SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 16, 1996
------------------
AMERICAN WATER WORKS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-3437-2 51-0063696
- ------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1025 Laurel Oak Road, P.O. Box 1770, Voorhees, New Jersey 08043
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 346-8200
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<PAGE> Page 2 FORM 8-K/A
The Registrant hereby amends the following items, financial statements,
exhibits or other portions of its Current Report of Form 8-K filed on March
1, 1996 as set forth in the pages attached hereto:
(List all such items, financial statements,
exhibits or other portions amended)
The following items of the Form 8-K are amended:
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
American Water Works Company, Inc.
(Registrant)
BY: /s/ George W. Johnstone
--------------------------
George W. Johnstone
President and Chief
Executive Officer
DATE: April 3, 1996
<PAGE> Page 3 FORM 8-K/A
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------------------------------------------------------------------
A current report on Form 8-K was filed on March 1, 1996 by the
Registrant describing a subsidiary's acquisition (the "Acquisition") of the
regulated water operations and certain related assets (the "Acquired
Business") of PG Energy Inc., formerly known as Pennsylvania Gas and Water
Company, a subsidiary of Pennsylvania Enterprises, Inc., as required under
Item 2 of Form 8-K. This Form 8-K/A provides audited financial statements as
of December 31, 1995 and for the twelve month period then ended and pro forma
information for the Acquired Business which were previously unavailable
pursuant to Item 7(a)(4) and Item 7(b)(2), respectively.
Pursuant to Item 7 of Form 8-K, the tables on pages 4 through 8 set
forth the unaudited pro forma financial statements which give effect to the
Acquisition accounted for as a purchase. The unaudited pro forma balance
sheet presents the combined financial position of the Registrant and the
Acquired Business as of December 31, 1995 assuming that the Acquisition had
occurred as of December 31, 1995. Such pro forma information is based upon
the historical balance sheet data of the Registrant and the Acquired Business
as of that date. The unaudited pro forma condensed statement of income gives
effect to the Acquisition by combining the results of operations of the
Registrant for the year ended December 31, 1995 with the results of
operations of the Acquired Business for the year ended December 31, 1995 on a
purchase method basis. The Report of Independent Public Accountants and the
audited financial statements of the Acquired Business are set forth on pages
9 through 23.
The pro forma financial information reflects pro forma adjustments that
are based upon available information and certain assumptions that the
Registrant believes are reasonable. The pro forma information does not
necessarily reflect the results of operations or the financial position of
the Registrant that actually would have resulted had the transaction to which
pro forma effect is given been consummated as of the date or for the period
indicated. The amounts contained in this Form 8-K/A are subject to
adjustment based on a balance sheet as of February 16, 1996 pursuant to the
terms of the Asset Purchase Agreement.
There are no exhibits included with this Form 8-K/A.
<PAGE> Page 4 FORM 8-K/A
Pro Forma Balance Sheet (Unaudited)
(In thousands)
Pro Forma
-------------------
Registrant Acquired Adjust-
(Historical) Business ments Combined
---------- ---------- -------- ----------
ASSETS
Property, plant and equipment
Utility plant - at original
cost less accumulated
depreciation $2,884,681 $ 354,203 $ $3,238,884
Utility plant acquisition
adjustments 34,974 14,538 6,500(a) 56,012
Other utility plant
adjustments 147 147
Non-utility property, net
of accumulated
depreciation 20,144 20,144
Excess of cost of
investments in
subsidiaries over book
equity at acquisition 22,638 22,638
---------- ---------- -------- ----------
2,962,584 368,741 6,500 3,337,825
---------- ---------- -------- ----------
Current assets
Cash and cash equivalents 23,204 23,204
Temporary investments - at
cost plus accrued interest 513 513
Customer accounts receivable 61,786 7,134 68,920
Allowance for uncollectible
accounts (1,030) (446) (1,476)
Unbilled revenues 47,790 4,627 52,417
Miscellaneous receivables 4,571 4,571
Materials and supplies 9,599 1,169 10,768
Deferred vacation pay 9,374 9,374
Other 8,563 272 8,835
---------- ---------- -------- ----------
164,370 12,756 177,126
---------- ---------- -------- ----------
Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 172,265 172,265
Funds restricted for
construction 13,927 13,927
Debt and preferred stock
expense 20,753 5,165 25,918
Deferred pension expense 16,468 16,468
Deferred postretirement
benefit expense 11,418 11,418
Tank painting costs 8,901 8,901
Other 32,455 20,588 53,043
---------- ---------- -------- ----------
276,187 25,753 301,940
---------- ---------- -------- ----------
$3,403,141 $ 407,250 $ 6,500 $3,816,891
========== ========== ======== ==========
<PAGE> Page 5 FORM 8-K/A
Pro Forma Balance Sheet (Unaudited)
(In thousands)
<TABLE>
Pro Forma
-------------------
Registrant Acquired Adjust-
(Historical) Business ments Combined
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 818,939 $ $ $ 818,939
Preferred stocks with
mandatory redemption
requirements 40,000 40,000
Preferred stocks without
mandatory redemption
requirements 11,673 11,673
Preferred stocks of
subsidiaries with mandatory
redemption requirements 42,326 42,326
Preferred stocks of
subsidiaries without
mandatory redemption
requirements 6,288 6,288
Long-term debt
American Water Works
Company, Inc. 116,000 116,000
Subsidiaries 1,268,649 140,420 1,409,069
---------- ---------- -------- ----------
2,303,875 140,420 2,444,295
---------- ---------- -------- ----------
Current liabilities
Bank debt 148,639 266,670(b) 415,309
Current portion of long-term
debt 44,321 677 44,998
Accounts payable 43,300 43,300
Taxes accrued, including
federal income 13,098 13,098
Interest accrued 26,263 1,828 28,091
Accrued vacation pay 9,512 9,512
Other 35,940 35,940
---------- ---------- --------- ----------
321,073 2,505 266,670 590,248
---------- ---------- --------- ----------
<PAGE> Page 6 FORM 8-K/A
Pro Forma Balance Sheet (Unaudited)
(In thousands)
Pro Forma
-------------------
Registrant Acquired Adjust-
(Historical) Business ments Combined
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Regulatory and other long-term
liabilities
Advances for construction 131,141 2,419 133,560
Deferred income taxes 356,608 356,608
Deferred investment tax
credits 38,515 38,515
Accrued pension expense 30,652 30,652
Accrued postretirement
benefit expense 9,100 9,100
Other 3,840 3,840
---------- ---------- -------- ----------
569,856 2,419 572,275
---------- ---------- -------- ----------
Contributions in aid of
construction 208,337 1,736 210,073
---------- ---------- -------- ----------
Commitments and contingencies
---------- ---------- -------- ----------
$3,403,141 $ 147,080 $266,670 $3,816,891
========== ========== ======== ==========
NOTES (Dollars in thousands):
(a) Represents consideration in excess of net assets acquired.
Consideration $ 266,670
Net assets acquired (260,170)
---------
$ 6,500
=========
(b) Represents bank debt incurred to finance the Acquisition.
</TABLE>
<PAGE> Page 7 FORM 8-K/A
Consolidated Statement of Income
(In thousands, except per share amounts)
<TABLE>
Pro Forma
-------------------
Registrant Acquired Adjust-
(Historical) Business ments Combined
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 802,820 $ 66,306 $ $ 869,126
---------- ---------- -------- ----------
Operating expenses
Operation and maintenance 402,362 25,230 (2,941)(c) 424,651
Depreciation and
amortization 79,977 8,439 163 (d) 88,579
General taxes 76,208 5,368 81,576
---------- ---------- -------- ----------
558,547 39,037 (2,778) 594,806
---------- ---------- -------- ----------
Operating income 244,273 27,269 2,778 274,320
Allowance for other funds used
during construction 11,771 11,771
Gain from eminent domain
litigation 6,600 6,600
Other income 1,844 109 1,953
---------- ---------- -------- ----------
264,488 27,378 2,778 294,644
---------- ---------- -------- ----------
Income deductions
Interest expense 117,042 12,946 11,562 (e) 141,550
Allowance for borrowed funds
used during construction (9,573) (203) (9,776)
Amortization of debt expense 1,273 1,273
Preferred dividends of
subsidiaries 3,698 3,698
Other deductions 2,341 2,341
---------- ---------- -------- ----------
114,781 12,743 11,562 139,086
---------- ---------- -------- ----------
Income before income taxes 149,707 14,635 (8,784) 155,558
Provision for income taxes 57,646 5,889 (3,382)(f) 60,153
---------- ---------- -------- ----------
Net income (loss) 92,061 8,746 (5,402) 95,405
Dividends on preferred stocks 3,984 3,984
---------- ---------- -------- ----------
Net income (loss) to common
stock $ 88,077 $ 8,746 $ (5,402) $ 91,421
========== ========== ======== ==========
Average shares of common stock
outstanding 33,382 33,382
Earnings per common share on
average shares outstanding $ 2.64 $ 2.74
========== ==========
<PAGE> Page 8 FORM 8-K/A
NOTES (Dollars in thousands):
(c) Represents reduction in operation and maintenance expenses as
a result of employee reductions pursuant to the terms of the Asset
Purchase Agreement filed with the Registrant's Current Report on
Form 8-K on March 1, 1996. In accordance with the Asset Purchase
Agreement, the Registrant hired 297 employees of the Acquired
Business which it believes to be adequate to operate the business.
PG Energy Inc., prior to the Acquisition, was a gas and water
company. As discussed in footnote (1) to the financial statements
of the Acquired Business, PG Energy Inc. used allocations approved
by the Pennsylvania Public Utility Commission in preparing the
Statement of Income from Water Business. This adjustment reflects
the difference between the allocated labor costs of $12,050 and the
labor costs of $9,109 for the 297 employees hired by the Registrant.
The table below provides detail regarding the actual headcount
reductions to be achieved by the Registrant.
Allocated Actual
--------- ------
Employees
Administrative
and general 91 11
Commercial 91 73
Distribution 135 125
Production 103 88
--------- ------
420 297
========= ======
(d) Represents the amortization, over a period of 40 years, of the
utility plant acquisition adjustment incurred in connection
with the Acquisition.
(e) Represents the interest expense on the debt incurred to finance the
Acquisition and the elimination of interest expense previously
allocated to the Acquired Business from PG Energy Inc. related to
debt not assumed in the Acquisition.
Debt incurred $266,670
Interest rate in effect at
commencement of facility 5.58%
--------
14,880
Interest allocated by
PG Energy, Inc. (3,318)
--------
$ 11,562
========
(f) Represents the state and federal income tax effect on the pro forma
adjustments at the Registrant's effective tax rate of 38.5%.
</TABLE>
<PAGE> Page 9 FORM 8-K/A
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To PG Energy Inc.:
We have audited the accompanying Statement of Net Assets of Water Business of
PG Energy Inc. (PGE), formerly known as Pennsylvania Gas and Water Company,
(a Pennsylvania Corporation and a wholly owned subsidiary of Pennsylvania
Enterprises, Inc.) as of December 31, 1995, and the related Statements of
Income and Cash Flows from Water Business for the year then ended. These
financial statements are the responsibility of PGE's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying financial statements have been prepared pursuant to the
Asset Purchase Agreement, dated as of April 26, 1995, by and between
Pennsylvania Enterprises, Inc., PGE, American Water Works Company, Inc. and
Pennsylvania-American Water Company, as discussed in Note 1, and are not
intended to be a complete presentation of the assets and liabilities of PGE's
Water Business.
In our opinion, the accompanying financial statements as of and for the year
ended December 31, 1995, present fairly, in all material respects, the Net
Assets of Water Business and its Income and Cash Flows pursuant to the Asset
Purchase Agreement referred to in Note 1 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 23, 1996
<PAGE> Page 10 FORM 8-K/A
PG ENERGY INC.
Statement of Net Assets of Water Business
as of December 31, 1995
(Thousands of Dollars)
ACQUIRED ASSETS
Utility Plant
Water utility plant, at original cost $373,597
Accumulated depreciation (24,322)
Acquisition adjustments 14,538
Construction work in progress 1,371
--------
Net water utility plant 365,184
Net common plant, at original cost 3,557
--------
Total utility plant 368,741
--------
Current Assets
Accounts receivable
Customers 7,134
Reserve for uncollectible accounts (446)
Accrued utility revenues 4,627
Material and supplies at average cost, net of
reserve for obsolescence 1,169
Prepaid expense 272
--------
Total current assets 12,756
--------
Deferred Charges
Regulatory assets
Deferred water utility billings 9,301
Deferred treatment plant costs and carrying charges 8,967
Other 2,320
Unamortized debt expense 5,165
--------
Total deferred charges 25,753
--------
TOTAL ACQUIRED ASSETS 407,250
--------
ASSUMED LIABILITIES
Long-Term Debt (Note 3) 140,420
--------
Current Liabilities:
Current portion of long-term debt (Note 3) 677
Accrued interest 1,828
--------
2,505
--------
Deferred Credits 4,155
--------
TOTAL ASSUMED LIABILITIES 147,080
--------
NET ASSETS OF WATER BUSINESS $260,170
========
The accompanying notes are an integral part of the financial statements.
<PAGE> Page 11 FORM 8-K/A
PG ENERGY INC.
Statement of Income from Water Business
for the Year Ended December 31, 1995
(Thousands of Dollars)
OPERATING REVENUES $ 66,306
--------
OPERATING EXPENSES:
Operation 18,447
Maintenance 6,783
Depreciation 7,858
Deferred treatment plant costs, net 581
Income taxes 5,867
Taxes other than income taxes 5,368
--------
Total operating expenses 44,904
--------
OPERATING INCOME 21,402
OTHER INCOME, NET 87
--------
INCOME BEFORE INTEREST CHARGES 21,489
--------
INTEREST CHARGES:
Interest on long-term debt
Amount equivalent to interest on assumed
indebtedness (Note 3) 9,530
Other 3,318
Other interest 98
Allowance for borrowed funds used during construction (203)
--------
Total interest charges 12,743
--------
NET INCOME FROM WATER BUSINESS $ 8,746
========
The accompanying notes are an integral part of the financial statements.
<PAGE>
<PAGE> Page 12 FORM 8-K/A
PG ENERGY INC.
Statement of Cash Flows from Water Business
for the Year Ended December 31, 1995
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
Income from water business $ 8,746
Effects of noncash charges to income -
Depreciation 7,858
Deferred income taxes, net 3,098
Deferred treatment plant costs and carrying charges, net 581
Other, net 185
Current assets less current liabilities, exclusive of
current portion of long-term debt -
Receivables and accrued utility revenues (736)
Other current assets and liabilities, net 780
Other operating items, net (2,714)
--------
Net cash provided by operating activities 17,798
--------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (17,858)
Other, net (184)
--------
Net cash used for investing activities (18,042)
--------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of long-term debt 261
Repayment of long-term debt (584)
Use of restricted funds held by trustee 3,462
Other, net (125)
--------
Net cash provided from financing activities 3,014
--------
NET CASH PROVIDED BY WATER BUSINESS $ 2,770
========
The accompanying notes are an integral part of the financial statements.
<PAGE> Page 13 FORM 8-K/A
PG ENERGY INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Purpose of statements. These statements have been prepared in
accordance with the Asset Purchase Agreement among Pennsylvania Enterprises,
Inc. ("PEI"), PG Energy Inc. ("PGE"), a wholly-owned subsidiary of PEI
formerly known as Pennsylvania Gas and Water Company, American Water Works
Company Inc. ("AWWC"), and Pennsylvania-American Water Company
("Pennsylvania-American"), a wholly-owned subsidiary of AWWC (collectively
the "Parties"), dated as of April 26, 1995 (the "Agreement"), providing for
the sale by PEI and PGE to Pennsylvania-American of substantially all of the
assets, properties and rights of PGE's water utility operations (the "Water
Business").
Under the terms of the Agreement, Pennsylvania-American made an initial
cash payment to PGE on February 16, 1996, the closing date for the sale of
the Water Business, of approximately $413.5 million (including a $6.5 million
premium over the book value of the assets sold) consisting of $266.4 million
in cash and the assumption of $147.1 million of PGE's liabilities, including
$141.1 million of its long-term debt, based on an Estimated Statement of Net
Assets (as such term is defined in the Agreement) of the Water Business as of
December 31, 1995. This price is subject to adjustment for changes in the
assets of the Water Business and the liabilities assumed by
Pennsylvania-American pursuant to the Agreement between December 31, 1995,
and the February 16, 1996, closing date.
The assets and liabilities reflected in the Statement of Net Assets of
Water Business comprise the following items:
o Acquired assets of PGE as defined in the Agreement, including
all the assets, properties and rights used exclusively in PGE's
regulated water business.
o Assumed liabilities as defined in the Agreement, including
specified indebtedness (as described in Note 3 of the Notes to
Financial Statements) and accrued interest thereon and other
specified liabilities related to the Water Business.
o The assumed liabilities do not include employee benefit
liabilities assumed by Pennsylvania-American as described in
Note 4 to the Financial Statements.
The accompanying Statement of Income from Water Business reflects PGE's
water utility operations for the year 1995. Operating revenues and expenses
have been determined in accordance with the methods utilized by PGE and the
Pennsylvania Public Utility Commission (the "PPUC") in establishing the
revenue requirements of PGE's water utility operations. Such methods include
specific identification of expenses where possible and allocation of common
expenses to the water utility operations based on PPUC-approved allocation
methodology. Interest charges relating to indebtedness of PGE have been
allocated to the Water Business based on the relationship of the gross water
utility plant that was sold to Pennsylvania-American pursuant to the
Agreement to the total of PGE's gross gas and water utility plant. This is
the same method as was utilized by PGE and the PPUC in establishing the
<PAGE> Page 14 FORM 8-K/A
revenue requirements of both PGE's gas and water utility operations. None of
the dividends on PGE's preferred stock have been allocated to the Water
Business.
Nature of the Business. PGE is a regulated public utility subject to the
jurisdiction of the PPUC for rate and accounting purposes. The financial
statements of PGE's Water Business have been prepared in accordance with
generally accepted accounting principles, including the provisions of
Financial Accounting Standards Board ("FASB") Statement 71, "Accounting for
the Effects of Certain Types of Regulation," which give recognition to the
rate and accounting practices of regulatory agencies such as the PPUC.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates involve judgments with
respect to, among other things, various future economic factors which are
difficult to predict and are beyond the control of PGE. Therefore, actual
amounts could differ from these estimates.
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll,
administrative and general costs, and an allowance for funds used during
construction, and the plant acquisition adjustments. The plant acquisition
adjustments represent the difference between the cost to PGE of plant
acquired as a system and the cost of such plant when first devoted to public
service. Except for approximately $340,000 recorded in 1993, which is being
amortized over a ten-year period, the plant acquisition adjustments relate to
acquisitions made prior to October 31, 1970, and thus are not required to be
amortized for financial reporting purposes since PGE believes there has been
no diminution in their value. Also, such treatment is consistent with PPUC
Orders.
Common plant assets (items used jointly in PGE's gas and water utility
operations) were determined in accordance with the Agreement and represent
the portion of common plant assets to be assigned to the Water Business. The
Agreement provides that a specific determination of the various tangible
personal property to be assigned to the Water Business shall be made prior to
the February 16, 1996, closing date and, therefore, the final purchase price
(as specified in the Agreement) will be based on the actual net book value of
the specific assets so assigned to the Water Business, including common plant
assets.
The allowance for funds used during construction ("AFUDC") is defined as
the net cost during the period of construction of borrowed funds used and a
reasonable rate upon other funds when so used. Such allowance is charged to
utility plant and reported as a reduction of interest expense (with respect
to the cost of borrowed funds) in the accompanying Statement of Income from
Water Business. AFUDC varies according to changes in the level of
construction work in progress and in the sources and costs of capital. The
weighted average rate for such allowance was approximately 8% in 1995.
PGE provides for depreciation on a straight-line basis for all common
plant assets and approximately 96% of the water utility plant assets and on
a 4% compound interest method for the remainder of the water utility plant
assets. Exclusive of transportation and work equipment, the annual provision
<PAGE> Page 15 FORM 8-K/A
for depreciation, as related to the average depreciable original cost of
utility plant constituting the Water Business, was 1.97% in 1995.
When depreciable property is retired, the original cost of such property
is removed from the utility plant accounts and is charged, together with the
cost of removal less salvage, to accumulated depreciation. No gain or loss
is recognized in connection with retirements of depreciable property, other
than in the case of significant involuntary conversions or extraordinary
retirements.
Revenues. PGE bills its customers based on estimated or actual meter
readings on a cycle basis. Certain water customers, primarily large users,
are billed monthly on a cycle that extends throughout the month. Other water
customers are billed bi-monthly on cycles that extend over the bi-monthly
period. The estimated unbilled amounts from the most recent meter reading
dates through the end of the period being reported on are recorded as accrued
revenues.
Deferred Charges (Regulatory Assets). PGE generally accounts for and
reports its costs in accordance with the economic effect of rate actions by
the PPUC. To this extent, certain costs are recorded as deferred charges
pending their recovery in rates. These amounts relate to previously-issued
orders of the PPUC and are of a nature which, in the opinion of PGE, will be
recoverable in future rates, based on such rate orders.
Pursuant to an Order of the PPUC entered September 5, 1990, PGE deferred
all operating expenses, including depreciation and property taxes, and the
carrying charges (equivalent to the AFUDC relative to the four Scranton Area
water treatment plants and related facilities from the dates of commercial
operation of the plants until March 23, 1991, the effective date of the
Scranton Area water rate increase approved by the PPUC on March 22, 1991.
By its Order entered June 23, 1993, relative to the Scranton Water Rate Area,
the PPUC granted PGE's request to recover $5.8 million of costs deferred
relative to the Scranton Area water treatment plants and related facilities
over a ten-year period beginning June 23, 1993, of which $1.5 million had
been recovered as of December 31, 1995.
Similarly, as permitted by an Order of the PPUC entered September 24,
1992, PGE deferred all operating expenses, including depreciation and
property taxes, and the carrying charges relative to the Crystal Lake Water
Treatment Plant and related facilities from August 3, 1992 (the date of
commercial operation of that plant), until March 9, 1993, the effective date
of the water rate increase approved by the PPUC on February 25, 1993, for
customers in PGE's Spring Brook Water Rate Area served exclusively by the
Crystal Lake Water Treatment Plant. Additionally, in accordance with an
Order of the PPUC entered July 28, 1993, PGE deferred all expenses and the
carrying charges relative to the Ceasetown and Watres Water Treatment Plants
and related facilities, until December 16, 1993, the effective date of the
water increase for customers served by the Ceasetown and Watres Water
Treatment Plants approved by the PPUC on December 15, 1993. A total of $4.6
million of costs relative to these plants and related facilities was deferred
pursuant to the respective PPUC Orders permitting the deferral of such costs.
As contemplated by the PPUC's Orders of September 24, 1992, and July 28,
1993, PGE planned to seek recovery of these costs, which total $4.6 million,
in its next rate increase request relative to the Spring Brook Water Rate
Area. Although it cannot be certain, PGE believes that the recovery of such
costs will be allowed by the PPUC in future rate increases, particularly in
<PAGE> Page 16 FORM 8-K/A
view of the PPUC's action allowing the recovery of the costs deferred with
respect to the Scranton Area water treatment plants and related facilities.
The PPUC has, in certain orders more fully described in Note 2 of the
Notes to Financial Statements, granted rate increases to PGE designed to be
phased-in over multiple periods under the terms of qualified phase-in plans
pursuant to the provisions of FASB Statement 92 entitled "Regulated
Enterprises-Accounting for Phase-in Plans". PGE has recorded a deferred
charge representing the revenue which will be recovered from customers in
subsequent years in accordance with the terms of such PPUC Orders. As of
December 31, 1995, $9.3 million of such revenue was deferred pending recovery
from PGE's customers.
The following deferred charges are included as "Other" regulatory assets
as of December 31, 1995 (in thousands of dollars):
Preliminary survey and investigation charges $ 878
Cold weather maintenance charges 521
Deferred water rate case expense 266
Pre-operating costs - Crystal Lake Water Treatment Plant 251
Unaccounted for water study 100
Jobbing work in progress 97
Retirement work in progress 93
Management audit charges 80
Other 34
------
$2,320
======
Income Taxes. The provision for income taxes as of December 31, 1995,
consists of the following components (in thousands of dollars):
Included in operating expenses:
Currently payable -
Federal $ 1,907
State 862
-------
Total currently payable 2,769
-------
Deferred, net -
Federal 2,841
State 257
-------
Total deferred, net 3,098
-------
Total included in operating expenses 5,867
-------
Included in other income, net:
Currently payable -
Federal 17
State 5
-------
Total currently payable 22
-------
<PAGE> Page 17 FORM 8-K/A
Deferred, net -
Federal -
State -
-------
Total deferred, net -
-------
Total included in other income, net 22
-------
Total provision for income taxes $ 5,889
=======
The components of deferred income taxes for 1995 (in thousands of
dollars) included in the accompanying Statement of Income from Water
Business, which are recorded consistent with the treatment allowed by the
PPUC for ratemaking purposes, are as follows:
Excess of tax depreciation over depreciation
for accounting purposes $ 2,165
Deferred treatment plant costs (369)
Deferred water utility billings (292)
Contributions and advances for construction 981
Other, net 613
-------
Total deferred taxes, net $ 3,098
=======
Included in:
Operating expenses $ 3,098
Other income, net -
-------
Total deferred taxes, net $ 3,098
=======
The total provision for income taxes shown in the accompanying statement
of income differs from the amount which would be computed by applying the
statutory federal income tax rate to income before income taxes. The
following table summarizes the major reasons for this difference in 1995 (in
thousands of dollars):
Income before income taxes $14,635
=======
Tax expense at statutory federal
income tax rate $ 5,122
Increases (reductions) in taxes
resulting from -
State income taxes, net of
federal income tax benefit 760
Other, net 7
-------
Total provision for income taxes $ 5,889
=======
Long Lived Assets. In March 1995, FASB Statement 121, "Accounting for
the Impairment of Long-Lived Assets", was issued. The provisions of this
statement, which are effective for fiscal years beginning after September 15,
1995, require that long-lived assets, identifiable intangibles, capital
leases and goodwill be reviewed for impairment whenever events occur or
changes in circumstances indicate that the carrying amount of the assets may
<PAGE> Page 18 FORM 8-K/A
not be recoverable. In addition, FASB Statement 121 requires that regulatory
assets meet the recovery criteria of FASB Statement 71, "Accounting for
Effects of Certain Types of Regulation", on an ongoing basis in order to
avoid a writedown. The implementation of FASB Statement 121 in 1996 is not
expected to have any significant impact on the Water Business since the
carrying amount of all assets, including regulatory assets, is considered
recoverable.
(2) RATE MATTERS
Scranton Area. By Order adopted March 22, 1991, the PPUC granted PGE an
approximate 110% rate increase effective March 23, 1991, for the Scranton
Water Rate Area that was designed to produce $15.0 million of additional
annual revenue to be phased-in over a two-year period under the terms of a
qualified phase-in plan, pursuant to Financial Accounting Standards Board
("FASB") Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in
Plans." In accordance with said Order, PGE deferred the billing of $4.7
million of the increased revenue recorded during the period March 23, 1991,
through March 22, 1992. Effective March 23, 1992, PGE began to bill such
$4.7 million by means of a surcharge that will be in effect during the period
through March 22, 2001, and as of December 31, 1995, $1.9 million had been so
billed to its Scranton Water Rate Area customers.
On September 25, 1992, PGE filed an application with the PPUC seeking a
water rate increase, designed to produce $9.9 million in additional annual
revenue. This rate increase request involved the approximately 56,000
customers in PGE's Scranton Water Rate Area at such date. By Order entered
June 23, 1993, the PPUC rejected the proposed rate increase in its entirety
"due to inadequate service" (i.e., water quality). However, by the same
Order, the PPUC granted PGE the alternative of a rate increase designed to
produce an additional $5.0 million in annual revenue, provided that PGE
dedicate the entire increase to augment the improvements to its water
distribution system until "the demonstration by [PGE] to [the PPUC] that it
is providing adequate service." PGE accepted this alternative and placed such
$5.0 million rate increase into effect as of June 23, 1993.
On August 19, 1993, the PPUC approved a settlement agreement (the
"Settlement Agreement") resolving certain disputed issues relating to its
June 23, 1993, Order. The Settlement Agreement provided, among other things,
for (i) modification by the PPUC of its June 23, 1993, Order to reduce the
amount of the revenue increase that it ordered be dedicated to distribution
system improvements by the related income taxes and other expenses and the
$319,000 additional expense for retiree health care and life insurance
benefits that the PPUC allowed PGE in its revenues (which resulted in the
requirement for an additional annual expenditure for distribution system
improvements by PGE of $2.5 million), (ii) the agreement by PGE (with which
it was in compliance as of December 31, 1995) to spend a total of $4.9
million annually (an additional $2.5 million over its actual average annual
expenditure of $2.4 million during the three-year period ended June 30,
1993) for distribution system improvements in the Scranton Water Rate Area
until the PPUC is satisfied that PGE is providing adequate service, (iii) the
modification by the PPUC of its June 23, 1993, Order to restore the Hollister
Reservoir to PGE's rate base, and (iv) the withdrawal by PGE and the Office
of Consumer Advocate (the "OCA") of their appeals to the Commonwealth Court
of Pennsylvania regarding the PPUC's June 23, 1993, Order.
<PAGE> Page 19 FORM 8-K/A
Spring Brook Water Rate Increase. Crystal Lake Service Area. On June
30, 1992, PGE filed an application with the PPUC seeking a water rate
increase, designed to produce $4.4 million in additional annual revenue.
This rate increase request involved the approximately 5,000 customers in the
Spring Brook Water Rate Area served exclusively by the Crystal Lake Water
Treatment Plant, which became fully operational in August, 1992. On December
15, 1992, PGE and certain parties filing objections to the rate increase
request reached a settlement providing for an approximate 130% rate increase
designed to produce $2.0 million of additional annual revenue to be phased-in
over a two-year period under the terms of FASB Statement 92. The settlement
provided that $1.1 million of the increased revenue (an approximate 72%
increase in rates) was to be realized through an immediate rate increase and
that the remaining $900,000 in increased revenue (an additional 58% increase
in rates) was to be realized through another rate increase one year later
(i.e., at the beginning of year two of the phase-in period). The settlement
also specified that the $900,000 in revenue that would be deferred during the
first year of the phase-in period, as well as an approximate $243,000 in
related carrying charges, was to be collected from customers in the form of a
surcharge in years three through five of the phase-in period. By Order
adopted February 25, 1993, the PPUC approved the settlement effective March
9, 1993.
In accordance with the provisions of FASB Statement 92, PGE commenced
recording the entire $2.0 million increase in annual revenue allowed by the
PPUC as additional revenue beginning March 9, 1993, along with the related
carrying charges on revenue deferred in accordance with the phase-in plan.
However, pursuant to the terms of the settlement, PGE deferred the billing of
approximately $900,000 of the increased revenue recorded during the first
year of the phase-in period (i.e., the period March 9, 1993, through March 8,
1994). Effective March 9, 1995, PGE began to bill, by means of the surcharge
that will be in effect in years three through five of the phase-in period,
the approximate $900,000 that has been so deferred, as well as the related
carrying charges and as of December 31, 1995, $293,000 had been so billed to
its Crystal Lake service area customers.
Ceasetown and Watres Service Areas. On April 29, 1993, PGE filed an
application with the PPUC seeking a water rate increase, designed to produce
$19.5 million in additional annual revenue. This rate increase request
involved approximately 59,300 customers in PGE's Spring Brook Water Rate
Area, principally those customers (i) served by the Ceasetown Water Treatment
Plant which was placed in service on March 31, 1993, (ii) served by the
Watres Water Treatment Plant which was placed in service on September 30,
1993, (iii) served jointly by the Ceasetown and Watres Water Treatment
Plants, and (iv) who are served exclusively by the Nesbitt Water Treatment
Plant. On September 23, 1993, PGE, the PPUC Office of Trial Staff, the OCA
and the Office of Small Business Advocate filed a settlement petition (the
"Settlement Petition") with the Administrative Law Judge ("ALJ") assigned to
conduct the investigation of the rate increase request. This Settlement
Petition provided for an overall 119% rate increase involving approximately
44,900 customers, principally those served either exclusively or jointly by
the Ceasetown and Watres Water Treatment Plants, that was designed to produce
$11.9 million of additional annual revenue to be phased-in over a two-year
period under the terms of a qualified phase-in plan, pursuant to FASB
Statement 92. Under the terms of the Settlement Petition, except for
approximately 200 customers who were previously served jointly by the
Hillside and Nesbitt Water Treatment Plants, none of the approximately 14,600
customers served exclusively by the Nesbitt Water Treatment Plant would
receive an increase. The Settlement Petition further provided that
<PAGE> Page 20 FORM 8-K/A
$6.4 million of the increased revenue (an approximate 65% increase in rates)
was to be realized through an immediate rate increase and that the remaining
$5.5 million of the increased revenue (an additional 54% increase in rates)
was to be realized through a further rate increase one year later (i.e., at
the beginning of year two of the phase-in period). The Settlement Petition
also specified that the $5.5 million in revenue that was to be deferred
during the first year of the phase-in period, as well as an approximate $1.3
million in related carrying charges, was to be collected from customers in
the form of a surcharge in years three through five of the phase-in period.
By Order adopted December 15, 1993, the PPUC approved the Settlement Petition
effective December 16, 1993.
In accordance with the provisions of FASB Statement 92, PGE commenced
recording the entire $11.9 million increase in annual revenue allowed by the
PPUC as additional revenue beginning December 16, 1993, along with the
related carrying charges on revenue deferred in accordance with the phase-in
plan. However, pursuant to the terms of the settlement, PGE deferred the
billing of $5.3 million of the increased revenue recorded during the first
year of the phase-in period (i.e., the period December 16, 1993, through
December 15, 1994). The amount so deferred was $200,000 less than the $5.5
million originally estimated because of slightly lower than anticipated
consumption. Effective December 16, 1995, PGE began to bill the $5.3 million
that had been so deferred, as well as the related carrying charges, by means
of the surcharge that will be effective in years three through five of the
phase-in period and as of December 31, 1995, $17,000 had been so billed to
its Ceasetown/Watres service area customers.
(3) LONG-TERM DEBT
Long-term debt at December 31, 1995, and the interest thereon during the
year ended December 31, 1995, were as follows (in thousands of dollars):
Long-term
debt Interest *
--------- --------
First mortgage bonds -
6.05 % Series, due 2019 $ 19,000 $ 1,150
7.00 % Series, due 2017 30,000 2,100
7.125% Series, due 2022 30,000 2,106
7.20 % Series, due 2017 50,000 3,600
--------- --------
129,000 8,956
Notes -
Water facility loans, (at interest rates ranging
from, 1.764% to 7.382%, repayable in
installments through 2012) 12,097 574
Less current maturities (677) -
--------- --------
Total long-term debt $ 140,420 $ 9,530
========= ========
* See Note 1, Summary of Significant Accounting Policies-Purpose of
Statements, regarding the allocation of interest charges to the
Water Business.
<PAGE> Page 21 FORM 8-K/A
All of the obligations of PGE and PEI with respect to such debt were
assigned to and assumed by Pennsylvania-American on February 16, 1996, in
connection with its purchase of the Water Business on that date.
7.125% Series First Mortgage Bonds. On December 22, 1992, the Luzerne
County Industrial Development Authority (the "Authority") issued $30.0
million of its 7.125% Exempt Facilities Revenue Bonds, 1992 Series B
(Pennsylvania Gas and Water Company Project)(the "1992 Series B Bonds") and,
in connection therewith, PGE issued $30.0 million of its 7.125% Series First
Mortgage Bonds to PNC Bank (formerly Northeastern Bank of Pennsylvania), as
trustee (the "IDA Trustee") for the 1992 Series B Bonds, as security for the
1992 Series B Bonds. The proceeds from the issuance of the 1992 Series B
Bonds were deposited in a construction fund held by the IDA Trustee for the
1992 Series B Bonds, pending their utilization to finance the construction of
various additions and improvements to PGE's water facilities for which
construction commenced subsequent to September 23, 1992. During 1995 the
remaining $3.4 million (including investment income) held by the IDA Trustee
and available to PGE to finance the construction of qualified water
facilities was so utilized.
Maturities and Sinking Fund Requirements. As of December 31, 1995, the
aggregate annual maturities (in thousands of dollars) of long-term debt for
each of the next five years ending December 31, all of which related to the
water facility loans, were:
Year Amount
---- ------
1996 $ 677
1997 $ 710
1998 $ 728
1999 $ 766
2000 $ 807
(4) POSTEMPLOYMENT BENEFITS
Pension Benefits
PGE's retirement plan is a trusteed, noncontributory, defined benefit
pension plan which covers substantially all employees. Pension benefits are
based on years of service and average final salary. PGE's funding policy is
to contribute an amount necessary to provide for benefits based on service to
date, as well as for benefits expected to be earned in the future by current
participants. To the extent that the present value of these obligations is
fully covered by assets in the trust, a contribution may not be made for a
particular year.
Net pension costs relative to the Water Business, including amounts
capitalized, was $288,000 in 1995. The following items were the components
of such net pension costs for the year 1995 (in thousands of dollars):
Present value of benefits earned during the year $ 351
Interest cost on projected benefit obligations 1,193
Return on plan assets (1,228)
Net amortization and deferral (28)
--------
Net pension cost $ 288
========
<PAGE> Page 22 FORM 8-K/A
The assumptions used in determining pension obligations for 1995 were:
Discount rate 7.00 %
Expected long-term rate of return on plan assets 9.00 %
Projected increase in future compensation levels 5.00 %
Under the terms of the Agreement regarding the sale of PGE's water
utility operations to Pennsylvania-American, on February 16, 1996,
Pennsylvania-American assumed the accumulated benefit obligations relating to
employees of PGE who accepted employment with Pennsylvania-American (the
"Transferred Employees"). In this regard, plan assets in an amount equal to
the actuarial present value of accumulated plan benefits relative to the
Transferred Employees, totaling an estimated $2.7 million at December 31,
1995, will be transferred to the AWWC pension plan.
Other Postretirement Benefits
In addition to pension benefits, PGE provides certain health care and
life insurance benefits for retired employees. Substantially all of PGE's
employees may become eligible for those benefits if they reach retirement age
while working for PGE. PGE records the cost of retiree health care and life
insurance benefits as a liability over the employees' active service periods
instead of on a benefits-paid basis.
The following items were the components of the net cost of postretirement
benefits other than pensions relative to the Water Business for the year 1995
(in thousands of dollars):
Present value of benefits earned during the year $ 103
Interest cost on accumulated benefit obligation 473
Return on plan assets (57)
Net amortization and deferral 320
--------
Net cost of postretirement benefits other than pensions 839
Less disbursements for benefits (453)
--------
Increase in liability for postretirement benefits other
than pensions $ 386
========
The assumptions used in determining other postretirement benefit
obligations for 1995 were:
Discount rate 7.00 %
Expected long-term rate of return on plan assets 9.00 %
Projected increase in future compensation levels 5.00 %
It was also assumed that the per capita cost of covered health care
benefits would increase at an annual rate of 9% in 1996 and that this rate
would decrease gradually to 5-1/2% for the year 2003 and remain at that level
thereafter. The health care cost trend rate assumption had a significant
effect on the amounts accrued. To illustrate, increasing the assumed health
care cost trend rate by 1 percentage point in each year would increase the
aggregate of the service and interest cost components of the net cost of
postretirement benefits other than pensions for the year 1995 by
approximately $50,000.
<PAGE> Page 23 FORM 8-K/A
Under the terms of the Agreement regarding the sale of PGE's water
utility operations to Pennsylvania-American, on February 16, 1996,
Pennsylvania-American assumed the accumulated benefit obligation relating to
the Transferred Employees, as well as 45% of PGE's retired employees as of
that date. In this regard, it is estimated that plan assets approximating
$1.4 million as of December 31, 1995, will be transferred to trusts
established by Pennsylvania-American to fund the accumulated plan benefits
relative to the Transferred Employees and 45% of PGE's retired employees as
of February 16, 1996.
Other Postemployment Benefits
In December, 1992, FASB Statement 112, "Employers' Accounting for
Postemployment Benefits," was issued. The provisions of this statement
require the recording of a liability for postemployment benefits (such as
disability benefits, including workers' compensation, salary continuation and
the continuation of benefits such as health care and life insurance) provided
to former or inactive employees, their beneficiaries and covered dependents.
(5) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of long-term debt was equal to its actual recorded value
on December 31, 1995, since such debt was assumed by Pennsylvania-American on
February 16, 1996, at its recorded value.
