-----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, MGG7YdK6ra4CjjEtjO0Y/u/cY8eJ5PX+pRU0avQLpAnfBmImK9pY1GWIJjuikVAz VeteA/vGfm4cYpX848PaKg== 0000927016-97-003506.txt : 19971231 0000927016-97-003506.hdr.sgml : 19971231 ACCESSION NUMBER: 0000927016-97-003506 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971230 SROS: NYSE 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: SEC FILE NUMBER: 001-10032 FILM NUMBER: 97746958 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 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, 1997 ------------------ 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 NEW YORK 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. [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant, as of December 3, 1997: $111,064,747 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: 5,881,441 shares outstanding at - --------------------------------------------------------------- December 3, 1997. - ---------------- DOCUMENTS INCORPORATED BY REFERENCE - ----------------------------------- Portions of the annual report to shareholders for the fiscal year ended September 30, 1997 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-2 Nonutility Operations I-9 Special Factors Affecting the Gas Industry I-9 Environmental Regulations I-10 Other Standards I-12 Item 2 - Properties I-13 Item 3 - Legal Proceedings I-13 Item 4 - Submission of Matters to a Vote of Security Holders I-13 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-5 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-2
PART I - ------ ITEM 1. BUSINESS - ---------------- Providence Energy Corporation (the Registrant or the Company) and its subsidiaries and their representatives may from time to time make written or oral statements, including statements contained in the Registrant's filings with the Securities and Exchange Commission (SEC) and in its reports to shareholders, including this Form 10-K and annual report to shareholders, which constitute or contain "forward-looking" statements as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases. All statements other than statements of historical facts included in this Form 10-K and annual report regarding the Registrant's financial position and strategic initiatives and addressing industry developments are forward-looking statements. Where, in any forward-looking statement, the Registrant, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The following are factors which could cause actual results to differ materially from those anticipated, and include but are not limited to: general economic, financial and business conditions; changes in, or the failure to comply with, government regulations; competition in the energy services sector; regional weather conditions; the availability and cost of natural gas; development and operating costs; the success and costs of advertising and promotional efforts; the availability and terms of capital; the business abilities and judgment of personnel; the ability of the Registrant to modify or redesign its computer systems to work properly in the year 2000; unanticipated environmental liabilities; the ability of the Registrant to form alliances and establish joint ventures outside of the traditional utility business and the success of any alliances or joint ventures; the costs and effects of unanticipated legal proceedings; the impacts of unusual items resulting from ongoing evaluations of business strategies and asset valuations; and changes in business strategy. General - ------- The Registrant was organized in 1981 as a Rhode Island business corporation. The Registrant's outstanding common shares are listed on the New York 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. In August 1996, the Registrant incorporated Providence Energy Services, Inc. to market natural gas and energy services. In January 1997, the Registrant agreed to form a new limited liability company, Providence-Southern, LLC, (the "Joint Venture"), together with an affiliate of Southern Company (Southern). The Joint Venture was formed to market retail electricity, gas and energy service in New England and will be owned 60% by Southern and 40% by the Registrant. As part of the agreement, the net assets of Providence Energy Services, Inc. will be contributed to the Joint Venture. The Registrant also conducts its nonutility operations through a wholly-owned nonutility subsidiary, Newport America Corporation. I-1 (Newport America)-see "Nonutility Operations". --------------------- ProvGas, Rhode Island's largest natural gas distributor, was founded in 1847 and serves approximately 165,000 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 168,000 for the twelve months ended September 30, 1997, of which approximately 90% were residential and 10% were commercial and industrial. The net increase in the average annual number of customers during fiscal 1997 over fiscal 1996 was approximately 1,700 or 1.0%. 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. Gas Service. The gas services provided by the Gas Companies can be grouped ------------ into four categories -- firm sales, firm transportation, non-firm sales and non- firm transportation. Firm service is provided to those residential, commercial and industrial customers that use natural gas throughout the year. Non-firm 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. The following table shows the distribution of gas to various customer classes, and the total gas sold and transported by year since 1993:
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Firm 80.4% 85.8% 76.4% 81.9% 83.9% Non-Firm 9.6 9.3 17.6 15.8 14.7 Transportation 10.0 4.9 6.0 2.3 1.4 ---- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== Total Gas Sold and Transported - ------------------------------ BCF(*) 27.3 28.1 28.1 28.7 27.1 ===== ===== ===== ===== =====
(*) Gas sales are denominated in billions of cubic feet (Bcf) of natural gas. Total gas sales include gas sold and transported by the Gas Companies. Firm Service. In recent years, the distribution of the Gas Companies' ------------- I-2 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. Non-Firm. Non-firm 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. Non-firm 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' non-firm sales fluctuates depending upon the relative price of natural gas to alternative fuels. Non-firm sales produce substantially less margin to the Gas Companies than firm sales due to the more competitive nature of non-firm sales. Service rates charged to dual-fuel customers are based on the price that the customer would otherwise pay for its alternative fuel. Through September 30, 1997, total margin was not impacted by non-firm sales due to the fact that the Rhode Island Public Utilities Commission (RIPUC) required the Registrant to return any margins earned from these non-firm customers to firm customers through the Gas Charge Clause (GCC) during the term of the Integrated Resource Plan. Beginning October 1, 1997, under the terms of the Price Stabilization Agreement, any margins earned from these non-firm customers will be retained by the Registrant - - See "Rates and Regulation" and "Competition & Marketing". -------------------- ----------------------- Transportation Service. The Registrant provides both firm and non-firm ----------------------- transportation of gas. Margin from the firm 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 "Rates and --------- Regulation". In 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 firm transportation service is comparable to the margin from firm sales. Margin from nonfirm transportation service is less than the margin from firm sales, but is generally comparable to the margin from interruptible sales, depending on 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 firm margin will not be materially impacted. Through September 30, 1997, total margin was not impacted by nonfirm transportation due to the fact that the RIPUC required the Registrant to return any margins earned from these nonfirm customers to firm customers through the GCC during the term of the Integrated Resource Plan. Beginning October 1, 1997, under the terms of the Price Stabilization Agreement, any margins earned from these non-firm customers will be retained by the Registrant - See "Rates and Regulation" and -------------------- "Competition & Marketing". - ------------------------ I-3 Gas Supply. During 1997, the Registrant purchased 84% of its gas supply in ----------- the production area with transportation to market and storage provided by firm pipeline contracts. Liquefied natural gas (LNG) provided 3% of supply requirements. The remaining 13% was purchased in the market area, generally on an interruptible basis. The Registrant's principal subsidiary, ProvGas, has entered into a full requirements contract with Duke Energy Trading and Marketing, LLC (DETM) to provide all of its gas supply needs beginning October 1, 1997 and continuing through September 30, 2000. DETM is a joint venture of Duke Energy (60%) and Mobil (40%). DETM will provide all gas supplies required by ProvGas while ProvGas is committed to purchase all supplies exclusively from DETM. Supplies required by ProvGas' firm sales customers will be purchased at a single, fixed commodity price for the entire contract period. In order to provide this service, DETM, for the contract period, will take responsibility for ProvGas' pipeline capacity resources not previously released, all storage contracts and all LNG capacity. Under the contract, DETM will purchase all working gas in storage including both LNG and contract storage as of October 1, 1997. All supply resources assigned to DETM will revert back to ProvGas on October 1, 2000. The contract was entered into following a competitive bidding process. As well as providing supply for firm customers at a fixed price, DETM will provide gas at market prices to cover ProvGas' non-firm sales customers' needs and to make up the supply imbalances of transportation customers. DETM will also provide various other services to ProvGas' transportation service customers, including enhanced balancing, standby and the storage and peaking services available under ProvGas' recently approved FT-2 storage service effective December 1, 1997. DETM will receive the supply related revenues from these services in exchange for providing the supply management inherent in these services. Included in the DETM contract are a number of other important features. ProvGas has retained the right to continue to make portfolio changes to reduce supply costs. To the extent it makes such changes, it must keep DETM whole for the value lost over the remainder of the contract period. The contract relieves ProvGas of the need to perform certain upstream supply management functions which will make it possible for ProvGas to take on the additional supply management workload required by the further unbundling of firm sales customers without major staffing additions. When not using capacity for its own sales, the Registrant released the capacity or used it to make off-system sales. In fiscal 1997, the Registrant received $7.2 million in revenue from released capacity, a 26.3% increase over the $5.7 million of revenue generated in fiscal 1996. The revenues reduced the firm customer's gas cost, making the Registrant more competitive. As a result of the DETM contract noted above, the Registrant will no longer generate revenue from released capacity. Rates and Regulation. ProvGas is subject to the regulatory jurisdiction of --------------------- the RIPUC with respect to rates and charges, standards of service, accounting and other matters. The standards set by the RIPUC affect all aspects of ProvGas' business, including its ability to market to new customers and to meet competition from other fuel suppliers. (see I-4 "Competition and Marketing".) In August 1997, the RIPUC approved the Price ------------------------- Stabilization Plan Settlement Agreement, (the Plan or Energize R.I.) among ProvGas, the Rhode Island Division of Public Utilities and Carriers (the Division), The Energy Council of Rhode Island, and the George Wiley Center. Effective October 1, 1997 through September 30, 2000, Energize R.I. provides customers with an initial price decrease of approximately four percent and a three-year price freeze. Under Energize R.I., the GCC will be suspended for the entire three-year term of the Plan. Any excess or deficiency between amounts billed and actual incurred gas costs will be retained or borne by ProvGas. Energize R.I. also requires ProvGas to make significant capital investments to improve its distribution system. Capital investments required by Energize R.I. are estimated to total approximately $26 million over its three-year term. In addition, ProvGas is required to fund the Demand Side Management Program Rebate Assistance Program and the Low Income Weatherization Program at annual levels of $.5 million and $.2 million, respectively. Energize R.I. also calls for ProvGas to fund the Low Income Assistance Program at an annual level of $1.0 million. Finally, Energize R.I. continues the process of unbundling by requiring ProvGas to provide unbundled service offerings up to 10 percent per year of firm system throughput. As part of Energize R.I., ProvGas will amortize approximately $4.0 million of environmental costs previously charged to the accumulated depreciation reserve over a ten year period. All environmental costs incurred during the term of Energize R.I. will also be amortized over a ten year period. Under Energize R.I. ProvGas may earn up to 10.9 percent annually on its average common equity of up to $81.0 million, $86.2 million and $92.0 million in fiscal 1998, 1999, 2000, respectively. In addition, ProvGas may not earn less than a 7 percent return on common equity. In the event that ProvGas earns in excess of 10.9 percent or less than 7 percent, ProvGas will defer revenues or costs through a deferred revenue account over the term of the Plan. Any balance in the deferred revenue account at the end of the Plan will be refunded to or recovered from customers in a manner determined by all parties and approved by the RIPUC. As a result of the above Plan, the three-year Settlement Agreement regarding the Integrated Resource Plan (IRP) approved by the RIPUC in February 1996 was terminated. The Settlement Agreement called for (1) $0.5 million annual funding associated with the Demand Side Management Program; (2) $0.2 million annual funding associated with a low-income weatherization program; and (3) a performance-based ratemaking mechanism. In 1997 and 1996, ProvGas was able to record its annual share of the performance-based ratemaking mechanism under this agreement which resulted in a $1.5 million increase to operating margin. Under the IRP, ProvGas was required to return all margins earned from non-firm sales to firm customers through the GCC. As a result of Energize R.I., ProvGas will be able to retain all margins earned from non-firm customers. The following table sets forth the results of ProvGas' applications before the RIPUC for revenue increases since 1990. I-5
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 GCC, such changes are not part of the general rate filings described above. See Footnotes 1 and 10 in the Notes to the Consolidated Financial Statements contained in the Registrant's 1997 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. (****) 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. The Registrant has been working closely with the RIPUC to develop a new rate structure that will allow the Registrant to offer unbundled services designed to meet the needs of its customers, such that those customers would have the option to purchase natural gas directly from suppliers and use the Registrant to transport the gas. The Registrant believes that this rate structure will foster a more competitive and flexible gas market in Rhode Island and allow it to remain competitive by offering commercial/industrial businesses value-added services at competitive prices. In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the Registrant, the Division, The Energy Council of Rhode Island (TEC-RI) and a consortium of oil heat organizations. The Agreement began a process of unbundling natural gas service in Rhode Island enabling customers to choose their gas suppliers. The Agreement went into effect June 2, 1996. This initial program was available to approximately 120 of the largest commercial and industrial customers. In April 1997, the Registrant filed a plan, "Business Choice", for the second phase of unbundling with the RIPUC. Under this filing, the Registrant evaluated the services offered in the first phase of unbundling as well as proposed to further expand the availability of unbundled services to an additional 3,400 medium and large commercial and industrial customers. The Registrant plans to implement the new services in December 1997. The Rate Design Settlement Agreement also included changes to ProvGas' gas cost recovery mechanism. Specifically, the Agreement replaced the previous CGA with the GCC effective June 2, 1996. In addition to the commodity and related pipeline transportation costs historically included in the CGA, the GCC provides for the recovery of: (1) inventory financing costs; (2) working capital associated with gas supply purchases; (3) bad I-6 debt expenses associated with the gas revenue portion of customer bills; and (4) a substantial portion of LNG operating and maintenance expenses, all of which were previously recovered in base rates. Prior to October 1, 1997, the GCC provided for reconciliation of total gas costs billed with the actual cost of gas incurred. Any excess or deficiency in amounts billed as compared to costs incurred was deferred and either refunded to, or recovered from, customers over a subsequent period. Effective October 1, 1997, as part of the Price Stabilization Plan Agreement described above, the variable gas cost component of the GCC was eliminated for a period of three years through September 30, 2000. Accordingly, any excess or deficiency in amounts billed as compared to costs incurred will be retained or borne by the Registrant. On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program Agreement between ProvGas and the Division. The objective of the pilot program was to mitigate the impact of natural gas price escalation through utilization of Financial Risk Management (FRM) tools, to develop a more balanced gas supply cost approach, and finally, to study in more detail some of the benefits and costs associated with the program. The FRM tools were limited to the use of options, including calls, puts, and collars, under the pilot program. The total expenditures for the purchase and exercise of the FRM tools and the net proceeds from the sale of FRM tools were flowed through the Variable Gas Cost component of the GCC and could not exceed $800,000. For fiscal year 1997, total expenditures, net of sales proceeds, made under the program were approximately $154,000. The program expired on September 30, 1997 and was not extended since its objectives were met through Energize R.I., described above. The Registrant held no open positions at September 30, 1997. Competition and Marketing. The Registrant experienced modest customer growth -------------------------- in both the residential and commercial/industrial markets. In all, the average annual number of customers rose one percent to 167,983. This customer growth was achieved in an underperforming local economy, one that is now showing signs of improvement. The Providence Place Mall began construction in early 1997 and will bring an estimated 3,000 construction jobs and more than 2,800 permanent jobs in sales, management and maintenance. The Fixed Income Group of Fidelity Investments will bring to Rhode Island 2,500 new jobs and a $75 million state- of-the art facility, the direct result of a creative package of land, lease and tax incentives offered by the State of Rhode Island. Also, the newly expanded T.F. Green Airport, and the arrival of Southwest Airlines, have begun to significantly improve the competitiveness of transportation options. In 1998, the Registrant's core marketing efforts will continue to focus on adding profitable new load and building loyalty with existing customers. The Registrant will continue joint marketing with the local network of heating contractors to promote heating conversions of customers on existing gas mains. In addition, the Registrant will extend its coupon rebate program for high efficiency heating equipment offered in combination with participating manufacturers and local distributors. In 1996, the Registrant instituted a Demand Side Management (DSM) Program, which furnishes rebates to customers installing new technologies such as gas- fired air conditioning, cogeneration and gas motors. These technologies use proportionately more natural gas during the summer months, when the distribution system has available capacity. The DSM I-7 program also allows for the improved utilization of existing resources, such as mains, services, and year-round supply contracts. Under the Price Stabilization Plan Agreement described in "Rates and Regulation", the Registrant is committed -------------------- to funding this program at an annual level of $0.5 million through September 30, 2000. As a result of the Rate Design Settlement Agreements approved in May 1996 and April 1997, the Registrant has been allowed to offer unbundled services to approximately 3500 of its largest customers. These customers are now able to purchase natural gas directly from suppliers and use the Registrant to transport the gas. In addition, under the Price Stabilization Plan Agreement, the Registrant is committed to providing unbundled service offerings to up to 10 percent per year of firm system throughput. The Registrant believes that this rate structure will foster a more competitive and flexible gas market in Rhode Island and allow it to remain competitive by offering commercial/industrial businesses value-added services at competitive prices. There are virtually unlimited opportunities to unbundle services, form alliances, custom-tailor services for customers, and greatly increase the Registrant's ability to compete with other energy suppliers. To facilitate the transition to a diversified energy marketer, the Registrant is planning to form business alliances outside of its traditional utility business. The Registrant is also seeking investment opportunities in non-regulated energy ventures. In November 1997, as part of the Registrant's strategic plan to strengthen its position in the energy industry, the Registrant purchased two Rhode Island-based oil distribution companies, which together serve over 4,000 customers. These acquisitions continue the Registrant's transition to a diversified energy marketer and service provider. In January, 1997, the Registrant agreed to form a new limited liability company, Providence-Southern, LLC (the "Joint Venture"), together with an affiliate of Southern Company, (Southern), the United States' largest producer of electricity. The Joint Venture was formed to market retail electricity, gas and energy services in New England and will be owned 60 percent by Southern and 40 percent by the Registrant. Providence-Southern, LLC will focus on tailoring its services to the individual needs of the residential, commercial, and industrial customers as consumers have more choices in a competitive energy market. In addition to meeting the electricity and gas commodity needs of customers, the Joint Venture will also serve as a marketing platform for other areas of expertise of the Registrant and Southern, including energy consulting and energy use analysis, home and business energy services, and unified billing. The definitive operating agreement ("Agreement") of the Joint Venture is expected to be finalized early in 1998. As part of the Joint Venture agreement described above, the operations of Providence Energy Services, Inc. will be contributed to the Joint Venture. Providence Energy Services, Inc. was incorporated in August 1996 to market natural gas and energy services and presently serves approximately 51 customers. In its first full year of operations in 1997, Providence Energy Services, Inc. recorded sales of approximately $5.1 million and established itself in the New England retail natural gas market. I-8 In August 1997, the Registrant was selected by Salve Regina University in Newport, Rhode Island to provide energy management services for the development and implementation of a comprehensive energy plan. The plan includes utilization of the latest energy management technology, installation of insulation, conversion of many campus buildings to natural gas, and a variety of other energy measures. This project is estimated to generate $1.5 million of revenues for the Registrant. These and other energy ventures will increasingly be separate from the distribution utility. There are strategic long-term planning costs associated with developing the new energy service offerings. These costs were approximately $700,000, net of tax, in 1997. Employees. As of September 30, 1997, the Registrant had 562 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. A new five year agreement became effective in January 1996. The agreement was developed by a labor-management negotiations committee and can be reopened for any reason at any time in order to allow for the committee to deal with new issues as they arise, which results in increased flexibility in the use of employees. This will result in increased job security and will position the Registrant to reduce costs and increase levels of customer service. The agreement calls for a general wage increase of 3.25% each year from 1997 to 2000. Additionally, in March 1996, a 38 month Labor Agreement was ratified by Local 12431-02 of the United Steelworkers of America, which represents 92 office and clerical employees. The agreement calls for a total wage increase of 8.44% over 38 months. 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 142,000 services, (a service is a pipe connecting a gas main with piping on a customer's premises), and approximately 163,000 active gas meters together with related facilities and equipment. The Gas Companies have regulating and metering facilities at nine points of delivery from Algonquin Gas Transmission Company (Algonquin) and one point of delivery from Tennessee Gas Pipeline Company, which the Gas Companies presently believe to be adequate for receiving gas into their distribution systems. 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. 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 I-9 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 had negotiated new pipeline transportation and gas storage contracts. 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 be approximately $21.7 million of which $16.2 million has been included in the GCC and has been collected from customers. The remaining minimum obligation of $5.5 million at September 30, 1997 will be assumed by DETM under the gas supply contract described in "Gas Supply". At the end of the ---------- three year term of the contract at September 30, 2000, the Registrant will assume any remaining liability, which cannot be estimated at September 30, 1997. 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, 1997, the Registrant was aware of four sites at which future costs may be incurred. I-10 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 PRP's. With respect to one of the Plympton sites, the Registrant has joined with other PRP's 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, Rhode Island. This site formerly contained a manufactured gas plant operated by the Registrant. As of September 30, 1997, approximately $1.8 million has been spent primarily on studies at this site. In accordance with state laws, such a voluntary study is monitored by the Rhode Island Department of Environmental Management (DEM). The purpose of this study was to determine the extent of environmental contamination at the site. The Registrant has completed the study which indicates that remediation will be required. The Registrant has several remediation options for the site and is currently negotiating with DEM and contractors to arrive at the best alternative. At September 30, 1997, the Registrant has compiled a preliminary range of costs based on remediation alternatives, ranging from $1.7 million to in excess of $5.0 million. However, because of the uncertainties associated with environmental assessment and remediation activities, the future cost of remediation could be higher than the alternatives noted above. Based on the proposals for remediation work, the Registrant has accrued $1.7 million at September 30, 1997, for anticipated future remediation costs at this site. Tests conducted following the discovery of an abandoned underground oil storage tank at the Registrant's Westerly, Rhode Island operations center in 1996 confirm the existence of contaminants at this site. The Registrant is currently conducting tests at this site, the costs of which are being shared equally with the prior owner, to determine the nature and extent of the contamination. Due to the early stages of investigation, management cannot offer any conclusions as to whether any remediation will be required at this site. In addition, in 1997, contamination from scrapped meters and regulators was discovered at this site. The Registrant has reported this to the DEM and the Rhode Island Department of Health and is in the process of remediation. It is anticipated that remediation will cost between $50,000 and $100,000. Accordingly, the Registrant has accrued $50,000 at September 30, 1997 for anticipated future remediation costs. In prior rate cases filed, 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 $2.3 million and an estimated $1.7 million for environmental remediation costs have been charged to the accumulated depreciation reserve at September 30, 1997. Of the environmental investigation costs incurred, approximately $0.9 million and $1.0 million were recorded in the years ended September 30, 1997 and 1996, respectively, while the remainder were incurred in prior years. I-11 Due to the materiality of the Registrant's environmental investigation and remediation expenditures, the Registrant sought new treatment of these amounts. As a result, included in the Price Stabilization Plan Settlement Agreement described in "Rates and Regulation", which is effective October 1, 1997, all -------------------- environmental investigation and remediation costs incurred through September 30, 1997 as well as all costs incurred during the three-year term of the Plan, will be amortized over a ten-year period. Additionally, it is the Registrant's practice to consult with the RIPUC on a periodic basis when, in management's opinion, significant amounts might be expended for environmental related costs. Management has begun discussions with other parties who may assist the Registrant in paying any future costs at the above sites. Management believes that its program for managing environmental issues, combined with rate recovery and financial contributions from others, will likely avoid any material adverse effect on its results of operations or its financial condition as a result of the ultimate resolution of the above sites. Other Standards - --------------- 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-12 ITEM 2. PROPERTIES - ------------------ In addition to the Registrant's gas distribution system and storage facilities, which constitute the principal properties of the Registrant, the Registrant owns several buildings and other facilities in Newport, Providence and Westerly that house its offices and provide floor space for its distribution and maintenance facilities. Substantially all the foregoing properties are mortgaged as collateral for the outstanding First Mortgage bonds of 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-13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' - ---------------------------------------------------------------------------- MATTERS ------- The Registrant's common stock is listed on the New York Stock Exchange and trades under the symbol "PVY". As of December 3, 1997, there were 6,458 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, 1997, 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 20 of the Registrant's Annual Report to Shareholders (pages 12 through 13 of this Form 10-K) for the fiscal year ended September 30, 1997, 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 18, of the Registrant's Annual Report to Shareholders (pages 1 through 9 of this Form 10-K) for the fiscal year ended September 30, 1997, 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 21 through 33 of the Registrant's Annual Report to Shareholders (pages 14 through 36 of this Form 10-K) for the fiscal year ended September 30, 1997, 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 (57) Chairman, President and Chief Executive Officer 1992 James DeMetro (49) Senior Vice President 1996 Gary S. Gillheeney (42) Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary 1996 Robert W. Owens (49) Senior Vice President 1996 Alycia L. Goody (45) General Counsel and Secretary 1994 Gerald A. Yurkevicz (40) Vice President, Marketing 1996 James A. Grasso (43) Vice President, Public and Government Affairs 1997
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 Senior Vice President of the Registrant and ProvGas in February 1996. For more than three years prior thereto, Mr. DeMetro served the Registrant and ProvGas as Vice President Energy Services. 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 Regulation. Mr. Gillheeney was elected Senior Vice President and Chief Financial Officer of the Registrant and ProvGas in February 1996, and 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. Mr. Owens was elected Senior Vice President of the Registrant and ProvGas in February 1996. For more than a year prior thereto, Mr. Owens served the Registrant and ProvGas as Vice President Operations. 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. III-1 Ms. Goody was elected General Counsel and Secretary of the Registrant in December 1994. Since 1994, Ms. Goody has also served ProvGas as Vice President, General Counsel and Secretary. For two years prior to that, Ms. Goody served ProvGas as Corporate Counsel. Mr. Yurkevicz was elected Vice President, Marketing of the Registrant in August 1996. For ten years prior thereto, Mr. Yurkevicz served as Principal in the Energy Practice at Mercer Management Consulting. Mr. Grasso was elected Vice President, Public and Government Affairs in May 1997. For three years prior thereto, Mr. Grasso served as Director of Public and Government Relations of the Eastern Region of Pan Energy Corporation and Manager of Public and Government Relations of Algonquin Gas Transmission Company. For ten years prior thereto, Mr. Grasso served as Manager of Land, Public and Government Relations of Algonquin Gas Transmission Company. 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 1998 James H. Dodge 1991 2000 John H. Howland 1993 1999 Douglas H. Johnson 1993 1999 William Kreykes 1996 1999 Paul F. Levy 1995 1998 Romolo A. Marsella 1993 1999 M. Anne Szostak 1995 1998 Kenneth W. Washburn 1975 2000 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 Executive Officer, Original Bradford Soap Works, Inc. Douglas H. Johnson is 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). William Kreykes is President and Chief Executive Officer, Lifespan Corporation since December 1994; from October 1990 to December 1994: President and Chief Executive Officer, Rhode Island Hospital. III-3 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. From 1991 to 1995: Chairman of the Board, Fleet Bank of 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 and Chief Executive Officer, Coaxial Communications of Central Ohio and Coaxial Communications of Southern Ohio (Effective January 1998). From 1991 to 1997: 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). III-4 ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- For the information called for by this item, reference is made to pages 7 to 14 of the Registrant's proxy statement filed December 16, 1997 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 15, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - ------------------------------------------------------------ MANAGEMENT ---------- For the information called for by this item, reference is made to page 15 of the Registrant's proxy statement filed December 16, 1998 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 15, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- For the information called for by this item, reference is made to page 6 of the Registrant's proxy statement filed December 16, 1997 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 15, 1998. 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, 1997 and 1996 Consolidated Statements of Income for the years ended September 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995 Consolidated Statements of Capitalization--September 30, 1997 and 1996 Consolidated Statements of Changes in Common Stockholders' Investment for the years ended September 30, 1997, 1996 and 1995 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 14 through 36 of this Form 10-K) for the year ended September 30, 1997, filed herewith as Exhibit 13. Schedule II. Reserves for the years ended September 30, 1997, 1996 and 1995. 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 ------------------- On September 5, 1997, the Registrant filed a report on Form 8-K regarding the Rhode Island Public Utilities Commission's approval of the three-year Price Stabilization Plan for the Providence Gas Company. 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). 4.3 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.) 4.6 Eighteenth Supplemental Indenture of The Providence Gas Company dated as of December 1, 1995. (Filed as Exhibit 4.6 to the report of the Registrant in Form 10-K for the year ended September 30, 1995 incorporated herein by this reference.) IV-2 4.7 Stock Rights Agreement (Filed as Exhibit 1 to the report of the Registrant in Form 8-K File No. 0-9380 dated August 3, 1988, incorporated herein by this reference.) 10.1 Material contracts filed as Exhibit 10 (a) through 10 (ff) to Registration Statement of the Registrant on Form S-2 (Registration No. 33-24125), incorporated herein by this reference. 10.2 Management contract dated October 29, 1997 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 Providence Gas Company in Form 10-K for the year ended September 30, 1997, 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 Management contract dated October 29, 1997 between James DeMetro, Senior Vice President, Energy Services of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.3 to the report of The Providence Gas Company in Form 10-K for the year ended September 30, 1997, incorporated herein by this reference.) 10.6 Management contract dated October 29, 1997 between Robert W. Owens, Senior Vice President, Gas Distribution of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.4 to the report of The Providence Gas Company in Form 10-K for the year ended September 30, 1997, incorporated herein by this reference.) 10.7 Management contract dated October 29, 1997 between Gary S. Gillheeney, Senior Vice President, Chief Financial Officer and Treasurer of The Providence Gas Company, and Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of the said Company. (Filed as Exhibit 10.5 to the report of The Providence Gas Company in Form 10- K for the year ended September 30, 1997, incorporated herein by this reference.) 10.8 Management contract dated October 29, 1997 between Alycia L. Goody, Vice President, General Counsel and Secretary, of The Providence Gas Company, and General Counsel and Secretary of the said Company. (Filed as Exhibit 10.6 to the report of The Providence Gas Company in Form 10- K for the year ended September 30, 1997, incorporated herein by this reference.) 10.9 Management contract dated October 29, 1997 between Gerald A. IV-3 Yurkevicz, Vice President, Marketing of the Registrant. 10.10 Non-Employee Director Stock Plan (incorporated by reference to Exhibit 4.3 in Form S-8 (Registration No. 333-25415)). 13 Portions of the Annual Report to Shareholders for the fiscal year ended September 30, 1997. (Pages 1 through 36) 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 4, 1997. 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 the 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 4, 1997 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 4, 1997, 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; S-8, Registration No. 33-43031; S-8, Registration No. 33-04209; S-8, Registration No. 33-25415; and S-8, Registration No. 33-31769. It should be noted that we have not audited any financial statements of the Company subsequent to September 30, 1997, or performed any audit procedures subsequent to the date of our report. Arthur Andersen LLP Boston, Massachusetts December 18, 1997 IV-6 Supplemental Schedule PROVIDENCE ENERGY CORPORATION Schedule II ----------------------------- RESERVES FOR THE YEARS ENDED ----------------------------- SEPTEMBER 30, 1997, SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 ------------------------------------------------------------- (Thousands of Dollars)
Charge for Which Additions Reserves Balance Charged Other Were Balance 9/30/96 to Operations Add (Deduct) Created 9/30/97 ------- ------------- ------------ ------- ------- RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 3,195 $ 5,200 $ -- $ 6,584 $ 1,811 Allowance for lease receivables - current 27 1 -- 1 27 other 9 94 -- 55 48 ------- ------- ------- ------- ------- Total $ 3,231 $ 5,295 $ -- $ 6,640 $ 1,886 ======= ======= ======= ======= ======= Allowance for lease receivables - long-term $ 403 $ 138 $ -- $ 140 $ 401 ======= ======= ======= ======= ======= DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $20,713 $ 782 $ -- $ -- $21,495 ------- ------- ------- ------- ------- Unamortized investment tax credit 2,533 -- -- 158 2,375 ------- ------- ------- ------- ------- Other- Liability and damage reserve 561 281 -- 221 621 Other 7,583 1,265 925(B) 537 9,236 ------- ------- ------- ------- ------- Total other 8,144 1,546 925 758 9,857 ------- ------- ------- ------- ------- Total deferred credits and reserves $31,390 $ 2,328 $ 925 $ 916 $33,727 ======= ======= ======= ======= =======
IV-7 Schedule II (cont'd)
Charge for Which Additions Reserves Balance Charged Other Were Balance 9/30/95 to Operations Add (Deduct) Created 9/30/96 ------- ------------- ------------ ------- ------- RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 1,995 $ 5,078 $ -- $ 3,878 $ 3,195 Allowance for lease receivables - current 337 3 -- 313 27 other 80 17 -- 88 9 ------- ------- ------- ------- ------- Total $ 2,412 $ 5,098 $ -- $ 4,279 $ 3,231 ======= ======= ======= ======= ======= Allowance for lease receivables - long-term $ 651 $ 1,179 $ -- $ 1,427 $ 403 ======= ======= ======= ======= ======= DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $18,734 $ 1,943 $ 36(C) $ -- $20,713 ------- ------- ------- ------- ------- Unamortized investment tax credit 2,691 -- -- 158 2,533 ------- ------- ------- ------- ------- Other- Liability and damage reserve 334 520 -- 293 561 Other 5,307 1,303 1,742(B) 769 7,583 ------- ------- ------- ------- ------- Total other 5,641 1,823 1,742 1,062 8,144 ------- ------- ------- ------- ------- Total deferred credits and reserves $27,066 $ 3,766 $ 1,778 $ 1,220 $31,390 ======= ======= ======= ======= =======
IV-8 SCHEDULE II (cont'd)
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 $1,086(C) $ -- $18,734 ------- ------- ------ ------- -------- Unamortized investment tax credit 2,851 -- -- 160 2,691 ------- ------- ------- ------- -------- Other- Liability and damage reserve 421 400 -- 487 334 Other 5,898 623 418(A) 1,632 5,307 ------- ------- ------- ------- -------- Total other 6,319 1,023 418 2,119 5,641 ------- ------- ------- ------- -------- Total deferred credits and reserves $24,676 $ 3,165 $ 1,504 $ 2,279 $27,066 ======= ======= ======= ======= =======
(A) Includes adjustments to the regulatory pension liability. (B) Principally an accrual for environmental investigation and remediation costs in addition to adjustment to the regulatory pension liability. (C) Represents adjustments to the regulatory asset and liability for FAS No. 109 activity. IV-9 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, 33-43031, 33-04209, and 33-25415. 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-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 /s/ JAMES H. DODGE ---------------------------------------- James H. Dodge, Chairman, President and CEO Date December 23, 1997 ---------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/JAMES H. DODGE Chairman, President and CEO 12-23-97 - ------------------------ (Principal Executive Officer) -------- James H. Dodge /s/GARY S. GILLHEENEY Senior Vice President, Chief 12-23-97 - ------------------------ Financial Officer, Treasurer -------- Gary S. Gillheeney and Assistant Secretary /s/GILBERT R. BODELL, JR. Director 12-23-97 - ------------------------ -------- Gilbert R. Bodell, Jr. /s/JOHN H. HOWLAND Director 12-23-97 - ------------------------ -------- John H. Howland /s/DOUGLAS H. JOHNSON Director 12-23-97 - ------------------------ -------- Douglas H. Johnson /s/WILLIAM KREYKES Director 12-23-97 - ------------------------ -------- William Kreykes /s/PAUL F. LEVY Director 12-23-97 - ------------------------ -------- Paul F. Levy /s/ROMOLO A. MARSELLA Director 12-23-97 - ------------------------ -------- Romolo A. Marsella /s/M. ANNE SZOSTAK Director 12-23-97 - ------------------------ -------- M. Anne Szostak /s/KENNETH W. WASHBURN Director 12-23-97 - ------------------------ -------- Kenneth W. Washburn /s/W. EDWARD WOOD Director 12-23-97 - ------------------------ -------- W. Edward Wood
IV-11 EX-10.9 2 MANAGEMENT CONTRACT WITH GERALD YURKEVICZ Contents Exhibit 10.9 - -------------------------------------------------------------------------------
Page Section 1. Term of Employment 1 Section 2. Position and Responsibilities 2 Section 3. Standard of Care 2 Section 4. Compensation 3 Section 5. Expenses 5 Section 6. Employment Terminations 5 Section 7. Change in Control 10 Section 8. Confidentiality and Noncompetition 13 Section 9. Indemnification 14 Section 10. Assignment 14 Section 11. Dispute Resolution and Notice 15 Section 12. Miscellaneous 15 Section 13. Governing Law 16
Providence Energy Corporation Employment Agreement This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of this 29th day of October, 1997 (hereinafter referred to as the "Effective Date"), by and between Providence Energy Corporation, together with its subsidiaries and affiliates (hereinafter referred to as the "Company"), a Rhode Island corporation having its principal offices at Providence Rhode Island and Gerald A. Yurkevicz (hereinafter referred to as the "Executive"). WHEREAS, the Executive is presently employed by the Company in the capacity of Vice President of the Company; WHEREAS, the Executive possesses considerable experience and an intimate knowledge of the business and affairs of the Company, its policies, methods, personnel, and operations; and WHEREAS, the Company recognizes that the Executive's contribution has been substantial and meritorious and, as such, the Executive has demonstrated unique qualifications to act in an executive capacity for the Company; and WHEREAS, the Company is desirous of assuring the continued employment of the Executive in the above stated capacity, and Executive is desirous of having such assurance. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: Section 1. Term of Employment The Company hereby agrees to employ the Executive and the Executive hereby agrees to continue to serve the Company, in accordance with the terms and conditions set forth herein, for an initial period of one (1) year, commencing as of the Effective Date of this Agreement, as indicated above; subject, however, to earlier termination as expressly provided in Section 6 herein. The initial one (1) year period of employment automatically shall be extended for one (1) additional year at the end of the initial one (1) year term, and then again after each successive year thereafter. However, either party may terminate this Agreement at the end of the initial one (1) year period, or at the end of any successive year thereafter, by giving the other party written notice of intent not to renew, delivered at least ninety (90) calendar days prior to the end of such initial period or successive term. In the event such notice of intent not to renew is properly delivered by the Company, this Agreement, along with all corresponding rights, duties, and covenants, shall automatically expire at the end of the initial period or successive term then in progress, with the exception of the provisions contained in Section 8 herein (which shall survive such 1 expiration). However, upon the effective date of the expiration, the Company shall provide to the Executive a continuation of his Base Salary (at the rate then in effect, as provided in Paragraph 4.1 herein) for a period of twelve (12) months, paid in equal monthly installments in accordance with the normal payroll practices of the Company. The Company also shall provide to the Executive all benefits to which the Executive has a vested right to at that time including, but not limited to, the retirement benefits described in Paragraph 4.4 herein, and the retiree medical insurance benefits described in Paragraph 4.6 herein. However, regardless of the above, if at any time during the initial period of employment, or successive term, a Change in Control of the Company occurs (as defined in Section 7 herein), then this Agreement shall become immediately irrevocable for the longer of: (a) one (1) year beyond the month in which the effective date of such Change in Control occurs; or (b) until all obligations of the Company hereunder have been fulfilled, and until all benefits provided hereunder have been paid. Section 2. Position and Responsibilities During the term of this Agreement, the Executive agrees to serve as Vice President of the Company. In his capacity as Vice President, the Executive shall maintain the level of duties and responsibilities as in effect as of the Effective Date, or such higher level of duties and responsibilities as he may be assigned during the term of this Agreement. The Executive shall have the same status, privileges, and responsibilities normally inherent in such capacities in corporations of similar size and character. Section 3. Standard of Care During the term of this Agreement, the Executive agrees to devote substantially his full time, attention, and energies to the Company's business and shall not be engaged in any other business activity, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage. However, subject to Section 8 herein, the Executive may serve as a director of other companies so long as such service is not injurious to the Company. The Executive covenants, warrants, and represents that he shall: (a) Devote his full and best efforts to the fulfillment of his employment obligations; and (b) Exercise the highest degree of loyalty and the highest standards of conduct in the performance of his duties. This Section 3 shall not be construed as preventing the Executive from investing assets in such form or manner as will not require his services in the daily operations of the affairs of the companies in which such investments are made. Section 4. Compensation As remuneration for all services to be rendered by the Executive during the term of this Agreement, and as consideration for complying with the covenants herein, the Company shall pay 2 and provide to the Executive the following: 4.1 Base Salary. The Company shall pay the Executive a Base Salary in an amount which shall be established from time to time by the Board of Directors of the Company or the Board's designee provided, however, that such Base Salary shall not be less than $130,000.00 per year. This Base Salary shall be paid to the Executive in equal monthly installments throughout the year, consistent with the normal payroll practices of the Company. The annual Base Salary shall be reviewed at least annually following the Effective Date of this Agreement, while this Agreement is in force, to ascertain whether, in the judgment of the Board or the Board's designee, such Base Salary should be increased, based primarily on the performance of the Executive during the year and on the then current rate of inflation. If so increased, the Base Salary as stated above shall, likewise, be increased for all purposes of this Agreement. 4.2 Annual Cash Incentive Compensation. The Company shall provide the Executive with the opportunity to earn an annual cash incentive compensation payment, at a level which is in accordance with the provisions of the Performance and Equity Incentive Plan or any such successor plan, and which is commensurate with the opportunity typically offered to executives having the same or similar duties and responsibilities as the Executive at companies similar in size and character to the Company. Nothing in this paragraph shall be construed as obligating the Company to refrain from changing and/or amending the Performance and Equity Incentive Plan so long as such changes are similarly applicable to all executives generally. 4.3 Long-Term Incentives. The Company shall provide the Executive the opportunity to earn a long-term incentive award, at a level which is in accordance with the provisions of the Performance and Equity Incentive Plan or any such successor plan, and which is commensurate with the opportunity typically offered to executives having the same or similar duties and responsibilities as the Executive at companies similar in size and in character to the Company. Nothing in this paragraph shall be construed as obligating the Company to refrain from changing, and/or amending the Performance and Equity Incentive Plan, so long as such changes are similarly applicable to all executives generally. 4.4 Retirement Benefits. The Company shall provide to the Executive participation in all Company qualified defined benefit and defined contribution retirement plans, subject to the eligibility and participation requirements of such plans. In addition, the Company shall provide to the Executive participation in the Supplemental Retirement Plan and all other nonqualified retirement programs typically offered to executives having the same or similar duties and responsibilities at the Company. Nothing in this paragraph shall be construed as obligating the Company to refrain from 3 changing, and/or amending the nonqualified retirement programs, so long as such changes are similarly applicable to all executives generally. 4.5 Employee Benefits. During the term of this Agreement, and as otherwise provided within the provisions of each of the respective plans, the Company shall provide to the Executive all benefits to which other executives and employees of the Company are entitled to receive, as commensurate with the Executive's position. Such benefits shall include, but not be limited to, group term life insurance, whole life insurance, comprehensive health and major medical insurance, dental insurance, vision insurance, and short-term and long- term disability. The Executive shall be entitled to paid vacation in accordance with the standard written policy of the Company with regard to vacations of employees. The Executive shall likewise participate in any additional benefit as may be established during the term of this Agreement, by standard written policy of the Company. 4.6 Perquisites. The Company shall provide to the Executive, at the Company's cost, all perquisites to which other executives of the Company are entitled to receive and such other perquisites which are suitable to the character of Executive's position with the Company and adequate for the performance of his duties hereunder. 4.7 Right to Change Plans. By reason of Paragraphs 4.5, and 4.6 herein, the Company shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing any benefit plan, program, or perquisite, so long as such changes are similarly applicable to executive employees generally. 4.8 Deferrals. The Company may permit the Executive to defer the Executive's receipt of the payment of up to one hundred (100%) percent of the cash component of the Executive's Annual Incentive Compensation. If any such deferral election is permitted, the Company shall, in its sole discretion, establish rules and procedures for such payment deferrals. Section 5. Expenses The Company shall pay, or reimburse the Executive, for all ordinary and necessary expenses, in a reasonable amount, which the Executive incurs in performing his duties under this Agreement including, but not limited to, travel, entertainment, professional dues and subscriptions, and all dues, fees, and expenses associated with membership in various professional, business, and civic associations and societies of which the Executive's participation is in the best interest of the Company. Section 6. Employment Terminations 6.1 Termination Due to Retirement. In the event the Executive's employment is terminated, while this Agreement is in force, by reason of Retirement (as defined under the then established rules of the Company's tax-qualified retirement plan), the Executive's benefits shall be determined in accordance with the Company's retirement, survivor's benefits, 4 insurance, and other applicable programs of the Company then in effect. Upon the effective date of such termination, the Company's obligation to pay and provide to the Executive Base Salary, Annual Cash Incentive Compensation and Long-Term Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3 herein, respectively), shall immediately expire. However, the Executive shall receive a pro rata portion of the total annual incentive compensation (both cash and long-term), calculated at target, to which he would be entitled during the year in which he retires, and shall receive all rights and benefits that he is vested in, pursuant to other plans and programs of the Company including, but not limited to, the retirement benefits as described in Paragraph 4.4 herein. 6.2 Termination Due to Death. In the event of the death of the Executive during the term of this Agreement, or during any period of Disability during which he is receiving compensation pursuant to Paragraph 6.3 herein, the Company shall pay to the Executive's surviving spouse, or other beneficiary as so designated by the Executive during his lifetime, or to the Executive's estate, as appropriate, all benefits to which the Executive had a vested right to pursuant to this Agreement. 6.3 Termination Due to Disability. In the event that the Executive becomes Disabled during the term of this Agreement and is, therefore, unable to perform his duties herein for a period of more than ninety (90) calendar days in the aggregate, during any period of twelve (12) consecutive months, or in the event of the Board's reasonable expectation that the Executive's Disability will exist for more than a period of ninety (90) calendar days, the Company shall have the right to terminate the Executive's active employment as provided in this Agreement. However, the Board shall deliver written notice to the Executive of the Company's intent to terminate for Disability at least thirty (30) calendar days prior to the effective date of such termination. A termination for Disability shall become effective upon the end of the thirty (30) day notice period. Upon such effective date, the Company's obligation to pay and provide to the Executive Base Salary, Annual Bonus, and Long-Term Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3, respectively), shall immediately expire. However, the Executive shall receive a pro rata portion of the total annual incentive compensation (both cash and long-term), calculated at target, to which he would be entitled during the year in which disability occurs and shall receive all rights and benefits that he is vested in, pursuant to other plans and programs of the Company, including, but not limited to, short- and long-term disability benefits, and retirement benefits as described in Paragraph 4.4. The term "Disability" shall mean, for all purposes of this Agreement, the incapacity of the Executive, due to injury, illness, disease, or bodily or mental infirmity, to engage in the performance of substantially all of the usual duties of employment with the Company as contemplated by Section 2 herein, such Disability to be determined by the Board of Directors of the Company upon receipt and in reliance on competent medical advice from one or more individuals, selected by the Board, who are qualified to give such professional medical 5 advice. If the Executive and the Company shall not be in agreement as to whether the Executive has suffered a Disability for the purposes of this Agreement, the matter shall be referred to a panel of three medical doctors, one of which shall be selected by the Executive, one of which shall be selected by the Company, and one of which shall be selected by the two doctors as so selected, and the decision of a majority of the panel with respect to the question of whether the Executive has suffered a Disability shall be binding upon the Executive and the Company. The expenses of any such referral shall be borne by the party against whom the decision of the panel is rendered. The Executive may be required by the Company to submit to medical examination at any time during the period of his employment hereunder, but not more often than quarter-annually, to determine whether a Disability exists for the purposes of this Agreement. It is expressly understood that the Disability of the Executive for a period of ninety (90) calendar days or less in the aggregate during any period of twelve (12) consecutive months, in the absence of any reasonable expectation that his Disability will exist for more than such a period of time, shall not constitute a failure by him to perform his duties hereunder and shall not be deemed a breach or default and the Executive shall receive full compensation for any such period of Disability or for any other temporary illness or incapacity during the term of this Agreement. 6.4 Voluntary Termination by the Executive. The Executive may terminate this Agreement at any time by giving the Board of Directors of the Company written notice of intent to terminate, delivered at least thirty (30) calendar days prior to the effective date of such termination (such period not to include vacation). The termination automatically shall become effective upon the expiration of the thirty (30) day notice period. Upon the effective date of such termination, the Company shall pay to the Executive his full Base Salary, at the rate then in effect as provided in Paragraph 4.1 herein, through the effective date of termination, plus all other benefits to which the Executive has a vested right to at that time including, but not limited to, accrued vacation pay. The Company also shall provide to the Executive the vested retirement benefits described in Paragraph 4.4 herein. With the exception of the covenants contained in Sections 8.1, 8.3 and 8.4 herein (which shall survive such termination), the Company and the Executive thereafter shall have no further obligations under this Agreement. 6.5 Involuntary Termination by the Company Without Cause. At all times prior to six (6) full calendar months before the effective date of a Change in Control (as defined in Section 7.2), or at any time more than two (2) years after the effective date of a Change in Control (as defined in Section 7.2), the Board may terminate the Executive's employment, as provided under this Agreement, at any time, for reasons other than death, Disability, Retirement, or for Cause, by notifying the Executive in writing of the Company's intent to terminate, at least thirty (30) calendar days prior to the effective date of such termination. Upon the effective date of such termination, following the expiration of the thirty (30) day 6 notice period, the Company shall pay to the Executive in twelve (12) equal monthly installments an amount equal to the Executive's annual Base Salary then in effect. Additionally, the Company shall continue to provide the Executive with health and welfare benefits for the twelve (12) month time period. In the event that, during the twelve (12) month period following the effective date of termination, the Executive becomes employed at the same or greater annual Base Salary than that which was in effect during the year in which termination occurred, the Company's obligation to make payments under this Section will immediately cease upon the date of the Executive's subsequent employment. In the event that, during the twelve (12) month period following the effective date of termination, the Executive becomes employed at a lesser annual Base Salary than that which was in effect during the year in which termination occurred, then upon the date of the Executive's re-employment, the Company's obligation to make payments under this section will be limited to a monthly amount reflecting the difference between the Executive's Base Salary at the date of re-employment and the Executive's Base Salary during the year in which termination occurred. The continuation of health and welfare benefits shall be discontinued prior to the end of the twelve (12) month period in the event the Executive has available substantially similar benefits from a subsequent employer. Further, the Company shall pay the Executive all other benefits to which the Executive has a vested right at the time, according to the provisions of the governing plan or program. With the exceptions of the covenants contained in Section 8 herein (which shall survive such termination) the Company and the Executive thereafter shall have no further obligations under this Agreement. If the Executive's employment is terminated for any of the reasons set forth in Section 7.1 herein, the Executive shall be entitled to receive the benefits provided in Section 7.1 herein in lieu of the benefits set forth in this Section 6.5. 6.6 Termination For Cause. Nothing in this Agreement shall be construed to prevent the Board from terminating the Executive's employment under this Agreement for "Cause." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the unanimous vote of the entire membership of the Board at a meeting of such Board duly called and held for that purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard by the Board) finding that in the good faith opinion of the Board that the Executive was guilty of conduct set forth in the second paragraph of this Section 6.6 and specifying the particulars thereof in detail. In the event the Board determines that Cause exists, the Board shall deliver written notice to the Executive of the facts and circumstances leading to the Board's determination. Upon receipt of this written notification, all provisions of this Agreement shall terminate, except for the confidentiality and noncompete provisions of Section 8 herein (which shall survive such termination). The Company shall pay the Executive his full Base Salary and accrued 7 vacation time through the date notice of a for Cause termination is delivered to the Executive, plus all other benefits to which the Executive has a vested right to at that time. The Company and the Executive thereafter shall have no further obligations under this Agreement other than the Executive's obligations under Section 8 hereof. "Cause" shall be determined by the Board in the exercise of good faith and reasonable judgment; and shall mean the willful misconduct, fraud, conviction of a felony, consistent gross neglect of duties, or wanton negligence by the Executive in the performance of his duties hereunder, or the material breach by the Executive of the terms of this Agreement. 6.7 Termination for Good Reason. At any time during the six (6) full calendar month period prior to the effective date of a Change in Control (as defined in Section 7.2) or the twenty four (24) month period following the effective date of a Change in Control (as defined in Section 7.2), the Executive may terminate this Agreement for Good Reason (as defined below) by giving the Board of Directors of the Company thirty (30) calendar days written notice of intent to terminate, which notice sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination. Upon the expiration of the thirty (30) day notice period, the Good Reason termination shall become effective, and the Company shall pay and provide to the Executive the benefits set forth in Section 7.1 herein. Good Reason shall mean, without the Executive's express written consent, the occurrence of any one or more of the following: (a) The assignment of the Executive to duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status as an officer of the Company, or a reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect during the immediately preceding fiscal year; (b) The Company's requiring the Executive to be based at a location which is at least fifty (50) miles further from the Executive's current primary residence than is such residence from the Company's current headquarters, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations as of the Effective Date; (c) A reduction by the Company in the Executive's Base Salary as in effect on the Effective Date, as provided in Section 4.1 herein, or as the same shall be increased from time to time; (d) A material reduction in the Executive's level of participation in any of the Company's short- and/or long-term incentive compensation plans, or employee benefit or retirement plans, policies, practices, or arrangements in which the Executive participates as of the Effective Date; provided, however, that reductions in the levels of participation 8 in any such plans shall not be deemed to be "Good Reason" if the Executive's reduced level of participation in each such program remains substantially consistent with the average level of participation of other executives who have positions commensurate with the Executive's position; or (e) The failure of the Company to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform this Agreement, as contemplated in Section 11.1 herein. Upon a termination for Good Reason within the six (6) full calendar month period prior to the effective date of a Change in Control, or within the twenty-four (24) months following the effective date of a Change in Control, the Executive shall be entitled to receive the payments and benefits set forth in Section 7.1 herein. The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. Section 7. Change in Control 7.1 Employment Terminations in Connection with a Change in Control. In the event of a Qualifying Termination (as defined below) within six (6) full calendar months prior to the effective date of a Change in Control, or within twenty-four (24) months following the effective date of a Change in Control, then in lieu of all other benefits provided to the Executive under the provisions of this Agreement, the Company shall pay to the Executive in a lump sum payment and provide him with the following severance benefits (hereinafter referred to as the "Severance Benefits"): (a) An amount equal to two (2) times the highest rate of the Executive's annualized Base Salary rate in effect at any time up to and including the effective date of termination; (b) An amount equal to two (2) times the Executive's target incentive award (both cash and long-term) established for the fiscal year in which the Executive's effective date of termination occurs; (c) An amount equal to the Executive's unpaid Base Salary and accrued vacation pay through the effective date of termination; (d) An amount equal to the Executive's unpaid targeted annual bonus, established for the plan year in which the Executive's effective date of termination occurs, multiplied by a fraction, the numerator of which is the number of completed days in the then existing fiscal year through the effective date of termination, and the denominator of which is three hundred sixty-five (365); 9 (e) A continuation of the welfare benefits of medical insurance, dental insurance, and group term life insurance for two (2) full years after the effective date of termination. These benefits shall be provided to the Executive at the same premium cost, and at the same coverage level, as in effect as of the Executive's effective date of termination. However, in the event the premium cost and/or level of coverage shall change for all employees of the Company, the cost and/or coverage level, likewise, shall change for the Executive in a corresponding manner. The continuation of these welfare benefits shall be discontinued prior to the end of the two (2) year period in the event the Executive has available substantially similar benefits from a subsequent employer, as determined by the Company's Board of Directors or the Board's designee. (f) A lump-sum cash payment of the actuarial present value equivalent of the aggregate benefits accrued by the Executive as of the effective date of termination under the terms of any and all supplemental retirement plans in which the Executive participates. For purposes of determining "final average pay" under such programs, the Executive's actual pay history as of the effective date of termination shall be used. For purposes of this Section 7, a Qualifying Termination shall mean any termination of the Executive's employment other than: (1) by the Company for Cause (as provided in Section 6.6 herein); (2) by reason of death, Disability (as provided in Section 6.2 herein), or Retirement (as such term is then defined in the Company's tax qualified defined benefit retirement plan; [provided that a termination which qualifies as a Retirement and which would otherwise qualify as a termination for Good Reason under Section 6.7 herein will be deemed to be a Qualifying Termination]). 7.2 Definition of "Change in Control." A Change in Control of the Company shall be deemed to have occurred as of the first day any one or more of the following conditions shall have been satisfied: (a) Any individual, corporation (other than the Company), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, of securities of the Company possessing twenty percent (20%) or more of the voting power for the election of directors of the Company; (b) There shall be consummated any consolidation, merger, or other business combination involving the Company or the securities of the Company in which holders of voting securities of the Company immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of the Company (or, if the Company does not survive such transaction, voting securities of the corporation surviving such transaction) having less than sixty percent (60%) of the total voting power in an election of directors of the Company (or such other surviving corporation); 10 (c) During any period of two (2) consecutive years, individuals who at the beginning of such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director of the Company was approved by a vote of at least two-thirds (2/3) of the directors of the Company then still in office who were directors of the Company at the beginning of any such period; or (d) There shall be consummated any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company (on a consolidated basis) to a party which is not controlled by or under common control with the Company. 7.3 Excise Tax Equalization Payment. In the event that the Executive becomes entitled to Severance Benefits or any other payment or benefit under this Plan, or under any other agreement with or plan of the Company (in the aggregate, the "Total Payments"), if any of the Total Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to the Executive in cash an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive after deduction of any Excise Tax upon the Total Payments and any Federal, state and local income tax and Excise Tax upon the Gross-Up Payment provided for by this Section 7.3 (including FICA and FUTA), shall be equal to the Total Payments. Such payment shall be made by the Company to the Executive as soon as practical following the effective date of termination, but in no event beyond thirty (30) days from such date. 7.4 Tax Computation. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amounts of such Excise Tax: (a) Any other payments or benefits received or to be received by the Executive in connection with a Change in Control of the Company or the Executive's termination of employment (whether pursuant to the terms of this Plan or any other plan, arrangement, or agreement with the Company, or with any person (which shall have the meaning set forth in Section 3(a)(9) of the Securities Exchange Act of 1934, including a "group" as defined in Section 13(d) therein) whose actions result in a Change in Control of the Company or any person affiliated with the Company or such persons) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel as supported by the Company's independent auditors and acceptable to the Executive, such other payments or benefits (in whole or in part) do not constitute parachute payments, or unless such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; 11 (b) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of: (i) the total amount of the Total Payments; or (ii) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (a) above); and (c) The value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of Federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the effective date of termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. 7.5 Subsequent Recalculation. In the event the Internal Revenue Service adjusts the computation of the Company under Section 7.4 herein so that the Executive did not receive the greatest net benefit, the Company shall reimburse the Executive for the full amount necessary to make the Executive whole, plus a market rate of interest, as determined by the Committee. 7.6 Payment of Legal Fees. To the extent permitted by law, the Company shall pay all legal fees, costs of litigation, prejudgment interest, and other expenses incurred in good faith by the Executive as a result of the Company's refusal to provide the severance benefits under this Section 7 to which the Executive becomes entitled under this Agreement, or as a result of the Company's contesting the validity, enforceability, or interpretation of this Agreement, or as a result of any conflict (including conflicts related to the calculation of parachute payments) between the parties pertaining to this Agreement. Section 8. Confidentiality and Noncompetition 8.1 Confidentiality. During the term of this Agreement and thereafter in perpetuity, the Executive will not directly or indirectly divulge or appropriate to his own use, or to the use of any third party, and "trade secrets" (as defined in Section 8.3), other secret or confidential information, knowledge or financial information of the Company or any of the Company's subsidiaries or affiliates (hereinafter, the Company and its subsidiaries and affiliates shall be collectively referred to as the "Company Group"), except as may be in the public domain other than by violation of this Agreement. 8.2 Noncompetition. From the date hereof until two (2) years after the termination of his employment hereunder, the Executive will not (i) directly or indirectly own any equity or proprietary interest in (except for ownership of shares in a publicly traded company not exceeding five percent (5%) of any class of outstanding securities), or be an employee, agent, director, advisor, or consultant to or for any corporation (other than the Company Group), business enterprise or any person engaged anywhere in the State of Rhode 12 Island or the Commonwealth of Massachusetts, whether on his own behalf or on behalf of any person other than the Company Group, in the manufacture, procuring, sale, marketing, promotion or distribution of any product or product lines functioning competitively with any product or product lines of the Company Group during the term of this Agreement, and the Executive will not assist in, manage or supervise any of the foregone activities; (ii) undertake any action to induce or cause any customer or client of the Company Group to discontinue any part of its business with the Company Group; (iii) cause, induce or in any way facilitate the employment by any other persons or organization of any employee of or consultant to the Company Group, provided, that this covenant shall become operative only upon the termination of the Executive's employment; or (iv) take or assist directly or indirectly in the taking, by acting as consultant to a third party or otherwise of any position on any matter involving the Company and pending before any state or other public agency, when such position is adverse to the position being promoted before such agency at the time by the Company. 8.3 Trade Secrets. "Trade Secrets" as used herein means all secret discoveries, invention, formulae, designs, methods, processes, techniques of production and know-how relating to the Company Group's business. "Confidential Information" as used herein means the Company Group's internal policies and procedures, suppliers, customers, financial information and marketing practices, as well as secret discoveries, inventions, formulae, designs, techniques of production, know-how and other information relating to the Company Group's business not rising to the level of a trade secret under applicable law. 8.4 The breach by the Executive of any of the covenants continued in this Paragraph 8 shall relieve the company of all further payment obligation under Paragraph 6 or Paragraph 7. Section 9. Indemnification The Company hereby covenants and agrees to indemnify and hold harmless the Executive fully, completely, and absolutely against and in respect to any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including attorney's fees), losses, and damages resulting from the Executive's good faith performance of his duties and obligations under the terms of this Agreement. Section 10. Outplacement Assistance Following a termination of the Executive's employment as described in Sections 6.5, 6.7, or 7.1 herein, the Executive shall be reimbursed by the Company for the costs of all outplacement services obtained by the Executive within the one (1) year (for termination pursuant to Section 6.5) and two (2) year (for terminations pursuant to Section 6.7 or 7.1) periods after the effective date of termination; provided, however, that the total reimbursement shall be limited to an amount equal to fifteen percent (15%) of the Executive's Base Salary as of the effective date of termination. Section 11. Assignment 11.1 Assignment by Company. This Agreement may and shall be assigned or transferred to, and shall be binding upon and shall inure to the benefit of, any successor of the Company, and any 13 such successor shall be deemed substituted for all purposes of the "Company" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation, or business entity which at any time, whether by merger, purchase, or otherwise, acquires all or essentially all of the assets of business of the Company. Notwithstanding such assignment, the Company shall remain, with such successor, jointly and severally liable for all its obligations hereunder. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall immediately entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled in the event of an involuntary termination by the Company, as provided in Paragraph 6.6 herein. Except as herein provided, this Agreement may not otherwise be assigned by the Company. 11.2 Assignment by Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, and administrators, successors, heirs, distributees, devisees, and legatees. If the Executive should die while any amounts payable to the Executive hereunder remain outstanding, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, in the absence of such designee, to the Executive's estate. Section 12. Dispute Resolution and Notice 12.1 Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration, conducted before a panel of three (3) arbitrators sitting in a location selected by the Executive within fifty (50) miles from the location of his employment with the Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel for the Executive, shall be borne by the Company. 12.2 Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal offices. Section 13. Miscellaneous 13.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 14 13.2 Entire Agreement. This Agreement supersedes any prior agreements or understandings, oral or written, between the parties hereto or between the Executive and the Company, with respect to the subject matter hereof and constitutes the entire Agreement of the parties with respect thereto. 13.3 Modification. This Agreement shall not be varied, altered, modified, canceled, changed, or in any way amended except by mutual agreement of the parties in a written instrument executed by the parties hereto or their legal representatives. 13.4 Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 13.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 13.6 Tax Withholding. The Company may withhold from any benefits payable under this Agreement all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 13.7 Beneficiaries. The Executive may designate one or more persons or entities as the primary and/or contingent beneficiaries of any amounts to be received under this Agreement. Such designation must be in the form of a signed writing acceptable to the Board or the Board's designee. The Executive may make or change such designation at any time. Section 14. Governing Law To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the state of Rhode Island. 15 IN WITNESS WHEREOF, the Executive and the Company (pursuant to a resolution adopted at a duly constituted meeting of its Board of Directors) have executed this Agreement, as of the day and year first above written. Executive: /s/ Gerald A. Yurkevicz ------------------------------------ ATTEST Providence Energy Corporation By: /s/ Alycia L. Goody By: /s/ James H. Dodge ---------------------------- --------------------------------- Corporate Secretary Chairman, President and CEO 16 EX-13 3 PORTIONS OF THE ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Providence Energy Corporation (the Company) and its subsidiaries and their representatives may from time to time make written or oral statements, including statements contained in the Company's filings with the Securities and Exchange Commission (SEC) and in its reports to shareholders, including this annual report to shareholders, which constitute "forward-looking" statements as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases. All statements other than statements of historical facts included in this annual report regarding the Company's financial position and strategic initiatives and addressing industry developments are forward-looking statements. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The following are factors which could cause actual results to differ materially from those anticipated, and include but are not limited to: general economic, financial and business conditions; changes in, or the failure to comply with, government regulations; competition in the energy services sector; regional weather conditions; the availability and cost of natural gas; development and operating costs; the success and costs of advertising and promotional efforts; the availability and terms of capital; the business abilities and judgment of personnel; the ability of the Company to modify or redesign its computer systems to work properly in the year 2000; unanticipated environmental liabilities; ability of the Company to form alliances and establish joint ventures outside of the traditional utility business and the success of any alliances or joint ventures; the costs and effects of unanticipated legal proceedings; the impacts of unusual items resulting from ongoing evaluations of business strategies and asset valuations; and changes in business strategy. SUMMARY The Company's current operating revenues and operating margin have increased, while net income has decreased over the comparable periods presented, as shown in the table below:
(000's) Percent 1997 1996 Change Change --------- -------- ------- -------- Operating Revenues $220,420 $215,152 5,268 2.4 Operating Margin 96,044 94,906 1,138 1.2 Net Income 7,831 8,970 (1,139) (12.7)
RESULTS OF OPERATIONS - 1997 VS 1996 Operating Revenues and Operating Margin During the current year, the Company experienced normal weather as opposed to colder- than-normal weather in 1996, which resulted in 1997 temperatures that were 5.2 percent warmer than 1996. The decrease in heating load due to the warmer temperatures resulted in decreased margin of approximately $1.7 million, which was offset by increased margin of $0.7 million as a result of load growth and an increase in the customer base of 1,707 or one percent. Primarily as a result of the warmer temperatures experienced in 1997, residential sales decreased 570 million cubic feet (MMcf) or 4.0 percent. The Company's commercial and industrial firm sales decreased approximately 1,608 MMcf or 16.6 percent as a result of warmer weather and customer migrations from sales service to transportation service in connection with unbundling natural gas service in Rhode Island. In 1996, approximately 120 of the largest commercial and industrial customers were eligible for unbundled service offerings. In December 1997, an additional 3,400 medium and large commercial and industrial customers are eligible. This migration of customers to transportation does not have a material effect on margin. The decrease due to weather was also offset by increases in margin of $0.8 million as a result of the rate increase effective December 17, 1995, and $0.4 million as the result of an increase in revenues associated with the phase-in of post-retirement expenses related to Statement of Financial Accounting Standards (SFAS) No. 106. The remaining increase in margin was primarily due to the Company's non-regulated joint venture, Providence-Southern, LLC (Providence- Southern) previously Providence Energy Services, Inc., (PES) which began operations in August of 1996 and improved operating efficiencies in the tracking and delivery of gas. Interruptible and other volumes remained consistent with last year. Operating margin from interruptible and other sales did not affect the Company's operating margin or results of operations because the Rhode Island Public Utilities Commission (RIPUC) required the Company to return any margins earned from these non-firm customers to firm customers through the Gas Charge Clause (GCC). Beginning October 1, 1997, under the Price Stabilization Plan Agreement discussed in Note 9 to the accompanying financial statements, the Company will retain all margins earned from these non-firm sales. The Company's transportation volumes increased approximately 1,345 MMcf as the result of the unbundling process described above. As the unbundling process continues, the Company expects transportation revenues and volumes will continue to increase as customers migrate from sales to transportation. Operating and Maintenance Expenses Overall, operating and maintenance expenses have decreased approximately $0.3 million or 0.5 percent versus last year. The Company had a $0.8 million decrease in outside services due to expenditures made in the prior year to develop new energy service offerings as well as expenses related to the Integrated Resource Plan (IRP). This decrease was offset by an increase in operating expenses of $0.7 million from Providence-Southern, the Company's non- regulated joint venture which markets natural gas and other energy services throughout New England. In addition, the Company's labor increased by $0.8 million related to cost of living and negotiated union contract increases. This increase in labor was offset by an increase in capitalized labor and administrative expenses of $0.7 million. This increase was the result of increased capital projects in 1997 as well as an increase in expenses allocated to capital projects. The Company also incurred increased post-retirement benefit expenses of $0.3 million as the result of the continued phasing of these expenses into the Company's rates in 1997. The remaining decrease of $0.6 million relates primarily to cost controls instituted by the Company. Page-2 The Company continually reviews its operating expenses in order to keep expenses as low as possible. However, the Company's expenses will vary based on weather and other factors. Depreciation and Amortization Depreciation and amortization expense increased approximately $0.9 million or 7.3 percent primarily as the result of increased capital additions, including technology related assets with shorter depreciable lives, as well as an increase in depreciation rates that became effective with the rate increase on December 17, 1995. Taxes Taxes have increased approximately $0.7 million or 3.7 percent primarily as the result of increased property taxes due to capital spending as well as increased property tax rates in 1997. Other, net Other, net decreased approximately $0.9 million. This decrease was the result of increased energy venture costs of approximately $0.3 million in 1997. The remainder of the decrease was primarily due to regulatory adjustments of $0.9 million in 1996 as the result of the rate decision effective December 17, 1995, offset by increases in the allowance for funds used during construction of $0.2 million as the result of increased capital spending. Interest Expense Interest expense for 1997 was stable when compared to 1996. Interest expense increased approximately $0.1 million primarily as the result of an increase in interest on long-term debt due to the Series R First Mortgage Bond issuance in December 1995. Future Outlook A) Business Opportunities/Industry Restructuring There are virtually unlimited opportunities to unbundle services, form alliances, custom-tailor services for customers, and compete with other energy suppliers. To facilitate the transition to a diversified energy marketer and service provider, the Company is planning to form business alliances outside of its traditional utility business. The Company is also seeking investment opportunities in non-regulated energy ventures. In January 1997, the Company agreed to form a new limited liability company, Providence-Southern, LLC (the "Joint Venture"), together with an affiliate of Southern Company(Southern), the United States' largest producer of electricity. The Joint Venture was formed to market electricity, gas, and energy services throughout New England and will be owned 60 percent by Southern and 40 percent by the Company. The Joint Venture will focus on tailoring its services to the individual needs of the residential, commercial, and industrial customers as consumers have more choices in a competitive energy market. In addition to providing for the electricity and gas commodity needs of customers, the Joint Venture will also serve as a marketing platform for other areas of expertise of the Company and of Southern, including energy consulting and energy use analysis, and home and business energy services. As part of the Joint Venture described above, the operations of PES will be contributed to the Joint Venture. PES was incorporated in August 1996 to market natural gas and energy services. Page-3 In November 1997, as part of the Company's strategic plan to strengthen its position in the energy industry, the Company purchased two Rhode Island-based oil distribution companies, which together service over 4,000 customers. These acquisitions continue the Company's transition to a diversified energy marketer and service provider. In August 1997, the Company was selected by Salve Regina University in Newport, Rhode Island to provide energy management services for the development and implementation of a comprehensive energy plan. The plan includes utilization of the latest energy management technology, installation of insulation, conversion of many campus buildings to natural gas, and a variety of other energy measures. Management estimates that this project will generate $1.5 million of revenues for the Company. These and other energy ventures will increasingly be separate from the distribution utility. There are strategic planning and operating costs associated with developing the new energy service offerings. These costs were approximately $0.7 million and $0.5 million, net of taxes, for 1997 and 1996, respectively. B) Regulatory In August 1997, the RIPUC approved the Price Stabilization Plan Settlement Agreement (the Plan or Energize R.I.) among The Providence Gas Company (ProvGas), the Rhode Island Division of Public Utilities and Carriers (the Division), The Energy Council of Rhode Island (TEC-RI), and the George Wiley Center. Effective October 1, 1997 through September 30, 2000, Energize R.I. provides customers with an initial price decrease of approximately four percent and a three-year price freeze. Under Energize R.I., the GCC will be suspended for the entire term. Any excess or deficiency between amounts billed and actual gas costs incurred will be retained or borne by the Company. Energize R.I. also requires the Company to make significant capital investments to improve its distribution system. Capital investments required by Energize R.I. are estimated to total approximately $26 million over its three year term. Similar to the IRP approved by the RIPUC in February 1996, which is superseded by Energize R.I., the Company is required to fund the Demand Side Management (DSM) Rebate Program and the Low-Income Weatherization Program at annual levels of $0.5 million and $0.2 million, respectively. In addition, Energize R.I. calls for the Company to fund the Low-Income Assistance Program at an annual level of $1.0 million. Energize R.I. also continues the process of unbundling by requiring ProvGas to provide unbundled service offerings to up to 10 percent per year of firm system throughput. As part of Energize R.I., ProvGas will amortize approximately $4 million of environmental costs previously charged to the accumulated depreciation reserve over a ten year period. All environmental costs incurred during the term of Energize R.I. will also be amortized over a 10-year period. All environmental costs incurred during the term of Energize R.I. will also be amortized over a 10-year period. Under Energize R.I., ProvGas may earn up to 10.9 percent annually on its average common equity of up to $81.0 million, $86.2 million, or $92.0 million in fiscal 1998, 1999, and 2000, respectively. In addition, ProvGas may not earn less than a seven percent return on common equity. In the event that ProvGas earns in excess of 10.9 percent or less than seven percent, the Company will defer revenues or costs through a deferred revenue account. Any balance in the deferred revenue account at the end of the Plan will be refunded to or recovered from customers in a manner determined by all parties and approved by the RIPUC. In May 1996, the RIPUC approved a Rate Design Settlement Agreement among ProvGas, the Division, TEC-RI, and a consortium of oil heat organizations. The Agreement began a process Page-4 of unbundling natural gas service in Rhode Island, enabling customers to choose their gas suppliers. The Agreement went into effect June 2, 1996. This initial step was available to approximately 120 of the largest commercial and industrial customers. In August 1997, the RIPUC approved a plan, called "Business Choice", to further expand the availability of unbundled services to an additional 3,400 medium and large commercial and industrial customers. The Company plans to commence Business Choice in December 1997. In 1998, North Attleboro Gas Company, a small distribution company with over 3,500 customers located in Massachusetts that is owned and operated by the Company, expects to file plans with the Massachusetts Department of Public Utilities for a comprehensive unbundling of rates in collaboration with other local distribution companies. As described in Note 1 to the consolidated financial statements, the Company complies with the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). In the event the Company determines that it no longer meets the criteria for following SFAS No. 71, the accounting impact would be an extraordinary, non-cash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS NO. 71 include: (1) increasing competition that restricts the Company's ability to establish prices to recover specific costs, and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. The Company periodically reviews these criteria to ensure the continuing application of SFAS No. 71 is appropriate. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its regulatory assets are probable of future recovery. C) New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share", effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaces the presentation of primary earnings per share with the presentation of basic earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Earnings per share calculated under SFAS No. 128 would have been unchanged for the periods presented. In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segment of an Enterprise and Related Information". SFAS No. 130, which is effective for fiscal years beginning after December 15, 1997, requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 131, which is effective for financial statements for periods beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. These statements require additional disclosure only and will not effect the financial position or results of operations of the Company. Effective October 1, 1997, the Company will adopt the provisions of Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities". This Statement provides authoritative Page-5 guidance for recognition, measurement, display, and disclosure of environmental remediation liabilities in financial statements. The Company has recorded environmental remediation liabilities of approximately $1.7 million at September 30, 1997. SOP 96-1 is not expected to have a material impact on the Company's financial position or results of operations upon adoption. RESULTS OF OPERATIONS - 1996 versus 1995 Operating Revenues and Operating Margin During 1996, the Company experienced colder-than-normal weather resulting in temperatures averaging 16.8 percent colder than 1995. The increase in heating load due to the colder temperatures represented approximately $5.7 million in increased operating margin. As a result of the colder temperatures experienced during 1996, residential sales, which provide the Company with its greatest source of sales, increased 1,714 million cubic feet (MMcf) or 13.5 percent over 1995. Also contributing to the increase was a net increase in the average annual number of customers during 1996 over 1995 of 1,689 or one percent. This increase contributed approximately $0.3 million of operating margin. Additionally, the RIPUC approved a rate increase effective December 17, 1995. Operating margin for 1996 increased approximately $3.2 million versus 1995 as a result of the rate increase. As a result of the RIPUC's approval in February 1996 of the IRP's performance-based ratemaking mechanism, the Company recorded an increase in operating margin of $1.5 million in 1996 as a result of gas cost savings achieved for the 12-month plan period which ended June 1996. These savings were somewhat offset by a one-time charge to operating and maintenance expenses of $0.8 million to fund a Low-Income Assistance Program as discussed below. The IRP Settlement Agreement was terminated in connection with the approval of Energize R.I. in August 1997. Interruptible and other volumes decreased approximately 2,300 MMcf or 47 percent versus 1995 primarily as a result of a decrease in non-firm sales of 1,200 MMcf and a decrease in sales for resale of 1,300 MMcf. These decreases were offset by an increase in special contracts of 200 MMcf. The decrease in interruptible and other sales did not have an impact on the Company's operating margin or results of operations because the RIPUC required the Company to return any margins earned from these non-firm customers to firm customers through the GCC. In addition, the Company had an increase in operating margin of approximately $0.2 million due to an increase in revenues associated with the phase-in of expenses for SFAS No. 106. Operating and Maintenance Expenses Overall operating and maintenance expenses for 1996 increased, approximately $4.7 million or 10.5 percent versus 1995. The Company had an increase of $1.1 million in its uncollectible revenue provision due to the increased operating revenues resulting from the colder-than-normal weather experienced during the year. As a result of the Company's improved earnings, performance incentive compensation expense increased approximately $0.7 million in 1996 versus 1995. Additionally, in connection with the RIPUC's approval of the IRP in February 1996, the Company had a one-time charge of $0.8 million to fund a Low-Income Assistance Program as well as $0.1 million of costs associated with the regulatory proceeding. Also, there were additional wage expenses of approximately $0.8 million related to performance, cost-of-living and negotiated union contract increases, as well as overtime pay due to the colder-than-normal weather. Finally, approximately $0.2 million of Page-6 expenses relating to the phase-in of SFAS No. 106 costs were incurred as well as expenses of approximately $0.6 million for outside services associated with the development of new energy service offerings. The remaining $0.4 million is attributable to increases in general operating costs. Taxes Taxes for 1996 have increased approximately $2.8 million or 18.9 percent from 1995. The increase in taxes, mainly Federal income and state gross earnings tax, resulted from higher pre-tax income and higher operating revenues, respectively. Interest Expense Overall, interest expense for 1996 was stable when compared to 1995. A decrease in weighted average short-term borrowings caused short-term interest expense to decrease approximately $0.7 million for 1996. The Company's long- term interest expense for 1996 increased approximately $0.8 million as a result of the Series R First Mortgage Bond issuance in December 1995. LIQUIDITY AND CAPITAL RESOURCES During 1997, the Company experienced a substantial increase in its net cash provided by operations primarily due to a decrease in deferred gas costs as the result of the timing of the recovery of incurred gas costs through the GCC, as discussed in Note 1 of the accompanying financial statements. This increase was offset by a decrease in cash flow due to increased inventories of approximately $2.2 million. On October 1, 1997, these inventories will be transferred at book value to Duke Energy Trading and Marketing, L.L.C. (DETM) under the terms of ProvGas' new gas supply contract described in Note 7 to the accompanying consolidated financial statements. Capital expenditures for 1997 of $23.3 million, which includes $2.4 million of equipment financed through long-term debt and capital leases, increased by approximately $2.5 million when compared to 1996 capital expenditures of $20.8 million. This increase was primarily due to expenditures related to the technology to integrate the Company's customer-related systems which is expected to be completed in 1998. As a result of Energize R.I. discussed in Note 9 to the accompanying financial statements, the Company is committed to making significant capital improvements to its distribution system during its three- year term. These improvements will be made by expanding the distribution system into economic development areas of Rhode Island as well as accelerating the replacement of mains and services. The Company anticipates its capital expenditures over the next three years to total approximately $75 million. During 1997, the Company entered into notes with five-year maturities in the amount of $3.3 million in order to finance capital expenditures. The notes have interest rates ranging from 4.9 to 7.5 percent. The Company meets seasonal cash requirements and finances its capital expenditures on an interim basis through short-term borrowings. As of September 30, 1997, the Company had lines of credit totaling $66.5 million with borrowings outstanding of $23.7 million. Page-7 The Company, like most owners of computer software, will be required to modify or replace significant portions of its software so that it will function properly in the year 2000. The Company has performed a Year 2000 impact assessment and is currently pursuing viable options, including renovation and replacement of existing systems, to ensure that its computer software applications and hardware will be Year 2000 compliant. In February 1997, the Company redeemed 16,000 shares of its preferred stock at the par value totaling $1.6 million in accordance with the annual sinking fund requirement. During the next two years, the Company intends to make a debt offering of $15 million to finance its capital expenditures and energy service offerings. The Company's ability to pay dividends is largely dependent upon receipt of dividends from ProvGas. Approximately $19 million of ProvGas' retained earnings were available for dividends at the end of fiscal 1997 under the most restrictive terms of ProvGas' First Mortgage Bond indenture. The Company offers a Dividend Reinvestment and Cash Stock Purchase Plan (the Plan) for its current shareholders. During 1997, 43.1 percent of the Company's shareholders participated in the Plan, with $1.4 million or 22.9 percent of declared dividends reinvested in new shares rather than paid in cash. In August 1997, the RIPUC approved Energize R.I., which provides customers with an initial price decrease of approximately four percent and a three-year price freeze. In addition, Energize R.I. suspends the GCC, which results in the Company retaining or bearing any excess or deficiency between gas costs billed and gas costs incurred. Energize R.I. requires the Company to make significant capital investments to improve its distribution system. Capital investments required by Energize R.I. are expected to total $26 million during its term . Energize R.I. also requires the Company to provide funding of the Low-Income Assistance Program, the DSM Rebate Program, and Low-Income Weatherization Program at an annual level of $1 million, $0.5 million, and $0.2 million, respectively. Under Energize R.I., ProvGas is allowed to earn a 10.9 percent return on average common equity of up to $81.0 million, $86.2 million, and $92.0 million in fiscal 1998,1999, and 2000, respectively. As a result of Energize R.I., the three-year Settlement Agreement regarding the IRP approved by the RIPUC in February 1996 was terminated. The Settlement Agreement called for (1) $0.5 million annual funding associated with the DSM Rebate Program; (2) $0.2 million annual funding associated with a Low-Income Weatherization Program; and (3) a performance-based ratemaking mechanism. In 1997 and 1996, the Company was able to record its annual share of the performance-based ratemaking mechanism under this agreement which resulted in $1.5 million of operating margin in each of those years. The savings to fund the rate decrease and freeze under Energize R.I. were generated by ongoing cost control initiatives and a full requirements contract with DETM. Under the contract, which runs from October 1, 1997 through September 30, 2000, supplies required by the Company's firm sales customers will be purchased at a single, fixed commodity price for the entire contract period. In order to provide this service, DETM will take responsibility for the Company's Page-8 pipeline capacity resources, storage contracts, and LNG capacity. Under the contract, DETM will provide all gas supplies required by the Company while the Company must purchase all supplies exclusively from DETM. All non-firm gas supply will be provided at market prices. For additional information on current and anticipated financial, economic, and operational data, references are made to the President's Message to Our Shareholders and 1997 The Year in Review sections of this Annual Report to Shareholders.
Common Stock Information Dividend Paid Quarter Ended High Low Per Share - -------------------------- --------- ------- ------------- September 30, 1997 $19 11/16 $17 1/4 $.27 June 30, 1997 18 3/8 17 1/8 .27 March 31, 1997 20 1/2 16 1/2 .27 December 31, 1996 18 3/4 16 3/4 .27 September 30, 1996 $18 3/4 $16 5/8 $.27 June 30, 1996 18 3/8 16 3/8 .27 March 31, 1996 18 3/4 16 5/8 .27 December 31, 1995 17 1/4 16 .27
Page-9 FINANCIAL AND OPERATING STATISTICS For the Years Ended September 30
1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- Operating revenues (thousands of dollars): Residential $135,259 $128,875 $106,387 $130,888 $120,997 $104,658 Commercial/ industrial 66,352 74,625 61,491 76,174 72,974 63,405 Total firm sales 201,611 203,500 167,878 207,062 193,971 168,063 Interruptible and other 10,299 9,882 14,026 14,471 14,336 21,394 Transportation 2,755 741 804 287 54 74 Other 5,755 1,029 1,284 958 954 810 -------- -------- -------- -------- -------- -------- Total operating revenues $220,420 $215,152 $183,992 $222,778 $209,315 $190,341 ======== ======== ======== ======== ======== ======== Gas sold and transported (MMcf): Residential 13,853 14,423 12,709 14,122 13,783 13,166 Commercial/ industrial 8,086 9,694 8,772 9,360 8,926 8,363 -------- -------- -------- -------- -------- -------- Total firm sales 21,939 24,117 21,481 23,482 22,709 21,529 Interruptible and other 2,633 2,610 4,950 4,547 3,985 6,717 Transportation 2,725 1,380 1,681 656 386 869 Company use and other 871 1,017 919 1,182 1,187 1,264 -------- -------- -------- -------- -------- -------- Total gas sold and transported 28,168 29,124 29,031 29,867 28,267 30,379 Less:off-system sales 280 412 1,682 2,179 501 5 -------- -------- -------- -------- -------- -------- Total throughput 27,888 28,712 27,349 27,688 27,766 30,374 ======== ======== ======== ======== ======== ======== Gas purchased, produced and transported (MMcf): Pipeline natural gas-contract 17,328 17,979 16,591 22,880 18,044 20,150 Pipeline natural gas-spot purchases 3,271 5,197 7,935 3,533 7,936 7,374 Pipeline natural gas-transportation 2,725 1,380 1,681 656 386 869 Underground storage 4,163 3,129 2,270 1,697 879 594 Liquefied natural gas 681 1,439 554 1,101 1,022 1,329 Liquid propane and synthetic natural gas - - - - - 63 -------- -------- -------- -------- -------- -------- Total 28,168 29,124 29,031 29,867 28,267 30,379 ======== ======== ======== ======== ======== ======== Average annual number of gas distribution customers: Residential 151,152 149,487 147,935 145,793 143,771 143,114 Commercial/ industrial 16,656 16,645 16,509 16,337 16,264 15,889 -------- -------- -------- -------- -------- -------- Total firm 167,808 166,132 164,444 162,130 160,035 159,003 Interruptible and transportation 175 144 143 141 123 115 -------- -------- -------- -------- -------- -------- Total 167,983 166,276 164,587 162,271 160,158 159,118 ======== ======== ======== ======== ======== ========
Page-10
1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- Total number of a gas distribution customers at year-end 166,535 164,312 163,294 159,375 159,135 157,087 ======== ======== ======== ======== ======== ======== Residential heating: Average consumption per customer (Mcf) 109 116 103 117 116 112 Average revenue per customer $ 1,043 $ 1,016 $ 844 $ 1,068 $ 1,008 $ 870 Average rate per Mcf $ 9.55 $ 8.77 $ 8.19 $ 9.10 $ 8.68 $ 7.80 Average annual number of customers 120,826 118,724 116,826 114,461 112,497 111,176 Maximum daily sendout (MMcf) 188 189 202 206 185 174 Actual calendar degree days 5,657 5,967 5,111 5,977 5,718 5,502 Normal calendar degree days 5,652 5,682 5,709 5,709 5,811 5,811
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet. Page-11 SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS For the Years Ended September 30 (thousands, except per share amounts)
1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- Operating revenues $220,420 $215,152 $183,992 $222,778 $209,315 $190,341 Cost of gas sold 124,376 120,246 100,944 135,104 126,314 111,568 -------- --------- -------- -------- -------- -------- Operating margin 96,044 94,906 83,048 87,674 83,001 78,773 -------- -------- -------- -------- -------- -------- Other operating expenses, excluding taxes 61,642 61,030 54,838 55,838 52,921 52,122 Taxes, other than income 13,732 13,007 11,769 12,540 12,597 11,497 Federal income taxes 4,608 4,683 3,104 4,460 3,554 2,774 -------- -------- -------- -------- -------- -------- Total operating expenses 79,982 78,720 69,711 72,838 69,072 66,393 -------- -------- -------- -------- -------- -------- Operating income 16,062 16,186 13,337 14,836 13,929 12,380 Other, net (2) 945 865 196 37 287 -------- -------- -------- -------- -------- ------- Income from continuing operations before interest expense 16,060 17,131 14,202 15,032 13,966 12,667 Interest expense 7,603 7,465 7,379 6,247 6,653 6,837 -------- -------- ------- --------- -------- ------ Income from continuing operations after interest expense 8,457 9,666 6,823 8,785 7,313 5,830 Preferred dividends of subsidiary (626) (696) (696) (696) (696) (696) -------- --------- ------- --------- -------- ------- Net income 7,831 8,970 6,127 8,089 6,617 5,134 Common dividends 6,242 6,155 6,062 5,856 4,889 4,908 -------- -------- ------- --------- -------- ------- Earnings reinvested in the corporation $ 1,589 $ 2,815 $ 65 $ 2,233 $ 1,728 $ 226 ======== ======== ======= ========= ======== ======= Weighted average common shares outstanding 5,790.1 5,709.2 5,624.2 5,534.1 4,761.8 4,478.4 ======== ======== ======= ========= ======== ======= Net income per common share $ 1.35 $ 1.57 $ 1.09 $ 1.46 $ 1.39 $ 1.15 ======== ======== ======= ========= ======== ======= Common dividends $ 1.08 $ 1.08 $ 1.08 $ 1.06 $ 1.02 $ 1.10 ======== ======== ======= ========= ======== =======
Page-12 OTHER FINANCIAL DATA SEPTEMBER 30 (thousands, except per share amounts)
1997 1996 1995 1994 1993 1992 ----- ---- ----- ---- ---- ---- Total assets $255,510 $250,150 $227,127 $233,311 $224,550 $197,459 Gas plant--at original cost 300,829 279,849 262,769 239,830 221,769 210,087 Gas plant--net of depreciation 190,307 179,473 169,792 159,012 149,272 144,767 Capitalization: Common stockholders' equity 85,661 82,565 78,524 77,156 73,368 54,491 Redeemable cumulative preferred stock 6,400 8,000 8,000 8,000 8,000 8,000 Long-term debt 72,372 72,456 74,482 60,079 62,163 60,958 Shares of common stock at year-end 5,832 5,748 5,668 5,581 5,486 4,534 Book value per share $14.69 $14.36 $ 13.85 $ 13.82 $ 13.37 $ 12.02 ====== ====== ======= ======== ======== ========
Page-13 CONSOLIDATED BALANCE SHEETS September 30
(thousands of dollars) 1997 1996 - --------------------------------------------------------------------------------- ASSETS Gas plant, at original cost (notes 1, 4, 7, and 9) $300,829 $279,849 Less--Accumulated depreciation and utility plant acquisition adjustments(note 9) 110,365 100,242 -------- -------- 190,464 179,607 -------- -------- Non-utility property, net (note 11) 1,182 1,141 -------- -------- Current assets: Cash and temporary cash investments (notes 1 and 8) 1,063 1,424 Accounts receivable, less allowance of $1,886 in 1997 and 3,231 in 1996 (notes 1, 3, and 7) 14,852 14,665 Unbilled revenues (note 1) 2,683 2,357 Deferred gas costs (notes 1, 7, and 9) 7,231 13,272 Inventories, at average cost- Liquefied natural gas, propane and under- ground storage 18,217 16,023 Materials and supplies 1,287 1,259 Prepaid and refundable taxes (note 2) 4,005 4,076 Prepayments 1,039 1,540 -------- -------- 50,377 54,616 -------- -------- Deferred charges and other assets (notes 1, 3, 6 and 7) 13,487 14,786 -------- -------- Total assets $255,510 $250,150 ======== ======== CAPITALIZATION AND LIABILITIES Capitalization (see accompanying statement) $164,433 $163,021 -------- -------- Current liabilities: Notes payable (notes 5 and 8) 23,675 23,270 Current portion of long-term debt (note 4) 3,707 2,022 Accounts payable (notes 6 and 7) 16,755 17,372 Accrued taxes 2,506 1,980 Accrued vacation 1,715 1,723 Customer deposits 3,461 3,996 Other 5,531 5,376 -------- -------- 57,350 55,739 -------- -------- Deferred credits and reserves: Accumulated deferred Federal income taxes (note 2) 21,495 20,713 Unamortized investment tax credits (note 2) 2,375 2,533 Other (notes 6 and 7) 9,857 8,144 -------- -------- 33,727 31,390 -------- -------- Commitments and contingencies (notes 7 and 9) - - Total capitalization and liabilities $255,510 $250,150 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page-14 CONSOLIDATED STATEMENTS OF INCOME For the Years Ended September 30
(thousands, except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------- Operating revenues $220,420 $215,152 $183,992 Cost of gas sold 124,376 120,246 100,944 -------- -------- -------- Operating margin 96,044 94,906 83,048 -------- -------- -------- Operating expenses: Operation and maintenance 48,768 49,033 44,368 Depreciation and amortization 12,874 11,997 10,470 Taxes-- State gross earnings 6,045 6,063 5,005 Local property and other 7,687 6,944 6,764 Federal income (note 2) 4,608 4,683 3,104 -------- -------- -------- Total operating expenses 79,982 78,720 69,711 -------- -------- -------- Operating income 16,062 16,186 13,337 Other, net (notes 1 and 11) (2) 945 865 -------- -------- -------- Income before interest expense 16,060 17,131 14,202 -------- -------- -------- Interest expense: Long-term debt 6,042 5,889 5,086 Other 1,786 1,682 2,437 Interest capitalized (225) (106) (144) -------- -------- -------- 7,603 7,465 7,379 -------- -------- -------- Income after interest expense 8,457 9,666 6,823 Preferred dividends of subsidiary (note 4) (626) (696) (696) --------- -------- -------- Net income $ 7,831 $ 8,970 $ 6,127 ========= ======== ======== Earnings per common share (note 14) $ 1.35 $ 1.57 $ 1.09 ========= ======== ======== Weighted average common shares outstanding (note 14) 5,790.1 5,709.2 5,624.2 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page-15
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30 (thousands of dollars) 1997 1996 1995 - --------------------------------------------- ----------- ---------- ---------- Cash provided by - Operating Activities: Income after interest expense $ 8,457 $ 9,666 $ 6,823 Items not requiring cash: Depreciation and amortization 12,846 12,012 10,529 Changes as a result of regulatory action - (1,453) - Deferred Federal income taxes 703 1,943 2,142 Gain on sale of nonutility property (note 11) - (699) - Write-down of nonutility property (note 11) - 714 - Amortization of investment tax credits (158) (158) (160) Changes in assets and liabilities which provided (used) cash: Accounts receivable (187) (634) 3,861 Unbilled revenues (326) 298 240 Deferred gas costs 6,041 (12,079) 14,626 Inventories (2,222) (5,626) 1,278 Prepaid and refundable taxes 14 1,857 (1,017) Prepayments 501 (174) 133 Accounts payable (617) 3,270 (4,222) Accrued taxes 526 (21) (165) Accrued vacation, customer deposits and other (388) 1,462 572 Deferred charges and other 2,697 1,307 (2,011) -------- -------- -------- Net cash provided by operating activities 27,887 11,685 32,629 -------- -------- -------- Investment Activities: Expenditures for property, plant and equipment, net (20,875) (20,781) (19,597) Proceeds from sale of nonutility property(note 11) - 725 - -------- -------- -------- Net cash used by investing activities (20,875) (20,056) (19,597) -------- -------- -------- Financing Activities: Issuance of common stock 44 31 - Proceeds from exercise of stock options 34 - - Issuance of mortgage bonds - 15,000 - Redemption of preferred stock (1,600) - - Issuance of long-term debt 1,345 - - Payments on long-term debt (2,164) (1,954) (2,081) Increase (decrease) in notes payable 405 933 (5,363) Cash dividends on preferred shares (note 4) (626) (696) (696) Cash dividends on common shares (4,811) (4,797) (4,759) -------- -------- -------- Net cash provided (used) by financing activities (7,373) 8,517 (12,899) -------- -------- -------- Increase (decrease) in cash (361) 146 133 Cash and temporary cash investments at beginning of year 1,424 1,278 1,145 -------- -------- -------- Cash and temporary cash investments at the end of year $ 1,063 $ 1,424 $ 1,278 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for- Interest (net of amount capitalized) $ 7,476 $ 6,738 $ 6,663 Income taxes (net of refunds) $ 2,036 $ 2,851 $ 1,388 Schedule of noncash investing activities: Capital lease obligations for equipment $ 437 $ - $ - Other long-term debt for equipment $ 1,983 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements. Page-16
CONSOLIDATED STATEMENTS OF CAPITALIZATION September 30 (thousands) 1997 1996 - ----------------------------------------------------------- -------- -------- Common stockholders' investment (notes 4, 6, and 10): Common stock, $1 Par, Authorized-20,000 shares Outstanding-5,832 shares in 1997 and 5,748 shares in 1996 $ 5,832 $ 5,748 Amount paid in excess of par 56,827 55,404 Retained earnings 23,002 21,413 -------- -------- 85,661 82,565 -------- -------- Cumulative preferred stock of subsidiary (notes 4 and 8): Redeemable 8.7% Series, $100 par Authorized - 80 shares Outstanding - 64 shares as of 1997 and 80 shares as of 1996 6,400 8,000 -------- -------- Long-term debt (notes 4, 7, and 8): 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 11,200 12,800 Series R, 7.50%, due December 30, 2025 15,000 15,000 Other long-term debt 3,207 - Capital Leases 1,672 1,678 -------- -------- 76,079 74,478 Less-current portion 3,707 2,022 -------- -------- 72,372 72,456 -------- -------- Total capitalization $164,433 $163,021 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page-17 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' INVESTMENT For the Three Years Ended September 30
Shares Amount Issued and Outstanding Paid In ---------------------- Excess Retained (thousands) Number Amount of Par Earnings - ----------------------------------- -------- --------- ---------- --------- Balance, September 30, 1994 5,581 $5,581 $53,042 $18,533 Add (deduct): Net income - - - 6,127 Dividends ($1.08 per share) - - - (6,062) Dividend reinvestment, cash stock purchase plan and employee benefit plans 87 87 1,279 - Accrual for stock compensation plans - - (87) - Amortization of deferred compensation for stock compensation plans - - 24 - -------- --------- ------- ------- Balance, September 30, 1995 5,668 5,668 54,258 18,598 Add (deduct): Net income - - - 8,970 Dividends ($1.08 per share) - - - (6,155) Dividend reinvestment, cash stock purchase plan and employee benefit plans 80 80 1,309 - Accrual for stock compensation plans - - (227) - Amortization of deferred compensation for stock compensation plans - - 64 - -------- --------- ------- ------- Balance, September 30, 1996 5,748 5,748 55,404 21,413 Add (deduct): Net income - - - 7,831 Dividends ($1.08 per share) - - - (6,242) Dividend reinvestment, cash stock purchase plan and employee benefit plans 82 82 1,392 - Exercise of stock options 2 2 32 - Accrual for stock compensation plan - - (110) - Amortization of deferred compensation for stock compensation plan - - 109 - -------- --------- ------- ------- Balance, September 30, 1997 5,832 $5,832 $56,827 $23,002 ======== ========= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. Page-18 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 Company). Revenues from natural gas sales and distribution businesses are reflected in the accompanying consolidated statements of income to arrive at operating income. Revenues and expenses of non-utility operations include sales and rentals of appliances as well as real estate rentals and are presented after operating income in the accompanying consolidated statements of income. All significant intercompany transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Regulation. The Providence Gas Company (ProvGas) is subject to regulation by the Rhode Island Public Utilities Commission (RIPUC). The accounting policies of ProvGas conform to GAAP 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 Gas) is subject to regulation by the Massachusetts Department of Public Utilities (MDPU). Operating Revenues. Operating revenues are generated principally from natural gas activities. 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. These leases are recorded on the accompanying balance sheet at the gross investment in the leases less unearned income. Unearned income is recognized in such a manner as to produce a constant periodic rate of return on the net investment in the finance lease. 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 being amortized over periods ranging from 1 to 24 years. Impairment of Long-Lived Assets. Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which became effective for the Company in 1997 established accounting standards for the impairment of long-lived assets. SFAS No. 121 also required that regulatory assets which are no longer probable of recovery through future revenues be charged to earnings. SFAS 121 did not have an impact on the Company's financial position or results of operations upon adoption. 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 Page-19 was approximately 3.85 percent for 1997 and 1996 and 3.75 percent for 1995. The Company retires property units by charging original cost, cost of removal, including environmental investigation and remediation costs, and salvage value to accumulated depreciation. Gas Charge Clause. In May 1996, the RIPUC approved a Rate Design Settlement Agreement. The Agreement included changes to ProvGas' gas cost recovery mechanism. Specifically, the Agreement replaced the previous Cost of Gas Adjustment Clause (CGA) with Gas Charge Clauses (GCC) effective June 2, 1996. In addition to the commodity and related pipeline transportation costs historically included in the CGA, the GCC provided for the recovery of: (1) inventory financing costs; (2) working capital associated with gas supply purchases; (3) bad debt expenses associated with the gas revenue portion of customer bills; and (4) a substantial portion of liquefied natural gas operating and maintenance expenses, all of which were previously recovered in base rates. Similar to the former CGA, the GCC provided for reconciliation of total gas costs billed with the actual cost of gas incurred. Any excess or deficiency in amounts billed as compared to costs incurred is deferred and either refunded to, or recovered from, customers over a subsequent period. As a result of the Price Stabilization Plan described in Note 9, the GCC will be suspended for the period of October 1, 1997 through September 30, 2000. Any excess or deficiency in amounts billed as compared to costs incurred, will be retained or borne by the Company. 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, net. 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 related 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:
(thousands of dollars) 1997 1996 - ------------------------------------- ------- ------- Cost of fuel assistance program $ 808 $ 1,271 Pension costs 7,379 6,920 Deferred costs related to phase-in plan 272 449 Unamortized debt expense 1,901 2,109 Post-retirement benefits 691 1,041 Pipeline interconnection costs - 309 Deferred rate case expense (note 9) 164 246 Other deferred charges 2,272 2,441 ------- ------- Total $13,487 $14,786 ======= =======
Temporary Cash Investments. Temporary cash investments are short term, highly liquid Page-20 investments with original maturities to the Company of not more than 90 days. Stock-Based Compensation. Compensation expense associated with awards of stock or options to employees is measured using the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (Note 10). Reclassifications. Certain prior year amounts have been reclassified for consistent presentation with the current year. 2. Federal Income Taxes The Company records income taxes in accordance with the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires deferred taxes to be provided for all temporary differences. The following is a summary of the provision for Federal income taxes for the three years in the period ended September 30:
(thousands of dollars) 1997 1996 1995 - ----------------------------------------------------------- Current $3,688 $2,989 $1,300 Deferred 703 1,943 2,142 ------ ------ ------ Total Federal income tax provision $4,391 $4,932 $3,442 ====== ====== ====== Income tax is charged (credited) to the following: Charged to operating expenses $4,608 $4,683 $3,104 Included in other, net (217) 249 338 ------ ------ ------ Total Federal income tax provision $4,391 $4,932 $3,442 ====== ====== ======
The effective Federal income tax rates and the reasons for their differences from the statutory Federal income tax rates are as follows:
1997 1996 1995 - -------------------------------------------------------------- Statutory Federal income tax rates 34.0% 34.0% 34.0% Reversing temporary differences (.3) .5 (.1) Charitable contribution - (.4) - Amortization of investment tax credits (.4) (.4) (.6) Other .9 .1 .3 ---- ---- ---- Effective Federal income tax rate 34.2% 33.8% 33.6% ==== ==== ====
Page-22 The Company's deferred tax assets and liabilities for each of the two years in the period September 30 are the result of the following temporary differences:
(thousands of dollars) 1997 1996 - --------------------------------------------------------------------- Long-term deferred taxes - ------------------------ Tax assets Unamortized ITC................................. $ 828 $ 883 Other........................................... 305 361 Tax liabilities Property related................................ (21,828) (20,328) Pension costs................................... (222) (519) Deferred charges................................ (578) (1,110) -------- -------- Net deferred tax liability included in accompanying consolidated balance sheet......... $(21,495) $(20,713) ======== ======== Prepaid Taxes - ------------- Tax assets Accounts receivable reserves.................... $ 458 $ 1,284 Property tax reserves........................... (229) (384) Alternative minimum tax......................... 703 876 Other........................................... 1,229 1,020 Tax liabilities Employee severance.............................. 56 56 Other........................................... (111) (40) ------- -------- Net prepaid taxes................................. 2,106 2,812 Prepaid gross earnings tax and other.............. 1,899 1,264 ------- -------- Net prepaid and refundable taxes included in accompanying consolidated balance sheet......... $ 4,005 $ 4,076 ======= ========
Investment tax credits are amortized through credits to other, net over the estimated lives of related property. 3. Lease Receivables The Company presently finances the installation of water heaters and other appliances for its customers under one to three year finance agreements. Previously, the Company leased water heaters and appliances to customers under 10-year sales-type leases.
Future minimum lease payments to be received are: (thousands of dollars) - ------------------------------------------------ 1998 $ 529 1999 491 2000 397 2001 342 ------ 1,759 Amount representing interest 312 ------ Amount representing principal $1,447 ======
Page-23 4. Capitalization A. First Mortgage Bonds In December 1995, ProvGas issued $15 million of First Mortgage Bonds. These First Mortgage Bonds are designated as Series R (7.5 percent) and will mature in December 2025. The net proceeds provided by this indebtedness were used to pay down ProvGas' short-term debt. The Company's ability to pay dividends is largely dependent on receipt of dividends from its principal subsidiary, ProvGas. Approximately $19 million of ProvGas' retained earnings were available for dividends under the most restrictive terms of ProvGas' First Mortgage Bond indenture. ProvGas' First Mortgage Bonds are secured by a lien on substantially all of the tangible and real property. As of September 30, 1997, the annual sinking fund requirements and maturities of long-term debt for each of the next five fiscal years are $2,509,000. B. Other Long-term Debt During 1997, the Company financed equipment purchases of approximately $3,328,000 through the issuance of long-term notes to IBM Credit Corporation. The notes have five-year terms and interest rates ranging from 4.9 to 7.5 percent. As of September 30, 1997, the maturities of these long-term notes over the next five years are $686,000 in 1998, $639,000 in 1999, $675,000 in 2000, $713,000 in 2001, and $490,000 in 2002. C. Redeemable Preferred Stock ProvGas' preferred stock, which consists of 80,000 shares of $100 par value, has an 8.7 percent cumulative annual dividend rate payable on a quarterly basis, and has no voting power or privileges. The stock is subject to a cumulative annual sinking fund requirement of 16,000 shares per year at par ($1,600,000) plus accrued or unpaid dividends which commenced in February 1997. Accordingly, 16,000 shares were redeemed by the Company at par value in February 1997. 5. Notes Payable The Company meets seasonal cash requirements and finances capital expenditures on an interim basis through short-term bank borrowings. As of September 30, 1997, the Company had lines of credit totaling $66,500,000 with borrowings outstanding of $23,675,000. The Company pays a fee for its lines of credit rather than maintaining compensating balances. The weighted average interest rate for borrowings outstanding at the end of the years was 5.79 percent in 1997, 5.65 percent in 1996, and 6.15 percent in 1995. 6. Employee Benefits A. Retirement Plans The Company 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 Company's policy to fund at least the minimum required contribution. Page-24 The following table sets forth the funding status of the pension plans and amounts recognized in the Company's consolidated balance sheets at September 30, 1997 and 1996:
(thousands of dollars) 1997 1996 - -------------------------------------------------------------------------------- Accumulated benefit obligation, including vested benefit obligation of $(38,094) as of September 30, 1997 and $(36,463) as of September 30, 1996 $ 45,022 $(42,578) ======== ======== Projected benefit obligation for service rendered to date $(60,323) $(57,209) Plan assets at fair value (primarily listed stocks, corporate bonds and U.S. bonds) 76,479 63,019 -------- -------- Excess of plan assets over projected benefit obligation 16,156 5,810 Unrecognized (gain)/loss (23,813) (13,139) Unrecognized prior service cost 2,842 3,126 Unrecognized net transition asset being recognized over 15 years from October 1, 1985 (408) (545) -------- -------- Net accrued pension cost included in other deferred credits and accounts payable at September 30, 1997 and 1996 $ (5,223) $ (4,748) ======== ========
Net pension cost for fiscal years 1997, 1996, and 1995 included the following components:
(thousands of dollars) 1997 1996 1995 - ------------------------------------------------------------------------------- Service cost $ 1,824 $ 1,709 $ 1,541 Interest cost on benefit obligations 4,583 4,262 3,872 Actual return on plan assets (16,458) (7,481) (10,300) Net amortization and deferral 10,526 2,091 5,713 -------- ------- -------- Net periodic pension cost 475 581 826 Adjustments due to regulatory action 475 (442) (424) -------- ------- -------- Net periodic pension cost recognized $ - $ 139 $ 402 ======== ======= ========
The discount rate and rate of increase in future compensation levels used in determining the projected benefit obligation were eight percent and six percent, respectively. The expected long-term rate of return on assets was nine percent. ProvGas recovers pension costs in rates when such costs are funded. Therefore, the amount by which funding differs from pension expense, determined in accordance with GAAP, is deferred and recorded as a regulatory asset or liability. B. Postretirement Benefits Other Than Pensions ProvGas currently offers retirees who have attained age 55 and worked five years for ProvGas 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 Page-25 contributions to the Plan currently, future contributions may be required if the cost of the Plan exceeds certain limits. Since 1993, postretirement benefit costs for active employees are recorded by ProvGas on an accrual basis, ratably over their service periods. Benefits of $10,526,000 earned prior to 1993 have been deferred as an unrecognized transition obligation, which ProvGas will amortize over a 20 year period. ProvGas funds its postretirement benefit obligation to a Voluntary Employee Benefit Association (VEBA) Trust. Total obligations of $1,372,000 in 1997, $1,454,000 in 1996, and $1,561,000 in 1995, were contributed to the VEBA Trust. ProvGas recovers its postretirement benefit obligations 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, ProvGas fully recovered its 1997, 1996, and 1995 postretirement obligations because such amounts were funded into the VEBA Trust. In addition, in September 1996, the Commission approved a ratable recovery of the cumulative unrecovered difference of $1,041,000 during 1997, 1998, and 1999. Of the total postretirement benefit obligations, $1,718,000, $1,454,000, and $1,231,000 were included in rates during 1997, 1996, and 1995, respectively. The Plan's costs and accumulated postretirement benefit obligation for 1997, 1996 and 1995 are calculated by ProvGas' actuaries using assumptions and estimates which include:
1997 1996 1995 - ---------------------------------------------------------------------------- Healthcare cost annual growth rate.................... 10.2% 11.4% 12.6% Healthcare cost annual growth rate - long-term......... 6.0% 6.0 6.0 Expected long-term rate of return (union).............. 8.5% 8.5 8.5 Expected long-term rate of return (non-union).......... 5.5% 5.5 5.5 Discount rate.......................................... 8.0% 8.0 8.0
The healthcare cost annual growth rate significantly impacts the estimated Plan obligation and annual expense. For example, in 1997, a one percent change in the above rates would change the obligation by $799,000 and would change the annual expense by $85,000. The obligations and assets of the Plan at September 30, 1997 and 1996 are as follows:
(in thousands) 1997 1996 - ------------------------------------------------------------ Accumulated post-retirement benefit obligation: Current retirees $(6,626) $(6,975) Active employees-eligible for benefits (1,361) (889) Active employees (3,761) (3,876) ------- ------- Total post-retirement benefit obligation (11,748) (11,740) Plan assets at fair value 4,704 3,106 -------- -------- Unfunded post-retirement benefit obligation (7,044) (8,634) Unrecognized transition obligation 8,421 8,947 Unrecognized net (gain) or loss (1,360) (313) -------- -------- Prepaid post-retirement benefit obligation included in the accompanying consolidated balance sheet $ 17 $ (-) ======== ========
Page-26 ProvGas' actuarial determined Plan costs for 1997, 1996, and 1995 include the following:
(in thousands) 1997 1996 1995 - --------------------------------------------------------- Service cost $ 228 $ 222 $ 230 Interest cost 896 896 909 Actual return on plan assets (278) (98) (28) Amortization and deferral 526 434 450 ------ ------ ------ Total annual plan costs $1,372 $1,454 $1,561 ====== ====== ======
C. Supplemental Retirement Plans ProvGas provides certain supplemental retirement plans for key employees. The projected benefit obligation is approximately $1,375,000 which is being accrued over the service period of these key employees. The supplemental retirement plans are unfunded. ProvGas accrued and expensed $612,000, $310,000, and $150,000 related to these benefits in 1997, 1996, and 1995, respectively. D. Performance and Equity Incentive Plan The Providence Energy Corporation Performance and Equity Incentive Plan (the Plan) provides that up to 225,000 shares of common stock may be granted to key employees, including employees of ProvGas, at no cost to the employees. Key employees who received common shares are entitled to receive dividends, but full beneficial ownership vests on the fifth anniversary of the date of the grant provided the participant is still employed by the Company. Vesting may be accelerated under certain circumstances. The Plan also provides for cash compensation to key employees. The executive compensation incentive awards totaled approximately $439,000 for 1997, $381,000 for 1996, and $248,000 for 1995. Amounts paid in cash are charged to expense when earned. However, amounts paid in restricted stock are deferred and amortized to expense over the five-year vesting period. Of the $248,000 1995 award, $167,000 was paid in cash during fiscal 1996. Of the $381,000 1996 award, $269,000 was paid in cash during 1997. Of the $439,000 1997 award, $297,000 will be Page-27 paid in cash during 1998. Grant shares totaling 5,989, 4,491, and 5,371 were purchased by the Company and reissued to key employees during 1997, 1996, and 1995, respectively. E. Restricted Stock Incentive Plan The Restricted Stock Incentive Plan provides that up to 60,000 shares of common stock may be granted to employees of the Company with at least three months of service, who are not officers or covered by a collective bargaining agreement, at no cost to the employee. All participants are entitled to receive dividends, however, full beneficial ownership vests on the third anniversary of the date of the grant provided that the participant is still employed by the Company. Vesting may be accelerated under certain circumstances. Awards under the Restricted Stock Incentive Plan totaled approximately $146,000 in 1996 consisting of 7,954 shares. There were no awards under the Restricted Stock Incentive Plan in 1997. All amounts awarded under the Restricted Stock Incentive Plan are deferred and amortized to expense over a three-year period. 7. Commitments and Contingencies A. Legal Proceedings The Company 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 Company's results of operations or financial condition. B. Capital Leases ProvGas 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 ProvGas, for a corresponding term at an annual amount of $150,000, the land on which the tank is situated. ProvGas also leases certain information systems and other equipment under capital leases. Property under Capital Leases: - -----------------------------
(thousands of dollars) 1997 1996 - ------------------------------------------------------------ Gas plant $ 6,116 $ 6,116 Computer and other equipment 1,988 1,551 Accumulated depreciation (6,484) (6,072) ------- ------- $ 1,620 $ 1,595 ======= =======
Commitments for Capital Leases are: - -------------------------------------
LNG Computer (thousands of dollars) Storage Equipment Total - ----------------------------------------------------------------- 1998 $ 136 $ 492 $ 628 1999 136 484 620 2000 136 297 433 2001 135 111 246 2002 - 35 35 ------ ------ ------ $ 543 $1,419 1,962 ====== ====== Amounts representing interest 290 ------ Amounts representing principal $1,672 ======
Page-28 C. Operating Leases The Company also leases facilities and equipment under operating leases with a total future obligation of approximately $354,000 as of September 30, 1997. D. Gas Supply As part of the Price Stabilization Plan Settlement Agreement described in Note 9, the Company's largest subsidiary, ProvGas, has entered into a full requirements gas supply contract with Duke Energy Trading and Marketing L.L.C. (DETM) for a term of three years. Under the contract, DETM guarantees to meet ProvGas' supply requirements, however, ProvGas must purchase all of its gas supply exclusively from DETM . Under the contract, ProvGas will transfer responsibility for its pipeline capacity resources, storage contracts, and LNG capacity to DETM. As a result, ProvGas' gas inventories at September 30, 1997, of approximately $18 million will be sold for book value to the supplier on October 1, 1997. As a result of Federal Energy Regulatory Commission (FERC) Order 636 and other related orders (the Orders), pipeline transportation companies have incurred significant costs, collectively known as transition costs. The majority of these costs will be reimbursed by the pipeline's customers, including the Company. The Company estimates its transition costs to be approximately $21.7 million, of which $16.2 million has been included in the GCC and collected from customers through September 30, 1997. The remaining minimum obligation of $5.5 million has been recorded in the accompanying consolidated balance sheet along with a regulatory asset anticipating future recovery. As part of the above supply contract, DETM will assume liability for these transition costs during the contract's three-year term. At the end of the three-year term of the contract, the Company will assume any remaining liability, which cannot be estimated at September 30, 1997. E. Environmental Matters Federal, state and local laws and regulations establishing standards and requirements for the protection of the environment have increased in number and in scope within recent years. The Company cannot predict the future impact of such standards and requirements which are subject to change and can take effect retroactively. The Company 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 paragraphs, the Company believes it is in substantial compliance with such laws and regulations. At September 30, 1997, the Company was aware of four sites at which future costs may be incurred. The Company has been designated as a "potentially responsible party" (PRP) under the Page-29 Comprehensive Environmental Response Compensation and Liability Act of 1980 at two sites in Plympton, Massachusetts on which waste material is alleged to have been deposited by disposal contractors employed in the past either directly or indirectly by the Company and other PRP's. With respect to one of the Plympton sites, the Company has joined with other PRP's in entering into an Administrative Consent Order with the Massachusetts Department of Environmental Protection. The costs to be borne by the Company, in connection with both Plympton sites, are not anticipated to be material to the financial condition of the Company. During 1995, the Company voluntarily began a study at its primary gas distribution facility located in Providence, Rhode Island. This site formerly contained a manufactured gas plant operated by the Company. As of September 30, 1997, approximately $1.8 million has been spent primarily on studies at this site. In accordance with state laws, such a voluntary study is monitored by the Rhode Island Department of Environmental Management (DEM). The purpose of this study was to determine the extent of environmental contamination at the site. The Company has completed the study which indicates that remediation will be required. The Company has several remediation options for the site and is currently negotiating with DEM and contractors to arrive at the best alternative. At September 30, 1997, the Company has compiled a preliminary range of costs based on remediation alternatives, ranging from $1.7 million to in excess of $5.0 million. However, because of the uncertainties associated with environmental assessment and remediation activities, the future cost of remediation could be higher than the alternatives noted above. Based on the proposals for remediation work, the Company has accrued $1.7 million at September 30, 1997, for anticipated future remediation costs at this site. Tests conducted following the discovery of an abandoned underground oil storage tank at the Company's Westerly, Rhode Island operations center in 1996 confirm the existence of contaminants at this site. The Company is currently conducting tests at this site, the costs of which are being shared equally with the prior owner, to determine the nature and extent of the contamination. Due to the fact that the testing is in its early stages, management cannot conclude as to whether any remediation will be required at this site. In addition, in 1997, contamination from scrapped meters and regulators was discovered at this site. The Registrant has reported this to the DEM and the Rhode Island Department of Health and is in the process of remediation. It is anticipated that remediation will cost between $50,000 and $100,000. Accordingly, the Company has accrued $50,000 at September 30, 1997 for anticipated future remediation costs. In prior rate cases filed, the Company 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 $2.3 million and an estimated $1.7 million for environmental remediation costs have been charged to the accumulated depreciation reserve at September 30, 1997. Of the environmental investigation costs incurred, approximately $0.4 million and $1.0 million were recorded in the years ended September 30, 1997 and 1996, respectively, while the remainder were incurred in prior years. Due to the materiality of the Company's environmental investigation and remediation expenditures, the Company sought new treatment of these amounts. As a result, included in the Price Stabilization Plan Settlement Agreement described in Note 9, which is effective October 1, 1997, all environmental investigation and remediation costs incurred through September 30, 1997 as well as all costs incurred during the three-year term of the Plan will be amortized over a ten-year period. Additionally, it is the Company's practice to consult with the RIPUC on a periodic basis when, in management's opinion, significant amounts might be expended for Page-30 environmental related costs. Effective October 1, 1997, the Company will adopt the provisions of Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities". This Statement provides authoritative guidance for recognition, measurement, display, and disclosure of environmental remediation liabilities in financial statements. SOP 96-1 is not expected to have a material impact on the Company's financial position or results of operation upon adoption. Management has begun discussions with other parties who may assist the Company in paying future costs at the above sites. Management believes that its program for managing environmental issues combined with rate recovery and financial contributions from others, will likely avoid any material adverse effect on its results of operations or its financial condition as a result of the ultimate resolution of the above sites. F. Fuel Assistance Program The Company participates in the State of Rhode Island's Fuel Assistance Program, the Percentage of Income Payment Plan. As a result, ProvGas has agreed to accept partial payment on certain customer accounts from various state agencies. As of September 30, 1997, approximately $629,000 was due from the State of Rhode Island related to gas consumed by customers over the last two years. 8. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value disclosures for the following financial instruments: Cash, Cash Equivalents 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 Company's financial instruments at September 30 are as follows:
1997 1996 -------------------------- -------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ---------------------------------------------------------------------------------- Cash and cash equivalents $ 1,063 $ 1,063 $ 1,424 $ 1,424 Short-term debt 23,675 23,675 23,270 23,270 Long-term debt 76,079 84,039 74,478 77,924 Preferred stock 6,400 7,030 8,000 8,395
Page-31 The difference between the carrying amount and the fair value of the Company's preferred stock and long-term debt, if they were settled at amounts reflected above, would likely be recovered in the Company's rates over a prescribed amortization period. Accordingly, any settlement should not result in a material impact on the Company's financial position or results of operations. 9. Rate Changes A. Price Stabilization Plan Settlement Agreement In August 1997, the RIPUC approved the Price Stabilization Plan Settlement Agreement (Energize R.I. or the Plan) among ProvGas, the Division of Public Utilities and Carriers (the Division), The Energy Council of Rhode Island, and the George Wiley Center. Effective for the period from October 1, 1997 to September 30, 2000, Energize R.I. provides customers with an initial price decrease of approximately four percent in addition to a three-year price freeze. Under Energize R.I., the GCC will be suspended for the entire term. Energize R.I. also requires ProvGas to make significant capital investments to improve its distribution system. Capital investments required by Energize R.I. are estimated to total approximately $26 million over its three-year term. In addition, Energize R.I. requires ProvGas to fund the Low-Income Assistance Program at an annual level of $1 million, the Demand Side Management Rebate Program at an annual level of $500,000 and the low income weatherization program at an annual level of $200,000. Energize R.I. also continues the process of unbundling by requiring ProvGas to provide unbundled service offerings to up to 10 percent per year of firm system throughput. As part of Energize R.I., ProvGas will amortize approximately $4 million of environmental costs previously charged to the accumulated depreciation reserve. These costs and all environmental costs incurred during the term of the Plan will be amortized over a 10-year period. In addition, as part of the Plan, ProvGas will write-off approximately $1.5 million of deferred revenues in October 1997. Under Energize R.I., ProvGas may earn up to 10.9 percent annually on its average common equity of up to $81.0 million, $86.2 million, or $92.0 million in fiscal 1998, 1999, and 2000, respectively. In addition, ProvGas may not earn less than a seven percent return on average common equity under the Plan. In the event that the Company earns in excess of 10.9 percent or less than seven percent, the Company will defer revenues or costs through a deferred revenue account. Any balance in the deferred revenue account at the end of the Plan will be refunded or recovered from customers in a manner determined by all parties and approved by the RIPUC. B. ProvGas Rate Increase In February 1995, ProvGas filed for rate relief requesting an approximate eight 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. 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 ProvGas' motion to reconsider a revenue adjustment of $171,572. That approval increases the overall rate increase to $4,161,572. C. North Attleboro Gas Rate Increase Page-32 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 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 Gas 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 Gas meets certain growth requirements by the year 2000. North Attleboro Gas capitalized AFUDC and other costs of approximately $37,000 in 1997, $61,000 in 1996, and $136,000 in 1995 that related primarily to the gas plant not yet phased into North Attleboro Gas' rates under the plan. North Attleboro amortized $214,000 in 1997, $212,000 in 1996, and $185,000 in 1995 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 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 Company 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. The Company offers two stock option plans for officers, directors, and key employees covering 250,000 shares of the Company's common stock. Options under the plans are granted at 100 percent of fair market value at the date of grant. The options expire 10 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 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, 1997, 1996, and 1995: Page-33
Weighted Average Number of Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding, September 30, 1994 56,508 $16.99 Granted 8,042 15.63 Exercised - - Expired (9,761) 17.23 ------- ------ Outstanding, September 30, 1995 54,789 16.74 Granted 7,449 17.00 Exercised - - Expired - - ------- ------ Outstanding, September 30, 1996 62,238 16.77 Granted 9,319 17.50 Exercised (2,130) 16.11 Expired (10,009) 17.71 ------- ------ Outstanding, September 30, 1997 59,418 $16.75 ======= ======
The following table sets forth information regarding options outstanding at September 30, 1997:
Weighted Weighted Average Number Weighted Average Exercise Price Number of Range of Currently Average Remaining for Currently Options Exercise Prices Exercisable Exercise Price Life Exercisable - ---------------------------------------------------------------------------------------- 59,418 $13.875-$19 50,927 $16.75 5.30 $16.63
At September 30, 1996 and 1995, 54,789 and 48,815 were currently exercisable, respectively. As described in Note 1, the Company uses the intrinsic method to measure compensation expense associated with grants of stock options or awards to employees. Had the Company used the fair value method to measure compensation, reported net income would have been $7,822,000 in 1997 and $8,963,000 in 1996. Earnings per share for both years would not have been affected. For purposes of determining the above disclosure required by Statement of Financial Accounting Standards No. 123, the fair value of options on their grant date was measured using the Black/Scholes option pricing model. Key assumptions used to apply this pricing model were as follows:
1997 1996 ---- ---- Risk-free interest rate 5.43% 6.24% Expected life of option grants (years) 7.0 7.0 Expected volatility of underlying stock 15% 15%
The pro-forma presentation only includes the effects of grants made subsequent to October 1, 1995. The estimated fair value of option grants made during 1997 and 1996 was $1.41 and $1.42, respectively, per option. Page-34 In January 1997, the shareholders of the Company adopted the Non-Employee Director Stock Plan, which provides that up to 50,000 shares of common stock may be granted to non-employee directors. The shares will be granted, at no cost to the director, on the first day of each fiscal year based on each director's aggregate fees earned in the prior fiscal year. All participants are entitled to vote the grant shares and receive dividends on the grant shares, however, full beneficial ownership vests on the third anniversary of the grant date provided the participant is still a director of the Company. Vesting may be accelerated under certain circumstances. There were no shares issued under the Non-Employee Director Stock Plan in fiscal 1997. 11. Non-utility Property During 1996, the Company sold land which was previously being rented to a third party for use as a parking lot. The land was sold for $725,000 generating a gain, net of taxes, of $522,000. Additionally, in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies", the Company performed an economic analysis of the value of its significant nonutility real estate in 1996. Based on the results of that analysis, the Company wrote down the carrying value of its nonutility real estate by $471,000 net of taxes, due to a decline in real estate prices. 12. Hedging On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program Settlement Agreement (the Settlement Agreement) between the Company and the Division. The Agreement allowed the Company to use options, including calls, puts and collars, in order to mitigate the impact of escalations in natural gas prices. The total expenditures for the purchase and exercise of Financial Risk Management (FRM) tools and the net proceeds from the sale of FRM tools were flowed through the Variable Gas Cost component of the GCC and could not exceed $800,000. The total expenditures, net of sales proceeds, made under the Program in 1997 were approximately $154,000. The Company did not hold any open contracts at September 30, 1997. The Settlement Agreement expired on September 30, 1997. The Settlement Agreement was not extended since its objectives were met through the Price Stabilization Plan Settlement Agreement described in Note 9. 13. New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share", effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaces the presentation of primary earnings per share with the presentation of basic earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is calculated by dividing income available to common stockholders by weighted average number of common shares outstanding for the period. Earnings per share calculated under SFAS No. 128 would have been unchanged for the periods presented. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 130, which is effective for fiscal years beginning after December 15, 1997, requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings Page-35 and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 131, which is effective for financial statements for periods beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. These statements require additional disclosure only and will not effect the financial position or results of operations of the Company. 14. Unaudited Quarterly Financial Information The following is unaudited quarterly financial information for the two years ended September 30, 1997 and 1996. 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 1997 - --------------------------------------------------------------- Operating revenues $64,038 $79,946 $42,921 $33,515 Operating income (loss) 6,355 8,782 2,210 (1,285) Net income (loss) 4,264 6,737 135 (3,305) Net income (loss) per share* .74 1.17 .02 (.58) Dec. 31 Mar. 31 June 30 Sept. 30 ------------------------------------ Fiscal 1996 - --------------------------------------------------------------- Operating revenues $58,406 $81,107 $43,273 $32,366 Operating income (loss) 6,566 9,779 906 (1,065) Net income (loss) 5,123 7,788 (909) (3,032) Net income (loss) per share* .90 1.37 (.16) (.54)
* Calculated on the basis of the weighted average shares outstanding during the quarter. Page-36 EX-22 4 SUBSIDIARIES OF THE REGISTRANT 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. Providence Energy Services, Inc. - Incorporated under the laws of Rhode Island. North Attleboro Gas Company - Incorporated under the laws of Massachusetts. EX-27 5 FINANCIAL DATA SCHEDULE
UT 1,000 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 PER-BOOK 190,464 1,182 50,377 13,487 0 255,510 5,832 56,827 23,002 85,661 0 6,400 72,372 23,675 0 0 3,707 0 0 0 63,695 255,510 220,420 4,608 75,374 79,982 16,062 (2) 16,060 8,457 7,831 626 7,831 6,242 6,042 27,887 1.35 1.35
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