<PAGE>
 
                                                                   Exhibit 10.6

CONTENTS
 
 
                                                  PAGE
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Section 1.  Term of Employment                       1
 
Section 2.  Position and Responsibilities            2
 
Section 3.  Standard of Care                         2
 
Section 4.  Compensation                             3
 
Section 5.  Expenses                                 5
 
Section 6.  Employment Terminations                  5
 
Section 7.  Change in Control                       10
 
Section 8.  Confidentiality and Noncompetition      13
 
Section 9.  Indemnification                         14
 
Section 10. Outplacement Assistance                 14
 
Section 11. Assignment                              15
 
Section 12. Dispute Resolution and Notice           15
 
Section 13. Miscellaneous                           16
 
Section 14. Governing Law                           16
 
<PAGE>
 
PROVIDENCE ENERGY CORPORATION
EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of this
23rd day of July, 1998 (hereinafter referred to as the "Effective Date"), by 
and between Providence Energy Corporation, together with its subsidiaries and
affiliates (hereinafter referred to as the "Company"), a Rhode Island
corporation having its principal offices at Providence Rhode Island and 
JAMES A. GRASSO (hereinafter referred to as the "Executive").

WHEREAS, the Executive is presently employed by the Company in the capacity of
VICE PRESIDENT OF THE COMPANY;

WHEREAS, the Executive possesses considerable experience and an intimate
knowledge of the business and affairs of the Company, its policies, methods,
personnel, and operations; and

WHEREAS, the Company recognizes that the Executive's contribution has been
substantial and meritorious and, as such, the Executive has demonstrated unique
qualifications to act in an executive capacity for the Company; and

WHEREAS, the Company is desirous of assuring the continued employment of the
Executive in the above stated capacity, and Executive is desirous of having such
assurance.

NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and
agreements of the parties set forth in this Agreement, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:

SECTION 1. TERM OF EMPLOYMENT

The Company hereby agrees to employ the Executive and the Executive hereby
agrees to continue to serve the Company, in accordance with the terms and
conditions set forth herein, for an initial period of one (1) year, commencing
as of the Effective Date of this Agreement, as indicated above; subject,
however, to earlier termination as expressly provided in Section 6 herein.

The initial one (1) year period of employment automatically shall be extended
for one (1) additional year at the end of the initial one (1) year term, and
then again after each successive year thereafter. However, either party may
terminate this Agreement at the end of the initial one (1) year period, or at
the end of any successive year thereafter, by giving the other party written
notice of intent not to renew, delivered at least ninety (90) calendar days
prior to the end of such initial period or successive term.

                                       1
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In the event such notice of intent not to renew is properly delivered by the
Company, this Agreement, along with all corresponding rights, duties, and
covenants, shall automatically expire at the end of the initial period or
successive term then in progress, with the exception of the provisions contained
in Section 8 herein (which shall survive such expiration). However, upon the
effective date of the expiration, the Company shall provide to the Executive a
continuation of his Base Salary (at the rate then in effect, as provided in
Paragraph 4.1 herein) for a period of twelve (12) months, paid in equal monthly
installments in accordance with the normal payroll practices of the Company. The
Company also shall provide to the Executive all benefits to which the Executive
has a vested right to at that time including, but not limited to, the retirement
benefits described in Paragraph 4.4 herein, and the retiree medical insurance
benefits described in Paragraph 4.6 herein.

However, regardless of the above, if at any time during the initial period of
employment, or successive term, a Change in Control of the Company occurs (as
defined in Section 7 herein), then this Agreement shall become immediately
irrevocable for the longer of: (a) one (1) year beyond the month in which the
effective date of such Change in Control occurs; or (b) until all obligations of
the Company hereunder have been fulfilled, and until all benefits provided
hereunder have been paid.

SECTION 2. POSITION AND RESPONSIBILITIES

During the term of this Agreement, the Executive agrees to serve as Vice
President of the Company. In his capacity as Vice President, the Executive shall
maintain the level of duties and responsibilities as in effect as of the
Effective Date, or such higher level of duties and responsibilities as he may be
assigned during the term of this Agreement. The Executive shall have the same
status, privileges, and responsibilities normally inherent in such capacities in
corporations of similar size and character.

SECTION 3. STANDARD OF CARE

During the term of this Agreement, the Executive agrees to devote substantially
his full time, attention, and energies to the Company's business and shall not
be engaged in any other business activity, whether or not such business activity
is pursued for gain, profit, or other pecuniary advantage. However, subject to
Section 8 herein, the Executive may serve as a director of other companies so
long as such service is not injurious to the Company. The Executive covenants,
warrants, and represents that he shall:

(a)  Devote his full and best efforts to the fulfillment of his employment
     obligations; and

(b)  Exercise the highest degree of loyalty and the highest standards of conduct
     in the performance of his duties.

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This Section 3 shall not be construed as preventing the Executive from investing
assets in such form or manner as will not require his services in the daily
operations of the affairs of the companies in which such investments are made.

SECTION 4. COMPENSATION

As remuneration for all services to be rendered by the Executive during the term
of this Agreement, and as consideration for complying with the covenants herein,
the Company shall pay and provide to the Executive the following:

4.1  BASE SALARY. The Company shall pay the Executive a Base Salary in an amount
which shall be established from time to time by the Board of Directors of the
Company or the Board's designee provided, however, that such Base Salary shall
not be less than $ 134,000.00 per year. This Base Salary shall be paid to the
Executive in equal monthly installments throughout the year, consistent with the
normal payroll practices of the Company.

The annual Base Salary shall be reviewed at least annually following the
Effective Date of this Agreement, while this Agreement is in force, to ascertain
whether, in the judgment of the Board or the Board's designee, such Base Salary
should be increased, based primarily on the performance of the Executive during
the year and on the then current rate of inflation. If so increased, the Base
Salary as stated above shall, likewise, be increased for all purposes of this
Agreement.

4.2  ANNUAL CASH INCENTIVE COMPENSATION. The Company shall provide the Executive
with the opportunity to earn an annual cash incentive compensation payment, at a
level which is in accordance with the provisions of the Performance and Equity
Incentive Plan or any such successor plan, and which is commensurate with the
opportunity typically offered to executives having the same or similar duties
and responsibilities as the Executive at companies similar in size and character
to the Company.

Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing and/or amending the Performance and Equity Incentive Plan
so long as such changes are similarly applicable to all executives generally.

4.3  LONG-TERM INCENTIVES. The Company shall provide the Executive the
opportunity to earn a long-term incentive award, at a level which is in
accordance with the provisions of the Performance and Equity Incentive Plan or
any such successor plan, and which is commensurate with the opportunity
typically offered to executives having the same or similar duties and
responsibilities as the Executive at companies similar in size and in character
to the Company.

                                       3
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Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing,and/or amending the Performance and Equity Incentive Plan,
so long as such changes are similarly applicable to all executives generally.

4.4  RETIREMENT BENEFITS. The Company shall provide to the Executive
participation in all Company qualified defined benefit and defined contribution
retirement plans, subject to the eligibility and participation requirements of
such plans. In addition, the Company shall provide to the Executive
participation in the Supplemental Retirement Plan and all other nonqualified
retirement programs typically offered to executives having the same or similar
duties and responsibilities at the Company.

Nothing in this paragraph shall be construed as obligating the Company to
refrain from changing, and/or amending the nonqualified retirement programs, so
long as such changes are similarly applicable to all executives generally.

4.5  EMPLOYEE BENEFITS. During the term of this Agreement, and as otherwise
provided within the provisions of each of the respective plans, the Company
shall provide to the Executive all benefits to which other executives and
employees of the Company are entitled to receive, as commensurate with the
Executive's position. Such benefits shall include, but not be limited to, group
term life insurance, whole life insurance, comprehensive health and major
medical insurance, dental insurance, vision insurance, and short-term and long-
term disability.

The Executive shall be entitled to paid vacation in accordance with the standard
written policy of the Company with regard to vacations of employees.  The
Executive shall likewise participate in any additional benefit as may be
established during the term of this Agreement, by standard written policy of the
Company.

4.6  PERQUISITES. The Company shall provide to the Executive, at the Company's
cost, all perquisites to which other executives of the Company are entitled to
receive and such other perquisites which are suitable to the character of
Executive's position with the Company and adequate for the performance of his
duties hereunder.

4.7  RIGHT TO CHANGE PLANS. By reason of Paragraphs 4.5, and 4.6 herein, the
Company shall not be obligated to institute, maintain, or refrain from changing,
amending, or discontinuing any benefit plan, program, or perquisite, so long as
such changes are similarly applicable to executive employees generally.

4.8  DEFERRALS.  The Company may permit the Executive to defer the Executive's
receipt of the payment of up to one hundred (100%) percent of the cash component
of the Executive's Annual Incentive Compensation. If any such deferral election
is permitted, the Company shall, in its sole discretion, establish rules and
procedures for such payment deferrals.

                                       4
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SECTION 5. EXPENSES

The Company shall pay, or reimburse the Executive, for all ordinary and
necessary expenses, in a reasonable amount, which the Executive incurs in
performing his duties under this Agreement including, but not limited to,
travel, entertainment, professional dues and subscriptions, and all dues, fees,
and expenses associated with membership in various professional, business, and
civic associations and societies of which the Executive's participation is in
the best interest of the Company.

SECTION 6. EMPLOYMENT TERMINATIONS

6.1  TERMINATION DUE TO RETIREMENT. In the event the Executive's employment is
terminated, while this Agreement is in force, by reason of Retirement (as
defined under the then established rules of the Company's tax-qualified
retirement plan), the Executive's benefits shall be determined in accordance
with the Company's retirement, survivor's benefits, insurance, and other
applicable programs of the Company then in effect.

Upon the effective date of such termination, the Company's obligation to pay and
provide to the Executive Base Salary, Annual Cash Incentive Compensation  and
Long-Term Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3 herein,
respectively), shall immediately expire. However, the Executive shall receive a
pro rata portion of the total annual incentive compensation (both cash and long-
term), calculated at target, to which he would be entitled during the year in
which he retires, and shall receive all rights and benefits that he is vested
in, pursuant to other plans and programs of the Company including, but not
limited to, the retirement benefits as described in Paragraph 4.4 herein.

6.2  TERMINATION DUE TO DEATH. In the event of the death of the Executive during
the term of this Agreement, or during any period of Disability during which he
is receiving compensation pursuant to Paragraph 6.3 herein, the Company shall
pay to the Executive's surviving spouse, or other beneficiary as so designated
by the Executive during his lifetime, or to the Executive's estate, as
appropriate, all benefits to which the Executive had a vested right to pursuant
to this Agreement.

6.3  TERMINATION DUE TO DISABILITY. In the event that the Executive becomes
Disabled during the term of this Agreement and is, therefore, unable to perform
his duties herein for a period of more than ninety (90) calendar days in the
aggregate, during any period of twelve (12) consecutive months, or in the event
of the Board's reasonable expectation that the Executive's Disability will exist
for more than a period of ninety (90) calendar days, the Company shall have the
right to terminate the Executive's active employment as provided in this
Agreement. However, the Board shall deliver written notice to the Executive of
the Company's intent to terminate for Disability at least thirty (30) calendar
days prior to the effective date of such termination.

                                           5
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A termination for Disability shall become effective upon the end of the thirty
(30) day notice period. Upon such effective date, the Company's obligation to
pay and provide to the Executive Base Salary, Annual Bonus, and Long-Term
Incentives (as provided in Paragraphs 4.1, 4.2, and 4.3, respectively), shall
immediately expire. However, the Executive shall receive a pro rata portion of
the total annual incentive compensation (both cash and long-term), calculated at
target, to which he would be entitled during the year in which disability occurs
and shall receive all rights and benefits that he is vested in, pursuant to
other plans and programs of the Company, including, but not limited to, short-
and long-term disability benefits, and retirement benefits as described in
Paragraph 4.4.

The term "Disability" shall mean, for all purposes of this Agreement, the
incapacity of the Executive, due to injury, illness, disease, or bodily or
mental infirmity, to engage in the performance of substantially all of the usual
duties of employment with the Company as contemplated by Section 2 herein, such
Disability to be determined by the Board of Directors of the Company upon
receipt and in reliance on competent medical advice from one or more
individuals, selected by the Board, who are qualified to give such professional
medical advice.

If the Executive and the Company shall not be in agreement as to whether the
Executive has suffered a Disability for the purposes of this Agreement, the
matter shall be referred to a panel of three medical doctors, one of which shall
be selected by the Executive, one of which shall be selected by the Company, and
one of which shall be selected by the two doctors as so selected, and the
decision of a majority of the panel with respect to the question of whether the
Executive has suffered a Disability shall be binding upon the Executive and the
Company. The expenses of any such referral shall be borne by the party against
whom the decision of the panel is rendered. The Executive may be required by the
Company to submit to medical examination at any time during the period of his
employment hereunder, but not more often than quarter-annually, to determine
whether a Disability exists for the purposes of this Agreement.

It is expressly understood that the Disability of the Executive for a period of
ninety (90) calendar days or less in the aggregate during any period of twelve
(12) consecutive months, in the absence of any reasonable expectation that his
Disability will exist for more than such a period of time, shall not constitute
a failure by him to perform his duties hereunder and shall not be deemed a
breach or default and the Executive shall receive full compensation for any such
period of Disability or for any other temporary illness or incapacity during the
term of this Agreement.

6.4  VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may terminate this
Agreement at any time by giving the Board of Directors of the Company written
notice of intent to terminate, delivered at least thirty (30) calendar days
prior to the effective date of such termination (such period not to include
vacation). The termination automatically shall become effective upon the
expiration of the thirty (30) day notice period.

                                       6
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Upon the effective date of such termination, the Company shall pay to the
Executive his full Base Salary, at the rate then in effect as provided in
Paragraph 4.1 herein, through the effective date of termination, plus all other
benefits to which the Executive has a vested right to at that time including,
but not limited to, accrued vacation pay. The Company also shall provide to the
Executive the vested retirement benefits described in Paragraph 4.4 herein. With
the exception of the covenants contained in Sections 8.1, 8.3 and 8.4 herein
(which shall survive such termination), the Company and the Executive thereafter
shall have no further obligations under this Agreement.

6.5  INVOLUNTARY TERMINATION BY THE COMPANY WITHOUT CAUSE. At all times prior to
six (6) full calendar months before the effective date of a Change in Control
(as defined in Section 7.2), or at any time more than two (2) years after the
effective date of a Change in Control (as defined in Section 7.2), the Board may
terminate the Executive's employment, as provided under this Agreement, at any
time, for reasons other than death, Disability, Retirement, or for Cause, by
notifying the Executive in writing of the Company's intent to terminate, at
least thirty (30) calendar days prior to the effective date of such termination.

Upon the effective date of such termination, following the expiration of the
thirty (30) day notice period, the Company shall pay to the Executive in twelve
(12) equal monthly installments an amount equal to the Executive's annual Base
Salary then in effect. Additionally, the Company shall continue to provide the
Executive with health and welfare benefits for the twelve (12) month time
period.

In the event that, during the twelve (12) month period following the effective
date of termination, the Executive becomes employed at the same or greater
annual Base Salary than that which was in effect during the year in which
termination occurred, the Company's obligation to make payments under this
Section will immediately cease upon the date of the Executive's subsequent
employment.  In the event that, during the twelve (12) month period following
the effective date of termination, the Executive becomes employed at a lesser
annual Base Salary than that which was in effect during the year in which
termination occurred, then upon the date of the Executive's re-employment, the
Company's obligation to make payments under this section will be limited to a
monthly amount reflecting the difference between the Executive's Base Salary at
the date of re-employment and the Executive's Base Salary during the year in
which termination occurred.  The continuation of health and welfare benefits
shall be discontinued prior to the end of the twelve (12) month period in the
event the Executive has available substantially similar benefits from a
subsequent employer.

Further, the Company shall pay the Executive all other benefits to which the
Executive has a vested right at the time, according to the provisions of the
governing plan or program. With the exceptions of the covenants contained in
Section 8 herein (which shall survive such termination) the Company and the
Executive thereafter shall have no further obligations under this Agreement.

                                       7
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If the Executive's employment is terminated for any of the reasons set forth in
Section 7.1 herein, the Executive shall be entitled to receive the benefits
provided in Section 7.1 herein in lieu of the benefits set forth in this Section
6.5.

6.6  TERMINATION FOR CAUSE. Nothing in this Agreement shall be construed to
prevent the Board from terminating the Executive's employment under this
Agreement for "Cause." Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the unanimous
vote of the entire membership of the Board at a meeting of such Board duly
called and held for that purpose (after reasonable notice to the Executive and
an opportunity for the Executive, together with the Executive's counsel, to be
heard by the Board) finding that in the good faith opinion of the Board that the
Executive was guilty of conduct set forth in the second paragraph of this
Section 6.6 and specifying the particulars thereof in detail. In the event the
Board determines that Cause exists, the Board shall deliver written notice to
the Executive of the facts and circumstances leading to the Board's
determination. Upon receipt of this written notification, all provisions of this
Agreement shall terminate, except for the confidentiality and noncompete
provisions of Section 8 herein (which shall survive such termination). The
Company shall pay the Executive his full Base Salary and accrued vacation time
through the date notice of a for Cause termination is delivered to the
Executive, plus all other benefits to which the Executive has a vested right to
at that time. The Company and the Executive thereafter shall have no further
obligations under this Agreement other than the Executive's obligations under
Section 8 hereof.

"Cause" shall be determined by the Board in the exercise of good faith and
reasonable judgment; and shall mean the willful misconduct, fraud, conviction of
a felony, consistent gross neglect of duties, or wanton negligence by the
Executive in the performance of his duties hereunder, or the material breach by
the Executive of the terms of this Agreement.

6.7  TERMINATION FOR GOOD REASON. At any time during the six (6) full calendar
month period prior to the effective date of a Change in Control (as defined in
Section 7.2) or the twenty four (24) month period following the effective date
of a Change in Control (as defined in Section 7.2), the Executive may terminate
this Agreement for Good Reason (as defined below) by giving the Board of
Directors of the Company thirty (30) calendar days written notice of intent to
terminate, which notice sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for such termination.

Upon the expiration of the thirty (30) day notice period, the Good Reason
termination shall become effective, and the Company shall pay and provide to the
Executive the benefits set forth in Section 7.1 herein.

Good Reason shall mean, without the Executive's express written consent, the
occurrence of any one or more of the following:

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(a)  The assignment of the Executive to duties materially inconsistent with the
     Executive's authorities, duties, responsibilities, and status as an officer
     of the Company, or a reduction or alteration in the nature or status of the
     Executive's authorities, duties, or responsibilities from those in effect
     during the immediately preceding fiscal year;

(b)  The Company's requiring the Executive to be based at a location which is at
     least fifty (50) miles further from the Executive's current primary
     residence than is such residence from the Company's current headquarters,
     except for required travel on the Company's business to an extent
     substantially consistent with the Executive's business obligations as of
     the Effective Date;

(c)  A reduction by the Company in the Executive's Base Salary as in effect on
     the Effective Date, as provided in Section 4.1 herein, or as the same
     shall be increased from time to time;

(d)  A material reduction in the Executive's level of participation in any of
     the Company's short- and/or long-term incentive compensation plans, or
     employee benefit or retirement plans, policies, practices, or arrangements
     in which the Executive participates as of the Effective Date; provided,
     however, that reductions in the levels of participation in any such plans
     shall not be deemed to be "Good Reason" if the Executive's reduced level of
     participation in each such program remains substantially consistent with
     the average level of participation of other executives who have positions
     commensurate with the Executive's position; or

(e)  The failure of the Company to obtain a satisfactory agreement from any
     successor to the Company to assume and agree to perform this Agreement, as
     contemplated in Section 11.1 herein.

Upon a termination for Good Reason within the six (6) full calendar month period
prior to the effective date of a Change in Control, or within the twenty-four
(24) months following the effective date of a Change in Control, the Executive
shall be entitled to receive the payments and benefits set forth in Section 7.1
herein.

The Executive's right to terminate employment for Good Reason shall not be
affected by the Executive's incapacity due to physical or mental illness.  The
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstance constituting Good Reason herein.

                                       9
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SECTION 7. CHANGE IN CONTROL

7.1  EMPLOYMENT TERMINATIONS IN CONNECTION WITH A CHANGE IN CONTROL. In the
event of a Qualifying Termination (as defined below) within six (6) full
calendar months prior to the effective date of a Change in Control, or within
twenty-four (24) months following the effective date of a Change in Control,
then in lieu of all other benefits provided to the Executive under the
provisions of this Agreement, the Company shall pay to the Executive in a lump
sum payment and provide him with the following severance benefits (hereinafter
referred to as the "Severance Benefits"):

(a)  An amount equal to two (2) times the highest rate of the Executive's
     annualized Base Salary rate in effect at any time up to and including the
     effective date of termination;

(b)  An amount equal to two (2) times the Executive's target incentive award
     (both cash and long-term) established for the fiscal year in which the
     Executive's effective date of termination occurs;

(c)  An amount equal to the Executive's unpaid Base Salary and accrued vacation
     pay through the effective date of termination;

(d)  An amount equal to the Executive's unpaid targeted annual bonus,
     established for the plan year in which the Executive's effective date of
     termination occurs, multiplied by a fraction, the numerator of which is the
     number of completed days in the then-existing fiscal year through the
     effective date of termination, and the denominator of which is three
     hundred sixty-five (365);

(e)  A continuation of the welfare benefits of medical insurance, dental
     insurance, and group term life insurance for two (2) full years after the
     effective date of termination. These benefits shall be provided to the
     Executive at the same premium cost, and at the same coverage level, as in
     effect as of the Executive's effective date of termination. However, in the
     event the premium cost and/or level of coverage shall change for all
     employees of the Company, the cost and/or coverage level, likewise, shall
     change for the Executive in a corresponding manner.

     The continuation of these welfare benefits shall be discontinued prior to
     the end of the two (2) year period in the event the Executive has available
     substantially similar benefits from a subsequent employer, as determined by
     the Company's Board of Directors or the Board's designee.

                                      10
<PAGE>
 
(f)  A lump-sum cash payment of the actuarial present value equivalent of the
     aggregate benefits accrued by the Executive as of the effective date of
     termination under the terms of any and all supplemental retirement plans in
     which the Executive participates. For purposes of determining "final
     average pay" under such programs, the Executive's actual pay history as of
     the effective date of termination shall be used.

For purposes of this Section 7, a Qualifying Termination shall mean any
termination of the Executive's employment OTHER THAN: (1) by the Company for
Cause (as provided in Section 6.6 herein); (2) by reason of death, Disability
(as provided in Section 6.2 herein), or Retirement (as such term is then defined
in the Company's tax qualified defined benefit retirement plan; [provided that a
termination which qualifies as a Retirement and which would otherwise qualify as
a termination for Good Reason under Section 6.7 herein will be deemed to be a
Qualifying Termination]).

7.2  DEFINITION OF "CHANGE IN CONTROL." A Change in Control of the Company shall
be deemed to have occurred as of the first day any one or more of the following
conditions shall have been satisfied:

(a)  Any individual, corporation (other than the Company), partnership, trust,
     association, pool, syndicate, or any other entity or any group of persons
     acting in concert becomes the beneficial owner, as that concept is defined
     in Rule 13d-3 promulgated by the Securities and Exchange Commission under
     the Securities Exchange Act of 1934, of securities of the Company
     possessing twenty percent (20%) or more of the voting power for the
     election of directors of the Company;

(b)  There shall be consummated any consolidation, merger, or other business
     combination involving the Company or the securities of the Company in which
     holders of voting securities of the Company immediately prior to such
     consummation own, as a group, immediately after such consummation, voting
     securities of the Company (or, if the Company does not survive such
     transaction, voting securities of the corporation surviving such
     transaction) having less than sixty percent (60%) of the total voting power
     in an election of directors of the Company (or such other surviving
     corporation);

(c)  During any period of two (2) consecutive years, individuals who at the
     beginning of such period constitute the directors of the Company cease for
     any reason to constitute at least a majority thereof unless the election,
     or the nomination for election by the Company's shareholders, of each new
     director of the Company was approved by a vote of at least two-thirds (2/3)
     of the directors of the Company then still in office who were directors of
     the Company at the beginning of any such period; or

                                      11
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(d)  There shall be consummated any sale, lease, exchange, or other transfer (in
     one transaction or a series of related transactions) of all, or
     substantially all, of the assets of the Company (on a consolidated basis)
     to a party which is not controlled by or under common control with the
     Company.

7.3  EXCISE TAX EQUALIZATION PAYMENT.  In the event that the Executive becomes
entitled to Severance Benefits or any other payment or benefit under this Plan,
or under any other agreement with or plan of the Company (in the aggregate, the
"Total Payments"), if any of the Total Payments will be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may
hereafter be imposed), the Company shall pay to the Executive in cash an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the Executive after deduction of any Excise Tax upon the Total Payments and any
Federal, state and local income tax and Excise Tax upon the Gross-Up Payment
provided for by this Section 7.3 (including FICA and FUTA), shall be equal to
the Total Payments. Such payment shall be made by the Company to the Executive
as soon as practical following the effective date of termination, but in no
event beyond thirty (30) days from such date.

7.4  TAX COMPUTATION. For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amounts of such Excise Tax:

(a)  Any other payments or benefits received or to be received by the Executive
     in connection with a Change in Control of the Company or the Executive's
     termination of employment (whether pursuant to the terms of this Plan or
     any other plan, arrangement, or agreement with the Company, or with any
     person (which shall have the meaning set forth in Section 3(a)(9) of the
     Securities Exchange Act of 1934, including a "group" as defined in Section
     13(d) therein) whose actions result in a Change in Control of the Company
     or any person affiliated with the Company or such persons) shall be treated
     as "parachute payments" within the meaning of Section 280G(b)(2) of the
     Code, and all "excess parachute payments" within the meaning of Section
     280G(b)(1) shall be treated as subject to the Excise Tax, unless in the
     opinion of tax counsel as supported by the Company's independent auditors
     and acceptable to the Executive, such other payments or benefits (in whole
     or in part) do not constitute parachute payments, or unless such excess
     parachute payments (in whole or in part) represent reasonable compensation
     for services actually rendered within the meaning of Section 280G(b)(4) of
     the Code in excess of the base amount within the meaning of Section
     280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax;

(b)  The amount of the Total Payments which shall be treated as subject to the
     Excise Tax shall be equal to the lesser of: (i) the total amount of the
     Total Payments; or (ii) the amount of excess parachute payments within the
     meaning of Section 280G(b)(1) (after applying clause (a) above); and

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(c)  The value of any noncash benefits or any deferred payment or benefit shall
     be determined by the Company's independent auditors in accordance with the
     principles of Sections 280G(d)(3) and (4) of the Code.

For purposes of determining the amount of the Gross-Up Payment, the Executive
shall be deemed to pay federal income taxes at the highest marginal rate of
Federal income taxation in the calendar year in which the Gross-Up Payment is to
be made, and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Executive's residence on the effective
date of termination, net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local taxes.

7.5  SUBSEQUENT RECALCULATION. In the event the Internal Revenue Service adjusts
the computation of the Company under Section 7.4 herein so that the Executive
did not receive the greatest net benefit, the Company shall reimburse the
Executive for the full amount necessary to make the Executive whole, plus a
market rate of interest, as determined by the Committee.

7.6  PAYMENT OF LEGAL FEES. To the extent permitted by law, the Company shall
pay all legal fees, costs of litigation, prejudgment interest, and other
expenses incurred in good faith by the Executive as a result of the Company's
refusal to provide the severance benefits under this Section 7 to which the
Executive becomes entitled under this Agreement, or as a result of the Company's
contesting the validity, enforceability, or interpretation of this Agreement, or
as a result of any conflict (including conflicts related to the calculation of
parachute payments) between the parties pertaining to this Agreement.

SECTION 8. CONFIDENTIALITY AND NONCOMPETITION

8.1  CONFIDENTIALITY. During the term of this Agreement and thereafter in
perpetuity, the Executive will not directly or indirectly divulge or appropriate
to his own use, or to the use of any third party, and "trade secrets" (as
defined in Section 8.3), other secret or confidential information, knowledge or
financial information of the Company or any of the Company's subsidiaries or
affiliates (hereinafter, the Company and its subsidiaries and affiliates shall
be collectively referred to as the "Company Group"), except as may be in the
public domain other than by violation of this Agreement.

8.2  NONCOMPETITION. From the date hereof until two (2) years after the
termination of his employment hereunder, the Executive will not (i) directly or
indirectly own any equity or proprietary interest in (except for ownership of
shares in a publicly traded company not exceeding five percent (5%) of any class
of outstanding securities), or be an employee, agent, director, advisor, or
consultant to or for any corporation (other than the Company Group), business
enterprise or any person engaged anywhere in the State of Rhode Island or the
Commonwealth of Massachusetts, whether on his own behalf or on behalf of any
person other than the Company Group, in the manufacture, procuring, sale,
marketing, promotion or

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<PAGE>
 
distribution of any product or product lines functioning competitively with any
product or product lines of the Company Group during the term of this Agreement,
and the Executive will not assist in, manage or supervise any of the foregone
activities; (ii) undertake any action to induce or cause any customer or client
of the Company Group to discontinue any part of its business with the Company
Group; (iii) cause, induce or in any way facilitate the employment by any other
persons or organization of any employee of or consultant to the Company Group,
provided, that this covenant shall become operative only upon the termination of
the Executive's employment; or (iv) take or assist directly or indirectly in the
taking, by acting as consultant to a third party or otherwise of any position on
any matter involving the Company and pending before any state or other public
agency, when such position is adverse to the position being promoted before such
agency at the time by the Company.

8.3  TRADE SECRETS. "Trade Secrets" as used herein means all secret discoveries,
invention, formulae, designs, methods, processes, techniques of production and
know-how relating to the Company Group's business. "Confidential Information" as
used herein means the Company Group's internal policies and procedures,
suppliers, customers, financial information and marketing practices, as well as
secret discoveries, inventions, formulae, designs, techniques of production,
know-how and other information relating to the Company Group's business not
rising to the level of a trade secret under applicable law.

8.4  The breach by the Executive of any of the covenants continued in this
Paragraph 8 shall relieve the company of all further payment obligation under
Paragraph 6 or Paragraph 7.

SECTION 9. INDEMNIFICATION

The Company hereby covenants and agrees to indemnify and hold harmless the
Executive fully, completely, and absolutely against and in respect to any and
all actions, suits, proceedings, claims, demands, judgments, costs, expenses
(including attorney's fees), losses, and damages resulting from the Executive's
good faith performance of his duties and obligations under the terms of this
Agreement.

SECTION 10. OUTPLACEMENT ASSISTANCE

Following a termination of the Executive's employment as described in Sections
6.5, 6.7, or 7.1 herein, the Executive shall be reimbursed by the Company for
the costs of all outplacement services obtained by the Executive within the one
(1) year (for termination pursuant to Section 6.5) and two (2) year (for
terminations pursuant to Section 6.7 or 7.1) periods after the effective date of
termination; provided, however, that the total reimbursement shall be limited to
an amount equal to fifteen percent (15%) of the Executive's Base Salary as of
the effective date of termination.

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<PAGE>
 
SECTION 11. ASSIGNMENT

11.1 ASSIGNMENT BY COMPANY. This Agreement may and shall be assigned or
transferred to, and shall be binding upon and shall inure to the benefit of, any
successor of the Company, and any such successor shall be deemed substituted for
all purposes of the "Company" under the terms of this Agreement. As used in this
Agreement, the term "successor" shall mean any person, firm, corporation, or
business entity which at any time, whether by merger, purchase, or otherwise,
acquires all or essentially all of the assets of business of the Company.
Notwithstanding such assignment, the Company shall remain, with such successor,
jointly and severally liable for all its obligations hereunder.

Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall immediately
entitle the Executive to compensation from the Company in the same amount and on
the same terms as the Executive would be entitled in the event of an involuntary
termination by the Company, as provided in Paragraph 6.6 herein.

Except as herein provided, this Agreement may not otherwise be assigned by the
Company.

11.2 ASSIGNMENT BY EXECUTIVE. This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives, executors,
and administrators, successors, heirs, distributees, devisees, and legatees. If
the Executive should die while any amounts payable to the Executive hereunder
remain outstanding, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee, or other designee or, in the absence of such designee, to the
Executive's estate.

SECTION 12. DISPUTE RESOLUTION AND NOTICE

12.1 ARBITRATION. Any dispute or controversy arising under or in connection with
this Agreement shall be settled by arbitration, conducted before a panel of
three (3) arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of his employment ith the Company, in
accordance with the rules of the American Arbitration Association then in
effect.

Judgment may be entered on the award of the arbitrator in any court having
proper jurisdiction. All expenses of such arbitration, including the fees and
expenses of the counsel for the Executive, shall be borne by the Company.

12.2 NOTICE. Any notices, requests, demands, or other communications provided
for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing with the Company or, in the case of the Company, at its principal
offices.

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<PAGE>
 
SECTION 13. MISCELLANEOUS

13.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.

13.2 ENTIRE AGREEMENT. This Agreement supersedes any prior agreements or
understandings, oral or written, between the parties hereto or between the
Executive and the Company, with respect to the subject matter hereof and
constitutes the entire Agreement of the parties with respect thereto.

13.3 MODIFICATION. This Agreement shall not be varied, altered, modified,
canceled, changed, or in any way amended except by mutual agreement of the
parties in a written instrument executed by the parties hereto or their legal
representatives.

13.4 SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.

13.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same Agreement.

13.6 TAX WITHHOLDING. The Company may withhold from any benefits payable under
this Agreement all federal, state, city, or other taxes as may be required
pursuant to any law or governmental regulation or ruling.

13.7 BENEFICIARIES. The Executive may designate one or more persons or
entities as the primary and/or contingent beneficiaries of any amounts to be
received under this Agreement. Such designation must be in the form of a signed
writing acceptable to the Board or the Board's designee. The Executive may make
or change such designation at any time.

SECTION 14. GOVERNING LAW

To the extent not preempted by federal law, the provisions of this Agreement
shall be construed and enforced in accordance with the laws of the state of
Rhode Island.

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     IN WITNESS WHEREOF, the Executive and the Company (pursuant to a resolution
adopted at a duly constituted meeting of its Board of Directors) have executed
this Agreement, as of the day and year first above written.

                                   Executive:



                                                 /s/ James A. Grasso
                                         ------------------------------------


ATTEST                             Providence Energy Corporation


By:  /s/ Susann G. Mark            By:  /s/ James H. Dodge
     -------------------                --------------------
     Corporate Secretary                Chairman, President and CEO

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