-----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, IYxjU1h/8/iwBvDd5fkthNxL/E91TMiCf0IindmkEI0XdlU8EBNRFVtrmwl2NnPg R3ydb70yEf12/7lsDMgJMw== 0000950132-96-000811.txt : 19961223 0000950132-96-000811.hdr.sgml : 19961223 ACCESSION NUMBER: 0000950132-96-000811 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961220 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10032 FILM NUMBER: 96684366 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-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION- Washington, D. C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 1996 ------------------ 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 4, 1996: $101,773,388 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: 5,767,747 shares outstanding at - --------------------------------------------------------------- December 4, 1996. - ---------------- DOCUMENTS INCORPORATED BY REFERENCE - ----------------------------------- Portions of the annual report to shareholders for the fiscal year ended September 30, 1996 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-11 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-11 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" information 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; 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; unanticipated environmental liabilities; changes in, or the failure to comply with, government regulations; 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. As of December 4, 1996, the Registrant's outstanding common shares are listed on the New York Stock Exchange. Prior to that date, these shares were listed on the American Stock Exchange. The Registrant is the parent of two wholly-owned natural gas distribution utilities, The Providence Gas Company (ProvGas) and North Attleboro Gas Company (North Attleboro Gas), together referred to as the Gas Companies. In August 1996, the Registrant incorporated Providence Energy Services, Inc. to market natural gas and energy services. The Registrant also conducts its nonutility operations through a wholly-owned nonutility subsidiary, Newport America Corporation (Newport America)-see nonutility operations. ProvGas, Rhode Island's largest natural gas distributor, was founded in 1847 and serves approximately 163,000 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. I-1 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 166,000 for the twelve months ended September 30, 1996, of which approximately 90% were residential and 10% were commercial and industrial. The net increase in the average annual number of customers during fiscal 1996 over fiscal 1995 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 due to the stagnant economy. Gas Service. The gas services provided by the Gas Companies can be grouped ------------ into three categories -- firm, interruptible and transportation service. Firm service is provided to those residential, commercial and industrial customers that use natural gas throughout the year. Interruptible service is provided to those commercial and industrial customers that do not require assured gas service because they can utilize an alternative fuel or otherwise operate without gas service. Transportation service is a service where the Gas Companies transport to certain large customers gas owned by those customers or by third parties selling gas to those customers. The following table shows the distribution of gas to various customer classes, and the total gas sold and transported by year since 1992: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Firm 85.8% 76.4% 81.9% 83.9% 73.9% Interruptible 9.3 17.6 15.8 14.7 23.1 Transportation 4.9 6.0 2.3 1.4 3.0 ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== Total Gas Sold and Transported - ------------------------------ BCF(*) 28.1 28.1 28.7 27.1 29.1 ===== ===== ===== ===== ===== (*) 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' firm ------------- sales has been approximately 60% to residential and 40% to commercial and industrial customers. Firm sales represent the highest percentage of operating margin and represent the core of the Gas Companies' business. Interruptible Service. Interruptible customers consist of two types: seasonal ---------------------- customers that typically use gas only during the nonwinter months and dual-fuel customers that contract for gas service on a year round basis, but agree to service interruption during certain peak periods. By retaining the right to interrupt service to the dual-fuel customers, the Gas Companies can balance daily demand from firm customers I-2 with available gas supply and pipeline capacity. Interruptible customers may interrupt their gas service, as well, when it is more economical to utilize an alternative fuel. Accordingly, the amount of the Gas Companies' interruptible sales fluctuates depending upon the relative price of natural gas to alternative fuels. Interruptible sales produce substantially less margin to the Gas Companies than firm sales due to the more competitive nature of interruptible sales. Service rates charged to dual-fuel customers are based on the price that the customer would otherwise pay for its alternative fuel. Total margin, however, is not impacted by nonfirm sales due to the fact that the Rhode Island Public Utilities Commission (RIPUC) requires 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 - see Rates and Regulation and Competition and Marketing. Transportation Service. The Registrant provides both firm and nonfirm ----------------------- 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 Special Factors Affecting the Natural Gas Industry. 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 the same as 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 impacted. Total margin is not impacted by nonfirm transportation due to the fact that the RIPUC requires 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 - see Rates and Regulation. Gas Supply. During 1996, 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 5% of supply requirements. The remaining 11% was purchased in the market area, generally on an interruptible basis. The Registrant maintains contracts sufficient to meet 100% of its firm winter demand using firm storage and firm pipeline transportation. When not using capacity for its own sales, the Registrant released the capacity or used it to make off-system sales. In fiscal 1996, the Registrant received $5.7 million in revenue from released capacity, a 10.5% increase over the $5.1 million of revenue generated in fiscal 1995. The revenues reduced the firm customer's gas cost, making the Registrant more competitive. I-3 In addition to managing its pipeline capacity, the Registrant has focused its attention on restructuring its supply portfolio to closely match its market requirements. A sophisticated planning model is used to support all major supply decisions and to identify specific areas in the supply and transportation portfolio where savings can be gained without jeopardizing the obligation to serve firm customers. During fiscal 1996, a number of supply contracts were renegotiated or terminated to reduce fixed fees. The most significant change was an increase in storage capacity for an expiring supply contract. Although the Registrant has significantly increased its storage capacities since the implementation of Federal Energy Regulatory Commission (FERC) Order 636, it continues to explore opportunities to add additional storage to its portfolio as a replacement for higher cost supplies as contracts expire. New storage will enhance the Registrant's ability to provide the flexibility needed to meet rapid shifts in temperature, manage market swings and stay competitive in the post FERC Order 636 environment. Rates and Regulation. ProvGas is subject to the regulatory jurisdiction of --------------------- the RIPUC with respect to rates and charges, standards of service, accounting and other matters. North Attleboro Gas Company is subject to similar regulatory jurisdiction by the Massachusetts Department of Public Utilities (MDPU). The standards set by these regulatory bodies affect all aspects of the Gas Companies' businesses, including their ability to market to new customers and to meet competition from other fuel suppliers -- see Competition and Marketing. In February 1996, the Company received approval of a three-year Settlement Agreement between itself and the Rhode Island Division of Public Utilities and Carriers (Division) regarding the Integrated Resource Plan (IRP), which was filed with the RIPUC in July 1994. The purpose of the IRP is to optimize the utilization of production transmission and distribution resources so that customers receive high quality services at the lowest possible costs. The Settlement Agreement provides for: (1) funding associated with Demand Side Management programs of $500,000, which are designed to provide equipment rebates for specific load building programs; (2) funding associated with a low income weatherization program of $200,000, which is designed to assist low income customers through the installation of conservation measures; and (3) a performance-based ratemaking mechanism. The Settlement Agreement also contains a general agreement that the Company's strategy and steps included in its supply plan are reasonable. The Settlement Agreement also provides for a one-time funding of up to $800,000 for a Low Income Assistance Program (LIAP) through a portion of the Company's share of the performance-based ratemaking mechanism. The LIAP was developed in response to the Company's anticipated loss of approximately $900,000 in Federal funding for the low income heat assistance program administered by the State of Rhode Island for 1996. The funding of these programs is generated through annual gas cost savings beginning in July 1995. The Company has performed an analysis of gas cost savings since July 1995 and has achieved sufficient savings as of June 30, 1996 to provide funding for these programs without incurring I-4 a charge to income. Accordingly, in 1996, the Company recorded its annual share of the performance-based ratemaking mechanism under this agreement which resulted in a $1.5 million increase to operating margin. Prior to the IRP, the cost of gas adjustment (CGA) clause contained a provision that enabled the Registrant to retain margins associated with nonfirm sales and transportation. Specifically, nonfirm margins above a threshold were shared at the ratio 66 2/3% to firm customers and 33 1/3% to the Registrant. This provision is suspended during the term of the IRP. In February 1995, ProvGas filed for rate relief requesting an approximate 8% general rate increase. The major factors contributing to the rate request were an increase in depreciation due to capital spending, an increase in working capital needs, and an increase in capital expenditures. On November 17, 1995, the RIPUC issued its decision on the rate request made by ProvGas. In its decision, the RIPUC authorized ProvGas to increase its rates to recover additional annual revenues in the amount of $3,990,000. Subsequent to the issuance of the rate decision, the RIPUC approved ProvGas' motion to reconsider a revenue adjustment of $171,572. That approval increases the overall rate increase to $4,161,572. Additionally, as a result of the order, ProvGas recorded several adjustments to its 1996 financial statements. Specifically: a) ProvGas began calculating property tax expense for rate purposes based on the current year's expense plus an estimate of one year's increase in expense. Previously, ProvGas was required to estimate two year's increase in expense. As a result, ProvGas reduced its regulatory liability for one year's property tax expense resulting in a one time gain of approximately $4,100,000, before tax. b) ProvGas wrote-off the $1,600,000, before tax, of restructuring costs previously deferred. (See Footnote 9 in the Notes to the Consolidated Financial Statements contained in the Registrant's Annual Report to Shareholders filed herewith as Exhibit 13.) The RIPUC had previously allowed ProvGas recovery of similar costs, but determined that the costs of the 1994 reorganization should not be recovered in rates. c) ProvGas wrote-off approximately $440,000, before tax, of previously deferred rate case expenses. (See Footnote 1 in the Notes to the Consolidated Financial Statements contained in the Registrant's Annual Report to Shareholders filed herewith as Exhibit 13.) d) ProvGas wrote-off approximately $470,000, before tax, of construction expenditures previously capitalized. These costs were capitalized in accordance with generally accepted accounting principles and were based on FERC guidance on accounting for such costs. The RIPUC agreed that such costs could be capitalized beginning in 1996, but did not allow recovery of previously capitalized costs. The net effect of the above adjustments did not result in a material gain or loss. The following table sets forth the results of ProvGas' applications before the RIPUC for revenue increases since 1981. I-5
Annualized Annualized Authorized Date of Revenue Increase Date Rates Revenue Increase Return on Application Requested Effective Allowed (*) Common Equity - ------------- ---------------------------- ---------------- ------------ -------------- 5/17/90 $15,800,000 03/15/91 $9,176,000 12.8% 1/15/93 9,100,000 (**) 11/14/93 694,000 11.2 2/16/95 14,880,000 (***) 12/17/95 4,161,572 (****) 10.9
(*) Although the RIPUC reviews and approves all changes in gas costs billed to customers through the 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 1996 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 largest customers, such that those customers would have the option to purchase natural gas directly from suppliers and use the Registrant to transport the gas. 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 Company, the Division, The Energy Council of Rhode Island (TEC-RI) and a consortium of oil heat organizations. The Agreement begins 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. While this initial program is available to approximately 120 of the largest commercial and industrial customers, the Company is required to make an additional filing in March 1997 that would expand the eligibility of unbundled services to other customers. The Company does not know the number of customers that would be impacted by the March 1997 filing at this time. The 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 debt expenses associated with the gas revenue portion of customer bills; and (4) a substantial portion of LNG operating and maintenance expenses, all I-6 of which were previously recovered in base rates. Similar to the former CGA, the GCC provides 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. On October 8, 1996, the RIPUC approved a one year Pilot Hedging Program Agreement between the Company and the Division. The objective of the pilot program is 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 will be 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 will be flowed through the Variable Gas Cost component of the GCC and cannot exceed $800,000. In October 1995, North Attleboro Gas received approval of its fifth and final rate increase under the qualified five year phase-in plan. Under the terms of the agreement, a 32 percent increase was phased-in over five years effective November 1, 1991. See Footnote 10 in the Notes to the Consolidated Financial Statements contained in the Registrant's Annual Report to Shareholders filed herewith as Exhibit 13. Competition and Marketing. The Registrant experienced modest customer growth -------------------------- in both the residential and commercial/industrial markets. In all, the average annual number of customers rose one percent to 166,276. This customer growth was achieved in an underperforming local economy, one that is now showing signs of improvement. The Providence Place Mall is scheduled to begin construction in early 1997 and 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, will significantly improve the competitiveness of transportation options. In 1997, 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, ProvGas 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 program also allows for the improved utilization of existing resources, such as mains, services, and year-round supply contracts. As a result of the Rate Design Settlement Agreement approved in May I-7 1996, ProvGas has been allowed to offer unbundled services to approximately 120 of its largest customers. These customers are now able to purchase natural gas directly from suppliers and use ProvGas to transport the gas. ProvGas will make an additional filing in March 1997 that would expand the eligibility of unbundled services to other customers. 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 Company's ability to compete with other energy suppliers. To facilitate the transition to a diversified energy marketer, 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. The Company currently has no material acquisitions pending. To pursue the opportunities discussed above, the Company on August 1, 1996, incorporated Providence Energy Services, Inc. to market natural gas and energy services to customers who are now able to choose their energy suppliers. The operating results of this new company did not have a material impact on the Company's results of operations for 1996. The Company has also established a relationship with Encon Systems, Inc. (Encon), a full-service energy-management company that develops and implements energy-efficient systems for commercial, industrial and institutional customers, as well as residential customers. The Company has established a $350,000 line of credit as a working capital supply primarily for Encon's PFS (a division of Pepsico) contract. In connection with the line of credit, the Company received a warrant to acquire stock representing 45 percent of the outstanding stock of Encon, which is exercisable until early 1997, subject to extension under certain circumstances. Additionally, North Attleboro Gas is currently piloting a new set of service contracts. North Attleboro Gas' annual service contract for the inspection of gas heating equipment will now include providing customers with an indoor air quality screening. Customers will receive a comprehensive indoor air quality informational report and will be given the opportunity to purchase carbon monoxide detectors and radon test kits from North Attleboro Gas. Once the results of the pilot program are analyzed, the Company will determine whether the indoor air quality program will generate additional growth opportunities. 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. The Company estimates these costs to be in the range of $400,000 to $600,000, net of tax, in 1997. Employees. As of September 30, 1996, the Gas Companies had 575 full- ---------- time employees. Approximately 278 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. I-8 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 thirty-eight month Labor Agreement was ratified by Local 12431-02 of the United Steelworkers of America, which represents 96 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. Storage Facilities. The Registrant has contracts with a number of interstate ------------------- pipelines for rights to store natural gas in underground storage facilities located on or near its systems. These contracts enable the Registrant to store up to 4,604 million cubic feet (MMcf), which is available for firm delivery. Also, additional storage capabilities of 210 MMcf are available on an interruptible basis. The Registrant has an agreement with Algonquin for the storage of up to the equivalent of 1,200 MMcf of vaporized LNG in a tank owned by Algonquin and located on land leased to Algonquin by the Registrant. The agreement expires in September 2001, but the Registrant has an option to extend the agreement for an additional thirty years. This agreement was renegotiated in 1996 as a result of Algonquin's filing with the FERC to make major improvements and modifications to the LNG facility, including the addition of liquefaction capability and the replacement of existing equipment with state-of-the-art equipment. The renegotiation of the contract will yield comparable service while reducing gas supply and operating costs. The renegotiated contract is contingent upon certain conditions being met, including FERC approval of the improvements and is scheduled to become effective November 1, 1998. The Registrant owns and operates an LNG storage and vaporization facility which has the capacity to store the equivalent of 200 MMcf of vaporized LNG. Nonutility Operations - --------------------- As described earlier, the Registrant conducts its nonutility operations through a wholly-owned subsidiary, Newport America. These operations total less than two percent of the Registrant's consolidated assets and consolidated revenues. Special Factors Affecting the Natural Gas Industry - -------------------------------------------------- General. The natural gas industry is subject to numerous legislative -------- I-9 and regulatory requirements, standards and restrictions that are subject to change and that affect the Gas Companies to varying degrees. Significant industry factors that have affected or may affect the Gas Companies from time to time include: lack of assurance that rate increases can be obtained from regulatory authorities in adequate amounts on a timely basis; changes in the regulations governing the Gas Companies' operations; reductions in the prices of oil and propane, which can make those fuels less costly than natural gas in some markets; increases in the price of natural gas; and competition with other gas suppliers for industrial customers, including potential attempts to bypass the Gas Companies' facilities. FERC Regulations. In recent years FERC has been attempting to increase ----------------- competition with regard to the transportation and sale of natural gas in interstate commerce. Beginning in late 1985, FERC began promulgating orders that allow all industry participants access to pipeline transportation on an open, nondiscriminatory basis to the extent of available capacity. Recent FERC orders are in furtherance of its policy to make gas transportation and alternate supply sources more accessible to all parties, including local distribution companies and their customers. Such open access allows the Gas Companies to obtain its supply through a more competitive national gas pipeline system, where and when capacity is available. FERC Order 636 and other related orders (the Orders) have significantly changed the structure and types of services offered by pipeline transportation companies. The most significant components of the restructuring occurred in November 1993. In response to these changes, the Registrant has negotiated new pipeline transportation and gas storage contracts. At the same time, a number of contracts with gas suppliers have been negotiated to complement the transportation and storage contracts. The portfolio of supply contracts is designed to be market responsive and is diversified with respect to contract lengths, source location, and other contract terms. On a periodic basis, the Registrant reviews all of its contracts to ensure a diverse, secure, flexible and economical supply portfolio is maintained. To meet the requirements of the Orders, the pipelines have incurred significant costs, collectively known as transition costs. The majority of these costs will be reimbursed by the pipelines' customers including the Registrant. Based upon current information, the Registrant anticipates its transition costs to net between $21 million and $22 million of which $15.8 million has been included in the GCC and is currently being collected from customers. The remaining minimum obligation of $5.2 million has been recorded in the accompanying consolidated balance sheets of the Registrant's 1996 Annual Report to Shareholders filed herewith as Exhibit 13 along with a regulatory asset anticipating future recovery through the GCC. To the extent that refunds are received based on FERC settlements, these refunds are returned to the customers through the GCC. The Registrant's ultimate liability may differ from the above estimates based on FERC settlements with the Registrant's pipeline I-10 transportation suppliers. FERC has approved settlements with three of its pipelines, which account for the bulk of the Registrant's transition costs. Negotiations are continuing on one additional pipeline, and based on the information available, the Registrant believes that its current range for transition costs is reasonable. Environmental Regulations - ------------------------- Federal, state and local laws and regulations establishing standards and requirements for the protection of the environment have increased in number and in scope within recent years. The Registrant cannot predict the future impact of such standards and requirements, which are subject to change and can take effect retroactively. The Registrant continues to monitor the status of these laws and regulations. Such monitoring involves the review of past activities and current operations, and may include expending funds to investigate or clean- up certain sites. To the best of its knowledge, subject to the following, the Registrant believes it is in substantial compliance with such laws and regulations. At September 30, 1996, the Registrant was aware of four sites at which future costs may be incurred. The Registrant has been designated as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act of 1980 at two sites at Plympton, Massachusetts on which waste material is alleged to have been deposited by disposal contractors employed in the past either directly or indirectly by the Registrant and other 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 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, 1996, approximately $1.5 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, 1996, the Company has compiled a preliminary range of costs based on remediation alternatives, ranging from $1.3 million to in excess of $5.0 million. Based on the proposals for remediation work, the Company has accrued $1.3 million at September 30, 1996, for anticipated future remediation costs at this site. Also, the Company has negotiated an agreement, which is subject to Federal regulatory approval, with a third party which provides for reimbursement of up to $2.5 million of certain remediation costs to be incurred at this site. Tests conducted following the discovery of an abandoned underground oil storage tank at the Company's Westerly, Rhode Island operations center I-11 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 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 $1.8 million and an estimated $1.3 for environmental remediation costs have been charged to the accumulated depreciation reserve at September 30, 1996. Of the environmental investigation costs incurred, approximately $1.0 million and $600,000 were recorded in the years ended September 30, 1996 and 1995, respectively, while the remainder were incurred in prior years. Management believes that this rate recovery mechanism is appropriate for recovery of future costs. 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 environmental related costs. Should future developments warrant additional rate recovery mechanisms, management intends to seek such recovery. 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. 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 STOCK- - -------------------------------------------------------------------- HOLDERS' MATTERS ---------------- The Registrant's common stock is listed on the New York Stock Exchange and trades under the symbol "PVY". Prior to December 4, 1996, the Registrant's common stock was listed and traded on the American Stock Exchange under the same symbol. As of December 4, 1996, there were 6,052 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, 1996, 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 22 through 25 of this Form 10-K) for the fiscal year ended September 30, 1996, 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 14 through 21 of this Form 10-K) for the fiscal year ended September 30, 1996, 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 26 through 46 of this Form 10-K) for the fiscal year ended September 30, 1996, 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 (56) Chairman, President and Chief Executive Officer 1992 James DeMetro (48) Senior Vice President 1996 Gary S. Gillheeney (41) Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary 1996 Robert W. Owens (48) Senior Vice President 1996 Alycia L. Goody (44) General Counsel and Secretary 1994 Gerald A. Yurkevicz (39) Vice President, Marketing 1996
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 Regulations. 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. Ms. Goody was elected General Counsel and Secretary of the III-1 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. 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 1997 John H. Howland 1993 1999 Douglas H. Johnson 1993 1999 Dorothy G. Kramer 1976 1997 William Kreykes 1996 1999 Paul F. Levy 1995 1998 Romolo A. Marsella 1993 1999 M. Anne Szostak 1995 1998 Kenneth W. Washburn 1975 1997 W. Edward Wood 1995 1998
Gilbert R. Bodell, Jr. is Chairman and former President, Frontier Manufacturing Company (textiles); former Vice President, Valley Lace Company and Esten Dyeing and Finishing Company, Inc. James H. Dodge has been Chairman since January 1992 and President and Chief Executive Officer of the Registrant since August 1990; from 1984 through August 1990: President and Chief Executive Officer of Vermont Gas Systems, Inc. (a regulated natural gas utility) and affiliated companies. John H. Howland is President and Chief Operating Officer, Original Bradford Soap Works, Inc. Douglas H. Johnson is Vice President and Managing Partner, Van Leesten & Johnson, Inc. (business and urban planning consultants) since October 1991; from 1980 to October 1991: President and Chief Executive Officer, Peerless Precision, Inc. (aerospace manufacturing company). Dorothy G. Kramer is a retired Senior Vice President, Treasurer and Corporate Secretary, Taco, Inc. (manufacturers of pumping, heat transfer and hydronic control equipment). 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 1996: 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, 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 5 to 11 of the Registrant's proxy statement filed December 18, 1996 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 16, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - ------------------------------------------------------------ MANAGEMENT ---------- For the information called for by this item, reference is made to page 12 of the Registrant's proxy statement filed December 18, 1996 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 16, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- For the information called for by this item, reference is made to page 4 of the Registrant's proxy statement filed December 18, 1996 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 16, 1997. 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, 1996 and 1995 Consolidated Statements of Income for the years ended September 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994 Consolidated Statements of Capitalization--September 30, 1996 and 1995 Consolidated Statements of Changes in Common Stockholders' Investment for the years ended September 30, 1996, 1995 and 1994 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 25 through 46 of this Form 10-K) for the year ended September 30, 1996, filed herewith as Exhibit 13. Schedule II. Reserves for the years ended September 30, 1996, 1995 and 1994. Schedules I to XIII not listed above are omitted as not applicable or not required under Regulation S-X. (b) Reports on Form 8-K ------------------- No reports were filed on Form 8-K during the latest quarter of the Registrant's fiscal year ended September 30, 1996. IV-1 (c) Exhibits -------- The following exhibits are filed as part of this report: 3.1 Articles of Incorporation, as amended (incorporated by reference to Exhibit 4(e) to the Registration Statement of the Registrant on Form S-2 (Registration No. 33-24125)). 3.2 Bylaws (incorporated by reference to Exhibit C to the Proxy Statement/Prospectus forming a part of the Registrant's Registration Statement on Form S-14 (Registration No. 2-69473), as amended at the annual meetings of the shareholders held January 14, 1985 and January 14, 1991, the text of such amendments being set forth in each case as Exhibit A to the proxy statement for such annual meeting, heretofore filed with the Securities and Exchange Commission and being incorporated herein by this reference). 4.1 Indenture dated as of August 1, 1981 from The Providence Gas Company to St. Louis Union Trust Company, Trustee, filed as Exhibit 4.1 to Registration Statement of The Providence Gas Company on Form S-1 (Registration No. 2-72726), incorporated herein by this reference. 4.2 First Supplemental Indenture dated as of May 1, 1986 from The Providence Gas Company to Centerre Trust Company of St. Louis, Trustee (filed as Exhibit 4 (b) to the Registration Statement of The Providence Gas Company on Form S-3 (Registration File No. 33-5023), incorporated herein by this reference). 4.2(a) Thirteenth Supplemental Indenture dated as of May 1, 1986 from The Providence Gas Company to Rhode Island Hospital Trust National Bank. 4.3 First Mortgage Indenture of The Providence Gas Company dated as of January 1, 1922, as supplemented by First through Twelfth Supplemental Indentures (incorporated by reference to Exhibit 10.10 to Registration Statement of The Providence Gas Company on Form S-1 (Registration No. 2-72726)). 4.4 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures of The Providence Gas Company dated as of August 1, 1988, June 1, 1990 and November 1, 1992, respectively (incorporated by reference to Exhibit 4 to the report of the Registrant to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1993). 4.5 Seventeenth Supplemental Indenture of The Providence Gas Company dated as of November 1, 1993. (Filed as Exhibit 4.5 to the report of The Registrant in Form 10-K for the year ended September 30, 1993 incorporated herein by this reference.) 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 December 19, 1994 between James H. Dodge, Chairman, President and Chief Executive Officer of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.1 to the report of the The Providence Gas Company in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.3 1989 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit A to the Registrant's proxy statement for the annual meeting of shareholders held January 9, 1989, heretofore filed with the Securities and Exchange Commission). 10.4 1989 Stock Option Plan (incorporated by reference to Exhibit B to the Registrant's proxy statement for the annual meeting of shareholders held January 9, 1989, heretofore filed with the Securities and Exchange Commission). 10.5 Management contract dated December 19, 1994 between James DeMetro, Vice President, Energy Services of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.1 to the report of The Providence Gas Company in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.6 Management contract dated December 19, 1994 between Robert W. Owens, Vice President, Operations of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.1 to the report of The Providence Gas Company in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.7 Management contract dated December 19, 1994 between Gary S. Gillheeney, Vice President, Financial and Information Services, Treasurer and Assistant Secretary of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.1 to the report of The Providence Gas Company in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.8 Management contract dated December 19, 1994 between Alycia L. Goody, Vice President, General Counsel and Secretary, of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.1 to the report of The Providence Gas Company in Form 10-Q for the quarter ended December 31, 1994, incorporated herein by this reference.) 10.9 Management contract dated September 3, 1996 between Gerald A. IV-3 Yurkevicz, Vice President, Marketing of the Registrant. 13 Portions of the Annual Report to shareholders for the fiscal year ended September 30, 1996. (Pages 14 through 46) 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 7, 1996. 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. /s/ Arthur Andersen LLP Boston, Massachusetts November 7, 1996 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 7, 1996, 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; and S-8 Registration No. 33-04209. It should be noted that we have not audited any financial statements of the Company subsequent to September 30, 1996, or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Boston, Massachusetts December 19, 1996 IV-6 Supplemental Schedule PROVIDENCE ENERGY CORPORATION Schedule II ----------------------------- RESERVES FOR THE YEARS ENDED ---------------------------- SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994 ------------------------------------------------------------- (Thousands of Dollars)
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(D) 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-7 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 ======= ====== ====== ====== =======
IV-8 SCHEDULE II (cont'd)
Charge for Which Additions Reserves Balance Charged Other Were Balance 9/30/93 to Operations Add (Deduct) Created 9/30/94 ------- ------------- ------------ ------- ------- RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 2,026 $4,991 $ -- $4,346 $ 2,671 Allowance for lease receivables - current 390 11 -- 34 367 other 96 -- -- 16 80 ------- ------ ------ ------ ------- Total $ 2,512 $5,002 $ -- $4,396 $ 3,118 ======= ====== ====== ====== ======= Allowance for lease receivables - long-term $ 778 $ 316 $ -- $ 143 $ 951 ======= ====== ====== ====== ======= DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $14,018 $1,235 $ 253(C) $ -- $15,506 ------- ------ ------ ------ ------- Unamortized investment tax credit 3,010 -- -- 159 2,851 ------- ------ ------ ------ ------- Other- Liability and damage reserve 296 145 -- 20 421 Other 4,395 1,232 1,726(B) 1,455 5,898 ------- ------ ------ ------ ------- Total other 4,691 1,377 1,726 1,475 6,319 ------- ------ ------ ------ ------- Total deferred credits and reserves $21,719 $2,612 $1,979 $1,634 $24,676 ======= ====== ====== ====== =======
(A) Includes adjustments to the regulatory pension liability. (B) Principally a reserve for restructuring charges which was offset by a deferred regulatory asset. Also reported are adjustments to the regulatory pension liability. (C) Represents adjustments to the regulatory asset and liability for FAS No. 109 activity. (D) Principally an accrual for environmental investigation and remediation costs in addition to adjustment to the regulatory pension liability. 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 and 33-04209: 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 19, 1996 ------------------------------------ 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 12-19-96 - --------------------------- (Principal Executive Officer) -------- James H. Dodge /s/ GARY S. GILLHEENEY Senior Vice President, Chief 12-19-96 - --------------------------- Financial Officer, Treasurer -------- Gary S. Gillheeney and Assistant Secretary /s/ GILBERT R. BODELL, JR. Director 12-19-96 - --------------------------- -------- Gilbert R. Bodell, Jr. /s/ JOHN H. HOWLAND Director 12-19-96 - --------------------------- -------- John H. Howland /s/ DOUGLAS H. JOHNSON Director 12-19-96 - --------------------------- -------- Douglas H. Johnson /s/ DOROTHY G. KRAMER Director 12-19-96 - --------------------------- -------- Dorothy G. Kramer /s/ WILLIAM KREYKES Director 12-19-96 - --------------------------- -------- William Kreykes /s/ PAUL F. LEVY Director 12-19-96 - --------------------------- -------- Paul F. Levy /s/ ROMOLO A. MARSELLA Director 12-19-96 - --------------------------- -------- Romolo A. Marsella /s/ M. ANNE SZOSTAK Director 12-19-96 - ------------------------- -------- M. Anne Szostak /s/ KENNETH W. WASHBURN Director 12-19-96 - ------------------------- -------- Kenneth W. Washburn IV-11 EX-10.9 2 MANAGEMENT CONTRACT EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement is made this 3rd day of September 1996, by --- --------- and between PROVIDENCE ENERGY CORPORATION, a Rhode Island Corporation with principal offices at 100 Weybosset Street, Providence, Rhode Island 02903 (the "Corporation") and Gerald A. Yurkevicz, of Lexington, Massachusetts (the ------------------- ------------------------ "Employee"), with respect to the following facts: 1. The Employee is employed by the Corporation as Vice President, Marketing; -------------- --------- the Corporation has confidence in the managerial and other skills of the Employee and desires to continue the employment of the Employee on the terms and conditions hereinafter contained; and in order to encourage the full attention by the Employee to his duties in his capacity aforesaid, the Corporation wishes to make provision for certain protections for the Employee in the event of the termination of his employment under specified conditions. 2. The Employee is willing to continue to be employed by the Corporation on such terms and conditions and with the benefit of such protections. NOW, THEREFORE, in consideration of the mutual promises hereinafter contained, the parties hereto mutually agree as follows: 1. Term of Agreement ----------------- The Corporation hereby employs the Employee, and the Employee hereby accepts employment by the Corporation for a term commencing with the date hereof and continuing until September 3, 1997 subject to ----------------- termination in accordance with the provisions of paragraph 3 below. 2. Capacity and Responsibilities ----------------------------- The Employee shall be employed by the Corporation in the capacity of Vice President, Marketing of the Corporation, or in such other ------------------------- executive capacities or positions as the board of directors of the Corporation may determine from time to time, with such duties and authority as customarily appertain to such office or other capacities or positions, and with such additional duties and authority as may be agreed upon by the Employee and the Corporation from time to time. While in the employ of the Corporation, the Employee agrees to serve the Corporation faithfully and diligently and to use his best efforts to promote the interests of the Corporation. 3. Termination After Change in Control ----------------------------------- (a) If a Change in Control, as hereinafter defined, shall have occurred, this Agreement and the employment of the Employee hereunder may be terminated as follows : (i) by the Employee, on not less than thirty (30) days' notice to the Corporation; or (ii) by the Corporation, at any time on not less than thirty (30) days' notice to the Employee, provided that (A) if there shall have been a change in Employment Conditions, as defined hereinafter, prior to the exercise by the Employee of his termination rights referred to above, or (B) if the termination of the Employee's employment by the Corporation shall be without cause (as defined hereinafter), then in either case the Employee shall be entitled to the payment of an amount equal to the sum of (i) his annual base compensation for one (1) year, as reportable to the Internal Revenue Service for federal income tax purposes, plus (ii) any amounts paid or payable under the Providence Energy Corporation Performance and Equity Incentive Plan (or under such other incentive plan of the Providence Energy Corporation as may be in effect from time to time) for the full fiscal year next preceding the date of termination. Such amount shall be paid to the Employee in twelve (12) consecutive equal monthly installments on the last day of each month beginning with the month next following the month in which the termination is effective. If and for as long as the Employee is entitled to payments under this paragraph, the Corporation will continue to provide to the Employee, at the Corporation's expense, the health and medical insurance benefits being provided to the Employee at the time of termination of his employment. 2 (b) Any payment provided for in subparagraph (a), above, shall be made without reduction whether or not any portion thereof shall be deemed an "excess parachute payment" under the provisions of Section 280G of the Internal Revenue Code of 1986, as the same may be amended from, time to time. (c) For the purposes of this Agreement, the Employee's employment shall be deemed to have been terminated for cause only if there shall have been an act of fraud, misappropriation or embezzlement on the part of the Employee. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the unanimous vote of the entire membership of the Corporation's board of directors at a meeting of such board duly called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard by the board) finding that in the good faith opinion of the board the Employee was guilty of conduct set forth in the first sentence of this subparagraph (c) and specifying the particulars thereof in detail. 4. Definition of Change in Control ------------------------------- For the purposes of this Agreement, a Change in Control shall be deemed to have occurred if (a) there shall be consummated (i) any consolidation or merger of the Corporation, a Rhode Island corporation and the holder of all of the outstanding capital stock of Providence Gas Company, in which the Corporation is not the continuing or surviving corporation, or pursuant to which shares of the Corporation's common stock are converted into cash, securities, or other property, other than a merger of the Corporation in which the holders of the Corporation's common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (ii) any sale, lease, exchange, or other transfer (in on transaction or a series of related transactions) of all or substantially all of the assets of Providence Gas Company; or (b) the shareholders of Providence Gas Company or of the Corporation approve any plan or proposal for the liquidation or dissolution of Providence Gas Company or of the Corporation; or 3 (c) any person (as such term is used in Sections 13(d) and 14(b)(2) of the Securities Exchange Act of 1934, as amended [the "Exchange Act"]), other than Providence Energy or a successor corporation resulting from a merger excluded under clause (i) of subparagraph (a), above, shall become directly or indirectly the owner or the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of thirty percent (30%) or more of the outstanding common stock of the Corporation, or any person (as such term is so used) shall become directly or indirectly the owner or the beneficial owner (within the meaning of said Rule 13d-3) of thirty percent (30%) or more of the outstanding common stock of the Corporation. 5. Definition of Change in Employment Conditions --------------------------------------------- For the purposes of this Agreement, a "Change in Employment Conditions" shall mean any of the following: (a) a change in the Employee's titles or offices as in effect immediately prior to a Change in Control, or any removal of the Employee from any of such positions, except in connection with the termination of his employment for cause or as a result of the Employee's retirement, permanent disability, or death; (b) a reduction by the Corporation in the Employee's annual base compensation as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement, or the Corporation's failure to increase (within 12 months of the Employee's last increase in compensation) the Employee's compensation after a Change in Control in an amount which at least equals, on a percentage basis, the weighted average percentage increase in compensation for all officers of the Corporation effected in the preceding 12 months; (c) any failure by the Corporation to continue in effect any benefit plan or arrangement in which the Employee is participating at the time of a Change in Control (or any other plans providing the Employee with substantially similar benefits) (hereinafter referred to as "Benefit Plans"), or the taking of any action by the Corporation which would adversely affect the Employee's participation in or materially reduce the Employee's benefits under any such Benefit Plan or deprive the Employee of any material fringe benefit enjoyed by the Employee at the time of a Change in Control; (d) a relocation of the Corporation's principal executive offices to a location outside of the Greater Providence, Rhode Island, area, or the Employee's relocation to any place other than the location at which the Employee performed his duties prior to a Change in Control, except for required travel by the Employee on the Corporation's business to an extent substantially consistent with the Employee's business travel obligations at the time of a Change in Control; 4 (e) any failure by the Corporation to provide the Employee with the number of paid vacation days to which the Employee is entitled at the time of a Change in Control; or (f) any breach by the Corporation of any material provision of this Agreement. 6. Successor to the Corporation ---------------------------- The Corporation will require any successor to or assignee of (whether direct or indirect, by purchase, merger, consolidation or otherwise) all or substantially all of the business and/or assets of the Corporation, by agreement, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession or assignment had taken place. Any failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession or assignment shall be deemed a breach of a material provision of this Agreement. As used in this Agreement, "Corporation" shall include any successor to or assignee of the Corporation's business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 7. Performance and Equity Incentive Plan ------------------------------------- Nothing in this agreement shall be deemed to alter or modify in any way such rights as the Employee may now or in the future have under the 1992 Performance and Equity Incentive Plan (the "Plan") of Providence Energy Corporation, as the same may be amended from time to time, including without limitation rights of the Employee with respect to the accelerated vesting of Grant Shares (as defined in the Plan) under certain circumstances as provided in the Plan. 8. Notices ------- 5 Any notice given or required to be furnished to the Employee under this Agreement shall be mailed to him by registered mail, postage prepaid, at his last-known mailing address as the same appears on the records of the Corporation, or at such other address as he may furnish to the Corporation in writing for the purpose. Any notice given or required to be furnished to the Corporation hereunder shall be mailed to it by registered mail, postage prepaid, at 100 Weybosset Street, Providence, Rhode Island 02903, attention: Secretary, or at such other address as the Corporation may furnish to the Employee in writing for the purpose. Any such notice shall be deemed to have been given when mailed in accordance with the foregoing. 9. Termination of Prior Employment Agreements ------------------------------------------ This Agreement is intended to supersede all prior employment agreements, oral or written, between the Employee and the Corporation, all of which are hereby terminated and canceled. Neither the Corporation nor the Employee shall have any further rights against or obligations to the other under any of such prior agreement. 10. Binding Effect, etc. -------------------- This Agreement shall be binding upon and inure to the benefit of the Employee and his heirs and the representatives of his estate. The interests of the Employee hereunder shall not be assignable. This Agreement shall also be binding upon and shall inure to the benefit of the Corporation and its successors and assigns. 11. Applicable Law -------------- This Agreement shall be governed in all respects by the laws of the State of Rhode Island. IN WITNESS WHEREOF, the parties have executed this employment Agreement as of the day and year first above written. PROVIDENCE ENERGY CORPORATION By: /s/ JAMES H. DODGE /s/ GERALD A. YURKEVICZ ------------------- ----------------------- James H. Dodge Gerald A. Yurkevicz Chairman, President, and CEO 6 EX-13 3 ANNUAL REPORT EXHIBIT 13 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 or contain "forward-looking" information 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; 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; unanticipated environmental liabilities; changes in, or the failure to comply with, government regulations; 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, operating margin and net income have increased over the comparable periods presented, as shown in the table below: (000's) Percent 1996 1995 Change Change - -------------------------------------------------------------- Operating Revenues $215,152 $183,992 $31,160 16.9 Operating Margin 94,906 83,048 11,858 14.3 Net Income 8,970 6,127 2,843 46.4 RESULTS OF OPERATIONS - 1996 VS 1995 Operating Revenues and Operating Margin During the current year, the Company has experienced colder than normal weather resulting in temperatures averaging 16.8 percent colder than last year. The increase in heating load due to the colder temperatures represents approximately $5.7 million in increased operating margin. As a result of the colder temperatures experienced during 1996, residential sales, which provide Page - 14 the Company with its greatest source of revenues, 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 $300,000 of operating margin. Additionally, the Rhode Island Public Utilities Commission (RIPUC) approved a rate increase effective December 17, 1995. Operating margin for the current year increased approximately $3.2 million versus last year as a result of the rate increase. As a result of the RIPUC's approval in February 1996 of the Integrated Resource Plan's (IRP) 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 twelve-month plan period which ended June 1996. These savings were somewhat offset by a one-time charge to operating and maintenance expenses of $800,000 to fund a low income assistance program as discussed below. The IRP settlement agreement covers a three-year period. The Company's ability to record up to $1.5 million in operating margin annually is dependent upon achieving certain levels of gas cost savings for each plan year. Also see Liquidity and Capital Resource discussion. Interruptible and other volumes decreased approximately 2,300 MMcf or 47 percent versus last year 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 requires the Company to return any margins earned from these non-firm customers to firm customers through the Gas Charge Clause (GCC). In addition, the Company had an increase in operating margin of approximately $200,000 due to an increase in revenues associated with the phase-in of expenses for Statement of Financial Accounting Standards (SFAS) No. 106. Operating and Maintenance Expenses Overall, operating and maintenance expenses have increased, approximately $4.7 million or 10.5 percent versus last year. 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 $700,000 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 $800,000 to fund a low income assistance program as well as $100,000 of costs associated with the regulatory proceeding. Also, there were additional wage expenses of approximately $800,000 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 $200,000 of expenses relating to the phase-in of SFAS No. 106 costs were incurred as well as expenses of approximately $600,000 for outside services associated with the development of new energy service offerings. The remaining $400,000 is attributable to increases in general operating costs. 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. Page -15 Taxes Taxes have increased approximately $2.8 million or 18.9 percent during the last year. The increase in taxes, mainly Federal income and state gross earnings tax, resulted from higher pretax 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 $700,000 for the current year. The Company's long-term interest expense for the current year has increased approximately $800,000 as a result of 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. The Company currently has no material acquisitions pending. To pursue the opportunities discussed above, the Company on August 1, 1996, incorporated Providence Energy Services, Inc. to market natural gas and energy services to customers who are now able to choose their energy suppliers. The operating results of this new company were not material in 1996. The Company has also established a relationship with Encon Systems, Inc. (Encon), a full-service energy-management company that develops and implements energy-efficient systems for commercial, industrial and institutional customers, as well as residential customers. The Company has established a $350,000 line of credit as a working capital supply primarily for Encon's PFS ( a division of PepsiCo) contract. In connection with the line of credit, the Company received a warrant to acquire stock representing 45 percent of the outstanding stock of Encon, which is exercisable until early 1997, subject to extension under certain circumstances. The companies are also working on joint marketing opportunities. Additionally, North Attleboro Gas Company (North Attleboro) is currently piloting a new set of service contracts. North Attleboro's annual service contract for the inspection of gas heating equipment will now include providing customers with an indoor air quality screening. Customers will receive a comprehensive indoor air quality informational report and will be given the opportunity to purchase carbon monoxide detectors and radon test kits from North Attleboro. Once the results of the pilot program are analyzed, the Company will determine whether the indoor air quality program will generate additional growth opportunities. These and other energy ventures will increasingly be separate from the distribution utility. There are strategic long-term planning and operating costs associated with developing the new energy service offerings. The Company estimates these costs to be in the range of $400,000 to $600,000, net of taxes, in 1997. Page - 16 B) Regulatory In May 1996, the RIPUC approved a Rate Design Settlement Agreement among the Company, the Rhode Island Division of Public Utilities and Carriers (Division), The Energy Council of Rhode Island (TEC-RI) and a consortium of oil heat organizations. The Agreement begins 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. While this initial step is available to approximately 120 of the largest commercial and industrial customers, the Company is required to make an additional filing in March 1997 that would expand the eligibility of unbundled services to other customers. The Company does not know the number of customers that would be impacted by the March 1997 filing at this time. Also on October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program Settlement Agreement between the Company and the Division. The objective of the pilot program is 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 will be 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 will be flowed through the Variable Gas Cost component of the GCC and cannot exceed $800,000. C) Subsidiaries The Company currently owns and operates North Attleboro, a small gas distribution company with over 3,000 customers located in Massachusetts. The Company continues to assess the long-term strategic fit of North Attleboro. The Company's assessment of this operation is part of its periodic evaluation of the strategic fit and financial performance of all major assets. The Company is considering various options for North Attleboro, including a restructuring of operations, a request for a rate increase or the possible sale of North Attleboro to another party. No decision has been made with respect to this matter and any decision will not likely result in a material change in the results of operations or the financial position of the Company. D) New Accounting Pronouncements The Financial Accounting Standards Board (FASB) recently released SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which will be effective for the Company in 1997. Based on the current regulatory environment, management does not believe the adoption of SFAS No. 121 will have a material impact on the financial position or results of operations of the regulated business. Management continues to analyze the effect of the adoption of SFAS No. 121 on its non-regulated business and has not yet concluded what effect the adoption of SFAS No. 121 will have. The FASB has also released SFAS No. 123, "Accounting for Stock-Based Compensation". Although this Statement will increase footnote disclosures regarding the Company's stock plans, management does not believe SFAS No. 123 will have an impact on the Company's results of operations or financial position. Page - 17 RESULTS OF OPERATIONS - 1995 VS 1994 Operating Revenues and Operating Margin The Company experienced the second warmest heating season in 42 years with temperatures averaging 10.5 percent warmer-than-normal. Overall, 1995 was 14.5 percent warmer than 1994, thereby decreasing operating margin by almost $5 million. As a result of the warmer-than-normal temperatures experienced during 1995, residential sales, which provide the Company with its greatest source of sales, decreased 1.4 billion cubic feet (Bcf) or 10 percent from 1994. Offsetting this decrease was a net increase in the average annual number of customers during 1995 over 1994 of approximately 2,300 or 1.4 percent. The moderate increase was the result of new housing construction and conversions from other energy sources offset by shut-offs for non-payment and housing vacancies due to the stagnant economy. Non-firm sales volumes increased approximately 400 MMcf or 9 percent. The increase in non-firm sales of approximately 1,000 MMcf was offset by a decrease in sales of gas for resale purposes of approximately 600 MMcf. Providence Gas Company's (ProvGas) increase in non-firm sales generated approximately $200,000 in additional operating margin as a result of ProvGas' non-firm margin sharing agreement. The decrease in sales of gas for resale purposes did not have an impact on the Company's operating margin because the RIPUC requires any margin earned from the sale of gas for resale purposes to be returned to firm customers through the GCC. Continuing efforts to be customer focused and to meet customer expectations resulted in the Company negotiating and receiving regulatory approval for five special agreements that allowed the offering of unbundled service to several large manufacturing companies. Without these agreements, these companies would have utilized other fuel and delivery alternatives, resulting in an annualized loss of operating margin of approximately $600,000. Operating and Maintenance Expenses Operating and maintenance expenses for fiscal 1995 decreased $1.9 million or four percent over the last fiscal year. This decrease was due to a lower uncollectible revenue provision resulting from the decrease in operating revenue and a slight improvement in the Company's collection of accounts receivable. The remainder of the decrease was primarily attributable to a reduction in labor and related expenses. The restructuring initiative that occurred at ProvGas in June 1994 and the impact of efficiency reviews as part of the continuous improvement programs has also contributed to the reduction in labor expenses. The Company continually reviews its operating expenses in order to keep expenses as low as possible. However, since the Company's expenses will vary based on weather and other factors, the four percent decrease in expenses experienced in 1995 will not necessarily reoccur in future years. Taxes Taxes have decreased $2.1 million or 12.5 percent during 1995 as compared to 1994. This was mainly due to a reduction in Federal income taxes as a result of lower pre-tax income and a reduction in the state gross earnings tax as a result of lower operating revenues due Page - 18 to warmer-than-normal weather. Other, Net Other, net increased by approximately $700,000 over 1994. This was attributed to decreases in expenses related to our customer equipment leasing program along with decreases in promotional advertising. Interest Expense Interest expense increased approximately $1.1 million or 18.1 percent in 1995 as compared to 1994. A significant increase in short-term interest rates plus a slight increase in overall weighted average short-term borrowings caused the increase in interest expense. LIQUIDITY AND CAPITAL RESOURCES During 1996, the Company experienced a substantial decrease in its net cash provided by operations primarily as the result of the timing of the recovery of incurred gas costs through the GCC as discussed in Footnote 1 of the accompanying consolidated financial statements. Capital expenditures for 1996 were $20.8 million versus $19.6 million in 1995, a 6.1 percent increase. Approximately $400,000 of the increase was due to increased environmental expenditures, which are included in the Company's depreciation factors consistent with the rate recovery treatment for all types of cost of removal. The remainder of the increase was primarily due to increased expenditures by the Company in new technology. Anticipated capital expenditures for the next three years are expected to total between $50 million and $60 million. In December 1995, the Company received proceeds of $15 million related to an issuance of First Mortgage Bonds, Series R (7.5 percent), which will mature in December 2025. The net proceeds received from the issuance were used to pay down short-term debt. The Company meets seasonal cash requirements and finances its capital expenditures program on an interim basis through short-term borrowings. As of September 30, 1996, the Company had lines of credit totaling $61,500,000 with borrowings outstanding of $23,270,000. During the next two years, the Company intends to make both equity and debt offerings in amounts ranging from $10 million to $15 million each to finance its capital expenditures and energy service offerings. In November 1996, the Company filed an application to list its common stock on the New York Stock Exchange. The Company is changing stock exchanges in an effort to make the Company more attractive to portfolio managers who follow its stock and to enable the Company to reach a broader investment community. The Company's ability to pay dividends is largely dependent upon receipt of dividends from ProvGas. Approximately $18 million of ProvGas' retained earning were available for dividends at the end of fiscal 1996 under the most restrictive terms of ProvGas' First Mortgage Bond indenture. The Company continued to offer a Dividend Reinvestment and Cash Stock Purchase Plan (the Plan) for its current shareholders. During 1996, 41.7 percent of the Company's shareholders participated in the Plan, with $1.4 million or 22.5 percent of declared dividends reinvested Page -19 in new shares rather than paid in cash. In February 1995, the Company filed for rate relief requesting an approximate eight percent general rate increase. The major factors contributing to the rate request were an increase in depreciation due to capital spending, an increase in working capital needs, and an increase in capital expenditures. In November 1995, the RIPUC authorized the Company to increase its rates to recover additional annual revenues in the amount of $3,990,000. Subsequent to the issuance of the rate decision, the RIPUC approved the Company's motion to reconsider a revenue adjustment of $171,572. That approval increases the overall rate increase to $4,161,572. As part of this award, the Company is allowed to earn a 10.9 percent return on common equity. See Footnote 10 to the accompanying consolidated financial statements for more details. On October 3, 1991, the Massachusetts Department of Public Utilities (MDPU) approved a settlement order reached between the Massachusetts Attorney General's Office and North Attleboro Gas. Due to the magnitude of the award (32 percent), the MDPU ordered North Attleboro Gas to phase-in the award over a five-year period effective November 1, 1991. As a result of this award, the final revenue increase of $94,445 was phased-in on November 1, 1995. In February 1996, the Company received approval of a three-year Settlement Agreement between itself and the Division regarding the IRP, which was filed with the RIPUC in July 1994. The purpose of the IRP is to optimize the utilization of production transmission and distribution resources so that customers receive high quality services at the lowest possible costs. The Settlement Agreement provides for: (1) funding associated with Demand Side Management programs of $500,000, which are designed to provide equipment rebates for specific load building programs; (2) funding associated with a low income weatherization program of $200,000, which is designed to assist low income customers through the installation of conservation measures; and (3) a performance-based ratemaking mechanism. The Settlement Agreement also contains a general agreement that the Company's strategy and steps included in its supply plan are reasonable. The Settlement Agreement also provides for a one-time funding of up to $800,000 for a Low Income Assistance Program (LIAP) through a portion of the Company's share of the performance-based ratemaking mechanism. The LIAP was developed in response to the Company's anticipated loss of approximately $900,000 in Federal funding for the low income heating assistance program administered by the State of Rhode Island for 1996. The funding of these programs is generated through annual gas cost savings beginning in July 1995. The Company has performed an analysis of gas cost savings since July 1995 and has achieved sufficient savings as of June 30, 1996 to provide funding for these programs without incurring a charge to income. Accordingly, in 1996, the Company recorded its annual share of the performance- based ratemaking mechanism under this agreement which resulted in a $1.5 million increase to operating margin. For additional information on current and anticipated financial, economic, and operational data, references are made to the President's Message to Shareholders and 1996: The Year in Review sections of this Annual Report to Shareholders. Page - 20
COMMON STOCK INFORMATION Dividend Paid Quarter Ended High Low Per Share - ------------------------------------------------------------- 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 September 30, 1995 16 3/8 14 3/4 .27 June 30, 1995 16 5/8 14 5/8 .27 March 31, 1995 17 1/2 14 3/4 .27 December 31, 1994 17 3/8 15 .27
Page -21 SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS For the Years Ended September 30 (thousands, except per share amounts)
1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- Operating revenues $215,152 $183,992 $222,778 $209,315 $190,341 $169,086 Cost of gas sold 120,246 100,944 135,104 126,314 111,568 101,707 -------- -------- -------- -------- -------- -------- Operating margin 94,906 83,048 87,674 83,001 78,773 67,379 -------- -------- -------- -------- -------- -------- Other operating expenses, excluding taxes 61,030 54,838 55,838 52,921 52,122 47,015 Taxes, other than income 13,007 11,769 12,540 12,597 11,497 11,031 Federal income taxes 4,683 3,104 4,460 3,554 2,774 440 -------- -------- -------- -------- -------- -------- Total operating expenses 78,720 69,711 72,838 69,072 66,393 58,486 -------- -------- -------- -------- -------- -------- Operating income 16,186 13,337 14,836 13,929 12,380 8,893 Other, net 945 865 196 37 287 1,562 -------- -------- -------- -------- -------- -------- Income from continuing operations before interest expense 17,131 14,202 15,032 13,966 12,667 10,455 Interest expense 7,465 7,379 6,247 6,653 6,837 7,764 -------- -------- -------- -------- -------- -------- Income from continuing operations after interest expense 9,666 6,823 8,785 7,313 5,830 2,691 Preferred dividends of subsidiary (696) (696) (696) (696) (696) (280) -------- -------- -------- -------- -------- -------- Net income 8,970 6,127 8,089 6,617 5,134 2,411 Common dividends 6,155 6,062 5,856 4,889 4,908 6,057 -------- -------- -------- -------- -------- -------- Earnings reinvested in the corporation $ 2,815 $ 65 $ 2,233 $ 1,728 $ 226 $ (3,646) ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding 5,709.2 5,624.2 5,534.1 4,761.8 4,478.4 4,337.9 ======== ======== ======== ======== ======== ======== Net income per common share $ 1.57 $ 1.09 $ 1.46 $ 1.39 $ 1.15 $ .56 ======== ======== ======== ======== ======== ======== Common dividends $ 1.08 $ 1.08 $ 1.06 $ 1.02 $ 1.10 $ 1.40 ======== ======== ======== ======== ======== ========
Page - 22 OTHER FINANCIAL DATA SEPTEMBER 30 (thousands, except per share amounts)
1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- Total assets $250,150 $227,127 $233,311 $224,550 $197,459 $189,422 Gas plant--at original cost 279,849 262,769 239,830 221,769 210,087 199,216 Gas plant--net of depreciation 179,473 169,792 159,012 149,272 144,767 139,741 Capitalization: Common stockholders' equity 82,565 78,524 77,156 73,368 54,491 52,302 Redeemable cumulative preferred stock 8,000 8,000 8,000 8,000 8,000 8,000 Long-term debt 72,456 74,482 60,079 62,163 60,958 42,885 Shares of common stock at year-end 5,748 5,668 5,581 5,486 4,534 4,408 Book value per share $ 14.36 $ 13.85 $ 13.82 $ 13.37 $ 12.02 $ 11.87 ======== ======== ======== ======== ======== ========
Page - 23 FINANCIAL AND OPERATING STATISTICS For the Years Ended September 30
1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- Operating revenues (thousands of dollars): Residential $128,875 $106,387 $130,888 $120,997 $104,658 $ 92,660 Commercial/ industrial 74,625 61,491 76,174 72,974 63,405 57,153 -------- -------- -------- -------- -------- -------- Total firm 203,500 167,878 207,062 193,971 168,063 149,813 Interruptible and other 9,882 14,026 14,471 14,336 21,394 17,681 Transportation 741 804 287 54 74 735 Other 1,029 1,284 958 954 810 857 -------- -------- -------- -------- -------- -------- Total operating revenues $215,152 $183,992 $222,778 $209,315 $190,341 $169,086 ======== ======== ======== ======== ======== ======== Gas sold and transported (MMcf): Residential 14,423 12,709 14,122 13,783 13,166 11,534 Commercial/ industrial 9,694 8,772 9,360 8,926 8,363 7,637 -------- -------- -------- -------- -------- -------- Total firm 24,117 21,481 23,482 22,709 21,529 19,171 Interruptible and other 2,610 4,950 4,547 3,985 6,717 5,659 Transportation 1,380 1,681 656 386 869 4,127 -------- -------- -------- -------- -------- -------- Total gas sold and transported 28,107 28,112 28,685 27,080 29,115 28,957 Company use and losses 605 919 1,182 1,187 1,264 1,445 -------- -------- -------- -------- -------- -------- Total sendout 28,712 29,031 29,867 28,267 30,379 30,402 ======== ======= ======== ======== ======== ======== Gas purchased, produced and transported (MMcf): Pipeline natural gas-contract 17,567 16,591 22,880 18,044 20,150 21,051 Pipeline natural gas-spot purchases 5,197 7,935 3,533 7,936 7,374 3,210 Pipeline natural gas-transportation 1,380 1,681 656 386 869 4,127 Underground storage 3,129 2,270 1,697 879 594 1,038 Liquefied natural gas 1,439 554 1,101 1,022 1,329 975 Liquid propane and synthetic natural gas - - - - 63 1 -------- -------- -------- -------- -------- -------- Total 28,712 29,031 29,867 28,267 30,379 30,402 ======== ======= ======== ======== ======== ======== Average annual number of customers: Residential 149,487 147,935 145,793 143,771 143,114 143,207 Commercial/ industrial 16,645 16,509 16,337 16,264 15,889 15,114 -------- -------- -------- -------- -------- -------- Total firm 166,132 164,444 162,130 160,035 159,003 158,321
Page - 24
Interruptible and transportation 144 143 141 123 115 79 -------- -------- -------- -------- -------- --------- Total 166,276 164,587 162,271 160,158 159,118 158,400 ======== ======== ======== ======== ======== ========= Total number of customers at year-end 164,312 163,294 159,375 159,135 157,087 159,234 ======== ======== ======== ======== ======== ========= Residential heating: Average consumption per customer (Mcf) 116 103 117 116 112 97 Average revenue per customer $ 1,016 $ 844 $ 1,068 $ 1,008 $ 870 $ 766 Average rate per Mcf $ 8.77 $ 8.19 $ 9.10 $ 8.68 $ 7.80 $ 7.91 Average annual number of customers 118,724 116,826 114,461 112,497 111,176 110,997 Maximum daily sendout (MMcf) 189 202 206 185 174 172 Calendar degree days 5,967 5,111 5,977 5,718 5,502 4,893
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet. Normal calendar degree days for fiscal year 1996 are 5,682; 1995 and 1994 are 5,709; 1993, 1992 and 1991 are 5,811. Page - 25
CONSOLIDATED BALANCE SHEETS September 30 (thousands of dollars) 1996 1995 - ------------------------------------------------------------- -------- -------- ASSETS Gas plant, at original cost (notes 1,4,7, and 10) $279,849 $262,769 Less--Accumulated depreciation and utility plant acquisition adjustments 100,242 92,868 -------- -------- 179,607 169,901 -------- -------- Nonutility property, net (note 12) 1,141 1,958 -------- -------- Current assets: Cash and temporary cash investments (notes 1 and 8) 1,424 1,278 Accounts receivable, less allowance of $3,231 in 1996 and $2,412 in 1995(notes 1,3,7, and 14) 14,665 14,031 Unbilled revenues (note 1) 2,357 2,655 Deferred gas costs (notes 1 and 7) 13,272 1,193 Inventories, at average cost- Liquefied natural gas, propane and under- ground storage 16,023 10,116 Materials and supplies 1,259 1,540 Prepaid and refundable taxes (note 2) 4,076 5,933 Prepayments 1,540 1,366 -------- -------- 54,616 38,112 -------- -------- Deferred charges and other assets (notes 1,3,6,7,9, and 10) 14,786 17,156 -------- -------- Total assets $250,150 $227,127 ======== ======== CAPITALIZATION AND LIABILITIES Capitalization (see accompanying statement) $163,021 $161,006 -------- -------- Current liabilities: Notes payable (notes 5 and 8) 23,270 7,337 Current portion of long-term debt (note 4) 2,022 1,950 Accounts payable (notes 6 and 7) 17,372 14,102 Accrued taxes (note 10) 1,980 6,059 Accrued vacation 1,723 1,679 Customer deposits 3,996 3,981 Other 5,376 3,947 -------- -------- 55,739 39,055 -------- -------- Deferred credits and reserves: Accumulated deferred Federal income taxes (note 2) 20,713 18,734 Unamortized investment tax credits (note 2) 2,533 2,691 Other (notes 6,7 and 9) 8,144 5,641 -------- -------- 31,390 27,066 -------- -------- Commitments and contingencies (note 7) - - Total capitalization and liabilities $250,150 $227,127 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page - 26 CONSOLIDATED STATEMENTS OF INCOME For the Years Ended September 30
(thousands, except per share amounts) 1996 1995 1994 - --------------------------------------- --------- --------- --------- Operating revenues $215,152 $183,992 $222,778 Cost of gas sold 120,246 100,944 135,104 -------- -------- -------- Operating margin 94,906 83,048 87,674 -------- -------- -------- Operating expenses: Operation and maintenance 49,033 44,368 46,223 Depreciation and amortization 11,997 10,470 9,615 Taxes-- State gross earnings 6,063 5,005 6,326 Local property and other 6,944 6,764 6,214 Federal income (note 2) 4,683 3,104 4,460 -------- -------- -------- Total operating expenses 78,720 69,711 72,838 -------- -------- -------- Operating income 16,186 13,337 14,836 -------- -------- -------- Other, net (notes 1, 10, and 12) 945 865 196 -------- -------- -------- Income before interest expense 17,131 14,202 15,032 -------- -------- -------- Interest expense: Long-term debt 5,889 5,086 4,987 Other 1,682 2,437 1,412 Interest capitalized (106) (144) (152) -------- -------- -------- 7,465 7,379 6,247 -------- -------- -------- Income after interest expense 9,666 6,823 8,785 Preferred dividends of subsidiary (note 4) (696) (696) (696) -------- -------- -------- Net income $ 8,970 $ 6,127 $ 8,089 ======== ======== ======== Earnings per common share (note 16) $ 1.57 $ 1.09 $ 1.46 ======== ======== ======== Weighted average common shares outstanding (note 16) 5,709.2 5,624.2 5,534.1 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page - 27
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30 (thousands of dollars) 1996 1995 1994 - -------------------------------------------------------- --------- --------- --------- Cash provided by - Operating Activities: Income after interest expense $ 9,666 $ 6,823 $ 8,785 Items not requiring cash: Depreciation and amortization 12,012 10,529 9,759 Changes as a result of regulatory action (1,453) - - Deferred Federal income taxes 1,943 2,142 1,235 Gain on sale of nonutility property (note 12) (699) - - Write-down of nonutility property (note 12) 714 - - Amortization of investment tax credits (158) (160) (159) Changes in assets and liabilities which provided (used) cash: Accounts receivable (634) 3,861 (654) Unbilled revenues 298 240 (41) Deferred gas costs (12,079) 14,626 1,734 Inventories (5,626) 1,278 310 Prepaid and refundable taxes 1,857 (1,017) 2,407 Prepayments (174) 133 (589) Accounts payable 3,270 (4,222) (934) Accrued taxes (21) (165) (71) Accrued vacation, customer deposits and other 1,462 572 211 Deferred charges and other 1,307 (2,011) (932) -------- -------- -------- Net cash provided by operations 11,685 32,629 21,061 -------- -------- -------- Investment Activities: Expenditures for property, plant and equipment, net (20,781) (19,597) (19,809) Proceeds from sale of nonutility property(note 12) 725 - - -------- -------- -------- Total (20,056) (19,597) (19,809) -------- -------- -------- Financing Activities: Issuance of common stock 31 - 265 Issuance of mortgage bonds 15,000 - 16,000 Payments on long-term debt (1,954) (2,081) (465) Increase (decrease) in notes payable 933 (5,363) (12,100) Cash dividends on preferred shares (note 4) (696) (696) (696) Cash dividends on common shares (4,797) (4,759) (4,566) -------- -------- -------- Total 8,517 (12,899) (1,562) -------- -------- -------- Increase (decrease) in cash and cash equivalents 146 133 (310) Cash and cash equivalents at beginning of year 1,278 1,145 1,455 -------- -------- -------- Cash and cash equivalents at end of year $ 1,424 $ 1,278 $ 1,145 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for- Interest (net of amount capitalized) $ 6,738 $ 6,663 $ 6,091 Income taxes (net of refunds) $ 2,851 $ 1,388 $ 856
The accompanying notes are an integral part of these consolidated financial statements. Page - 28
CONSOLIDATED STATEMENTS OF CAPITALIZATION September 30 (thousands of dollars) 1996 1995 - ----------------------------------------------------------- -------- -------- Common stockholders' investment (notes 4, 6 and 11): Common stock, $1 Par, Authorized -20,000 shares Outstanding -5,748 shares in 1996 and 5,668 shares in 1995 $ 5,748 $ 5,668 Amount paid in excess of par 55,404 54,258 Retained earnings 21,413 18,598 -------- -------- 82,565 78,524 -------- -------- Cumulative preferred stock of subsidiary (notes 4 and 8): Redeemable 8.7% Series, $100 par Authorized - 80 shares Outstanding - 80 shares as of 1996 and 1995 8,000 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 12,800 14,400 Series R, 7.50%, due December 30, 2025 15,000 15,000 Capital Leases 1,678 2,032 -------- -------- 74,478 76,432 -------- -------- Less-current portion 2,022 1,950 -------- -------- 72,456 74,482 -------- -------- Total capitalization $163,021 $161,006 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page - 29 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, 1993 5,486 $5,486 $51,582 $16,300 Add (deduct): Net income - - - 8,089 Dividends ($1.06 per share) - - - (5,856) Dividend reinvestment, cash stock purchase plan and employee benefit plans 95 95 1,531 - Accrual for Executive Stock Compensation Plan - - (71) - --------- -------- ------- ------- Balance, September 30, 1994 5,581 5,581 53,042 18,533 Add (deduct): Net income - - - 6,127 Dividends ($1.08 per share) - - - (6,062) Dividend reinvestment, cash stock purchase plan and employee benefit plans 87 87 1,279 - Accrual for Executive Stock Compensation Plan - - (63) - --------- -------- ------- ------- Balance, September 30, 1995 5,668 5,668 54,258 18,598 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 Executive Stock Compensation Plan - - (163) - --------- -------- ------- ------- Balance, September 30, 1996 5,748 $5,748 $55,404 $21,413 ========= ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. Page - 30 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 nonutility 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) 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. The Company recognizes the profits associated with these leases when the sale is made, after providing reserves for unearned income, doubtful accounts and warranty repairs. Gas Plant. Gas plant is stated at the original cost of construction. In accordance with the uniform system of accounts prescribed by the RIPUC, the difference between the original cost of gas plant acquired and the cost to ProvGas is recorded as a Utility Plant Acquisition Adjustment and is being amortized over periods ranging from 1 to 24 years. Depreciation. Depreciation is provided on the straight-line basis at rates designed to amortize the cost of depreciable plant over its estimated useful life. The composite depreciation rate expressed as a percentage of the average depreciable gas plant in service was approximately 3.85 percent for 1996 and 3.75 percent for 1995 and 1994. 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 Page - 31 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 provides 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 provides 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. 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 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) 1996 1995 - -------------------------------------- -------- -------- Cost of fuel assistance program $ 1,271 $ 1,836 Restructuring program (note 9) - 1,600 Pension costs 6,920 6,361 Deferred costs related to phase-in plan 449 601 Unamortized debt expense 2,109 2,217 Postretirement benefits 1,041 1,041 Pipeline interconnection costs 309 625 Deferred rate case expense (note 10) 246 853 Other deferred charges 2,441 2,022 ------- ------- Total $14,786 $17,156 ======= ======= Temporary Cash Investments. Temporary cash investments are short term, highly liquid investments with a maturity to the Company of not more than 90 days. Reclassifications. Certain prior 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. Page - 32 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) 1996 1995 1994 - ---------------------------------- ------ ------ ------- Current $2,989 $1,300 $3,211 Deferred 1,943 2,142 1,235 ------ ------ ------ Total Federal income tax provision $4,932 $3,442 $4,446 ====== ====== ====== Income tax is charged (credited) to the following: Charged to operating expenses $4,683 $3,104 $4,460 Included in other, net 249 338 (14) ------ ------ ------ Total Federal income tax provision $4,932 $3,442 $4,446 ====== ====== ======
The effective Federal income tax rates and the reasons for their differences from the statutory Federal income tax rates are as follows:
1996 1995 1994 ----- ----- ----- Statutory Federal income tax rates 34.0% 34.0% 34.0% Reversing temporary differences .5 (.1) (.4) Charitable contribution (.4) - - Amortization of investment tax credits (.4) (.6) (.4) Other .1 .3 .4 ---- ---- ---- Effective Federal income tax rate 33.8% 33.6% 33.6% ==== ==== ====
The Company's deferred tax assets and liabilities for each of the two years in the period ended September 30 are the result of the following temporary differences:
(thousands of dollars) 1996 1995 - ---------------------------------------------- --------- -------- Long-term deferred taxes - ------------------------ Tax assets Unamortized ITC............................. $ 883 $ 934 Other....................................... 361 420 Tax liabilities Property related............................ (20,328) (17,992) Pension costs............................... (519) (614) Deferred charges............................ (1,110) (1,482) -------- -------- Net deferred tax liability included in accompanying consolidated balance sheet..... $(20,713) $(18,734) ======== ========
Page - 33
Prepaid Taxes - ------------- Tax assets Accounts receivable reserves................ $1,284 $ 814 Property tax reserves....................... (384) 1,108 Alternative minimum tax..................... 876 - Other....................................... 1,020 1,194 Tax liabilities Employee severance.......................... 56 (541) Other....................................... (40) (121) ------ ------ Net prepaid taxes............................. 2,812 2,454 Prepaid gross earnings tax and other.......... 1,264 3,479 ------ ------ Net prepaid and refundable taxes included in accompanying consolidated balance sheet..... $4,076 $5,933 ====== ======
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) - ------------------------------------------------- 1997 $ 544 1998 544 1999 544 2000 360 2001 362 ------ 2,354 Amount representing interest 388 ------ Amount representing principal $1,966 ====== 4. CAPITALIZATION A. Long-term Debt 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 indebtness 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 $18 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. Page - 34 As of September 30, 1996, the annual sinking fund requirements and maturities of long-term debt for the next five fiscal years are $1,600,000 in 1997, $2,509,000 in 1998, $2,509,000 in 1999, $2,509,000 in 2000, and $2,509,000 in 2001. B. 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 commencing in February 1997. 5. NOTES PAYABLE The Company meets seasonal cash requirements and finances its construction program on an interim basis through short-term bank borrowings. As of September 30, 1996, the Company had lines of credit totaling $61,500,000 with borrowings outstanding of $23,270,000. 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 5.65 percent in 1996, 6.15 percent in 1995 and 5.29 percent in 1994. 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. In 1996, the Company changed its plans as a result of negotiated union contracts. The plans are to be formally amended by the Board of Directors in 1997. The changes resulted in additional service time being recognized, a change in the benefit formula and an increase in the period of supplemental payments. The net effect of these changes was an increase in the projected benefit obligation and unrecognized prior service cost of approximately $2,153,000. 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, 1996 and 1995:
(thousands of dollars) 1996 1995 - ------------------------------------------------------------ -------------------- Accumulated benefit obligation, including vested benefit obligation of $(36,463) as of September 30, 1996 and $(37,034) as of September 30, 1995 $(42,578) $(38,519) ======== ======== Projected benefit obligation for service rendered to date $(57,209) $(50,708) Plan assets at fair value (primarily listed stocks, corporate bonds and U.S. bonds) 63,019 58,058 -------- -------- Excess of plan assets over projected benefit obligation 5,810 7,350 Unrecognized (gain)/loss (13,139) (12,584)
Page - 35
Unrecognized prior service cost 3,126 1,193 Unrecognized net transition asset being recognized over 15 years from October 1, 1985 (545) (681) ------- -------- Net accrued pension cost included in other deferred credits and accounts payable at September 30, 1996 and 1995 $(4,748) $(4,722) ======= =======
Net pension cost for fiscal years 1996, 1995 and 1994 included the following components:
(thousands of dollars) 1996 1995 1994 - ----------------------------------------------------------- -------------------------- Service cost $ 1,709 $ 1,541 $ 1,589 Interest cost on benefit obligations 4,262 3,872 3,814 Actual return on plan assets (7,481) (10,300) 995 Net amortization and deferral 2,091 5,713 (6,229) ------- -------- -------- Net periodic pension cost 581 826 169 Adjustments due to regulatory action (442) (424) (131) ------- -------- -------- Net periodic pension cost recognized $ 139 $ 402 $ 38 ======= ======== ========
The discount rate and rate of increase in future compensation levels used in determining the projected benefit obligation were 8 percent and 6 percent, respectively. The expected long-term rate of return on assets was 9 percent. 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 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 $1,454,000 in 1996, $1,561,000 in 1995, and $1,566,000 in 1994 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 Page - 36 favored investment funds, such as the VEBA Trust. Accordingly, ProvGas fully recovered its 1996, 1995 and 1994 postretirement obligations because such amounts were funded into the VEBA Trust. Of the total postretirement benefit obligations, $1,454,000, $1,231,000 and $855,000 were included in rates during 1996, 1995 and 1994, respectively. In September 1996, the Commission approved a ratable recovery of the cumulative unrecovered difference of $1,041,000 during 1997, 1998, and 1999. The Plan's costs and accumulated postretirement benefit obligation for 1996, 1995 and 1994 are calculated by ProvGas' actuaries using assumptions and estimates which include:
1996 1995 1994 - ---------------------------------------------------- --------------------- Healthcare cost annual growth rate.................. 11.4% 12.6% 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 1996, a one percent change in the above rates would change the obligation by $833,000 and would change the annual expense by $90,000. The obligations and assets of the Plan at September 30, 1996 and 1995 are as follows:
(in thousands) 1996 1995 - -------------------------------------- --------------------- Accumulated post-retirement benefit obligation: Current retirees $ (6,975) $ (7,426) Active employees-eligible for benefits (889) (845) Active employees (3,876) (3,694) -------- -------- Total post-retirement benefit obligation (11,740) (11,965) Plan assets at fair value 3,106 2,080 -------- -------- Unfunded post-retirement benefit obligation (8,634) (9,885) Unrecognized transition obligation 8,947 9,474 Unrecognized net (gain) or loss (313) 402 -------- -------- Accrued post-retirement benefit obligation included in the accompanying consolidated balance sheet $ (-) $ (9) ======== ========
Page - 37 ProvGas' actuarial determined Plan costs for 1996, 1995 and 1994 include the following:
(in thousands) 1996 1995 1994 - ----------------------------------- ------- ------- ------- Service cost $ 222 $ 230 $ 238 Interest cost 896 909 835 Actual return on plan assets (98) (28) (37) Amortization and deferral 434 450 530 ------ ------ ------ Total annual plan costs $1,454 $1,561 $1,566 ====== ====== ======
C. Supplemental Retirement Plans ProvGas provides certain supplemental retirement plans for key employees. The projected benefit obligation is approximately $1,098,000 which is being accrued over the service period of these key employees. The supplemental retirement plans are unfunded. ProvGas accrued and expensed $310,000, $150,000 and $44,000 related to these benefits in 1996, 1995, and 1994, 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 $381,000 for 1996, $248,000 for 1995, and $240,000 for 1994. 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 $240,000 1994 award, $153,000 was paid in cash during fiscal 1995. Of the $248,000 1995 award, $167,000 was paid in cash during fiscal 1996. Of the $381,000 1996 award, $269,000 will be paid in cash during 1997. Grant shares totaling 4,491, 5,371 and 4,902 were purchased by the Company and reissued to key employees during 1996, 1995 and 1994, respectively. E. Restricted Stock Incentive Plan During 1996, the Company adopted a 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 Incentive Stock Plan totaled approximately $146,000 in 1996 consisting of 7,954 shares. All amounts awarded under the Restricted Stock Incentive Plan are deferred and amortized to expense over a three-year period. Page - 38 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 equipment under capital leases. Property under Capital Leases: - -----------------------------
(thousands of dollars) 1996 1995 - ------------------------------------------- -------- ----------------- Gas plant $ 6,116 $ 6,116 Information Systems 1,551 1,551 Accumulated depreciation (6,072) (5,659) ------- ------- $ 1,595 $ 2,008 ======= ======= Commitments for Capital Leases are: - ---------------------------------- LNG Computer (thousands of dollars) Storage Equipment Total - ------------------------------ -------------------------------------- 1997 $ 136 $ 404 $ 540 1998 136 373 509 1999 136 373 509 2000 136 186 322 2001 135 - 135 ------ ------- ------- $ 679 $ 1,336 2,015 ====== ======= Amounts representing interest 337 ------- Amounts representing principal $ 1,678
====== C. Operating Leases The Company also leases facilities and equipment under operating leases with a total future obligation of approximately $483,000 as of September 30, 1996. D. Gas Supply Restructuring Federal Energy Regulatory Commission (FERC) Order 636 and other related orders (the Orders) have Page - 39 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 Company has negotiated new pipeline transportation and gas storage contracts. At the same time, a number of contracts with gas suppliers have been negotiated to complement the transportation and storage contracts. The portfolio of supply contracts is designed to be market responsive and is diversified with respect to contract lengths, source location and other contract terms. On a periodic basis, the Company reviews all of its contracts to ensure a diverse, secure, flexible and economical supply portfolio is maintained. To meet the requirements of the Order, the pipelines have incurred significant costs, collectively known as transition costs. The majority of these costs will be reimbursed by the pipeline's customers including the Company. Based upon current information, the Company anticipates its transition costs to net between $21 million and $22 million of which $15.8 million has been included in the GCC and is currently being collected from customers. The remaining minimum obligation of $5.2 million has been recorded in the accompanying consolidated balance sheets along with a regulatory asset anticipating future recovery through the GCC. To the extent that refunds are received based on FERC settlements, these refunds are returned to the customers through the GCC. The Company's ultimate liability may differ from the above estimates based on FERC settlements with the Company's pipeline transportation suppliers. FERC has approved settlements with three of the Company's transportation pipelines, which account for the bulk of the Company's transition costs. Negotiations are continuing on one additional pipeline and, based on the information available, the Company believes that its current range for transition costs is reasonable. 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, 1996, 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 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 Page - 40 located in Providence, Rhode Island. This site formerly contained a manufactured gas plant operated by the Company. As of September 30, 1996, approximately $1.5 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, 1996, the Company has compiled a preliminary range of costs based on remediation alternatives, ranging from $1.3 million to in excess of $5.0 million. Based on the proposals for remediation work, the Company has accrued $1.3 million at September 30, 1996, for anticipated future remediation costs at this site. Also, the Company has negotiated an agreement, which is subject to Federal regulatory approval, with a third party which provides for reimbursement of up to $2.5 million of certain remediation costs to be incurred at this site. Tests conducted following the recent discovery of an abandoned underground oil storage tank at the Company's Westerly, Rhode Island operations center 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 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 $1.8 million and an estimated $1.3 million for environmental remediation costs have been charged to the accumulated depreciation reserve at September 30, 1996. Of the environmental investigation costs incurred, approximately $1.0 million and $600,000 were recorded in the years ended September 30, 1996 and 1995, respectively, while the remainder were incurred in prior years. Management believes that this rate recovery mechanism is appropriate for recovery of future costs. 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 environmental related costs. Should future developments warrant additional rate recovery mechanisms, management intends to seek such recovery. 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, 1996, approximately $800,000 was due from the State of Rhode Island related to gas consumed by customers over the last two years. Page - 41 8. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value disclosures for the following financial instruments: Cash, Cash Equivalents and Short-term Debt - ------------------------------------------ The carrying amount approximates fair value due to the short-term maturity of these instruments. Long-term Debt and Preferred Stock - ---------------------------------- The fair value of long-term debt and preferred stock is estimated based on currently quoted market prices for similar types of issues. The carrying amounts and estimated fair values of the Company's financial instruments at September 30 are as follows:
1996 1995 ----------------- ----------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - --------------------------- -------- ------- -------- ------- Cash and cash equivalents $ 1,424 $ 1,424 $ 1,278 $ 1,278 Short-term debt* 23,270 23,270 7,337 7,337 Long-term debt* 74,478 77,924 76,432 81,816 Preferred stock 8,000 8,395 8,000 8,800
* 1995 balances adjusted for the issuance of $15,000,000 in First Mortgage Bonds Series R subsequent to year-end. 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. RESTRUCTURING In June 1994, the Company, following a six-month study of its major processes, realigned its personnel to meet the existing and future challenges associated with an increasingly competitive energy marketplace. The intent of the restructuring was to significantly improve the Company's customer services, lower operating costs and increase operating efficiencies. Approximately 30 people were separated from the Company, while approximately 18 new employees have been hired to fill newly defined positions. The employees bring skill, expertise and experience to the Company not previously available within its work force. The direct cost of this realignment was approximately $1 million, net of tax consisting primarily of severance pay and related benefits for personnel who were separated during 1994. Substantially all costs were paid as of September 30, 1995. The Company had discussed the reorganization with the RIPUC and based on prior RIPUC allowance of similar costs, the Company deferred these costs in 1995 in anticipation of recovery in its most recent rate case. (See Footnote 10.) Page - 42 10. RATE CHANGES A.ProvGas Rate Increase In February 1995, ProvGas filed for rate relief requesting an approximate 8 percent general rate increase. The major issues contributing to the rate request were an increase in depreciation due to capital spending, an increase in working capital needs, and an increase in capital expenditures. 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. Additionally, as a result of the rate decision, ProvGas recorded several adjustments in its 1996 financial statements. Specifically: a) ProvGas began calculating property tax expense for rate purposes based on the current year's expense plus an estimate of one year's increase in expense. Previously, ProvGas was required to estimate two year's increase in expense. As a result, ProvGas reduced its regulatory liability for one year's property tax expense resulting in a one time gain of approximately $4,100,000 before tax. b) ProvGas wrote-off the $1,600,000, before tax, of restructuring costs previously deferred. (See Footnote 9.) The RIPUC had previously allowed ProvGas recovery of similar costs, but determined that the costs of the 1994 reorganization should not be recovered in rates. c) ProvGas wrote-off approximately $440,000, before tax, of previously deferred rate case expenses. (See Footnote 1.) d) ProvGas wrote-off approximately $470,000, before tax, of construction expenditures previously capitalized. These costs were capitalized in accordance with GAAP and were based on FERC guidance on accounting for such costs. The RIPUC agreed that such costs could be capitalized beginning in 1996, but did not allow recovery of the previously capitalized costs. The net effect of the above adjustments did not result in a material gain or loss. B. North Attleboro Gas Rate Increase In October 1991, the MDPU released its settlement order in regards to a rate request which included a qualified phase-in plan. Due to the magnitude of the rate request, the MDPU ordered North Attleboro Gas Company to phase-in a 32 percent increase over five years as follows:
Estimated Estimated Percentage Additional Increase in Annual Rate Base Date Effective Revenues Revenues - ---------------------------- ---------- ------------ November 1, 1991 $188,096 8.13% November 1, 1992 203,042 8.12 November 1, 1993 200,967 7.43
Page - 43 November 1, 1994 141,137 4.86 November 1, 1995 94,445 3.10
The rate settlement further required North Attleboro to classify $545,000 of gas plant as plant held for future use for rate case purposes. This plant will be included in future rates if North Attleboro meets certain growth requirements by the year 2000. North Attleboro capitalized AFUDC and other costs of approximately $61,000 in 1996, $136,000 in 1995 and $198,000 in 1994 related primarily to the gas plant not yet phased into North Attleboro's rates under the plan. North Attleboro amortized $212,000 in 1996, $185,000 in 1995 and $114,000 in 1994 of amounts previously deferred. 11. 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 ten years from the date of grant and in the case of options granted to the directors, the options become exercisable after the first anniversary of the date of such grant. Under the stock option plans, stock appreciation rights may be granted in conjunction with all or part of any stock option grants to 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, 1996, 1995, and 1994: Number of Shares - ------------------------------------------------- Outstanding, September 30, 1993 57,439 Granted at $19.000 per share 7,117 Exercised - Terminated (8,048) Surrendered - ------ Outstanding, September 30, 1994 56,508 Granted at $15.625 per share 8,042 Exercised - Terminated (9,761) Page - 44 Surrendered - ----- Outstanding, September 30, 1995 54,789 Granted at $17.000 per share 7,449 Exercised - Terminated - Surrendered - ------ Outstanding, September 30, 1996 62,238 ====== 12. NONUTILITY 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. 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. 13. HEDGING On October 8, 1996, the RIPUC approved a one-year Pilot Hedging Program Settlement Agreement between the Company and the Rhode Island Division of Public Utilities and Carriers. The Agreement allows 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 will be flowed through the Variable Gas Cost component of the GCC and cannot exceed $800,000. The Company had not entered into any hedging transactions as of September 30, 1996 and, depending on market conditions, would anticipate utilizing FRM tools in the first quarter of fiscal 1997. 14. ACQUISITION ACTIVITY The Company is seeking investment opportunities in nonregulated energy ventures. During 1996, the Company established a relationship with Encon Systems, Inc. (Encon), a full-service energy-management company that develops and implements energy-efficient systems for commercial, industrial and institutional customers, as well as residential customers. The Company has established a $350,000 line of credit as a working capital supply primarily for Encon's PFS (a division of PepsiCo) contract. In connection with the line of credit, the Company received a warrant to acquire stock representing 45 percent of the outstanding stock of Encon, which is exercisable until early 1997, but subject to extension under certain circumstances. The companies are also working on joint marketing opportunities. Currently, no material acquisitions are pending. Page - 45 15. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", effective for fiscal years beginning after December 15, 1995. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets and requires that regulatory assets which are no longer probable of recovery through future revenues be charged to earnings. SFAS No. 121 will be effective for the Company in fiscal 1997. At that time, the Company will perform a full analysis of its long-lived assets. Based on the current regulatory environment, management does not believe the adoption of SFAS No. 121 will have a material impact on the Company's financial position or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995. SFAS No. 123 allows an alternative accounting for stock-based employee compensation agreements and requires that financial statements include certain disclosures related to stock-based employee compensation agreements. The Company does not plan to adopt the alternative accounting under this pronouncement but will update its disclosures with respect to its stock plans, as required. 16. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is unaudited quarterly financial information for the two years ended September 30, 1996 and 1995. 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 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) Fiscal 1995 - ---------------------------------------------------------------- Operating revenues $49,302 $66,162 $38,157 $30,371 Operating income (loss) 5,022 7,834 892 (411) Net income (loss) 3,307 5,848 (844) (2,184) Net income (loss) per share* .59 1.04 (.15) (.39)
* Calculated on the basis of weighted average shares outstanding during the quarter. Page - 46 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-30-1996 OCT-01-1995 SEP-30-1996 PER-BOOK 179,607 1,141 54,616 14,786 0 250,150 5,748 55,404 21,413 82,565 8,000 0 72,456 23,270 72,800 0 1,600 0 1,678 422 61,837 250,150 215,152 4,683 194,283 198,966 16,186 945 17,131 7,465 9,666 696 8,970 6,155 5,889 11,685 1.57 1.57
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