The net proceeds provided by this indebtedness were used to paydown the Registrant's short-term debt. The accompanying consolidated balance sheets, statements of capitalization and related disclosures have been prepared to reflect the issuance of this debt and the subsequent retirement of the note payable. PAGE - 37 The Registrant's ability to pay dividends is largely dependent on receipt of dividends from its principal subsidiary, ProvGas. Approximately $14 million of ProvGas' retained earnings were available for dividends under the most restrictive terms of the Registrant's First Mortgage Bond indenture. The Registrant's First Mortgage Bonds are secured by a lien on substantially all of the tangible and real property. As of September 30, 1995, the annual sinking fund requirements and maturities of long-term debt for the next five fiscal years are $1,600,000 in 1996, $1,600,000 in 1997, $2,509,000 in 1998, $2,509,000 in 1999, and $2,509,000 in 2000. B. 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 unless a default in the payment of dividends or sinking fund obligations occurs. 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 commencing at the end of 1997. 4. NOTES PAYABLE The Registrant meets seasonal cash requirements and finances its construction program on an interim basis through short-term bank borrowings. As of September 30, 1995, the Registrant had lines of credit totaling $66,000,000 ($48,500,000 committed) with borrowings outstanding of $22,337,000. The accompanying consolidated balance sheets reflect an adjusted note payable balance of $7,337,000 reflecting the anticipated paydown of short-term borrowings with proceeds from a First Mortgage Bond issuance as discussed in Footnote 3. The Registrant pays a fee for its committed lines of credit rather than maintaining compensating balances. The weighted average interest rate for borrowings outstanding at the end of the years was 6.15% in 1995, 5.29% in 1994 and 3.47% in 1993. 5. 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. PAGE - 38 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, 1995 and 1994 (in thousands): 1995 1994 Accumulated benefit obligation, including vested benefit obligation of ($37,034) as of September 30, 1995 and ($35,850) as of September 30, 1994 $(38,519) $(37,233) ======== ======== Projected benefit obligation for service rendered to date $(50,708) $(49,867) Plan assets at fair value (primarily listed stocks, corporate bonds and U.S. bonds) 58,058 50,897 Projected benefit obligation less than plan assets 7,350 1,030 Unrecognized net (gain) loss (12,584) (5,413) Unrecognized prior service cost 1,193 1,304 Unrecognized net transition asset being recognized over 15 years from October 1, 1985 (681) (817) Net accrued pension cost included in other deferred credits and accounts payable at September 30, 1995 and 1994 $ (4,722) $ (3,896) ======= ======== Net pension cost for fiscal years 1995, 1994 and 1993 included the following components (in thousands): 1995 1994 1993 Service cost $ 1,541 $ 1,589 $ 1,502 Interest cost on benefit obligations 3,872 3,814 3,673 Annual return on plan assets (10,300) 995 (8,890) Net amortization and deferral 5,713 (6,229) 4,453 Net periodic pension cost 826 169 738 Adjustments due to regulatory action (410) (131) (655) Net periodic pension cost recognized $ 416 $ 38 $ 83 ======= ======= ======= 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. 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 generally accepted accounting principles, is deferred and recorded as a regulatory asset or liability. PAGE - 39 B. Post-retirement Benefits Other Than Pensions The Registrant currently offers retirees, who have attained age 55 and worked five years for the Registrant, healthcare and life insurance benefits during retirement (the Plan). These benefits are similar to the benefits offered to active employees. Although retirees are not required to make contributions to the Plan currently, future contributions may be required if the cost of the Plan exceeds certain limits. On October 1, 1993, the Registrant adopted the provisions of the Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post- retirement Benefits Other Than Pensions" (SFAS No. 106). SFAS No. 106 requires that these benefits be accrued over the service life of covered employees. Prior to the adoption of SFAS No. 106, the Registrant accounted for these costs when paid. These costs were $604,000 in 1993. Upon adoption of SFAS No. 106, the Registrant calculated an unrecognized transition obligation of $10,526,000, which the Registrant will recognize over a 20-year amortization period. The Registrant funds its SFAS No. 106 expense to a Voluntary Employee Benefit Association (VEBA) Trust. Contributions to the VEBA Trust were approximately $1,561,000 in 1995 and $1,566,000 in 1994. The Registrant recovers its SFAS No. 106 costs 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 will fully recover its 1995 and 1994 SFAS No. 106 expense of $1,561,000 and $1,566,000, respectively because such amounts were funded into the VEBA Trust. Of the total SFAS No. 106 costs, $1,231,000 and $855,000 were recovered in rates during 1995 and 1994, respectively. The cumulative unrecovered difference of $1,041,000 has been deferred and will be recovered in future years. The Plan's costs and accumulated post-retirement benefit obligation for 1995 and 1994 are calculated by the Registrant's actuaries using assumptions and estimates which include the following: Percent Healthcare cost annual growth rate.............12.6 Healthcare cost annual growth rate - long-term..6.0 Expected long-term rate of return (union).......5.5 Expected long-term rate of return (non-union)...8.5 Discount rate...................................8.0 The healthcare cost annual growth rate significantly impacts the estimated Plan obligation and annual expense. For example, in 1995, a one percent change in the above rates would change the obligation by $838,000 and would change the annual expense by $91,000. PAGE - 40 The obligations and assets of the Plan at September 30, 1995 and 1994 are as follows: 1995 1994 Accumulated post-retirement benefit obligation: Current retirees $ (7,425,800) $ (6,518,300) Active employees-eligible for benefits (844,700) (795,100) Active employees (3,694,600) (3,618,700) Total post-retirement benefit obligation (11,965,100) (10,932,100) Plan assets at fair value 2,080,300 856,400 Unfunded post-retirement benefit obligation (9,884,800) (10,075,700) Unrecognized transition obligation 9,473,600 9,999,900 Unrecognized net (gain) or loss 402,300 75,800 Accrued post-retirement benefit obligation included in the accompanying consolidated balance sheet $ (8,900) $ -- ============ ============ The Registrant's actuarial determined Plan costs for 1995 and 1994 include the following: 1995 1994 Service cost $ 229,400 $ 238,400 Interest cost 909,200 834,500 Actual return on plan assets (28,300) (36,600) Amortization and deferral 450,200 529,700 Total annual plan costs $1,560,500 $1,566,000 ========== ========== C. Supplemental Retirement Plans The Registrant provides certain supplemental retirement plans for key employees. The projected benefit obligation is approximately $688,000 which is being accrued over the service period of these key employees. The supplemental retirement plans are unfunded. The Registrant expensed $150,000, $44,000 and $39,000 related to these benefits in 1995, 1994 and 1993, respectively. PAGE - 41 D. Performance and Equity Incentive Plan During 1993, the Board of Directors, with subsequent approval of the Registrant's common shareholders, adopted the Providence Energy Corporation Performance and Equity Incentive Plan (the Plan). The Plan provides that up to 225,000 shares of common stock may be granted to key employees, including employees of the Registrant, at no cost to the employees. Key employees, who received common shares, are entitled to receive dividends, but assumption of full beneficial ownership is contingent upon future service of the employee. The Plan also provides for cash compensation to key employees. The executive compensation incentive awards totaled approximately $248,000 for 1995, $240,000 for 1994 and $260,000 for 1993. Amounts paid in cash are charged to expense when earned, however, amounts paid in restricted stock are deferred and amortized to expense over a five-year period. Of the $260,000 1993 award, $177,000 was paid in cash during fiscal 1994. Of the $240,000 1994 award, $153,000 was paid in cash during fiscal 1995. The Registrant estimates $167,000 of the 1995 award will be paid in cash during 1996. Grant shares totaling 5,371 and 4,902 were purchased by the Registrant for key employees during 1995 and 1994, respectively. 6. 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 Gas Transmission Company (Algonquin) for storage space in a liquefied natural gas (LNG) tank. The capital lease arrangement also provides that Algonquin lease from the Registrant, for a corresponding term at an annual amount of $150,000, the land on which the tank is situated. The Registrant also leases certain information systems equipment under capital leases. Property under Capital Leases: (thousands of dollars) 1995 1994 Gas plant $6,116 $ 6,116 Information systems 1,551 -- Accumulated depreciation 5,659 5,256 $2,008 $ 860 ====== ====== PAGE - 42 Commitments for Capital Leases: LNG Computer (thousands of dollars) Storage Equipment Total 1996 $ 155 $ 373 $ 528 1997 134 373 507 1998 136 373 509 1999 136 373 509 2000 136 186 322 2001-2005 430 - 430 $1,127 $1,678 2,805 ====== ====== Amounts representing interest 773 Amounts representing principal $2,032 ====== C. Operating Leases The Registrant also leases facilities and equipment under operating leases with a total future obligation of approximately $530,000 as of September 30, 1995. D. Gas Supply Restructuring Federal Energy Regulatory Commission (FERC) Order 636 and other related orders (the Orders) have significantly changed the structure and types of services offered by pipeline transportation companies. The most significant components of the restructuring occurred in November 1993. In response to these changes, the Registrant has 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 is designed to be market responsive and is diversified with respect to contract lengths, source location and other contract terms. On a periodic basis, the Registrant reviews all of its contracts to ensure a diverse, secure, flexible and economical supply portfolio is maintained. To meet the requirements of the Order, the pipelines 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. Based upon current information, the Registrant anticipates its transition costs to net between $17 million and $19 million of which $12.6 million has been included in the CGA and is currently being collected from customers. The remaining minimum obligation of the $4.4 million has been recorded in the accompanying consolidated balance sheets along with a regulatory asset anticipating future recovery through the CGA. The Registrant's ultimate liability may differ from the above estimates based on FERC settlements with the Registrant's pipeline transportation suppliers. FERC has approved settlements with three of its pipelines, which account for the bulk of the Registrant's transition costs. Negotiations are PAGE - 43 continuing on one additional pipeline, and based on the information available, the Registrant believes that its current range for transition costs is reasonable. E.Environmental 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, 1995, the Registrant is aware of three sites at which future costs may be incurred. The Registrant has been designated as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act of 1980 at two sites at Plympton, Massachusetts on which waste material is alleged to have been deposited by disposal contractors employed in the past either directly or indirectly by the Registrant and other PRPs. With respect to one of the Plympton sites, the Registrant has joined with other PRPs in entering into an Administrative Consent Order with the Massachusetts Department of Environmental Protection. The costs to be borne by the Registrant, in connection with both Plympton sites, are not anticipated to be material to the financial condition of the Registrant. During 1995, the Registrant voluntarily began a study at its primary gas distribution facility located in Providence. In accordance with state laws, such a voluntary study is monitored by the Rhode Island Department of Environmental Management. The purpose of this study is to determine the extent of environmental contamination on the site, if any. The study is continuing, and although results are not conclusive, preliminary findings indicate that clean-up may be required. The level of clean-up is likely to vary significantly depending upon the proposed future use of the site. In fact, if the site remains in its present use, only minimal clean-up may be required. As of September 30, 1995, the Registrant cannot estimate the future cost of investigation and clean-up as a result of the uncertainties discussed. As of September 30, 1995, approximately $590,000 had been spent on studies at this site. In its rate case filed in February 1995, 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. Accordingly, environmental investigation costs of approximately $841,000 have been charged to the accumulated depreciation reserve at September 30, 1995. Management believes that this PAGE - 44 rate recovery mechanism is appropriate for recovery of future costs. Should future developments warrant additional rate recovery mechanisms, management will seek such recovery. In addition to rate recovery, management has a program to ascertain the possibility of recovery under prior insurance coverage. Also, management has begun discussions with other parties who may assist the Registrant in paying future costs at the above sites. Management believes that its program for managing environmental issues combined with rate recovery, possible insurance 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 three sites. F.Fuel Assistance Program The Registrant participates in the State of Rhode Island's Fuel Assistance Program, the Percentage of Income Payment Plan. As a result, the Registrant has agreed to accept partial payment on certain customer accounts from various state agencies. As of September 30, 1995, $2.5 million was due from the State of Rhode Island related to gas consumed by customers over the last two years. G. Lease Receivables In prior years, the Registrant sold to a financial institution lease receivables of hot water heaters and conversion burners installed at customers' homes or businesses. These receivables were sold with recourse limited to default by the lessee. In the event of default, the Registrant would recognize as a loss the excess of the receivable balance, net of established reserves for such default over the value of the equipment. The balance of these receivables as of September 30, 1995 was approximately $1,062,000. 7.Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value disclosures for the following financial instruments: Cash, Cash Equivalents and Short-term Debt The carrying amount approximates fair value due to the short-term maturity of these instruments. Long-term Debt and Preferred Stock The fair value of long-term debt and preferred stock is estimated based on currently quoted market prices for similar types of issues. The carrying amounts and estimated fair values of the Registrant's financial instruments at September 30 are as follows: PAGE - 45 1995 Carrying Fair (in thousands) Amount Value Cash and cash equivalents $ 1,278 $ 1,278 Short-term debt * 7,337 7,337 Long-term debt * 76,432 81,816 Preferred stock 8,000 8,800 * Adjusted for the issuance of $15,000,000 in First Mortgage Bonds Series R issued subsequent to year-end. 1994 Carrying Fair (in thousands) Amount Value Cash and cash equivalents $ 1,145 $ 1,145 Short-term debt 27,700 27,700 Long-term debt 62,164 64,565 Preferred stock 8,000 8,000 The difference between the carrying amount and the fair value of the Registrant's preferred stock and long-term debt, if they were settled at amounts reflected above, would likely be recovered in the Registrant's rates over a prescribed amortization period. Accordingly, any settlement would not result in a material impact on the Registrant's financial position or results of operations. 8.Restructuring In June 1994, the Registrant, following a six month study of its major processes, realigned its personnel to meet the existing and future challenges associated with an increasingly competitive energy marketplace. The intent of the restructuring was to significantly improve the Registrant's customer services, lower operating costs and increase operating efficiencies. Approximately 30 people were separated from the Registrant, while approximately 18 new employees have been hired to fill newly defined positions. The employees bring skill, expertise and experiences to the Registrant not previously available within its work force. The direct cost of this realignment is estimated to be about $1 million, net of tax. A significant portion of this $1 million is severance pay and related benefits for personnel who were separated during 1994. Substantially, all costs have been paid as of September 30, 1995. The Registrant has discussed the reorganization with the RIPUC and based on prior RIPUC allowance of similar costs, the Registrant deferred these costs in anticipation of recovery in its next rate case. (See Footnote 11 for subsequent event.) PAGE - 46 9.Rate Changes A.ProvGas Rate Increase In February 1995, ProvGas filed for rate relief requesting an approximate 8 percent general rate increase. The major issues contributing to the rate request were an increase in depreciation due to capital spending, an increase in working capital needs and an increase in capital expenditures. (See Footnote 11 for subsequent event.) B.North Attleboro Gas Rate Increase In October 1991, the MDPU released its settlement order in regards to a rate request which included a qualified phase-in plan. Due to the magnitude of the rate request, the MDPU ordered North Attleboro Gas Company to phase-in a 32 percent increase over five years as follows: Estimated Estimated Percentage Additional Increase in Annual Rate Base Date Effective Revenues Revenues November 1, 1991 $188,096 8.13 November 1, 1992 203,042 8.12 November 1, 1993 200,967 7.43 November 1, 1994 141,137 4.86 November 1, 1995 94,445 3.10 The rate settlement further required North Attleboro to classify $545,000 of gas plant as plant held for future use for rate case purposes. This plant will be included in future rates if North Attleboro meets certain growth requirements by the year 2000. North Attleboro capitalized AFUDC and other costs of approximately $136,000 in 1995, $198,000 in 1994 and $239,000 in 1993 related to the gas plant not yet phased into North Attleboro's rates under the plan. North Attleboro amortized $185,000 in 1995, $114,000 in 1994 and $4,000 in 1993 of amounts previously deferred. 10.Stock Rights and Options Currently, one common stock purchase Right is attached to each outstanding share of common stock. Each Right entitles the holder to purchase one share of common stock at a price of $110.00 per share, subject to adjustment. In the event that certain transactions as defined in the Rights Agreement occur, each Right will become exercisable for that number of shares of common stock of the acquiring company (or of the Registrant in certain circumstances) which at the time of the transaction has a market value of two times the exercise price. These Rights expire on August 17, 1998 and may be redeemed by a two-thirds vote of the Directors at a redemption price of $.01 per Right. Due to the anti-dilutive characteristics of these Rights, there is no assumed impact on earnings per share. PAGE - 47 The Registrant offers two stock option plans for officers, directors and key employees covering 250,000 shares of the Registrant's common stock. Options under the plans are granted at 100 percent of fair market value at the date of grant. The options expire ten years from the date of grant and in the case of options granted to the directors, the options become exercisable after the first anniversary of the date of such grant. Under the stock option plans, stock appreciation rights may be granted in conjunction with all or part of any stock option grants to key employees. Such rights offer optionees the alternative of electing not to exercise the related stock option, but to receive instead an amount in cash, stock or a combination of cash and stock equivalents for the difference between the option price and the fair market value of the share. Stock option data are summarized as follows for the years ended September 30, 1995, 1994 and 1993: Number of Shares Outstanding, September 30, 1992 59,883 Granted at $16.375 per share 8,017 Exercised (6,803) Terminated (3,658) Surrendered -- Outstanding, September 30, 1993 57,439 Granted at $19.000 per share 7,117 Exercised -- Terminated (8,048) Surrendered -- Outstanding, September 30, 1994 56,508 Granted at $15.625 per share 8,042 Exercised -- Terminated (9,761) Surrendered -- Outstanding, September 30, 1995 54,789 ====== 11. Subsequent Event - Rate Order On November 17, 1995, the RIPUC issued its decision on the rate request made by ProvGas in February 1995. In its decision, the RIPUC authorized ProvGas to increase its rates to recover additional annual revenues in the amount of $3,990,000. Subsequent to the issuance of the rate decision, the RIPUC approved the Registrant's motion to reconsider a revenue adjustment of $171,572. That approval increases the overall rate increase to $4,161,572. Additionally, as a result of the order, ProvGas will record several adjustments to its first quarter 1996 financial statements. Specifically: PAGE - 48 a) ProvGas will begin calculating property tax expense for rate purposes based on the current year's expense plus an estimate of one year's increase in expense. Previously, ProvGas was required to estimate two year's increase in expense. As a result, ProvGas will reduce its regulatory liability for one year's property tax expense resulting in a one time gain of approximately $3,900,000 before tax. b) ProvGas will write-off and not recover the $1,600,000, before tax, of restructuring costs previously deferred. (See Footnote 8.) The RIPUC had previously allowed ProvGas recovery of similar costs, but determined that the costs of the 1994 reorganization should not be recovered in rates. c) ProvGas will write-off approximately $400,000, before tax, of previously deferred rate case expenses. (See Footnote 1.) d) ProvGas will write-off approximately $461,000, before tax, of construction expenditures previously capitalized. These costs were capitalized in accordance with generally accepted accounting principles and were based on Federal Energy Regulatory Commission guidance on accounting for such costs. The RIPUC agreed that such costs could be capitalized beginning in 1996, but did not allow recovery of the previously capitalized costs. The net effect of the above adjustments will be recorded in ProvGas' first quarter financial statements and based on management's current estimates will not result in a material impact. 12.Unaudited Quarterly Financial Information The following is unaudited quarterly financial information for the two years ended September 30, 1995 and 1994. Quarterly variations between periods are caused primarily by the seasonal nature of gas sales and the availability of gas. (thousands, except per share amounts) Quarter Ended Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal 1995 Operating revenues $49,302 $66,162 $38,157 $30,371 Operating income (loss) 5,022 7,834 892 (411) Net income (loss) 3,307 5,848 (844) (2,184) Net income (loss) per share* .59 1.04 (.15) (.39) Fiscal 1994 Operating revenues $62,957 $83,570 $42,492 $33,759 Operating income 5,106 8,075 516 1,139 Net income (loss) 3,714 6,509 (1,182) (952) Net income (loss) per share* .68 1.18 (.21) (.17) * Calculated on the basis of weighted average shares outstanding during the quarter. PAGE - 49 EX-27 2
5 12-MOS SEP-30-1995 SEP-30-1995 1,278 0 14,031 2,412 11,656 38,112 257,264 87,363 227,127 38,279 74,400 78,524 0 8,000 82 227,127 183,992 13,337 0 100,944 66,607 0 7,379 16,441 3,104 0 0 0 0 6,127 1.09 1.09
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