ITEM 1. BUSINESS General
Providence Energy Corporation (the Registrant or the Company) was organized in 1981 as a Rhode Island business corporation. The Registrant's outstanding common shares are presently listed on the American Stock Exchange. The Registrant is the parent of two wholly-owned gas distribution utilities, The Providence Gas Company (ProvGas) and North Attleboro Gas Company (North Attleboro Gas), together referred to as the Gas Companies. The Registrant also conducts its nonutility operations through a wholly-owned nonutility subsidiary, Newport America Corporation (Newport America).
ProvGas, Rhode Island's largest natural gas distributor, was founded in 1847 and serves approximately 159,000 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 846,600.
The Registrant's nonutility operations and investments are conducted through Newport America - see Nonutility Operations.
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 monthly number of customers of approximately 162,000 for the twelve months ended September 30, 1994, of which approximately 90% were residential and 10% were commercial and industrial.
The net increase in the average monthly number of customers during fiscal 1994 over fiscal 1993 was approximately 2,100 or 1.3 percent. The modest 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 a 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 made 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.
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The following table shows the distribution of gas to various customer classes, and the total gas sold and transported by year since 1990.
1994 1993 1992 1991 1990
Firm 81.2 83.9% 73.9% 66.2% 74.4% Interruptible 16.5 14.7 23.1 19.5 7.5 Transportation 2.3 1.4 3.0 14.3 18.1 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
Total Gas Sold and Transported
BCF(*) 28.7 27.1 29.1 29.0 27.8 ===== ===== ===== ===== ===== (*) Gas sales are denominated in billions of cubic feet of natural gas, (Bcf). Total gas sales include gas sold and transported by the Gas Companies.
Firm Service. In recent years, the distribution of the Gas Companies' firm sales has been approximately 61% to residential and 39% to commercial and industrial customers. Firm sales represent the highest percentage of operating margin and represent the core of the Gas Companies' business.
Interruptible Service. Interruptible customers consist of two types: seasonal customers that typically use gas only during the nonwinter months and dual-fuel customers that contract for gas service on a year round basis, but agree to service interruption during certain peak periods. By retaining the right to interrupt service to the dual-fuel customers, the Gas Companies can balance daily demand from firm customers with available gas supply and pipeline capacity. Interruptible customers may interrupt their gas service, as well, when it is more economical to utilize an alternative fuel. Accordingly, the amount of the Gas Companies' interruptible sales fluctuates depending upon the relative price of natural gas to alternative fuels.
Interruptible sales produce substantially less margin to the Gas Companies than firm sales due to the more competitive nature of interruptible sales. Service rates charged to dual-fuel customers are based on the price that the customer would otherwise pay for its alternative fuel. Total margin, however, is generally not impacted by nonfirm sales due to a margin-sharing mechanism - see Rates and Regulation and Competition and Marketing.
Transportation Service. Margin from the transportation of gas purchased by certain large customers from third parties is likely to represent an increasing percentage of the Gas Companies' future total margin due to the continuing regulatory developments affecting the natural gas industry - see Special Factors Affecting the Natural Gas Industry. In
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general, these developments now allow customers to buy gas directly from the producer-supplier rather than solely from the local gas distribution company. Customer-owned gas is transported to the customer's premises through a combination of the interstate pipelines and the Gas Companies' distribution systems.
For a given quantity of gas, the Gas Companies' margin from transportation service is considerably less than their margin from firm sales, but is generally comparable to their margin from interruptible sales, depending upon the price of alternative fuels. To the extent that the Gas Companies' existing customers buy gas directly from producer-suppliers, the Gas Companies' revenue will decrease although nonfirm margin may not be impacted. Total margin is impacted by nonfirm sales and transportation sales under a margin-sharing mechanism- see Rates and Regulation. During fiscal 1994, the Registrant saw an increase in its transportation sales as compared to last year by 270 MMcf or 70 percent due to additional capacity available for transportation and competitive third party pricing.
Gas Supply
During fiscal 1994, the Registrant purchased its gas supplies from multiple sources. Of these sources, 79 percent was provided by contracts with direct suppliers (well-head producers) on a firm transportation basis. The Registrant, during off-peak periods, has also taken advantage of inexpensive gas supplies offered on the spot market which constitutes 13 percent of the Registrant's gas supply. Lastly, the Registrant uses liquefied natural gas (LNG) and underground storage (eight percent) to complete its supply portfolio.
In a deregulated market, effective management of natural gas supply offers the Registrant a competitive advantage. The Registrant has responded to deregulation by aggressively broadening supply sources and transportation options. The Registrant has created a flexible, responsive, and competitive portfolio of suppliers, transporters, and storage services. A key component to operating in this new competitive environment is the flexibility gained by successful storage management for both supply balancing and meeting cold weather requirements. In 1994, the Registrant's underground storage capacity increased by 123 percent from 1.3 billion cubic feet (Bcf) to 2.9 Bcf, while our firm daily withdrawal capability increased by over 200 percent from 9 million cubic feet (MMcf) to 28 MMcf. Managing supply requires a thorough knowledge of its own market requirements. Where the Registrant once purchased a bundled package, including the gas and transportation of the gas to its city gate, the Registrant now buy and sell both gas supply and pipeline capacity using the new system of bulletin boards to schedule supply, to locate purchasers for available gas and capacity, and to track the availability and price of both gas supply and pipeline capacity. To meet the challenge of managing supply and improve the Registrant's ability to respond competitively, the Registrant has expanded its planning capability, upgraded its ability to electronically monitor its distribution system, added the capability to telemeter our larger
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customers, and created a supply operations center designed to centralize all daily supply management functions. The Registrant's goal is to buy natural gas directly from producers at the lowest possible price and arrange space on pipelines for specific delivery dates to ensure that it has adequate supply to meet its constantly changing demand. In addition, the Registrant's enhanced ability to manage supply improves the Registrant's ability to respond quickly to new marketing opportunities.
This capability of managing supply is critical to providing its customers with a reliable and competitively priced product. The Registrant's diversified portfolio of supply options virtually guarantees that no single event will unduly affect price and supply. The Registrant's supply of liquefied natural gas (LNG) and expanding storage capability provides the flexibility needed to maintain reliability in severe cold, met rapid shifts in temperature and, in conjunction with supply management, provide a competitive edge as markets and prices change.
In the new environment, the Registrant is able to sell capacity that is not needed through a program called "capacity release". Part of maintaining a healthy supply of natural gas means that the Registrant has capacity reserved for future growth and peak season needs - particularly for severely colder-than-normal weather. The revenues generated from these sales reduce the cost of gas for firm customers and improve our competitive position. Upgraded planning, system modeling, and supply flexibility increase the Registrant's ability to release capacity and efficiently use our supply resources to reduce costs to customers. In 1994, the Registrant generated $2.1 million in reduced gas costs from its capacity release program.
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 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.
On October 14, 1993, the RIPUC approved ProvGas' request to adopt a new rate design, including a declining block rate structure, seasonal gas cost accounting and higher customer charges effective November 14, 1993. The declining block rate structure allows ProvGas to recover more fixed costs through rates immediately when a customer begins buying natural gas.
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Also, the new block rate structure will help balance customer bills during the year and will help protect ProvGas and its customers during periods of extreme weather conditions. This new block rate structure should result in a stabilization of earnings from year to year. In addition to the improved stability in earnings, the new rates are designed to increase annual operating margin by approximately $700,000. Other components of the rate award include an allowed return on equity of 11.2 percent. In 1994, for accounting and gas cost recovery purposes, ProvGas recorded the embedded cost of gas using seasonal gas cost factors of $4.26 per thousand cubic feet (Mcf) during November '93 through April '94 and $2.77 per Mcf during May '94 through September '94. The ultimate effect of the seasonal gas cost accounting will be that quarterly operating margins will decrease in the winter months and increase in the summer months when compared to the previous method. Assuming normal weather, annual earnings should not be affected by this change.
Another significant attribute of the new rate design structure as compared to the previous method is a higher customer charge. The average monthly customer charge has been increased to recognize that a substantial portion of ProvGas' costs are relatively fixed and should be recovered from customers even when gas consumption is less than expected. ProvGas' volumetric charge has decreased in order to off set the increased customer charge.
The following table sets forth the results of ProvGas' applications before the RIPUC for rate increases since 1981.
Annualized Annualized Authorized Date of Rate Increase Date Rates Rate Increase Return on Application Requested Effective Granted (*) Common Equity
9/28/81 $12,400,000 07/20/82 $9,600,000 15.5% 2/27/84 10,800,000 12/28/84 5,600,000 15.5 8/04/88 8,300,000 06/01/89 4,860,000 13.0 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
(*) Although the RIPUC reviews and approves all changes in gas costs billed to customers under the Cost of Gas Adjustment (CGA) clause, such changes are not part of the general rate filings described above. See notes 1 and 9 in notes to Consolidated Financial Statements contained in the Registrant's 1994 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.
An agreement was reached between North Attleboro Gas and the Massachusetts' Attorney General's office, subsequently approved by the MDPU for a rate increase effective November 1, 1991. Under the terms of
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the agreement, a 32 percent increase will be phased-in over five years. See note 9 to the Consolidated Financial Statements contained in the Registrant's Annual Report to Shareholders filed herewith as Exhibit 13.
Under the agreement, the non-firm margin threshold for system interruptible sales and system transportation will be calculated annually using the average of total non-firm margins earned from system interruptible sales and system transportation sales for the preceding three years. A new non-firm margin threshold will be calculated for each fiscal year beginning in October. Non-firm margins earned above the threshold will be shared at a ratio of 66 2/3% to firm ratepayers and 33 1/3% to the Registrant. For the fiscal 1993 year that threshold was $2.1 million as compared to $1.6 million in fiscal 1992. The threshold for fiscal 1994 has been determined to be $2.5 million. The Registrant retained the provision to collect the full $2.8 million it received earlier plus $.2 million as a result of a consolidation with the purchase of South County Gas Company. If actual non-firm margin were below the $3 million threshold, the Registrant would add an amount to its CGA to bring collections up to the $3 million non-firm threshold.
Competition and Marketing. Under the current laws of Rhode Island and Massachusetts, no gas utility may sell gas in a city or town where another utility is already selling gas, unless the new utility shall have obtained a certificate from RIPUC or MDPU, as the case may be, certifying that the public convenience and necessity requires the same. Such an action requires a public hearing with notice to specific parties including the gas utility already serving the area. To date, neither ProvGas nor North Attleboro Gas has experienced any competition from the other natural gas utilities in its service areas.
The Registrant faces its most intense competition from fuel oil in certain market segments. During 1994, for commercial and industrial customers, oil has enjoyed a price advantage over natural gas. Despite this price advantage, the Registrant continues to add both commercial and industrial customers. This is mainly the result of price stability afforded historically by natural gas over oil and is also the result of value added benefits from reliable customer service provided to the Registrant's customer sectors.
Advanced gas technologies play a significant role in load growth for both the commercial and industrial sectors. Such technologies include on site cogeneration capabilities, cost-effective alternatives to electric space conditioning, process cooling, motor drives and the utilization of compressed natural gas vehicles.
ProvGas opened its first public natural gas filling station in June 1992. This market development provides on-site fueling capabilities for large fleet operators. ProvGas expects natural gas vehicles (NGV) to produce modest margin growth over the next five years. ProvGas has 15 companies and State agencies using the station. Including ProvGas' own natural gas vehicles, there are about 125 NGV's operating in Rhode Island.
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ProvGas helped the East Providence School Department and Ryder Transportation Company win a Federal grant to study the effectiveness of natural gas school buses compared to standard diesel fuel buses. Beginning in January 1995, four natural gas buses will be tested for fuel cost and overall vehicle economy. ProvGas assisted in the construction of a compressed natural gas filling station in East Providence to service the buses. This is the first use of natural gas school buses in Rhode Island.
The Registrant plans to work with other companies to build CNG filling stations. A significant boost to these efforts occurred this year with legislative approval of a bill allowing nonutility companies to sell natural gas for vehicular use without being subject to public utility regulation. This legislation allows private investors to build the natural gas refueling infrastructure, a critical step in the development of the natural gas vehicle market.
To further promote the Registrant's objective of maximizing growth, market research activities have been intensified. This market research will identify growth opportunities, such as non-users on existing mains, increase existing user load and main extension to developments not evaluated previously. This research will also provide the data essential to design marketing strategies. At present, only approximately 45% of the residences within the Registrant's service areas are heated by natural gas. Furthermore, 24% of the Registrant's customers currently do not use natural gas to heat their homes. As a result, the Registrant believes that marketing to this segment represents a potential for significant growth.
The Registrant has completed the contract with the U.S. Navy to provide gas service to a boiler plant facility in Newport, R.I.. This arrangement allows for conversion of the Navy facility from oil firing to a combination of oil and natural gas firing. In addition, based upon a technology that was developed for various NASA space programs, the fuel cell will be fully operational by February 1995. Fuel cells use natural gas as a raw material in a chemical reaction that results in the creation of both electricity and hot water. The Navy's fuel cell will provide electricity and hot water at a significant discount versus the current conventional sources. ProvGas estimates the annual natural gas usage to be about 15 MMcf annually - this is equivalent to the gas usage of about 120 residential heating customers.
Employees
At September 30, 1994, the Gas Companies had 568 full-time employees Approximately 276 of those employees were covered by a collective bargaining agreement with the United Steelworkers of America. These same union employees and ProvGas ratified a three year extension to the contract which ended in January 1993. The agreement calls for general wage increases of 3.5 percent in 1993, 3.75 percent in 1994 and 4 percent in 1995. Also incorporated into the contract were work practice changes and other action steps designed to allow ProvGas to achieve greater operating efficiencies. I-7
Gas Distribution Systems. The Gas Companies' distribution systems consist of approximately 2,360 miles of gas mains ranging in size from 2 to 36 inches in diameter, approximately 137,400 services, (a service is a pipe connecting a gas main with piping on a customer's premises), and approximately 167,500 active gas meters together with related facilities and equipment. The Gas Companies have regulating and metering facilities at seven points of delivery from Algonquin, which the Gas Companies presently believe to be adequate for receiving gas into their distribution systems.
Storage Facilities
Under an agreement with Texas Eastern, the Registrant is entitled to the underground storage of up to 1,200 MMcf of natural gas at a facility located in Leidy, Pennsylvania. Withdrawals from storage are on a firm basis at the time of proposed withdrawal. The Registrant has additional storage capacity of 3,081 MMcf in various underground storage fields for the 1994/95 winter, which may be withdrawn on a best efforts basis at time of the proposed withdrawal. The only limitation to the timely withdrawal is a potential temporary bottleneck in the pipeline caused by heavy seasonal demand.
The Registrant has an agreement with Algonquin for the storage of up to the equivalent of 1,170 MMcf of vaporized LNG in a tank owned by Algonquin and located on land leased to Algonquin by the Registrant. The agreement expires in 2003, but the Registrant has an option to extend the agreement for an additional thirty years. The Registrant owns and operates an LNG storage and vaporization facility which has the capacity to store the equivalent 185 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.
During fiscal 1994, Newport America had three wholly-owned subsidiaries engaged in various nonutility businesses. Prudence Corporation owns real estate for investment and rental purposes. S & M Appliance Service Company, whose nonutility assets were sold in August 1992, was a wholesale distributor of gas heating and air conditioning equipment with installation and service capabilities. Patience Realty Corporation was involved in constructing a timeshare and condominium complex along the waterfront in Newport, Rhode Island (the Wellington Project).
Special Factors Affecting the Natural Gas Industry
General. The natural gas industry is subject to numerous legislative and regulatory requirements, standards and restrictions that are subject to change and that affect the Gas Companies to varying degrees. Significant industry factors that have affected or may affect the Gas
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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 sources 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 order (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 successfully negotiated new pipeline transportation and gas storage contracts.
At the same time, a number of contracts with gas suppliers have been negotiated to complement the transportation and storage contracts. The portfolio of supply contracts 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 share of transition costs to total between $16 million and $19 million of which $8.3 million has been included in the CGA and is currently being collected from customers. The remaining minimum obligation of $7.7 million has been recorded in the accompanying consolidated balance sheet along with a regulatory asset anticipating future recovery through the CGA.
The Registrant's ultimate liability may differ from the above estimates based on FERC settlements with the Registrant's pipeline transportation suppliers. FERC has approved settlements with two of its
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pipelines, which account for the bulk of its transition costs. Negotiations are continuing on the two additional pipelines, but recent favorable developments have considerably reduced the uncertainty previously disclosed. As a result, the Registrant has decreased the range for potential transition costs accordingly.
Environmental Regulations
Federal, state and local laws and regulations establishing standards and requirements for 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 and current operations and properties. To the best of its knowledge, subject to the following paragraph, the Registrant believes it is in substantial compliance with such laws and regulations. However, should future costs be incurred, relating to the items mentioned below, the Registrant anticipates recovery from third parties or through rates.
The Registrant is aware of four sites at which it may incur future costs for environmental investigation and clean-up. Based on current available information, however, the amount of costs, if any, related to these sites will not be material to the operations of the Registrant or its financial position.
Management anticipates requesting rate relief for all costs related to the environmental matters and believes that the ultimate resolution of these matters will not have a materially adverse effect on the Registrant's results of operations and financial condition.
With regard to the clean air quality standards, the Registrant believes that the use of natural gas in industrial and electric generation boilers and turbines is one way to reduce pollutants discharged into the atmosphere. To the extent that the use of clean burning fuels is mandated by federal or state policy, management believes that demand for the Registrant's natural gas would increase.
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.
ITEM 2.
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,
I-10 Providence and Westerly which house its offices and provide floor space for its distribution and maintenance facilities.
Substantially all the foregoing properties are mortgaged as collateral for outstanding bonds of ProvGas.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDERS' MATTERS
The Registrant's common stock is listed on the American Stock Exchange and trades under the symbol "PVY". As of December 27, 1994, there were approximately 6,636 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' on the Registrant's Annual Report to shareholders for the fiscal year ended September 30, 1994, which is filed herewith under Part IV as Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
For the information called for by this item, reference is made to page 18 of the Registrant's Annual Report to shareholders for the fiscal year ended September 30, 1994, which is filed herewith under Part IV as Exhibit 13.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Regarding the information that relates to this item, reference is made to the materials within the following: Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 14 through 17, of the Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1994, which if filed herewith under Part IV as Exhibit 13.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the information called for by this item, reference is made to pages 25 through 31 of the Registrant's Annual Report to shareholders for the fiscal year ended September 30, 1994, which is filed herewith under Part IV as Exhibit 13.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
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PART III
ITEM 10.
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 in
Registrant Name and Age Office First Held
James H. Dodge (54) Chairman, President and Chief Executive Officer 1992
James DeMetro (46) Vice President, Energy Services 1992
Gary S. Gillheeney (39) Vice President, Financial and Information Services, Treasurer and Assistant Secretary 1994
Alycia L. Goody (42) General Counsel and Corporate Secretary 1991
William D. Mullin (46) Vice President, Corporate Relations1994
Robert W. Owens (46) Vice President, Operations
Bruce G. Wilde (48) Vice President, Human Resources and Assistant Secretary 1994
Mr. Dodge was elected President and Chief Executive Officer of Providence Energy Corporation and ProvGas in August 1990 after the retirement of Louis R. Hampton. Mr. Dodge subsequently became Chairman of the Board in January 1992. Prior to his employment with the Registrant, he was President and Chief Executive Officer of Vermont Gas Systems, Inc. Vermont Gas Systems, Inc. is a regulated public utility which sells natural gas to a portion of the population of the State of Vermont.
Mr. DeMetro was elected Vice President, Energy Services of Providence Energy Corporation and ProvGas in March 1992. For more than five years, prior thereto, Mr. DeMetro served the Brooklyn Union Gas Company, a regulated natural gas utility, in various management positions, most recently as Manager, Rates and Regulations.
Mr. Gillheeney was elected Vice President, Financial and Information Services, Treasurer and Assistant Secretary in May 1994. For more than five years prior thereto, Mr. Gillheeney served ProvGas in various management positions, most recently as Assistant Treasurer and Controller. III-1 Ms. Goody was elected General Counsel and Corporate Secretary of Providence Energy Corporation and ProvGas in January 1991. For two years, prior thereto, Ms. Goody served ProvGas as Corporate Counsel. For three more years prior to that, Ms. Goody served as an Assistant Attorney General for the Commonwealth of Massachusetts.
Mr. Mullin was elected Vice President, Corporate Relations of Providence Energy Corporation and ProvGas in January 1994. For five years prior to his current position with Providence Energy Corporation and ProvGas, he served ProvGas in various management positions, most recently as Vice President, Operations.
Mr. Owens was elected Vice President, Operations Providence Energy Corporation and the ProvGas in January 1994. For more than five years prior thereto, Mr. Owens served the Providence Energy Corporation and ProvGas in various management positions, most recently as Vice President, Treasurer and Chief Financial Officer.
Mr. Wilde was elected Vice President, Human Resources and Assistant Secretary of Providence Energy Corporation in May 1994. For more than five years prior thereto, Mr. Wilde served ProvGas in various management positions, most recently as Assistant Vice President for Personnel.
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DIRECTORS OF THE REGISTRANT
The following information is furnished with respect to the Directors of the Registrant.
Name Director Since Expiration of Term
William W. Bennett * 1992 1997
Gilbert R. Bodell, Jr. 1980 1995
James H. Dodge 1991 1997
Diane M. Disney * 1994 1997
Robert P. Freeman * 1983 1995
Louis R. Hampton 1971 1995
John H. Howland 1993 1996
Douglas H. Johnson 1993 1996
Dorothy G. Kramer 1976 1995
Romolo A. Marsella 1993 1996
Kenneth W. Washburn 1975 1997
* Will be leaving as a Director in January 1995.
William W. Bennett is Director of Operations, Rocky Hill School in Warwick, RI.
Gilbert R. Bodell, Jr. is President, Frontier Manufacturing Company (textile); former Vice President, Valley Lace Co. and Esten Dyeing and Finishing Co.
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.
Diane M. Disney is the Deputy Assistant to the Secretary of Defense (Civilian Personnel Policy).
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Robert P. Freeman since July, 1992: President of Lazard Freres Real Estate Fund; since July, 1992, Chairman, and from February, 1991 to July, 1992: President and Chief Executive Officer, Pacific Gateway Properties, Inc. (formerly Perini Investment Properties, Inc.) previously President, the Marathon Group of Companies, Inc. (holding company of investment counselling and real estate development firms).
Louis R. Hampton is the retired Chairman of the Board of Directors. Mr. Hampton served as President and Chief Executive Officer of the Registrant for more than 16 years; retiring from those positions in 1990.
John H. Howland is President and Chief Operating Officer, Original Bradford Soap Works, Inc. (textiles).
Douglas H. Johnson since October, 1991: Vice President and Managing Partner, M. Van Leesten Associates, Inc. (business and urban planning consultants); from 1980 to October, 1991: President and Chief Executive Officer, Peerless Precision, Inc. (aerospace manufacturing company).
Dorothy G. Kramer is retired Senior Vice President, Treasurer and Corporate Secretary, Taco, Inc. (manufacturers of pumping, heat transfer and hydronic control equipment).
Romolo A. Marsella is President, Marsella Development Corporation (real estate development).
Kenneth W. Washburn is Chairman and President, Union Wadding company (manufacturers of non-woven textiles).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
For the information called for by this item, reference is made to pages 7 to 13 of the Providence Energy Corporation's proxy statement filed December 16, 1994 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 19, 1995.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For the information called for by this item reference is made to page 14 of the Providence Energy Corporation's proxy statement filed December 16, 1994 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 19, 1995.
Section 16 Compliance
For the information called for by this item reference is made to page 15 of the Providence Energy Corporation's proxy statement filed December 16, 1994 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 19, 1995.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information called for by this item reference is made to page 6 of the Providence Energy Corporation's proxy statement filed December 16, 1994 with the Securities and Exchange Commission for the annual meeting of shareholders to be held January 19, 1995.
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PART IV
Item 14.
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, 1994 and 1993 Consolidated Statements of Income for the years ended September 30, 1994, 1993 and 1992 Consolidated Statements of Cash Flows for the years ended September 30, 1994, 1993 and 1992 Consolidated Statements of Capitalization--September 30, 1994 and 1993 Consolidated Statements of Changes in Common Stockholders Investment for the years ended September 30, 1994, 1993 and 1992 Notes to Consolidated Financial Statements Report 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 18 through 29) for the year ended September 30, 1994, filed herewith as Exhibit 13.
Supplemental Notes to Consolidated Financial Statements Report of Independent Public Accountants on Schedules Consent of Independent Public Accountants.
V. Property, Plant and Equipment for the years ended September 30, 1994, 1993 and 1992.
VI. Accumulated Depreciation and Amortization of Property, Plant and Equipment for the years ended September 30, 1994, 1993 and 1992.
VIII. Reserves for the years ended September 30, 1994, 1993 and 1992.
IX. Short-term borrowings for the years ended September 30, 1994, 1993 and 1992.
The information required to be submitted in Schedule X has been included in the financial statements and related notes.
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, 1994.
IV-1
(c) Exhibits
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation, as amended (incorporated by reference to Exhibit 4(e) to the Registration Statement of the Registrant on Form S-2 (Registration No. 33-24125)).
3.2 Bylaws (incorporated by reference to Exhibit C to the Proxy Statement/Prospectus forming a part of the Registrant's Registration Statement on Form S-14 (Registration No. 2-69473), as amended at the annual meetings of the shareholders held January 14, 1985 and January 14, 1991, the text of such amendments being set forth in each case as Exhibit A to the proxy statement for such annual meeting, heretofore filed with the Securities and Exchange Commission and being incorporated herein by this reference).
4.1 Indenture dated as of August 1, 1981 from The Providence Gas Company to St. Louis Union Trust Company, Trustee, filed as Exhibit 4.1 to Registration Statement of The Providence Gas Company on Form S-1 (Registration No. 2-72726), incorporated herein by this reference.
4.2 First Supplemental Indenture dated as of May 1, 1986 from The Providence Gas Company to Centerre Trust Company of St. Louis, Trustee (filed as Exhibit 4 (b) to the Registration Statement of The Providence Gas Company on Form S-3 (Registration File No. 33-5023), incorporated herein by this reference).
4.3 First Mortgage Indenture of The Providence Gas Company dated as of January 1, 1922,as supplemented by First through Twelfth Supplemental Indentures (incorporated by reference to Exhibit 10.10 to registration statement of The Providence Gas Company on Form S-1 (Registration No. 2-72726)).
4.4 Fourteenth, Fifteenth and Sixteenth Supplemental Indentures of The Providence Gas Company dated as of August 1, 1988, June 1, 1990 and November 1, 1992, respectively (incorporated by reference to Exhibit 4 to the report of the Registrant to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1993).
4.5 Seventeenth Supplemental Indenture of The Providence Gas Company dated as of November 1, 1993.
10.1 Material contracts filed as Exhibit 10 (a) through 10 (ff) to Registrant Statement of the Registrant on Form S-2 (Registration No. 33-24125), incorporated herein by this reference.
IV-2
10.2 Employment agreement dated August 20, 1990 between James H. Dodge, President of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.2 to the report of the Registrant in Form 10-K for the year ended September 30, 1992, incorporated herein by this reference.)
10.3 1989 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit A to the Registrant's proxy statement for the annual meeting of shareholders held January 9, 1989, heretofore filed with the Securities and Exchange Commission).
10.4 1989 Stock Option Plan (incorporated by reference to Exhibit B to the Registrant's proxy statement for the annual meeting of shareholders held January 9, 1989, heretofore filed with the Securities and Exchange Commission).
10.5 Non-firm Margin Sharing Agreement. (Filed as Exhibit 10.3 to the report of the Registrant in Form 10-K for the year ended September 30, 1992, incorporated herein by this reference.)
10.6 Employment agreement date April 1, 1992 between James DeMetro, Vice President, Energy Services of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.4 to the report of the Registrant in Form 10-K for the year ended September 30, 1992, incorporated herein by this reference.)
10.7 Employment agreement date August 15, 1991 between Robert W. Owens, Vice President, Treasurer and Chief Financial Officer of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.5 to the report of the Registrant in Form 10-K for the year ended September 30, 1992, incorporated herein by this reference.)
10.8 Employment agreement dated June 27, 1991 between Raymond F. Allen, Vice President, Customer Relations of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.6 to the report of the Registrant in Form 10-K for the year ended September 30, 1992, incorporated herein by this reference.)
10.9 Employment agreement dated July 1, 1991 between William D. Mullin, Vice President, Operations of The Providence Gas Company, and the said Company. (Filed as Exhibit 10.7 to the report of the Registrant in Form 10-K for the year ended September 30, 1992, incorporated herein by this reference.)
13 Portions of the Annual Report to shareholders for the fiscal year ended September 30, 1994.
22 Subsidiaries of the Registrant.
IV-3
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 3, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the accompanying index to financial statements are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein, in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts November 3, 1994
IV-4
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 3, 1994, included in this Form 10-K, into the Company's previously filed registration statements on Forms S-3, Registration No. 33-62318; S-3 Registration No. 33-70086; S-3, Registration No. 33-31768; S-8, Registration No. 33-31770; and S-8 Registration No. 33-43031. It should be noted that we have not audited any financial statements of the Company subsequent to September 30, 1994, or performed any audit procedures subsequent to the date of our report.
Arthur Andersen LLP
Boston, Massachusetts December 27, 1994
IV-5
PROVIDENCE ENERGY CORPORATION Schedule V PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED SEPTEMBER 30, 1994, SEPTEMBER 30, 1993 AND SEPTEMBER 30, 1992 (Thousands of Dollars) Balance Additions Sales and Balance Classification Sept 30, 1993 at Cost Retirements Other Sept 30, Gas Plant Land and rights-of-way $ 816 $ -- $ -- $ -- $ 816 Structures 19,751 623 -- -- 20,374 Distribution equip.170,880 17,804 638 -- 188,046 Transportation equip.1,788 1 118 -- 1,671 Other equip. 24,618 1,155 75 (275) 25,423 Construction work 3,916 (412) -- (4) 3,500 Total gas plant $221,769 $19,171 $ 831 $ (279) $239,830 ======== ======= ======= ======= ======== Nonutility property $ 2,654 $ -- $ -- $ -- $ 2,654 ======== ======= ======= ======= ========
Balance Additions Sales and Balance Classification Sept 30, 1992 at Cost Retirements Other Sept 30, 1993 Gas Plant Land and rights-of-way $ 803 $ 6 $ -- $ 7 $ 816 Structures 19,144 516 40 131 19,751 Distribution equip. 160,719 11,640 939 (540) 170,880 Transportation equip. 1,898 3 185 72 1,788 Other equip. 23,901 971 306 52 24,618 Construction work in progress 3,622 325 -- (31) 3,916 Total gas plant $210,087 $13,461 $ 1,470 $ (309) $221,769 ======== ======= ======= ======= ======== Nonutility property $ 2,654 $ -- $ -- $ -- $ 2,654 ======== ======= ======= ======= ========
Additions Sales and Balance Classification Sept 30, 1991 at Cost Retirements Other Sept 30, 1992 Gas Plant Land and rights-of-way $ 795 $ 8 $ -- $ -- $ 803 Structures 20,500 176 1,544 12 19,144 Distribution equip. 149,338 11,963 582 -- 160,719 Transportation equip. 2,339 2 443 -- 1,898 Other equip. 24,194 290 334 249 23,901 Construction work in progress 2,050 952 -- 620 3,622 Total gas plant $199,216 $13,391 $ 2,903 $ 383 $210,087 ======== ======= ======= ======= ======== Nonutility property $ 3,266 $ -- $ 606(A)$ (6) $ 2,654 ======== ======= ======= ======= ======== IV-6 (A) Principally relates to sale of S&M Appliance Service Company.
PROVIDENCE ENERGY CORPORATION Schedule VI ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED SEPTEMBER 30, 1994, SEPTEMBER 30, 1993 AND SEPTEMBER 30, 1992 (Thousands of Dollars)
Additions Deductions
Cost of Balance Charged to Removal Balance Classification 9/30/93 Operations Other Retirements Less Salvage 9/30/94 Gas Plant: Gas equipment $70,796 $ 9,555 $ 47 $ 721 $520 $79,157 Transportation equipment 1,701 42 -- 82 -- 1,661
Total gas plant $72,497 $ 9,597 $ 47 $ 803 $520 $80,818 ======= ========= ====== ====== ==== ======= Nonutility property $ 536 $ 85 $ -- $ -- $ -- $ 621 ======= ========= ====== ====== ==== =======
Cost of Balance Charged to Removal Balance Classification 9/30/92 Operations Other Retirements Less Salvage 9/30/93 Gas Plant: Gas equipment $63,516 $ 8,969 $ 52 $1,288 $453 $70,796 Transportation equipment 1,804 65 (2) 166 -- 1,701
Total gas plant $65,320 $ 9,034 $ 50 $1,454 $453 $72,497 ======= ========= ====== ====== ==== ======= Nonutility property $ 451 $ 85 $ -- $ -- $ -- $ 536 ======= ========= ====== ====== ==== =======
Cost of Balance Charged to Removal Balance Classification 9/30/91 Operations Other Retirements Less Salvage 9/30/92 Gas Plant: Gas equipment $57,370 $ 8,582 $ 91 $2,449 $ 78 $63,516 Transportation equipment 2,105 93 -- 394 -- 1,804
Total gas plant $59,475 $ 8,675 $ 91 $2,843 $ 78 $65,320 ======= ========= ====== ====== ==== ======= Nonutility property $ 611 $ 116 $ -- $ 276 (A) $ -- $ 451 ======= ========= ====== ====== ==== =======
(A) Represents accumulated depreciation from sale of S&M Appliance Service Company. IV-7
PROVIDENCE ENERGY CORPORATION Schedule VIII RESERVES FOR THE YEARS ENDED SEPTEMBER 30, 1994, SEPTEMBER 30, 1993 AND SEPTEMBER 30, 1992 (Thousands of Dollars) 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 282 9 -- 34 257 other 96 -- -- 16 80 $ 2,404 $5,000 $ -- $ 4,396 $ 3,008 ======= ====== ======= ======= ======= Allowance for lease receivables - long-term $ 778 $ 316 $ -- $ 143 $ 951 ======= ====== ======= ======= =======
DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $14,018 $7,033 $ -- $5,545 $15,506 Unamortized investment tax credit 3,010 -- -- 159 2,851 Other- Liability and damage reserve 296 145 -- 20 421 Other 5,188 1,358 2,659(C) 2,540 6,665 Total other 5,484 1,503 2,659 2,560 7,086 Total deferred credits and reserves $22,512 $8,536 $ 2,659 $8,264 $25,443 ======= ====== ======= ====== =======
IV-8
Schedule VIII (cont'd)
Which Additions Reserves Balance Charged Other Were Balance 9/30/92 to Operations Add (Deduct) Created 9/30/93
RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 2,275 $3,980 $ -- $4,229 $ 2,026 Allowance for lease receivables - current 326 -- -- 44 282 other -- 96 -- -- 96 $ 2,601 $4,076 $ -- $ 4,273 $ 2,404 ======= ====== ======= ======= ======= Allowance for lease receivables - long-term $ 760 $ 190 $ -- $ 172 $ 778 ======= ====== ======= ======= =======
DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $13,474 $ 544 $ -- $ -- $14,018 Unamortized investment tax credit 3,167 -- -- 157 3,010 Other- Liability and damage reserve 146 150 -- -- 296 Other 4,822 1,129 1,636(A) 2,399 5,188 Total other 4,968 1,279 1,636 2,399 5,484 Total deferred credits and reserves $21,609 $1,823 $ 1,636 $ 2,556 $22,512 ======= ====== ======= ======= =======
IV-8(b)
SCHEDULE VIII (cont')
Which Additions Reserves Balance Charged Other Were Balance 9/30/91 to Operations Add (Deduct) Created 9/30/92
RESERVES DEDUCTED FROM ASSETS: Accounts receivable Allowance for doubtful accounts $ 2,603 $4,176 $ -- $4,504 $ 2,275 Allowance for lease receivables - current 1,372 68 -- 1,114 326
$ 3,975 $4,244 $ -- $ 5,618 $ 2,601 ======= ====== ======= ======= ======= Allowance for lease receivables - long-term $ 84 $1,317 $ -- $ 641 $ 760 ======= ====== ======= ======= =======
DEFERRED CREDITS AND RESERVES: Accumulated deferred income taxes $13,127 $ 347 $ -- $ -- $13,474 Unamortized investment tax credit 3,345 -- -- 178 3,167 Other- Liability and damage reserve 21 125 -- -- 146 Other 1,970 1,936 4,371 (B) 3,455 4,822 Total other 1,991 2,061 4,371 3,455 4,968 Total deferred credits and reserves $18,463 $2,408 $ 4,371 $ 3,633 $21,609 ======= ====== ======= ======= =======
(A) Includes advance payments on customers' service agreements. (B) Principally an additional reserve for pension costs which was offset by a deferred regulatory asset in addition to advance payments on customer service agreements. (C) Principally a reserve for restructuring charges which was offset by a deferred regulatory asset in addition to advance payments on customer service agreements.
IV-8c
Schedule IX
PROVIDENCE ENERGY CORPORATION SHORT-TERM BORROWINGS For The Years Ended September 30, 1994, 1993 and 1992 (Thousands of dollars)
September 30, 1994 1993* 1992
Balance at end of period $27,700 $23,800 $23,410
Weighted average interest rate on borrowings outstanding at end of period 5.29% 3.47% 3.58%
Maximum borrowings outstanding during the period based on month-end balances $49,400 $53,010 $48,410
Average daily borrowings outstanding for the period $27,020 $28,931 $38,877
Weighted daily average annual interest rate 3.96% 3.61% 4.69%
The Company meets seasonal cash requirements and finances its construction program on an interim basis through short-term bank borrowings. Such borrowings may be under open lines of credit (total available $63,000,000; total committed $48,500,000) or by special arrangements.
* Assumes issuance of First Mortgage Bonds of $16 million on September 30, 1993.
IV-9
Exhibit 22. SUBSIDIARIES OF THE REGISTRANT
The Providence Gas Company - Incorporated under the laws of Rhode Island.
Newport America Corporation - Incorporated under the laws of Rhode Island.
North Attleboro Gas Company - Incorporated under the laws of Massachusetts.
IV-10
INCORPORATION BY REFERENCE INTO REGISTRATION STATEMENTS ON FORM S-8
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13,1990) under the Securities Act of 1933, the Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Part II of Registrant's Registration Statements on Form S-8 Nos. 33-31769, 33-31770 and 33-43031:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the Securities being registered, the Registrant will, unless in the opinion of its counsel that matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
IV-11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE ENERGY CORPORATION
By JAMES H. DODGE James H. Dodge, Chairman, President and CEO
Date December 15, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
JAMES H. DODGE Chairman, President and CEO 12-15-94 James H. Dodge (Principal Executive Officer)
GARY S. GILLHEENEY Vice President, Financial 12-15-94 Gary S. Gillheeney and Information Services, Treasurer and Assistant Secretary
WILLIAM W. BENNETT Director 12-15-94 William W. Bennett
GILBERT R. BODELL, JR. Director 12-15-94 Gilbert R. Bodell, Jr.
Director Diane M. Disney
ROBERT P. FREEMAN Director 12-15-94 Robert P. Freeman
LOUIS R. HAMPTON Director 12-15-94 Louis R. Hampton
JOHN H. HOWLAND Director 12-15-94 John H. Howland
DOUGLAS H. JOHNSON Director 12-15-94 Douglas H. Johnson
IV-12
DOROTHY G. KRAMER Director 12-15-94 Dorothy G. Kramer
ROMOLO A. MARSELLA Director 12-15-94 Romolo A. Marsella
KENNETH W. WASHBURN Director 12-15-94 Kenneth W. Washburn
IV-12(a)
EXHIBIT 13. PORTIONS OF ANNUAL REPORT OF REGISTRANT
SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS For the Years Ended September 30 (thousands, except per share amounts) 1994 1993 1992
Operating revenues $222,778 $209,315 $190,341 Cost of gas sold 135,104 126,314 111,568 Operating margin 87,674 83,001 78,773 Other operating expenses, excluding taxes 55,838 52,921 52,122 Taxes, other than income 12,540 12,597 11,497 Federal income taxes 4,460 3,554 2,774 Total other operating expenses 72,838 69,072 66,393 Operating income 14,836 13,929 12,380 Nonutility operations and other: Revenues - - 554 Operating costs - - 573 Other income (loss) 196 37 306 196 37 287 Income from continuing operations before interest expense 15,032 13,966 12,667 Interest expense 6,247 6,653 6,837 Income from continuing operations after interest expense 8,785 7,313 5,830 Preferred dividends of subsidiary (696) (696) (696) Income from continuing operations 8,089 6,617 5,134 Loss from discontinued operations, net of tax -- -- -- Net income (loss) 8,089 6,617 5,134 Common dividends 5,856 4,889 4,908 Earnings reinvested in the corporation $ 2,233 $ 1,728 $ 226 ======== ======== ======== Weighted average common shares outstanding 5,534.1 4,761.8 4,478.4 ======== ======== ======== Amounts per common share: Continuing operations $ 1.46 $ 1.39 $ 1.15 Discontinued operation -- -- -- Net income (loss) $ 1.46 $ 1.39 $ 1.15 ======== ======== ======== Common dividends $ 1.06 $ 1.02 $ 1.10 ======== ======== ========
PAGE - 1 OTHER FINANCIAL DATA SEPTEMBER 30 1994 1993 1992
Total assets $233,311 $224,550 $197,459 Gas plant--at original cost 239,830 221,769 210,087 Gas plant--net of depreciation 159,012 149,272 144,767 Capitalization: Common stockholders' equity 77,156 73,368 54,491 Redeemable cumulative preferred stock 8,000 8,000 8,000 Long-term debt 60,079 62,163 60,958 Shares of common stock at year end 5,581 5,486 4,534 Book value per share $ 13.82 $ 13.37 $ 12.02 ======== ======== ========
FINANCIAL AND OPERATING STATISTICS For the Years Ended September 30
1994 1993 1992
Operating Revenues (thousands of dollars): Residential $130,888 $120,997 $104,658 Commercial/ Industrial 76,174 72,974 63,405 Total Firm 207,062 193,971 168,063 Interruptible 14,471 14,336 21,394 Transportation 287 54 74 Other 958 954 810 Total operating revenues $222,778 $209,315 $190,341 ======== ======== ======== Gas Sold and Transported (MMcf): Residential 14,122 13,783 13,166 Commercial/ Industrial 9,168 8,926 8,363 Total Firm 23,290 22,709 21,529 Interruptible 4,739 3,985 6,717 Transportation 656 386 869 Total gas sold and transported 28,685 27,080 29,115 Company use and losses 1,182 1,187 1,264 Total sendout 29,867 28,267 30,379 ======== ======== ========
PAGE - 2
Gas Purchased, Produced and Transported (MMcf): Pipeline natural gas-contract 22,880 18,044 20,150 Pipeline natural gas-spot purchases 3,533 7,936 7,374 Pipeline natural gas-transportation 656 386 869 Underground storage 1,697 879 594 Liquefied natural gas 1,101 1,022 1,329 Liquid propane and synthetic natural gas - - 63 Total 29,867 28,267 30,379 ======== ======== ======== Average Annual Number Of Customers: Residential 145,793 143,771 143,114 Commercial/ Industrial 16,337 16,264 15,889 Total Firm 162,130 160,035 159,003 Interruptible & transportation 141 123 115 Total 162,271 160,158 159,118 ======== ======== ======== Total number of customers at year-end 159,375 159,135 157,087 ======== ======== ======== Residential Heating: Average consumption per customer (Mcf) 117 116 112 Average revenue per customer $ 1,068 $ 1,008 $ 870 Average rate per Mcf $ 9.10 $ 8.68 $ 7.80 Average annual number of customers 114,461 112,497 111,176 Maximum daily sendout (MMcf) 206 185 174 Calendar degree days 5,977 5,718 5,502
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet.
Normal calendar degree days for fiscal year 1994 are 5,709; 1993, 1992 and 1991 are 5,811; 1990 and 1989 are 5,938.
PAGE - 3 SELECTED FINANCIAL DATA - SUMMARY OF OPERATIONS For the Years Ended September 30 (thousands, except per share amounts) 1991 1990 1989
Operating revenues $169,086 $156,906 $143,640 Cost of gas sold 101,707 91,306 83,947 Operating margin 67,379 65,600 59,693 Other operating expenses, excluding taxes 47,015 41,545 39,701 Taxes, other than income 11,031 10,281 9,426 Federal income taxes 440 1,709 968 Total other operating expenses 58,486 53,535 50,095 Operating income 8,893 12,065 9,598 Nonutility operations and other: Revenues 4,877 7,496 7,400 Operating costs 4,891 7,207 7,132 Other income (loss) 1,576 332 (1,419) 1,562 621 (1,151) Income from continuing operations before interest expense 10,455 12,686 8,447 Interest expense 7,764 7,721 6,686 Income from continuing operations after interest expense 2,691 4,965 1,761 Preferred dividends of subsidiary (280) -- -- Income from continuing operations 2,411 4,965 1,761 Loss from discontinued operations, net of tax -- -- (5,075) Net income (loss) 2,411 4,965 (3,314) Common dividends 6,057 5,916 5,761 Earnings reinvested in the corporation $ (3,646) $ (951) $(9,075) ======== ======== ======= Weighted average common shares outstanding 4,337.9 4,235.8 4,127.1 ======== ======= ======== Amounts per common share: Continuing operations $ .56 $ 1.17 $ .43 Discontinued operation -- -- (1.23) Net income (loss) $ .56 $ 1.17 $ (.80) ======== ======= ======== Common dividends $ 1.40 $ 1.40 $ 1.40 ======== ======== ========
PAGE - 4
OTHER FINANCIAL DATA SEPTEMBER 30 1991 1990 1989
Total assets $189,422 $182,258 $170,782 Gas plant--at original cost 199,216 189,952 172,302 Gas plant--net of depreciation 139,741 135,331 124,644 Capitalization: Common stockholders' equity 52,302 53,975 53,333 Redeemable cumulative preferred stock 8,000 -- -- Long-term debt 42,885 49,148 42,730 Shares of common stock at year end 4,408 4,278 4,186 Book value per share $11.87 $ 12.62 $12.74 ====== ======== =======
FINANCIAL AND OPERATING STATISTICS For the Years Ended September 30
1991 1990 1989
Operating Revenues (thousands of dollars): Residential $ 92,660 $105,418 $ 96,899 Commercial/ Industrial 57,153 43,120 39,246 Total Firm 149,813 148,538 136,145 Interruptible 17,681 6,569 5,566 Transportation 735 833 1,182 Other 857 966 747 Total operating revenues $169,086 $156,906 $143,640 ======== ======== ======== Gas Sold and Transported (MMcf): Residential 11,534 14,452 13,948 Commercial/ Industrial 7,637 6,188 5,818 Total Firm 19,171 20,640 19,766 Interruptible 5,659 2,084 1,641 Transportation 4,127 5,026 3,287 Total gas sold and transported 28,957 27,750 24,694 Company use and losses 1,445 985 977 Total sendout 30,402 28,735 25,671 ======== ======== ========
PAGE - 5
Gas Purchased, Produced and Transported (MMcf): Pipeline natural gas-contract 21,051 15,060 16,451 Pipeline natural gas-spot purchases 3,210 5,848 3,879 Pipeline natural gas-transportation 4,127 5,026 3,287 Underground storage 1,038 1,305 853 Liquefied natural gas 975 1,488 841 Liquid propane and synthetic natural gas 1 8 360 Total 30,402 28,735 25,671 ======== ======== ========
Average Annual Number Of Customers: Residential 143,207 139,718 135,274 Commercial/ Industrial 15,114 13,179 12,454 Total Firm 158,321 152,897 147,728 Interruptible & transportation 79 65 65 Total 158,400 152,962 147,793 ======== ======== ======== Total number of customers at year-end 159,234 155,028 147,281 ======== ======== ======== Residential Heating: Average consumption per customer (Mcf) 97 128 128 Average revenue per customer $ 766 $ 920 $ 880 Average rate per Mcf $ 7.91 $ 7.21 $ 6.86 Average annual number of customers 110,997 106,984 102,178 Maximum daily sendout (MMcf) 172 163 165 Calendar degree days 4,893 5,750 5,725
1 Mcf is one thousand cubic feet; 1 MMcf is one million cubic feet.
Normal calendar degree days for fiscal year 1994 are 5,709; 1993, 1992 and 1991 are 5,811; 1990 and 1989 are 5,938.
PAGE - 6
CONSOLIDATED BALANCE SHEETS September 30 (thousands of dollars) 1994 1993 ASSETS Gas plant, at original cost (notes 1,3 and 6) $239,830 $221,769 Less--Accumulated depreciation and utility plant acquisition adjustments 80,733 72,436 159,097 149,333 Nonutility property, net 2,033 2,118 Current assets: Cash and temporary cash investments (notes 1 and 7) 1,145 1,455 Accounts receivable, less allowance of $3,008 in 1994 and $2,404 in 1993 17,892 17,238 Unbilled revenues (note 1)2,8952,854 Deferred gas costs (notes 1 and 6) 15,819 16,453 Inventories, at average cost- Liquefied natural gas, propane and under- ground storage 11,255 11,390 Materials and supplies 1,679 1,854 Prepaid and refundable taxes (note 2) 4,030 7,170 Prepayments 1,499 910 56,214 59,324
Deferred charges and other assets (notes 1 and 5) 15,967 13,775
Total assets $233,311 $224,550 ======== ========
CAPITALIZATION AND LIABILITIES Capitalization (see accompanying statement) $145,235 $143,531
Current liabilities: Notes payable (notes 4 and 7) 27,700 23,800 Current portion of long-term debt (note 3) 2,085 466 Accounts payable (note 6) 18,324 18,618 Accrued taxes (note 2) 6,224 7,560 Accrued vacation 1,584 1,703 Customer deposits 3,580 2,952 Other (note 8) 3,136 3,408 62,633 58,507
Deferred credits and reserves: Accumulated deferred Federal income taxes (note 2) 15,506 14,018 Unamortized investment tax credits (note 2) 2,851 3,010 Other (note 5) 7,086 5,484 25,443 22,512 Commitments and contingencies (notes 6 and 8)
Total capitalization and liabilities $233,311 $224,550 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. PAGE - 7 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30 (thousands of dollars) 1994 1993 1992 Cash provided by - Operations: Income after interest expense $ 8,785 $ 7,313 $ 5,830 Items not requiring cash: Depreciation and amortization 9,759 9,301 8,833 Deferred Federal income taxes 1,235 544 347 Amortization of investment tax credits (159) (157) (178) Changes in assets and liabilities which provided (used) cash: Accounts receivable (654) (2,491) (3,427) Unbilled revenues (41) 510 145 Deferred gas costs 1,734 (9,853) 1,973 Inventories 310 (4,032) 1,255 Deferred capacity charges -- 1,343 (846) Prepaid and refundable taxes 2,407 337 2,121 Prepayments (589) 305 (165) Accounts payable (934) 1,592 2,993 Accrued taxes (71) 151 162 Refundable gas costs -- (1,795) 1,795 Accrued vacation, customer deposits and other 237 632 (533) Net cash provided by operations 22,019 3,700 20,305 Investment Activities: Expenditures for property, plant and equipment (19,171) (13,461) (13,391) Proceeds from sale of assets (note 6) -- -- 704 Deferred charges and other (1,596) (1,660) (1,963) Total (20,767) (15,121) (14,650) Financing Activities: Issuance of common stock 1,555 17,149 1,963 Issuance of mortgage bonds 16,000 25,000 -- Payments on long-term debt (465) (259) (36,876) Increase (decrease) in notes payable (12,100) (24,610) 35,196 Cash dividends on preferred shares (note 3) (696) (696) (696) Cash dividends on common shares (5,856) (4,889) (4,908) Total (1,562) 11,695 (5,321) Increase (decrease) in cash and cash equivalents (310) 274 334 Cash and cash equivalents at beginning of year 1,455 1,181 847 Cash and cash equivalents at end of year $ 1,145 $ 1,455 $ 1,181 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during year for- Interest (net of amount capitalized) $ 6,091 $ 6,999 $ 6,788 Income taxes (net of refunds) $ 856 $ 2,307 $ (275)
The accompanying notes are an integral part of these consolidated financial statements. PAGE - 8 CONSOLIDATED STATEMENTS OF INCOME For the Years Ended September 30
(thousands, except per share amounts) 1994 1993 1992
Operating revenues $222,778 $209,315 $190,341 Cost of gas sold 135,104 126,314 111,568 Operating margin 87,674 83,001 78,773 Operating expenses: Other operation 42,395 40,247 40,335 Maintenance 3,828 3,601 3,119 Depreciation and amortization 9,615 9,073 8,668 Taxes-- State gross receipts 6,326 5,752 4,888 Local property and other 6,214 6,845 6,609 Federal income (note 2) 4,460 3,554 2,774 Total operating expenses 72,838 69,072 66,393
Operating income 14,836 13,929 12,380
Nonutility operations and other (note 1): Revenues - 554 Operating costs - 573 Other income, net 196 37 306 196 37 287 Income before interest expense 15,032 13,966 12,667
Interest expense: Long-term debt 4,987 5,172 4,380 Other 1,412 1,614 2,650 Interest capitalized (152) (133) (193) 6,247 6,653 6,837 Income after interest expense 8,785 7,313 5,830
Preferred dividends of subsidiary (note 3) (696) (696) (696)
Net income $ 8,089 $ 6,617 $ 5,134 ======== ======== ======== Earnings per common share (note 10) $ 1.46 $ 1.39 $ 1.15 ======== ======== ======== Weighted average common shares outstanding (note 10) 5,534.1 4,761.8 4,478.4 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
PAGE - 9 CONSOLIDATED STATEMENTS OF CAPITALIZATION September 30 (thousands) 1994 1993 Common stockholders' investment (notes 3 and 10): Common stock, $1 Par, Authorized--20,000 shares, Outstanding--5,581 shares in 1994 and 5,486 shares in 1993 $ 5,581 $ 5,486 Amount paid in excess of par 53,042 51,582 Retained earnings 18,533 16,300 77,156 73,368
Cumulative preferred stock of subsidiary (notes 3 and 7): Redeemable 8.7% Series, $100 par Authorized - 80 shares Outstanding - 80 shares as of 1994 and 1993 8,000 8,000
Long-term debt (notes 3, 6, and 7): First Mortgage Bonds, secured by utility property-- Series M, 10.25%, due July 31, 2008 10,000 10,000 Series N, 9.63%, due May 30, 2020 10,000 10,000 Series O, 8.46%, due September 30, 2022 12,500 12,500 Series P, 8.09%, due September 30, 2022 12,500 12,500 Series Q, 5.62%, due November 30, 2003 16,000 16,000 Capital Leases 1,164 1,629 62,164 62,629 Less-current portion 2,085 466 60,079 62,163
Total capitalization $145,235 $143,531 ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
PAGE - 10 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' INVESTMENT
For the Three Years Ended September 30
Amount Shares Paid In Issued and Outstanding Excess Retained (thousands) Number Amount of Par Earnings
Balance, September 30, 1991 4,408 $ 4,408 $ 33,548 $ 14,346 Add (deduct): Net income - - - 5,134 Cash dividends ($1.10 per share) - - - (4,908) Dividend reinvestment & cash stock purchase plan 100 100 1,437 - Employee benefit plans 26 26 402 - Preferred stock expenses - - (2) -
Balance, September 30, 1992 4,534 4,534 35,385 14,572
Add (deduct): Net income - - - 6,617 Cash dividends ($1.02 per share) - - - (4,889) Common stock offering 850 850 14,493 - Dividend reinvestment and cash stock purchase plan 83 83 1,417 - Employee benefit plans 13 13 202 - Stock options 6 6 101 - Preferred stock expenses (16)
Balance, September 30, 1993 5,486 5,486 51,582 16,300 Add (deduct): Net income - - - 8,089 Cash dividends ($1.06 per share) - - - (5,856) Dividend reinvestment & cash stock purchase plan 87 87 1,399 - Employee benefit plans 8 8 132 - Accrual for key employee stock compensation plan - - (71) -
Balance, September 30, 1994 5,581 $ 5,581 $ 53,042 $ 18,533 ======== ======== ========= ======== The accompanying notes are an integral part of these consolidated financial statements.
PAGE - 11 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 the natural gas distribution business are reflected in the accompanying consolidated statements of income to arrive at operating income. Revenues and expenses of nonutility operations include sales of appliances as well as appliance rental and are presented after operating income in the accompanying consolidated statements of income. All significant intercompany transactions have been eliminated in consolidation.
Regulation. The Providence Gas Company (ProvGas) is subject to regulation by the Rhode Island Public Utilities Commission (RIPUC). The accounting policies of ProvGas conform to generally accepted accounting principles as applied in the case of regulated public utilities and are in accordance with the regulators' accounting requirements and rate-making practices. North Attleboro Gas Company (North Attleboro) is subject to regulation by the Massachusetts Department of Public Utilities (MDPU).
Operating Revenues. Operating revenues consist principally of gas sales. The gas companies record accrued utility revenues based on estimates of gas volumes consumed and not billed at the end of an accounting period in order to match revenues with related costs.
Lease Accounting. The Company leases water heaters and other appliances to customers under finance leases. The Company recognizes the profits associated with these leases when the sale is made, after providing reserves for unearned income, doubtful accounts and warranty repairs.
Gas Plant. Gas Plant is stated at the original cost of construction. In accordance with the uniform system of accounts prescribed by the RIPUC, the difference between the original cost of gas plant acquired and the cost to ProvGas is recorded as a Utility Plant Acquisition Adjustment and is amortized over periods ranging from 1-22 years.
Depreciation. Depreciation is provided on the straight-line basis at rates designed to amortize the cost of depreciable plant over its estimated useful life. The composite depreciation rate expressed as a percentage of the average depreciable gas plant in service was approximately 3.75 percent for all years presented.
The Company retires property units by charging original cost, cost of removal and salvage value to accumulated depreciation.
Cost of Gas Adjustment. The Company has Cost of Gas Adjustment clauses (CGA) which allow for the adjustment of rates charged to customers in order to recover actual gas costs incurred, including demand and commodity charges. The CGA provides for reconciliation of total gas costs billed with
PAGE - 12 the actual cost of gas recorded. Any excess or deficiency in amounts billed as compared to costs is deferred and either refunded to, or recovered from, the customers over a subsequent period.
Allowance for funds used during construction. The Company capitalizes interest and an allowance for equity funds in accordance with established policies of the RIPUC and MDPU. The rates used are based on the actual cost of debt and the allowed equity return. Interest capitalized is shown as a reduction of interest expense and the equity allowance is included in other income.
Deferred charges and other assets. The Company defers and amortizes certain costs in a manner consistent with authorized or probable rate making treatment. Deferred financing costs are amortized over the life of the security while the remaining deferred charges and other assets are amortized over a recovery period specified by the respective Commissions.
Deferred charges include:
1994 1993
Cost of fuel assistance program $ 1,832 $ 1,812 Restructuring program 1,600 - Pension costs 5,890 5,153 Deferred costs related to phase-in plan 649 573 Unamortized debt expense 2,422 2,451 Post-retirement benefits 708 - Pipeline interconnection costs 921 1,140 Other deferred charges 1,945 2,646 TOTAL $ 15,967 $ 13,775 ======== ========
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 consolidated income statement and cash flow amounts have been reclassified for consistent presentation with the current year.
2.FEDERAL INCOME TAXES
In 1994, the Company adopted Statement of Financial Accounting Standards No. 109, (SFAS No. 109), Accounting for Income Taxes, which requires an asset and a liability approach to accounting for income taxes. Under the provisions of SFAS No. 109, deferred taxes are provided for all temporary differences. The prior year financial statements have not been restated.
When implementing SFAS No. 109, the Company reduced deferred taxes that were previously provided at rates higher than the current tax rate. Additional
PAGE - 13 deferred taxes and prepaid taxes were also provided for certain temporary differences previously not provided. These adjustments to deferred taxes will be returned to or collected from customers in the future. Accordingly, the Company has recorded a net regulatory liability corresponding to the tax adjustments. The implementation of SFAS No. 109 has had no impact on the Company's results of operations or cash flows.
The following is a summary of the provision for federal income taxes for the three years in the period ended September 30:
(thousands of dollars) 1994 1993 1992 Current $ 3,211 $ 2,487 $ 2,374 Deferred 1,235 1,113 347 Total Federal income tax provision $ 4,446 $ 3,600 $ 2,721 ======= ======= ======
Income tax is charged (credited) to the following for each of the three years ended September 30:
Charged to operating expenses $ 4,460 $ 3,554 $ 2,774 Included in nonutility operating expenses - - 50 Included in other income (loss), net (14) 46 (103) Total Federal income tax provision $ 4,446 $ 3,600 $ 2,721 ======= ======= =======
The effective Federal income tax rates and the reasons for their differences from the statutory Federal income tax rates are as follows:
1994 1993 1992 Statutory Federal income tax rates 34.0% 34.0% 34.0% Effect of change of Statutory Rate to 35% for 1994 .3 - - Reversing timing differences (.3) (.7) (.9) Impact of equity allowance- AFUDC - (.2) (.5) Amortization of investment tax credits (.4) (.5) (.7) Other .1 .3 (.1) 33.6% 32.9% 31.8% ==== ==== ====
PAGE - 14
The Company's deferred tax assets and liabilities as of September 30, 1994 are the result of the following temporary differences: Long-term deferred taxes (thousands of dollars) Tax assets Unamortized ITC $ 961 Regulatory liability 326 Other 1,250
Tax liabilities Property related (15,676) Pension costs (648) Deferred charges (1,688) Other (31)
Net deferred tax liability included in accompanying consolidated balance sheet $(15,506) ========== Pre-paid taxes Tax assets Accounts receivable reserves $ 913 Property tax reserves 985 Alternative minimum tax 138 Tax liabilities Employee severance (409) Other (86) Net prepaid taxes 2,816 Prepaid gross receipts tax and other 1,214 Net prepaid and refundable taxes included in accompanying $ 4,030 ========
During 1994, the Company received permission from the Internal Revenue Service to change its tax year to a fiscal year ended September 30. Previously, the Company was a calendar year tax payer.
Investment tax credits are amortized through credits to other income over the estimated lives of related property.
3. CAPITALIZATION
A. Long-term Debt
In November 1993, the Company issued $16 million, of First Mortgage Bonds. These First Mortgage Bonds, Series Q, will mature in 2003. The net proceeds provided by this indebtedness were used to pay down the Company's short-term debt. The accompanying consolidated financial statements and related disclosures have been prepared as if this debt was issued and the notes payable retired as of September 30, 1993.
PAGE - 15 The Company's ability to pay dividends is largely dependent on receipt of dividends from its principal subsidiary, ProvGas. Approximately $12,713,000 of ProvGas' retained earnings were available for dividends under the terms of the most restrictive ProvGas First Mortgage Bond indenture.
The Company's First Mortgage Bonds are secured by a lien on both tangible and real property.
As of September 30, 1994, the annual sinking fund requirements and current maturities of long-term debt and capital leases for the next five fiscal years are $2,085,500 in 1995, $1,969,300 in 1996, $1,875,200 in 1997, $2,542,600 in 1998, and $2,509,000 in 1999.
B. Preferred Stock
ProvGas' preferred stock, which consists of 80,000 shares of $100 par value, has an 8.7% 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 at the end of 1997.
4.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, 1994, the Company had lines of credit totaling $63,000,000 ($48,500,000 committed) with borrowings outstanding of $27,700,000.
The Company pays a fee for its committed lines of credit rather than maintaining compensating balances.
5.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 during a short period prior to retirement. It is the Company's policy to fund the plan as required by the Employee Retirement Income Security Act.
The following table sets forth the funded status of the pension plans and amounts recognized in the Company's consolidated balance sheets at September 30, 1994 and 1993 (in thousands):
1994 1993 Accumulated benefit obligation, including vested benefits of $35,850 as of September 30, 1994 and $35,019 as of September 30, 1993 $(37,233) $(36,230) ======== ========
PAGE - 16 Projected benefit obligation for service rendered to date $(49,867) $(47,962) Plan assets at fair value (primarily listed stocks, corporate bonds and U.S. bonds) 50,897 54,991 Projected benefit obligation less than plan assets 1,030 7,029 Unrecognized net (gain) (5,413) (11,087) Prior service cost not yet recognized in net periodic pension cost 1,304 1,178 Unrecognized net assets at October 1, 1985 being recognized over 15 years (817) (953) Net accrued pension cost included in other deferred credits at September 30, 1994 and 1993 $ (3,896) $ (3,833) ======== ========
Net pension cost for fiscal years 1994, 1993 and 1992 included the following components: 1994 1993 1992
Service cost-benefits earned during the period $ 1,589 $ 1,502 $ 1,243 Interest cost on projected benefit obligation 3,814 3,673 3,342 Return on plan assets 995 (8,890) (5,246) Net amortization and deferral (6,229) 4,453 997 Retirement incentive plan, net - - 4,762 Net periodic pension cost 169 738 5,098 Adjustments due to regulatory action (131) (655) (4,998) Net periodic pension cost recognized $ 38 $ 83 $ 100 ======= ======= =======
The discount rate and rate of increase in future compensation levels used for all years presented 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 generally accepted accounting principles, is deferred and recorded as a regulatory asset or liability.
B. Post-retirement Benefits Other Than Pensions
The Company currently offers retirees who have attained age 55 and worked 5 years for the Company 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.
PAGE - 17 On October 1, 1993, the Company adopted the provisions of the Statement of Financial Accounting Standards No. 106, Employers' Accounting for Post- retirement Benefits Other Than Pensions (SFAS No. 106). SFAS No. 106 requires that these benefits be accrued over the service life of covered employees. Prior to the adoption of SFAS No. 106, the Company accounted for these costs when paid. These costs were $604,000 in 1993 and $519,000 in 1992.
Upon adoption of SFAS No. 106, the Company calculated an unrecognized transition obligation of $10,526,000, which the Company plans to recognize over a 20-year amortization period.
In 1994, the Company funded its total 1994 SFAS No. 106 expense of approximately $1,566,000 to a Voluntary Employee Benefit Association (VEBA) Trust. The assets in the VEBA Trust, available to pay future plan benefits, are invested in cash equivalents at September 30, 1994.
The Company recovers its SFAS No. 106 costs in rates to the extent allowed by the RIPUC. The RIPUC generally allows such costs to be recovered if amounts are funded into tax favored investment funds, such as the VEBA Trust. Accordingly, the Company will fully recover its 1994 SFAS No. 106 expense of $1,566,000 because such amounts were funded into the VEBA Trust. Of the total SFAS No. 106 costs, $855,000 were recovered in rates during 1994, while the remaining $711,000 has been deferred and will be recovered in future years.
The Plan's costs and accumulated post-retirement benefit obligation for 1994 are calculated by the Company's actuaries using assumptions and estimates which include:
Percent Healthcare cost annual growth rate 12.6 Healthcare cost annual growth rate - long-term 6.0 Expected long-term rate of return (union) 5.5 Expected long-term rate of return (non-union) 8.5 Discount rate 8.0
The healthcare cost annual growth rate significantly impacts the estimated Plan obligation and annual expense. For example, a 1% change in the above rates would change the obligation by $853,000 and would change the annual expense by $90,000.
The obligations and assets of the Plan at September 30, 1994 are:
PAGE - 18 Accumulated post-retirement benefit obligation:
Current retirees $ (6,518,300) Active employees-eligible for benefits (795,100) Active employees (3,618,700) Total post-retirement benefit obligation (10,932,100) Plan assets at fair value 856,400 Unfunded post-retirement benefit obligation (10,075,700) Unrecognized transition obligation 9,999,900 Unrecognized net (gain) or loss 75,800 Accrued post-retirement benefit obligation included in the Company's consolidated balance sheet $ -- ============
The Company's actuarial determined Plan costs for 1994 include:
Service cost $ 238,400 Interest cost 834,500 Actual return on plan assets (36,600) Amortization and deferral 529,700 Total annual plan costs $1,566,000 ==========
C. Supplemental Retirement Plans
The Company provides certain supplemental retirement plans for key employees. The projected benefit obligation is approximately $2 million which is being accrued over the service period of these key employees. The supplemental retirement plans are unfunded. The Company expensed $44,000 and $39,000 related to these benefits in 1994 and 1993, respectively.
During 1992, the Company implemented a Retirement Incentive Plan (the Plan) along with other personnel reductions designed to reduce the Company's total annual payroll and related costs by approximately $3.5 million. Each of the employees that elected the Plan received an early retirement incentive payment and an increased pension plan benefit in addition to their normal retirement benefits. The early retirement incentive payment of $900,000 was expensed during 1992. Consistent with regulatory treatment, pension costs are reflected in the consolidated financial statements based upon pension contributions. The impact of the increased pension plan benefits of approximately $4.8 million will be expensed in future years to the extent additional pension contributions may be required.
PAGE - 19 D. Stock Plan
During 1993, the Board of Directors, with subsequent approval of the Company's common shareholders, adopted the Providence Energy Corporation Performance and Equity Incentive Plan (the Plan). The Plan provides that up to 225,000 shares of common stock may be granted to key employees, including employees of ProvGas, at no cost to the employees. Key employees, who received common shares, are entitled to receive dividends, but assumption of full beneficial ownership is contingent upon future service of the employee. The Plan also provides for cash bonuses to key employees.
The executive compensation incentive awards totaled approximately $240,000 and $260,000 for 1994 and 1993, respectively. Amounts paid in cash are charged to expense when earned, however, amounts paid in restricted stock are deferred and amortized to expense over a five-year period.
Of the $260,000 1993 award, $177,000 was paid in cash during 1994. The Company estimates $150,000 of the 1994 award will be paid in cash during 1995 and that amount has been expensed in 1994. Shares, totaling 4,902, were purchased by the Company and issued to key employees during 1994.
6.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 conditions.
B. 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.
The gross amounts related to this capital lease are summarized below:
(thousands of dollars) 1994 1993 Gas plant $6,116 $ 6,116 Accumulated depreciation 5,256 4,981 $ 860 $1,135 ====== ======
PAGE - 20 The Company also has lease agreements for various facilities and computer equipment. The total annual rental costs, including the LNG storage costs described above, were approximately $2,319,000 in 1994, $2,168,000 in 1993, and $2,075,000 in 1992. The aggregate commitments for existing leases are as follows: LNG Computer (thousands of dollars) Storage & Other Total 1995 $ 320 $1,134 $1,454 1996 155 770 925 1997 134 352 486 1998 136 122 258 1999 136 50 186 2000-2004 565 4 569 $1,446 $2,432 $3,878 ====== ====== ======
C.Gas Supply Restructuring
Federal Energy Regulatory Commission (FERC) Order 636 and other related orders (the Orders) have significantly changed the structure and types of services covered by pipeline transportation companies. The most significant components of the restructuring occurred in November 1993. In response to these changes, the Company has successfully negotiated new transportation pipeline 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, 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 Orders, 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 total between $16 million and $19 million of which $8.3 million has been included in the CGA and is currently being collected from customers. The remaining minimum obligation of the $7.7 million has been recorded in the accompanying consolidated balance sheet along with a regulatory asset anticipating future recovery through the CGA.
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 two of its pipelines, which account for the bulk of its transition costs. Negotiations are continuing on the two additional pipelines, but recent developments have considerably reduced the uncertainty previously disclosed. As a result, the Company has decreased the range for potential transition costs accordingly.
PAGE - 21 D.Environmental
Federal, state and local laws and regulations establishing standards and requirements for 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 and current operations and properties. To the best of its knowledge, subject to the following paragraph, the Company believes it is in substantial compliance with such laws and regulations. However, should future costs be incurred, relating to the items mentioned below, the Company anticipates recovery from third parties or through rates.
The Company is aware of four sites at which it may incur future costs for environmental investigation and clean-up. Based on current available information, however, the amount of costs, if any, related to these sites will not be material to the operations of the Company or its financial position.
Management anticipates requesting rate relief for all costs related to the environmental matters and believes that the ultimate resolution of these matters will not have a materially adverse effect on the Company's results of operations and financial condition.
E.Fuel Assistance Program
The Company participates in the State of Rhode Island's Fuel Assistance Program, the Percentage of Income Payment Plan (PIPP). As a result, ProvGas has agreed to accept partial payment on certain customer accounts from various state agencies. As of September 30, 1994, $2.3 million was due from the State of Rhode Island related to gas consumed by customers over the last three years.
F. Lease Receivables
In prior years, the Company sold to a financial institution lease receivables of hot water heaters and conversion burners installed at customer's homes or businesses. These receivables were sold with recourse limited to default by the lessee. In the event of default, the Company would recognize as a loss the excess of the receivable balance, net of established reserves for such default over the value of the equipment. The balance of these receivables as of September 30, 1994 is approximately $1,418,000.
The Company is also liable to the extent of default for mortgage receivables totaling $560,000 million relating to a time-share project which was discontinued in 1989.
PAGE - 22 7.Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value disclosures for the following financial instruments:
Cash, cash equivalents and short-term debt
The carrying amount approximates fair value due to the short-term maturity of these instruments.
Long-term debt and preferred stock
The fair value of long-term debt and preferred stock is estimated based on currently quoted market prices for similar types of issues.
The carrying amounts and estimated fair values of the Company's financial instruments at September 30 are as follows:
Carrying Fair Amount Value
Cash and cash equivalents $ 1,145 $ 1,145 Short-term debt 27,700 27,700 Long-term debt 62,164 63,401 Preferred stock 8,000 8,000
Carrying Fair Amount Value
Cash and cash equivalents $ 1,455 $ 1,455 Short-term debt* 23,800 23,800 Long-term debt* 62,629 53,179 Preferred stock 8,000 7,143
*Adjusted for the issuance of $16,000,000 in First Mortgage Bonds, Series Q.
Anticipated regulatory treatment for 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 be recovered in the Company's rates over a prescribed amortization period. Accordingly, any settlement would not result in a material impact on the Company's financial position or results of operations.
PAGE - 23
8.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 market place. 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 will be hired throughout the upcoming year to fill newly defined positions. The employees eventually hired for these new positions will bring skill, expertise and experiences to the Company not previously available within its workforce.
The direct cost of this realignment is estimated to be about $1 million, net of tax. A significant portion of this $1 million is severance pay and related benefits for personnel who were separated during 1994. The Company anticipates paying all amounts accrued within the next six months. The Company has discussed the reorganization with the RIPUC and based on prior RIPUC allowance of similar costs, the Company has deferred these costs in anticipation of recovery in its next rate case.
9.Rate Changes
A.ProvGas rate increase
In October 1993, ProvGas received approval from the RIPUC to implement a new rate design, effective November 14, 1993, that will help promote economic development and reduce the Company's earnings sensitivity to weather. In addition to the improved stability in earnings, the new rates are designed to increase annual operating margin by approximately $700,000. The RIPUC also allowed ProvGas an 11.2% return on equity.
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% increase over five years as follows:
Estimated Estimated Percentage Additional Increase in Annual Rate Base Date Effective Revenues Revenues
November 1, 1991 $188,096 8.13 November 1, 1992 203,042 8.12 November 1, 1993 200,967 7.43 November 1, 1994 141,137 4.86 November 1, 1995 94,445 3.10
PAGE - 24 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 $198,000 in 1994, $239,000 in 1993 and $330,000 in 1992 related to the gas plant not yet phased into North Attleboro's rates under the plan. North Attleboro amortized $114,000 in 1994 and $4,000 in 1993 of amounts previously deferred.
10.Stock Rates and Options
Currently, one common stock purchase Right is attached to each outstanding share of common stock. Each Right entitles the holder to purchase one share of common stock at a price of $110.00 per share, subject to adjustment. In the event that certain transactions as defined in the Rights Agreement occur, each Right will become exercisable for that number of shares of common stock of the acquiring company (or of the 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% 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 to 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, 1994, 1993 and 1992:
Number of Shares Outstanding, September 30, 1991 35,690
Granted at $17.125 per share 7,193 Granted at $16.875 14,000 Granted at $13.875 3,000 Exercised -- Terminated -- Surrendered -- Outstanding, September 30, 1992 59,883
PAGE - 25 Granted at $16.375 per share 8,017 Exercised (6,803) Terminated (3,658) Surrendered -- Outstanding, September 30, 1993 57,439
Granted at $19.000 per share 7,117 Exercised -- Terminated (8,495) Surrendered -- Outstanding, September 30, 1994 56,061 ======
11.Unaudited Quarterly Financial Information
The following is unaudited quarterly financial information for the two years ended September 30, 1994 and 1993. Quarterly variations between periods are caused primarily by the seasonal nature of gas sales and the availability of gas. It is important to note that the new rate structure and a new method to account for gas costs means that quarterly earnings in 1994 are not comparable to prior years.
(thousands, except per share amounts) Quarter Ended Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal 1994 Operating revenues $62,957 $83,570 $42,492 $33,759 Operating income 5,106 8,075 516 1,139 Net income (loss) 3,714 6,509 (1,182) (952) Net income (loss) per share* .68 1.18 (.21) (.17) Fiscal 1993 Operating revenues $61,435 $76,410 $38,277 $33,193 Operating income (loss) 5,938 10,821 (621) (2,209) Net income (loss) 4,119 8,828 (2,394) (3,936) Net income (loss) per share* .91 1.93 (.52) (.74)
* Calculated on the basis of weighted average shares outstanding during the quarter.
PAGE - 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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)
1994 1993 Change %Change
Operating revenues $222,778 $209,315 $13,463 6.4 Operating margin 87,674 83,001 4,673 5.6 Net income 8,089 6,617 1,472 22.2
RESULTS OF OPERATIONS - 1994 VS 1993
On October 14, 1993, the Rhode Island Public Utilities Commission (RIPUC) approved ProvGas' request to adopt a new rate design, including a declining block rate structure, seasonal gas costs accounting and higher customer charges, effective November 14, 1993. The declining block rate structure allows ProvGas to recover more fixed costs through rates immediately when a customer begins using natural gas. Also, the new block rate structure will help balance customer bills during the year and will help protect ProvGas and its customers during periods of extreme weather conditions. This new block structure should result in a stabilization of earnings from year to year. In addition to the improved stability in earnings, the new rates are designed to increase annual operating margin by approximately $700,000. Other components of the rate award included an allowed return on equity of 11.2%. In 1994, for accounting and gas cost recovery purposes, ProvGas recorded the embedded cost of gas using seasonal gas cost factors of $4.26 per thousand cubic feet (Mcf) during November '93 through April '94 and $2.77 per Mcf during May '94 through September '94. The ultimate effect of the seasonal gas cost accounting will be that quarterly operating margin will decrease in the winter months and increase in the summer months when compared to the previous method. Assuming normal weather, annual earnings should not be affected by this change.
Another significant attribute of the new rate design structure as compared to the previous method is a higher customer charge. The average monthly customer charge has been increased to recognize that a substantial portion of ProvGas' costs are relatively fixed and should be recovered from customers even when gas consumption is less than expected. ProvGas' volumetric charge has decreased in order to off-set the increased customer charge.
PAGE - 27 For the first time in twelve years, the Company experienced a colder- than-normal heating season as it relates to normal temperatures utilized in the last rate case. During 1994, temperatures averaged 4.7 percent colder- than-normal. In addition, 1994 weather was also 4.5 percent colder than 1993, thereby increasing operating margin by approximately $700,000.
The net increase in the average annual number of customers during 1994 over 1993 was approximately 2,100 or 1.3 percent. The modest 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.
As a result of the colder temperatures experienced during 1994, residential sales, which provide the Registrant with its greatest source of sales, increased 339 million cubic feet (MMcf) or 2.5 percent over 1993. Also affecting the increase was the modest increase in number of customers.
Non-firm sales volumes increased approximately 1,000 MMcf or 28 percent reflecting an increase in sales to other natural gas utilities. Offsetting the above was a small decrease in off-system cogeneration sales (approx. 300 MMcf) due to the expiration of a short-term contract with a cogeneration customer located outside the Company's service territory. Both of these items, however, did not have a material impact on the Company's operating margin or results of operations because the RIPUC limits the amount of margin ProvGas can retain. Any margin earned, which is greater than or less than the RIPUC limits, is returned to or collected from customers through the Cost of Gas Adjustment Clause (CGA).
Overall, other operation and maintenance expenses have increased approximately $2.4 million or 5.4 percent during 1994 as compared to 1993. The increase was the result of a higher uncollectible revenues provision, normal wage increases granted due to negotiated union contract terms, employee merit raises and expected "one-time" legal and related expenses associated with compliance with Order 636. Additionally, the Company implemented a new accounting standard for accounting for post-retirement healthcare benefits which increased the annual expense by $167,000. This increase was fully recovered in rates. See Footnote 5 of the accompanying consolidated financial statements for more information. Furthermore, maintenance expenses increased, reflecting a higher level of service and system repair work, caused primarily by the colder-than-normal weather experienced during the peak heating season.
Offsetting the increases was a restructuring initiative that occurred at ProvGas in June 1994. The intent of the restructuring was to significantly improve the Company's customer services, lower operating expenses and increase operating efficiencies. The Company, during 1994, realized approximately $200,000 in savings as a result of the restructuring. For more information on the restructuring, see Footnote 8 to the accompanying consolidated financial statements.
PAGE - 28 Taxes have increased approximately $850,000 or 5.3 percent during the latest year. The increase in taxes, mainly Federal income and state gross receipts, were the result of higher pretax income and higher operating revenues, respectively. Offsetting the above increase was a decrease in property taxes resulting from an aggressive program over the past several years to work with the local cities and towns to reduce the assessment on which ProvGas pays taxes.
During 1994, the Company adopted the Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes, which requires an asset and liability approach to account for income taxes. There were significant adjustments incorporated into the consolidated balance sheet. However, there was no income statement impact as a result of the adoption of SFAS No. 109. For a more detailed explanation, see Footnote 2 to the accompanying consolidated financial statements.
Interest expenses for 1994 decreased approximately $400,000 or 6.1 percent as compared to 1993. A small increase in short-term interest rates offset by a decline in weighted average borrowings caused a decrease in short-term interest expense. Long-term interest expense decreased as a result of the refinancing of higher cost debt and sinking fund payments. RESULTS OF OPERATIONS - 1993 VS 1992
During 1993, the Company experienced a 1.6 percent warmer-than-normal heating season. However, 1993 weather averaged four percent colder than 1992, thereby increasing operating margin by $1.1 million or 23 cents per common share, net of tax.
The net increase in the average annual number of customers during 1993 over 1992 was approximately 1,000 or .7 percent. Although the actual increase for new customers exceeded one percent, this was offset by a greater than normal number of shut-offs for non-payment and housing vacancies.
As a result of colder temperatures during 1993, residential sales volumes increased approximately 700 MMcf or 4.7 percent over 1992. Non-firm sales volumes decreased approximately 2,700 MMcf or 40.7 percent as a result of the expiration of a short-term contract in November 1992 with a cogeneration customer located outside the Company's service territory. This decrease in non-firm sales had no material impact of the Company's financial position or results of operations due to ProvGas' 1992 non-firm margin sharing agreement.
Other operation and maintenance expenses have increased approximately $400,000 or less than one percent during 1993. The modest increase was due to normal wage increases and maintenance expenses due to more emphasis on service and system repair work. Offsetting the increase in the above expenses was the implementation of a work force reduction initiative in 1992. This initiative decreased the Company's total payroll and related costs by approximately $1 million during 1993 as compared to 1992.
PAGE - 29 Taxes increased by approximately $1.9 million or 13.2 percent during 1993 as compared to 1992. The increase in taxes was mainly the result of higher pretax income and higher operating revenues.
Interest expense for 1993 decreased by approximately $200,000 or 2.7 percent over 1992. The decline in short-term interest rates, coupled with a decrease in weighted average short-term borrowings, led to the decrease in short-term interest expense. Offsetting the decrease in short-term interest was an increase in long-term interest expense due to the issuance of First Mortgage Bonds, Series O & P totaling $25 million. This issuance was used to call higher cost debt and led to interest savings in 1994.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, the Company experienced a sharp increase in its net cash provided by operations. Increases in income after interest expense and increases in non-cash expenses, including deferred taxes and depreciation, collection of gas costs from the undercollection that existed in 1993 provided the major reason for the increase in net cash provided by operations.
On October 3, 1991, the Massachusetts Department of Public Utilities (MDPU) approved a settlement order reached between the Massachusetts Attorney General's Office and North Attleboro Gas Company regarding a rate request filed by North Attleboro Gas. Due to the magnitude of the rate award (32 percent), the MDPU ordered North Attleboro Gas to phase-in the rate award over a five-year period effective November 1, 1991. As a result, North Attleboro Gas phased-in an annual revenue increase of $201,000 on November 1, 1993. Future increases will phase-in each November 1 through the year 1995.
In November 1993, ProvGas received proceeds of $16 million related to an issuance of First Mortgage Bonds, Series Q (5.62%). The net proceeds received from the issuance were used to pay down short-term debt. Short- term debt was used earlier to call long-term debt bearing a high interest rate. The previous issuances called were First Mortgage Bonds, Series L (8.85%) and the Series II Senior Debentures (8.50%). This issuance will generate annual savings of approximately $300,000, net of tax.
In late June 1993, the Company priced its public offering of 850,000 shares of common stock at $19 per common share. The net proceeds of $15.3 million, along with an additional $1.1 million, totaling $16.4 million, were contributed as capital to ProvGas. ProvGas used the equity for repayment of short-term debt incurred to finance ProvGas' capital expenditures.
In November 1992, ProvGas issued $25 million of First Mortgage Bonds. These bonds, which consisted of $12.5 million (8.46%) designated as Series O and $12.5 million (8.09%) designated as Series P, will mature in September 2022. The Series P issuance is subject to an annual mandatory redemption provision in the amount of $625,000 beginning in fiscal year 2003. The net proceeds provided by this issuance were used to paydown short-term debt.
PAGE - 30 The Company meets seasonal cash requirements and finances its capital expenditures program on an interim basis through short-term borrowings. As of September 30, 1994, the Company had lines of credit totaling $63,000,000 ($48,500,000 committed) with borrowings outstanding of $27,700,000.
In April 1994, the Company increased its quarterly dividend rate from 26 cents per share of common stock to 27 cents per share of common stock. This action was taken due to the continued financial improvement of the Company and to provide current shareholders a fair and reasonable return. The Company has continued to pay dividends for 145 consecutive years, an American Stock Exchange record and the longest among all natural gas distribution companies.
The Company's ability to pay dividends is largely dependent upon receipt of dividends from ProvGas. Approximately $12.7 million of ProvGas' retained earnings were available for dividends at the end of 1994 under the terms of the most restrictive ProvGas First Mortgage Bond indenture.
The Company continued to offer a dividend reinvestment plan for its current shareholders. During 1994, 40 percent of the Company's shareholders participated in the plan, with $1.3 million or 22 percent of declared dividends reinvested in new shares rather than paid in cash.
Capital expenditures for the latest year were $19.2 million as compared to $13.5 million in 1993. The increase in capital expenditures was for new and replacement mains, services, meters and electronic meter reading equipment. Anticipated capital expenditures for the next three years are expected to total between approximately $45 million to $55 million. These expenditures will be for construction and upgrading of gas systems and improved technology systems.
COMMON STOCK INFORMATION
Dividend Quarter Ended High Low Per Share
September 30, 1994 $17 1/2 $15 1/8 $.27 June 30, 1994 17 14 5/8 .27 March 31, 1994 19 1/8 16 3/8 .26 December 31, 1993 20 1/2 17 7/8 .26
September 30, 1993 21 1/4 18 3/4 .26 June 30, 1993 19 1/4 17 1/2 .26 March 31, 1993 19 1/2 16 .25 December 31, 1992 16 5/8 15 1/8 .25
PAGE - 31