<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Pennsylvania Enterprises, Inc.
-------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Pennsylvania Enterprises, Inc.
-------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_]$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2).
[_]$500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, no par value, stated value $10 per share
-------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
5,753,178 shares
-------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11:*
$71.12 per share (Proposed Sale Price / Number of Outstanding Shares)
-------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$409,143,000
-------------------------------------------------------------------
[X]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$81,829
-------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
-------------------------------------------------------------------
(3) Filing Party:
Pennsylvania Enterprises, Inc.
-------------------------------------------------------------------
(4) Date Filed:
June 21, 1995
-------------------------------------------------------------------
- --------
* The filing fee was calculated by taking one-fiftieth of one percent of
$409,143,000, which is equal to $81,829.
<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Pennsylvania Gas and Water Company
-------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Pennsylvania Gas and Water Company
-------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_]$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2).
[_]$500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Preferred Stock, par value $100 per share
-------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
367,600 shares
-------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11:
$1,112.71 per share (Proposed Sale Price / Number of Outstanding Shares)
-------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$409,143,000
-------------------------------------------------------------------
[X]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$81,829
-------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
-------------------------------------------------------------------
(3) Filing Party:
Pennsylvania Enterprises, Inc.*
-------------------------------------------------------------------
(4) Date Filed:
June 21, 1995
-------------------------------------------------------------------
- --------
* Pennsylvania Gas and Water Company is a wholly-owned subsidiary of
Pennsylvania Enterprises, Inc.
<PAGE>
[LOGO OF PENNSYLVANIA ENTERPRISES INC.
APPEARS HERE]
September 1, 1995
Dear PEI Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Pennsylvania Enterprises, Inc. ("PEI") to be held on October 11, 1995, at
10:00 a.m., at The Woodlands Inn & Resort, 1073 Highway 315, Wilkes-Barre,
Pennsylvania. At this important meeting you will be asked to approve the Asset
Purchase Agreement providing for the sale by PEI and Pennsylvania Gas and
Water Company ("PG&W") of PG&W's regulated water operations and certain
related assets (the "Sale of the Water Business") to Pennsylvania-American
Water Company ("PAWC"), a wholly-owned subsidiary of American Water Works
Company, Inc., for approximately $409 million (including debt assumed),
subject to adjustment. Immediately following the sale, PEI's and PG&W's
principal assets will consist of gas utility operations and approximately
46,000 acres of land.
The affirmative vote of a majority of the votes cast by all PEI Shareholders
at the PEI Special Meeting is required to approve the Asset Purchase Agreement
relating to the Sale of the Water Business. The written consent or affirmative
vote of the sole holder of the outstanding shares of PG&W common stock, and
the affirmative vote of the holders of a majority of the outstanding shares of
PG&W preferred stock, voting as a class, are also required to consummate the
Sale of the Water Business.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE SALE OF THE WATER BUSINESS IS FAIR
TO, AND IN THE BEST INTERESTS OF, PEI AND ITS SHAREHOLDERS. THE BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE ASSET PURCHASE AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE
ASSET PURCHASE AGREEMENT.
Legg Mason Wood Walker, Incorporated, PEI's financial advisor, has rendered
a written opinion to the Board of Directors of PEI that as of the date of the
Asset Purchase Agreement the consideration to be received by PG&W in the Sale
of the Water Business pursuant to the Asset Purchase Agreement is fair from a
financial point of view to the holders of PEI Common Stock and the holders of
PG&W Common and Preferred Stock. A copy of such opinion is attached as Annex B
to the Joint Proxy Statement and should be read in its entirety by the holders
of PEI Common Stock.
Important information regarding PEI, PG&W and the proposed Sale of the Water
Business is included in the attached Joint Proxy Statement of PEI and PG&W.
You are urged to read the Joint Proxy Statement carefully.
<PAGE>
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the Special Meeting
of PEI Shareholders, it is important that your shares be represented. Please
complete, sign and date your proxy card and return it in the enclosed envelope
as soon as possible. If, after voting your shares by proxy, you decide you
would rather vote them in person, you may do so at the meeting. All executed
but unmarked proxies received by PEI will be voted FOR the approval and
adoption of the Asset Purchase Agreement.
Sincerely,
/s/ Dean T. Casaday
Dean T. Casaday
President and Chief Executive Officer
2
<PAGE>
[LOGO OF PENNSYLVANIA GAS AND
WATER COMPANY APPEARS HERE]
September 1, 1995
Dear PG&W Preferred Shareholder:
You are cordially invited to attend a Special Meeting of holders of shares
of 4.10% Cumulative Preferred Stock, 1966 Cumulative Preferred Stock and 9%
Cumulative Preferred Stock of Pennsylvania Gas and Water Company ("PG&W") to
be held on October 11, 1995, at 11:00 a.m., at The Woodlands Inn & Resort,
1073 Highway 315, Wilkes-Barre, Pennsylvania. At this important meeting, you
will be asked to approve the Asset Purchase Agreement providing for the sale
by PG&W and Pennsylvania Enterprises, Inc. ("PEI") of PG&W's regulated water
operations and certain related assets (the "Sale of the Water Business") to
Pennsylvania-American Water Company ("PAWC"), a wholly-owned subsidiary of
American Water Works Company, Inc., for approximately $409 million (including
debt assumed), subject to adjustment. Immediately following the sale, PG&W's
and PEI's principal assets will consist of gas utility operations and
approximately 46,000 acres of land.
The Asset Purchase Agreement must be approved by the written consent or
affirmative vote of the sole holder of the outstanding shares of PG&W Common
Stock and the affirmative vote of a majority of the outstanding shares of PG&W
Preferred Stock, voting as a class. PG&W's 9% Cumulative Preferred Stock is
traded in the form of PG&W Depositary Preferred Shares, each of which
represents ownership of 1/4th of a share of 9% Cumulative Preferred Stock.
Chemical Bank, which serves as Depositary for the 9% Cumulative Preferred
Stock, will vote all PG&W Depositary Preferred Shares in accordance with the
instructions received from the holders of such shares.
The Asset Purchase Agreement must also be approved by the affirmative vote
of a majority of the votes cast by all holders of shares of PEI Common Stock
at the Special Meeting of PEI Shareholders to be held on October 11, 1995. If
the Asset Purchase Agreement is approved by the requisite vote of the holders
of PEI Common Stock and PG&W Preferred Stock, immediately following the PG&W
Special Meeting, PEI, as the sole holder of all the outstanding shares of PG&W
Common Stock, will execute a written consent approving the Asset Purchase
Agreement.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE SALE OF THE WATER BUSINESS IS FAIR
TO, AND IN THE BEST INTERESTS OF, PG&W AND ITS SHAREHOLDERS. THE BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE ASSET PURCHASE AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE
ASSET PURCHASE AGREEMENT.
Legg Mason Wood Walker, Incorporated, PG&W's financial advisor, has rendered
a written opinion to the Board of Directors of PG&W that as of the date of the
Asset Purchase Agreement the consideration to be received by PG&W in the Sale
of the Water Business pursuant to the Asset Purchase Agreement is fair from a
financial point of view to the holders of PG&W Common and Preferred Stock and
the holders of PEI Common
<PAGE>
Stock. A copy of such opinion is attached as Annex B to the Joint Proxy
Statement and should be read in its entirety by the holders of PG&W Preferred
Stock and PG&W Depositary Preferred Shares.
Important information regarding PG&W, PEI and the proposed Sale of the Water
Business is included in the attached Joint Proxy Statement of PG&W and PEI. You
are urged to read the Joint Proxy Statement carefully.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the Special Meeting
of PG&W Preferred Shareholders, it is important that your shares be
represented. Please complete, sign and date your proxy card and return it in
the enclosed envelope as soon as possible. PG&W Preferred Shareholders who have
voted their shares by proxy, but decide they would rather vote them in person,
may do so at the Special Meeting. Holders of PG&W Depositary Preferred Shares
who attend the PG&W Special Meeting may not vote their PG&W Depositary
Preferred Shares in person. All executed but unmarked proxies received by PG&W
will be voted FOR the approval and adoption of the Asset Purchase Agreement.
Sincerely,
/s/ Dean T. Casaday
Dean T. Casaday
President and Chief Executive Officer
2
<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
WILKES-BARRE CENTER
[LOGO OF 39 PUBLIC SQUARE
PENNSYLVANIA WILKES-BARRE, PENNSYLVANIA 18711-0601
ENTERPRISES, INC. TELEPHONE: (717) 829-8843
APPEARS HERE]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting (the "PEI Special Meeting") of
shareholders of Pennsylvania Enterprises, Inc., a Pennsylvania corporation
("PEI"), will be held at The Woodlands Inn & Resort, 1073 Highway 315, Wilkes-
Barre, Pennsylvania, on October 11, 1995, at 10:00 a.m., for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt an Asset
Purchase Agreement, dated as of April 26, 1995 (the "Asset Purchase
Agreement"), among PEI, Pennsylvania Gas and Water Company ("PG&W"),
American Water Works Company, Inc. ("AWWC"), and Pennsylvania-American
Water Company ("PAWC"), pursuant to which PG&W will sell to PAWC its
regulated water operations and certain related assets (the "Sale of the
Water Business"), as more fully described in the attached Joint Proxy
Statement of PEI and PG&W. A conformed copy of the Asset Purchase Agreement
is attached to this Joint Proxy Statement as Annex A; and
2. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The Asset Purchase Agreement must be approved by the affirmative vote of a
majority of the votes cast by all PEI Shareholders at the PEI Special Meeting.
The Asset Purchase Agreement must also be approved by the written consent or
affirmative vote of the sole holder of the outstanding shares of PG&W Common
Stock, and the affirmative vote of a majority of the outstanding shares of
PG&W Preferred Stock, voting as a class.
The Board of Directors has fixed the close of business on August 30, 1995,
as the record date for the determination of holders of PEI Common Stock
entitled to notice of and to vote at the meeting.
Please read the attached Joint Proxy Statement carefully.
Holders of PEI Common Stock do not have statutory appraisal or dissenters
rights with respect to the Asset Purchase Agreement.
If you plan to attend the PEI Special Meeting and are a shareholder of
record, please mark your proxy card in the appropriate space. An admission
ticket will be mailed to you prior to the meeting date. However, if your
shares are not registered in your own name, please advise the shareholder of
record (your bank, broker, etc.) that you wish to attend. That firm will
provide you with the evidence of your ownership that will enable you to gain
admittance to the meeting.
Whether you plan to attend the PEI Special Meeting or not, please sign and
date the enclosed proxy and return it promptly by mail in the enclosed
envelope. No postage is required if mailed in the United States. If you attend
the PEI Special Meeting, you may vote either in person or by your proxy. All
executed but unmarked proxies received by PEI will be voted FOR the approval
and adoption of the Asset Purchase Agreement.
Proxies with respect to PEI Common Stock may be revoked by filing with the
Secretary of PEI written notice of revocation bearing a later date than the
proxy, by duly executing a later-dated proxy relating to the same PEI Common
Stock or by attending the PEI Special Meeting and voting in person (although
attendance at the PEI Special Meeting will not in and of itself constitute
revocation of a proxy). Any written notice with respect to PEI Common Stock
must be sent to Secretary, Pennsylvania Enterprises, Inc., Wilkes-Barre
Center, 39 Public Square, Wilkes-Barre, Pennsylvania 18711-0601.
By order of the Board of Directors,
/s/ Thomas J. Ward
Thomas J. Ward,
Secretary
Wilkes-Barre, Pennsylvania
September 1, 1995
- -------------------------------------------------------------------------------
IMPORTANT
SHAREHOLDERS CAN HELP AVOID THE NECESSITY AND EXPENSE OF FOLLOW-UP LETTERS
TO ASSURE THAT A QUORUM IS PRESENT AT THE PEI SPECIAL MEETING BY PROMPTLY
RETURNING THE ENCLOSED PROXY. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
- -------------------------------------------------------------------------------
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
[LOGO OF WILKES-BARRE CENTER
PENNSYLVANIA 39 PUBLIC SQUARE
GAS AND WATER WILKES-BARRE, PENNSYLVANIA 18711-0601
COMPANY TELEPHONE: (717) 829-8843
APPEARS HERE]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting (the "PG&W Special Meeting")
of the holders (the "PG&W Preferred Shareholders") of shares of 4.10%
Cumulative Preferred Stock, 1966 Cumulative Preferred Stock and 9% Cumulative
Preferred Stock (collectively, the "PG&W Preferred Stock") of Pennsylvania Gas
and Water Company, a Pennsylvania corporation ("PG&W"), will be held at The
Woodlands Inn & Resort, 1073 Highway 315, Wilkes-Barre, Pennsylvania, on
October 11, 1995, at 11:00 a.m., for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Asset
Purchase Agreement, dated as of April 26, 1995 (the "Asset Purchase
Agreement"), among Pennsylvania Enterprises, Inc. ("PEI"), PG&W, American
Water Works Company, Inc. ("AWWC"), and Pennsylvania-American Water Company
("PAWC") pursuant to which PG&W will sell to PAWC its regulated water
operations and certain related assets (the "Sale of the Water Business"),
as more fully described in the attached Joint Proxy Statement of PG&W and
PEI. A conformed copy of the Asset Purchase Agreement is attached to this
Joint Proxy Statement as Annex A; and
2. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The Asset Purchase Agreement must be approved by the written consent or
affirmative vote of the sole holder of the outstanding shares of PG&W Common
Stock and the affirmative vote of a majority of the outstanding shares of PG&W
Preferred Stock, voting as a class. PG&W's 9% Cumulative Preferred Stock is
traded in the form of PG&W Depositary Preferred Shares, each of which
represents ownership of 1/4th of a share of PG&W's 9% Cumulative Preferred
Stock. Chemical Bank, which serves as Depositary (the "Depositary") for the
PG&W 9% Cumulative Preferred Stock, will vote all PG&W Depositary Preferred
Shares in accordance with the instructions received from the holders of such
shares.
The Asset Purchase Agreement must also be approved by the affirmative vote
of a majority of the votes cast by all holders of shares of PEI Common Stock
at the PEI Special Meeting of Shareholders to be held on October 11, 1995. If
the Asset Purchase Agreement is approved by the requisite vote of the holders
of PEI Common Stock and PG&W Preferred Stock immediately following the PG&W
Special Meeting, PEI, as the sole holder of all of the outstanding shares of
PG&W Common Stock, will execute a written consent approving the Asset Purchase
Agreement.
The Board of Directors has fixed the close of business on August 30, 1995,
as the record date for the determination of holders of PG&W Preferred Stock
entitled to notice of and to vote at the meeting.
Please read the attached Joint Proxy Statement carefully.
PG&W Preferred Shareholders and holders of PG&W Depositary Preferred Shares
who do not vote in favor of the approval of the Asset Purchase Agreement and
otherwise comply with the provisions of the Pennsylvania Business Corporation
Law will have the right, if the Sale of the Water Business is consummated, to
dissent from the Sale of the Water Business and seek payment of the fair value
of their shares of PG&W Preferred Stock or PG&W Depositary Preferred Shares,
as the case may be. See "Dissenters Rights--PG&W Preferred Shareholders" in
the attached Joint Proxy Statement and Annex C thereto, for a description of
the procedures to be followed in order to perfect such dissenters rights.
<PAGE>
If you plan to attend the PG&W Special Meeting and are a shareholder of
record, please mark your proxy card in the appropriate space. An admission
ticket will be mailed to you prior to the meeting date. If your shares are not
registered in your own name, please advise the shareholder of record (your
bank, broker, etc.) that you wish to attend. That firm will provide you with
evidence of your ownership that will enable you to gain admittance to the
meeting. If you are a holder of PG&W Depositary Preferred Shares, please
advise the Depositary that you wish to attend. The Depositary will provide you
with evidence of your ownership that will enable you to gain admittance to the
PG&W Special Meeting.
Whether you plan to attend the PG&W Special Meeting or not, please sign and
date the enclosed proxy and return it promptly by mail in the enclosed
envelope. No postage is required if mailed in the United States. PG&W
Preferred Shareholders who attend the meeting, may vote either in person or by
proxy. Holders of PG&W Depositary Preferred Shares who attend the PG&W Special
Meeting may not vote their PG&W Depositary Preferred Shares in person. All
executed but unmarked proxies received by PG&W will be voted FOR the approval
and adoption of the Asset Purchase Agreement.
Proxies with respect to shares of PG&W's 4.10% Cumulative Preferred Stock or
PG&W's 1966 Cumulative Preferred Stock may be revoked by filing with the
Secretary of PG&W written notice of revocation bearing a later date than the
proxy, by duly executing a later-dated proxy relating to the same shares of
PG&W's 4.10% Cumulative Preferred Stock or PG&W's 1966 Cumulative Preferred
Stock or by attending the PG&W Special Meeting and voting in person (although
attendance at the PG&W Special Meeting will not in and of itself constitute
revocation of a proxy). Any written notice revoking a proxy with respect to
PG&W's 4.10% Cumulative Preferred Stock or PG&W's 1966 Cumulative Preferred
Stock must be sent to Secretary, Pennsylvania Gas and Water Company, Wilkes-
Barre Center, 39 Public Square, Wilkes-Barre, Pennsylvania 18711-0601. Proxies
with respect to PG&W Depositary Preferred Shares may be revoked by filing with
the Depositary written notice of revocation bearing a later date than the
proxy or by duly executing a later-dated proxy relating to the same PG&W
Depositary Preferred Shares. Any written notice revoking a proxy with respect
to the PG&W Depositary Preferred Shares must be sent to Chemical Mellon
Shareholder Services, Stock Transfer Administration--Vice President, 450 West
33rd Street, New York, New York 10001.
By order of the Board of Directors,
/s/ Thomas J. Ward
Thomas J. Ward,
Secretary
Wilkes-Barre, Pennsylvania
September 1, 1995
- -------------------------------------------------------------------------------
IMPORTANT
SHAREHOLDERS CAN HELP AVOID THE NECESSITY AND EXPENSE OF FOLLOW-UP LETTERS
TO ASSURE THAT A QUORUM IS PRESENT AT THE PG&W SPECIAL MEETING BY PROMPTLY
RETURNING THE ENCLOSED PROXY. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
- -------------------------------------------------------------------------------
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY
The Parties............................................................. 1
PEI and PG&W.......................................................... 1
AWWC and PAWC......................................................... 1
Shareholder Meetings.................................................... 1
PEI................................................................... 1
PG&W.................................................................. 1
Voting.................................................................. 2
Solicitation, Revocation and Use of Proxies............................. 2
PEI Shareholders...................................................... 2
PG&W Preferred Shareholders........................................... 3
The Proposed Sale of the Water Business................................. 3
General............................................................... 3
Reasons for the Sale of the Water Business............................ 3
Recommendations of the PEI and PG&W Boards of Directors............... 4
Conditions to Consummation of the Sale of the Water Business; Regula-
tory Approvals....................................................... 4
Employees............................................................. 4
Termination of Asset Purchase Agreement............................... 4
Termination Payments and Expense Reimbursement........................ 4
Opinion of Financial Advisor............................................ 5
Accounting Treatment.................................................... 5
Dissenters Rights....................................................... 5
Federal Income Tax Consequences......................................... 5
PEI Summary Consolidated Financial Data................................. 6
PG&W Summary Financial Data............................................. 7
PEI and PG&W Unaudited Pro Forma Financial Information.................. 8
PEI SPECIAL MEETING....................................................... 9
Purpose of Meeting...................................................... 9
Date, Time and Place of Meeting......................................... 9
Record Date; Shareholders Entitled to Vote and Required Vote............ 9
Solicitation, Revocation and Use of Proxies............................. 9
No Dissenters Rights.................................................... 10
Shareholder Proposals................................................... 10
Other Business.......................................................... 10
Trading Market for and Market Price of PEI Common Stock................. 10
PG&W SPECIAL MEETING...................................................... 11
Purpose of Meeting...................................................... 11
Date, Time and Place of Meeting......................................... 11
Record Date; Shareholders Entitled to Vote and Required Vote............ 11
Solicitation, Revocation and Use of Proxies............................. 12
Dissenters Rights....................................................... 12
Shareholder Proposals................................................... 13
Other Business.......................................................... 13
Trading Market for and Market Price of PG&W Preferred Stock............. 13
SPECIAL FACTORS........................................................... 14
Background of and Reasons for the Sale of the Water Business............ 14
Recommendations of the PEI and PG&W Boards of Directors................. 17
Opinion of PEI and PG&W Financial Advisor............................... 17
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Preliminary Legg Mason Report......................................... 18
Legg Mason Report..................................................... 19
Analysis of Consideration to be Received by PG&W...................... 19
Projections........................................................... 19
Comparable Public Company Methodology................................. 19
Comparable Acquisition Transaction Methodology........................ 20
Discounted Cash Flow Methodology...................................... 21
Accounting Treatment.................................................... 22
Federal Income Tax Consequences......................................... 22
Federal Income Tax Consequences to PEI Shareholders and PG&W Preferred
Shareholders......................................................... 22
Federal Income Tax Consequences to PEI and PG&W....................... 22
THE SALE OF THE WATER BUSINESS........................................... 23
Basic Terms of the Asset Purchase Agreement............................. 23
Description of the Assets Sold and Liabilities Assumed................ 23
Purchase Price........................................................ 24
Post-Closing Adjustment............................................... 24
Conditions to Sale.................................................... 24
Certain Covenants..................................................... 26
Employees............................................................. 27
Representations and Warranties........................................ 27
Amendments and Termination............................................ 28
Termination Payments and Expense Reimbursements....................... 28
Regulatory Filings and Approvals........................................ 28
Transactions Between PG&W and PAWC After the Sale of the Water Business. 29
USE OF CERTAIN PROCEEDS OF THE SALE OF THE WATER BUSINESS................. 30
DISSENTERS RIGHTS......................................................... 31
PG&W Preferred Shareholders............................................. 31
PEI SELECTED CONSOLIDATED FINANCIAL DATA.................................. 34
PEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 36
Discontinued Operations................................................. 36
Results of Continuing Operations........................................ 38
Six Months Ended June 30, 1995, Compared With Six Months Ended June
30, 1994............................................................. 38
Year Ended December 31, 1994, Compared With Year Ended December 31,
1993................................................................. 40
Year Ended December 31, 1993, Compared With Year Ended December 31,
1992................................................................. 41
Rate Matters............................................................ 43
Rate Filings.......................................................... 43
Effects of Inflation.................................................. 43
Liquidity and Capital Resources......................................... 44
Liquidity............................................................. 44
Interim Financing Practices........................................... 44
Current Maturities of Long-Term Debt and Preferred Stock.............. 44
Long-Term Debt and Capital Stock Financings........................... 45
Construction Expenditures and Related Financing....................... 46
Long-Lived Assets..................................................... 46
PEI UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS................. 47
PG&W SELECTED FINANCIAL DATA.............................................. 55
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PG&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 57
Discontinued Operations................................................. 57
Results of Continuing Operations........................................ 59
Six Months Ended June 30, 1995, Compared With Six Months Ended June
30, 1994............................................................. 59
Year Ended December 31, 1994, Compared With Year Ended December 31,
1993................................................................. 61
Year Ended December 31, 1993, Compared With Year Ended December 31,
1992................................................................. 62
Rate Matters............................................................ 64
Rate Filings.......................................................... 64
Effects of Inflation.................................................. 64
Liquidity and Capital Resources......................................... 64
Liquidity............................................................. 64
Interim Financing Practices........................................... 64
Current Maturities of Long-Term Debt and Preferred Stock.............. 64
Long-Term Debt and Capital Stock Financings........................... 64
Construction Expenditures and Related Financing....................... 65
Long-Lived Assets..................................................... 65
PG&W UNAUDITED PRO FORMA FINANCIAL STATEMENTS............................. 66
DESCRIPTION OF PROPERTY TO BE SOLD........................................ 74
PRINCIPAL HOLDERS OF PEI COMMON STOCK AND PG&W PREFERRED STOCK............ 74
SECURITY OWNERSHIP OF PEI AND PG&W MANAGEMENT............................. 74
INDEPENDENT PUBLIC ACCOUNTANTS OF PEI AND PG&W............................ 75
INCORPORATION BY REFERENCE................................................ 76
INDEX TO FINANCIAL STATEMENTS OF PEI AND PG&W............................. F-1
CONSOLIDATED FINANCIAL STATEMENTS OF PEI.................................. F-3
FINANCIAL STATEMENTS OF PG&W.............................................. F-36
ANNEXES:
A. Asset Purchase Agreement
B. Opinion of Legg Mason Wood Walker, Incorporated with respect to the
Sale of the Water Business
C. Sections 1571-1580 and Section 1932 of the Pennsylvania Business
Corporation Law relating to dissenters right
</TABLE>
iii
<PAGE>
SUMMARY
The following is a summary of certain information contained in this Joint
Proxy Statement. This summary is not intended to be complete and is qualified
in its entirety by the more detailed information and financial statements
contained elsewhere in this Joint Proxy Statement and the attached Annexes and
the information which is incorporated herein by reference, all of which are
important and should be reviewed carefully. Capitalized terms used herein
without definition have the meanings ascribed to them elsewhere in this Joint
Proxy Statement.
THE PARTIES.
PEI and PG&W. Pennsylvania Enterprises, Inc. ("PEI") is a holding company
which, through its principal subsidiary, Pennsylvania Gas and Water Company
("PG&W"), is engaged in the distribution of natural gas and water. As of August
1, 1995, PG&W had approximately 139,700 gas customers and 133,100 water
customers in northeastern Pennsylvania, including the cities of Scranton and
Wilkes-Barre. PEI is an exempt public holding company within the meaning of the
Public Utility Holding Company Act of 1935, as amended. PG&W's gas and water
businesses are regulated by the Pennsylvania Public Utility Commission (the
"PPUC"). PEI and PG&W are incorporated in Pennsylvania, with headquarters at
Wilkes-Barre Center, 39 Public Square, Wilkes-Barre, Pennsylvania, 18711-0601,
(717) 829-8843.
AWWC and PAWC. American Water Works Company, Inc. ("AWWC") is a holding
company which, through its regulated subsidiary companies, is primarily engaged
in the business of providing water supply services. As of December 31, 1994,
AWWC and its subsidiaries on a consolidated basis had assets of approximately
$3.2 billion. For the year ended December 31, 1994, AWWC's consolidated
operating revenues were approximately $770 million and its consolidated net
income was approximately $78.6 million. As of August 1, 1995, AWWC, through 23
subsidiaries, provided water service to approximately 1.7 million customers in
21 states. Pennsylvania-American Water Company ("PAWC") is a wholly-owned
subsidiary of AWWC and is engaged in the distribution of water to customers in
Pennsylvania. PAWC is regulated by the PPUC. As of August 1, 1995, PAWC had
approximately 385,900 customers in Pennsylvania. AWWC is incorporated in
Delaware. AWWC's headquarters are located at Corporate Center, 1025 Laurel Oak
Road, Voorhees, New Jersey, 08043, (609) 346-8200. PAWC is incorporated in
Pennsylvania. PAWC's headquarters are located at 800 West Hershey Park Drive,
Hershey, Pennsylvania 17033, (717) 533-5000.
SHAREHOLDER MEETINGS.
PEI. A special meeting (including any adjournments thereof, the "PEI Special
Meeting") of holders of PEI Common Stock (the "PEI Shareholders") will be held
at The Woodlands Inn & Resort, 1073 Highway 315, Wilkes-Barre, Pennsylvania on
October 11, 1995, at 10:00 a.m. At the PEI Special Meeting, action will be
taken on the following matters:
1. To consider and vote upon a proposal to approve and adopt an Asset
Purchase Agreement dated as of April 26, 1995, among PEI, PG&W, AWWC and
PAWC (the "Asset Purchase Agreement"), pursuant to which PG&W will sell to
PAWC its regulated water operations and certain related assets (the "Sale
of the Water Business");
2. To transact such other business as may properly come before the PEI
Special Meeting.
See "PEI SPECIAL MEETING--Purpose of Meeting" and "--Date, Time and Place of
Meeting."
PG&W. A special meeting (including any adjournments thereof, the "PG&W
Special Meeting") of the holders (the "PG&W Preferred Shareholders") of PG&W
Preferred Stock and PG&W Depositary Preferred
1
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Shares will be held at The Woodlands Inn & Resort, 1073 Highway 315, Wilkes-
Barre, Pennsylvania on October 11, 1995, at 11:00 a.m. At the PG&W Special
Meeting, action will be taken on the following matters:
1. To consider and vote upon a proposal to approve and adopt the Asset
Purchase Agreement, pursuant to which the Sale of the Water Business will
be consummated;
2. To transact such other business as may properly come before the PG&W
Special Meeting.
See "PG&W SPECIAL MEETING--Purpose of Meeting" and "--Date, Time and Place of
Meeting."
VOTING.
Only holders of record of PEI Common Stock at the close of business on August
30, 1995, are entitled to notice of and to vote at the PEI Special Meeting. The
presence in person or by proxy of a majority of the outstanding shares of PEI
Common Stock is necessary to constitute a quorum at the PEI Special Meeting. If
there are insufficient votes to constitute a quorum, the PEI Special Meeting
may be adjourned in order to permit further solicitation of proxies. Broker
non-votes, abstentions and withhold authority votes all count for the purpose
of determining a quorum. At the PEI Special Meeting, each PEI Shareholder is
entitled to one vote for each share of PEI Common Stock held. The affirmative
vote of a majority of the votes cast by all PEI Shareholders at the PEI Special
Meeting is required to approve the Asset Purchase Agreement. See "PEI SPECIAL
MEETING--Record Date; Shareholders Entitled to Vote and Required Vote."
Only holders of record of PG&W Preferred Stock and PG&W Depositary Preferred
Shares at the close of business on August 30, 1995, are entitled to notice of
and to vote at the PG&W Special Meeting. The presence in person or by proxy of
a majority of the outstanding shares of PG&W Preferred Stock is necessary to
constitute a quorum at the PG&W Special Meeting. If there are insufficient
votes to constitute a quorum, the PG&W Special Meeting may be adjourned in
order to permit further solicitation of proxies. Broker non-votes, abstentions,
and withhold authority votes all count for the purpose of determining a quorum.
At the discretion of the Depositary, Depositary non-votes will count for the
purpose of determining a quorum.
At the PG&W Special Meeting, each holder of PG&W Preferred Stock is entitled
to one vote for each share held. Each holder of PG&W Depositary Preferred
Shares, each representing a 1/4th interest in a share of PG&W 9% Cumulative
Preferred Stock, is entitled to 1/4th vote for each PG&W Depositary Preferred
Share held. Chemical Bank, which serves as Depositary for PG&W's 9% Cumulative
Preferred Stock (the "Depositary"), will vote PG&W Depositary Preferred Shares
in accordance with the instructions received from the holders of such shares.
The votes of the PG&W Depositary Preferred Shares will be aggregated and voted
by the Depositary by means of a vote of the PG&W's 9% Cumulative Preferred
Stock. The Depositary may not vote any shares of PG&W's 9% Cumulative Preferred
Stock absent instructions received from holders of PG&W Depositary Preferred
Shares. Holders of PG&W Depositary Preferred Shares may not vote their PG&W
Depositary Preferred Shares in person at the PG&W Special Meeting.
The affirmative vote of a majority of the outstanding shares of PG&W
Preferred Stock is required to approve the Asset Purchase Agreement. The
written consent or affirmative vote of the sole holder of shares of Common
Stock, no par value, stated value, $10.00 per share, of PG&W ("PG&W Common
Stock"), is also required to approve the Asset Purchase Agreement. See "PG&W
SPECIAL MEETING--Record Date; Shareholders Entitled to Vote and Required Vote."
SOLICITATION, REVOCATION AND USE OF PROXIES.
PEI Shareholders. All holders of PEI Common Stock represented at the PEI
Special Meeting by properly executed proxies received prior to or at the PEI
Special Meeting, unless such proxies previously have been revoked, will be
voted at the PEI Special Meeting in accordance with the instructions on the
proxies. If no contrary instructions are indicated, such proxies will be voted
FOR the approval and adoption of the Asset Purchase Agreement.
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Pennsylvania law provides that a proxy, unless coupled with an interest (for
example, a vote pooling or similar arrangement among PEI Shareholders; certain
agreements among PEI Shareholders regarding the voting of their shares of PEI
Common Stock; or an unrevoked proxy in favor of an existing or potential
creditor of a PEI Shareholder), is revocable at will by a shareholder,
notwithstanding any other agreement or any provision in the proxy to the
contrary. Proxies with respect to PEI Common Stock may be revoked by filing
with the Secretary of PEI written notice of revocation bearing a later date
than the proxy, by duly executing a later-dated proxy relating to the same PEI
Common Stock or by attending the PEI Special Meeting and voting in person
(although attendance at the PEI Special Meeting will not in and of itself
constitute revocation of a proxy). Any written notice revoking a proxy with
respect to PEI Common Stock must be sent to Secretary, Pennsylvania
Enterprises, Inc., Wilkes-Barre Center, 39 Public Square, Wilkes-Barre,
Pennsylvania 18711-0601. See "PEI SPECIAL MEETING--Solicitation, Revocation and
Use of Proxies."
PG&W Preferred Shareholders. All holders of PG&W Preferred Stock represented
at the PG&W Special Meeting by properly executed proxies received prior to or
at the PG&W Special Meeting, unless such proxies previously have been revoked,
will be voted at the PG&W Special Meeting in accordance with the instructions
on the proxies. If no contrary instructions are indicated, such proxies will be
voted FOR the approval and adoption of the Asset Purchase Agreement.
Pennsylvania law provides that a proxy, unless coupled with an interest (for
example, a vote pooling or similar arrangement among PG&W Preferred
Shareholders; certain agreements among PG&W Preferred Shareholders regarding
the voting of their shares of PG&W Preferred Stock or PG&W Depositary Preferred
Shares; or an unrevoked proxy in favor of an existing or potential creditor of
a PG&W Preferred Shareholder), is revocable at will by a shareholder,
notwithstanding any other agreement or provision in the proxy to the contrary.
Proxies with respect to shares of PG&W's 4.10% Cumulative Preferred Stock or
PG&W's 1966 Cumulative Preferred Stock may be revoked by filing with the
Secretary of PG&W written notice of revocation bearing a later date than the
proxy, by duly executing a later-dated proxy relating to the same shares of
PG&W's 4.10% Cumulative Preferred Stock or PG&W's 1966 Cumulative Preferred
Stock or by attending the PG&W Special Meeting and voting in person (although
attendance at the PG&W Special Meeting will not in and of itself constitute
revocation of a proxy). Any written notice revoking a proxy with respect to
shares of PG&W's 4.10% Cumulative Preferred Stock or PG&W's 1966 Cumulative
Preferred Stock must be sent to Secretary, Pennsylvania Gas and Water Company,
Wilkes-Barre Center, 39 Public Square, Wilkes-Barre, Pennsylvania 18711-0601.
Proxies with respect to PG&W Depositary Preferred Shares may be revoked by
filing with the Depositary written notice of revocation bearing a later date
than the proxy or by duly executing a later-dated proxy relating to the same
PG&W Depositary Preferred Shares. Any written notice revoking a proxy with
respect to PG&W Depositary Preferred Shares must be sent to Chemical Mellon
Shareholder Services, Stock Transfer Administration--Vice President, 450 West
33rd Street, New York, New York 10001. See "PG&W SPECIAL MEETING--Solicitation,
Revocation and Use of Proxies."
THE PROPOSED SALE OF THE WATER BUSINESS.
General. Under the terms of the Asset Purchase Agreement, PEI has agreed to
cause PG&W to sell to PAWC all of PG&W's regulated water operations and certain
related assets (the "Water Business"), including 10 water treatment plants, 36
reservoirs and approximately 7,000 acres of watershed land for $409,143,000
(including debt assumed), subject to adjustment. See "THE SALE OF THE WATER
BUSINESS--Basic Terms of the Asset Purchase Agreement--Description of Assets
Sold and Liabilities Assumed."
Reasons for the Sale of the Water Business. The respective Boards of
Directors of PEI and PG&W have unanimously approved the Asset Purchase
Agreement and believe that it is in the best interests of the respective
shareholders, employees and customers of PEI and PG&W. For a further discussion
of the factors considered in the recommendation of the respective Boards of
Directors of PEI and PG&W with respect to the Sale of the Water Business, see
"SPECIAL FACTORS--Background of and Reasons for the Sale of the Water Business"
and "--Recommendations of the PEI and PG&W Boards of Directors."
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RECOMMENDATIONS OF THE PEI AND PG&W BOARDS OF DIRECTORS
THE BOARD OF DIRECTORS OF PEI BELIEVES THAT THE SALE OF THE WATER BUSINESS IS
FAIR TO, AND IN THE BEST INTERESTS OF, PEI AND THE PEI SHAREHOLDERS. THE BOARD
OF DIRECTORS OF PEI HAS UNANIMOUSLY APPROVED THE TERMS OF THE ASSET PURCHASE
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE PEI SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE ASSET PURCHASE AGREEMENT.
THE BOARD OF DIRECTORS OF PG&W BELIEVES THAT THE SALE OF THE WATER BUSINESS
IS FAIR TO, AND IN THE BEST INTERESTS OF, PG&W AND THE PG&W PREFERRED
SHAREHOLDERS. THE BOARD OF DIRECTORS OF PG&W HAS UNANIMOUSLY APPROVED THE TERMS
OF THE ASSET PURCHASE AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT PG&W PREFERRED
SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE ASSET PURCHASE AGREEMENT.
SEE "SPECIAL FACTORS--RECOMMENDATIONS OF THE BOARDS OF DIRECTORS OF PEI AND
PG&W."
Conditions to Consummation of the Sale of the Water Business; Regulatory
Approvals. The obligation of each of PEI, PG&W, AWWC and PAWC to consummate the
Sale of the Water Business is subject, among other conditions, to (i) the
receipt of certain regulatory approvals, including the approval of the PPUC,
(ii) the receipt of certain other consents including, without limitation, the
consent to the assignment of certain contracts from PG&W to PAWC, (iii) the
approval of the Asset Purchase Agreement by the PEI Shareholders and the PG&W
Preferred Shareholders, (iv) the receipt of the consent of the holders of
certain indebtedness of PG&W and PEI, including, without limitation, (a) the
holders of no less than 60% of the aggregate principal amount of (x) PG&W's
First Mortgage Bonds 9.23% Series due 1999, PG&W's First Mortgage Bonds 9.34%
Series due 2019 and PG&W's First Mortgage Bonds 8.375% Series due 2002, voting
as one class and (y) PG&W's First Mortgage Bonds 7.20% Series due 2017, PG&W's
First Mortgage Bonds 7.125% Series due 2022, PG&W's First Mortgage Bonds 6.05%
Series due 2019 and PG&W's First Mortgage Bonds 7% Series due 2017, voting as
one class and (b) the holders of a majority of each of four series of Luzerne
County Industrial Development Authority Exempt Facilities Revenue Bonds, and
(v) certain other conditions. See "THE SALE OF THE WATER BUSINESS--Basic Terms
of the Asset Purchase Agreement--Conditions to Sale."
Employees. PAWC has agreed to offer employment to at least 294 individuals
who are currently employed by PG&W and to assume certain liabilities with
respect to such employees. See "THE SALE OF THE WATER BUSINESS--Basic Terms of
the Asset Purchase Agreement--Employees."
Termination of Asset Purchase Agreement. The Asset Purchase Agreement may be
terminated for certain reasons, including, but not limited to, (i) the failure
of the closing of the transactions contemplated by the Asset Purchase Agreement
to have occurred on or prior to April 26, 1996, (ii) the receipt by PEI or PG&W
of a proposal to acquire all or most of the assets of PEI or PG&W or at least a
majority of the outstanding voting securities of PEI or PG&W (or a proposal to
acquire an option to acquire any of the foregoing), which PEI's Board of
Directors determines in good faith to be more favorable to the PEI Shareholders
than the transactions contemplated by the Asset Purchase Agreement, (iii) a
failure by PEI or PG&W to obtain the approval of the PEI Shareholders and the
PG&W Preferred Shareholders of the Asset Purchase Agreement at the PEI Special
Meeting and the PG&W Special Meeting or (iv) a failure by PG&W and PAWC to
resolve any disputes with respect to the survey of the real property to be sold
to PAWC which survey is required to be performed prior to the Closing. See "THE
SALE OF THE WATER BUSINESS--Basic Terms of the Asset Purchase Agreement--
Amendments and Termination."
Termination Payments and Expense Reimbursement. If (i) PEI or PG&W terminates
the Asset Purchase Agreement after receiving a proposal to acquire all or most
of the assets of PEI or PG&W or the Water Business or at least a majority of
the outstanding voting securities of PEI or PG&W (or a proposal to acquire an
option to acquire any of the foregoing) which the Board of Directors of PEI
determines in good faith to be more favorable to the PEI Shareholders than the
transactions contemplated by the Asset Purchase Agreement, or (ii) any party to
the Asset Purchase Agreement terminates the Asset Purchase Agreement because
the Asset Purchase Agreement is not approved by the PEI Shareholders or the
PG&W Preferred Shareholders and within 3 months after the date of such
termination PEI or PG&W enters into a letter of intent or definitive agreement
with any person or
4
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group of persons other than AWWC or its affiliates concerning any acquisition,
merger, consolidation or other similar transaction that would result in the
transfer to such person or group of persons of at least 10% of the assets to be
acquired by PAWC pursuant to the Asset Purchase Agreement or any other
transaction if that transaction would be inconsistent with PEI's or PG&W's
obligations under the Asset Purchase Agreement (a "Competing Transaction") or
consummates a Competing Transaction or (iii) if AWWC or PAWC terminates the
Asset Purchase Agreement due to either (a) PEI's or PG&W's breach of certain of
its obligations with respect to this Joint Proxy Statement which are not cured
or (b) the withdrawal by the Board of Directors of PEI or PG&W of its
recommendation in favor of the transactions contemplated by the Asset Purchase
Agreement and if PEI enters into a letter of intent or definitive agreement
with respect to a Competing Transaction or consummates a Competing Transaction
within 6 months of such termination, PG&W has agreed to pay to PAWC a breakup
fee of $9,000,000 and to reimburse PAWC for all reasonable out-of-pocket
expenses (up to $1,500,000) incurred by PAWC and AWWC in connection with the
transactions contemplated by the Asset Purchase Agreement. See "SALE OF THE
WATER BUSINESS--Basic Terms of the Asset Purchase Agreement--Termination
Payments and Expense Reimbursements."
OPINION OF FINANCIAL ADVISOR.
PEI has retained Legg Mason Wood Walker, Incorporated ("Legg Mason") as
financial advisor for itself and PG&W in connection with the Sale of the Water
Business. Legg Mason has delivered to the Boards of Directors of PEI and PG&W
its written opinion that as of the date of the Asset Purchase Agreement the
consideration to be received by PG&W pursuant to the Sale of the Water Business
is fair to the PEI Shareholders, the PG&W Common Shareholder and the PG&W
Preferred Shareholders, from a financial point of view. A copy of such opinion
is attached as Annex B to this Joint Proxy Statement and should be read in its
entirety by the PEI Shareholders and the PG&W Preferred Shareholders. See
"SPECIAL FACTORS--Opinion of Financial Advisor."
ACCOUNTING TREATMENT.
The Sale of the Water Business will result in the disposal of a business
segment for financial reporting purposes by each of PEI and PG&W. In accordance
with generally accepted accounting principles, the estimated loss of $5.8
million on the Sale of the Water Business net of the anticipated income of $6.9
million from the Water Business during the phase-out period (assuming that the
Closing occurs on December 31, 1995) was recorded as of March 31, 1995, and the
financial statements of both PEI and PG&W for 1994 and prior years have been
restated to reflect the operations of the Water Business as "discontinued
operations." See "SPECIAL FACTORS--Accounting Treatment."
DISSENTERS RIGHTS.
PEI Shareholders. PEI Shareholders do not have dissenters rights with respect
to the Asset Purchase Agreement. See "PEI SPECIAL MEETING--Dissenters Rights."
PG&W Preferred Shareholders. PG&W Preferred Shareholders and holders of PG&W
Depositary Preferred Shares who do not vote in favor of the approval of the
Asset Purchase Agreement and otherwise comply with the provisions of the
Pennsylvania Business Corporation Law will have the right, if the Sale of the
Water Business is consummated, to dissent from the Sale of the Water Business
and seek payment of the fair value of their shares of PG&W Preferred Stock. See
"PG&W SPECIAL MEETING--Dissenters Rights" and "DISSENTERS RIGHTS--PG&W
Preferred Shareholders."
FEDERAL INCOME TAX CONSEQUENCES.
The consummation of the Sale of the Water Business pursuant to the Asset
Purchase Agreement will not have any federal income tax consequences to PEI
Shareholders or PG&W Preferred Shareholders, but will be a taxable transaction
to PG&W. See "SPECIAL FACTORS--Federal Income Tax Consequences."
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PEI SUMMARY CONSOLIDATED FINANCIAL DATA.
The summary consolidated financial data set forth below have been derived
from PEI's unaudited consolidated financial statements as restated to reflect
PG&W's water utility operations as "discontinued operations" effective March
31, 1995. IN PREPARING THIS SUMMARY CONSOLIDATED FINANCIAL DATA, ALL OF PEI'S
INTEREST CHARGES AND PG&W'S PREFERRED STOCK DIVIDENDS HAVE BEEN ALLOCATED TO
CONTINUING OPERATIONS (SEE NOTE 2 BELOW).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 (1) 1993 (1) 1992 (1) 1995 (1) 1994 (1)
--------- --------- --------- --------- ---------
(UNAUDITED, AND IN THOUSANDS OF DOLLARS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES...... $ 167,992 $ 153,325 $ 143,227 $ 93,421 $ 106,801
Cost of gas........... 98,653 86,557 77,720 54,281 64,814
--------- --------- --------- --------- ---------
OPERATING MARGIN........ 69,339 66,768 65,507 39,140 41,987
OTHER OPERATING EX-
PENSES................. 48,852 46,870 45,638 26,964 28,799
--------- --------- --------- --------- ---------
OPERATING INCOME........ 20,487 19,898 19,869 12,176 13,188
OTHER INCOME (DEDUC-
TIONS), NET............ 258 (472) (92) 412 194
INTEREST CHARGES (2).... (13,793) (12,888) (13,164) (7,669) (6,499)
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS............. 6,952 6,538 6,613 4,919 6,883
INCOME (LOSS) WITH
RESPECT TO DISCONTINUED
OPERATIONS............. 10,504 7,909 4,915 (3,704) 4,724
--------- --------- --------- --------- ---------
INCOME BEFORE
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS........ 17,456 14,447 11,528 1,215 11,607
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (2).... 4,639 6,462 5,065 1,383 2,644
--------- --------- --------- --------- ---------
NET INCOME (LOSS)....... $ 12,817 $ 7,985 $ 6,463 $ (168) $ 8,963
========= ========= ========= ========= =========
EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing operations. $ .43 $ .02 $ .39 $ .62 $ .78
Discontinued opera-
tions................ 1.92 1.80 1.22 (.65) .87
--------- --------- --------- --------- ---------
Net income (loss)
before premium on
redemption of
subsidiary's
preferred stock...... 2.35 1.82 1.61 (.03) 1.65
Premium on redemption
of subsidiary's
preferred stock...... (.18) -- -- -- (.10)
--------- --------- --------- --------- ---------
Earnings (loss) per
share of common
stock................ $ 2.17 $ 1.82 $ 1.61 $ (.03) $ 1.55
========= ========= ========= ========= =========
Cash dividends per
share of common
stock................ $ 2.20 $ 2.20 $ 2.20 $ 1.10 $ 1.10
========= ========= ========= ========= =========
CAPITALIZATION AT END OF
PERIOD:
Common shareholders'
investment........... $ 172,012 $ 165,775 $ 135,144 $ 168,455 $ 168,875
Preferred stock of
PG&W--
Not subject to
mandatory
redemption, net..... 33,615 33,615 33,615 33,615 33,615
Subject to mandatory
redemption.......... 1,760 31,840 41,920 1,680 16,760
Long-term debt........ 220,705 155,388 148,866 157,893 158,191
--------- --------- --------- --------- ---------
Total capitaliza-
tion............. $ 428,092 $ 386,618 $ 359,545 $ 361,643 $ 377,441
========= ========= ========= ========= =========
NET UTILITY PLANT AT END
OF PERIOD.............. $ 209,672 $ 198,865 $ 191,345 $ 212,403 $ 201,925
========= ========= ========= ========= =========
TOTAL ASSETS AT END OF
PERIOD:
Continuing operations. $ 321,236 $ 318,057 $ 257,458 $ 296,126 $ 291,220
Discontinued opera-
tions, net (3)....... 203,196 193,002 183,702 197,713 201,355
--------- --------- --------- --------- ---------
Total............. $ 524,432 $ 511,059 $ 441,160 $ 493,839 $ 492,575
========= ========= ========= ========= =========
</TABLE>
- --------
See page 7 for an explanation of footnotes.
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- --------
(1) Restated to reflect discontinued operations.
(2) None of PEI's interest charges nor any of PG&W's Preferred Stock dividends
has been allocated to the discontinued operations. Interest charges
relating to indebtedness of PG&W have been allocated to the discontinued
operations based on the relationship of the gross water utility plant of
the discontinued operations to the total of PG&W's gross gas and water
utility plant. This is the same method as has been utilized by PG&W and the
PPUC in establishing the revenue requirements of both PG&W's gas and water
utility operations.
(3) Net of (i) liabilities being assumed by PAWC, (ii) estimated liability for
income taxes on sale of discontinued operations, (iii) with respect to the
six months ended June 30, 1995, the anticipated income from discontinued
operations during the balance of the phase-out period, and (iv) with
respect to periods ended in 1994 and earlier years, other net assets of the
discontinued operations (which were written off as of March 31, 1995). See
Note 2 of Notes to PEI's Consolidated Financial Statements included
elsewhere in this Joint Proxy Statement.
PG&W SUMMARY FINANCIAL DATA.
The selected financial data set forth below have been derived from PG&W's
unaudited financial statements, as restated to reflect PG&W's water utility
operations as "discontinued operations" effective March 31, 1995. IN PREPARING
THIS SUMMARY FINANCIAL DATA, ALL OF PG&W'S PREFERRED STOCK DIVIDENDS HAVE BEEN
ALLOCATED TO CONTINUING OPERATIONS (SEE NOTE 2 BELOW).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1994 (1) 1993 (1) 1992 (1) 1995 (1) 1994 (1)
-------- -------- -------- -------- --------
(UNAUDITED, AND IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............ $167,992 $153,325 $143,227 $93,421 $106,801
Cost of gas................. 98,653 86,557 77,720 54,281 64,814
-------- -------- -------- ------- --------
OPERATING MARGIN.............. 69,339 66,768 65,507 39,140 41,987
OTHER OPERATING EXPENSES...... 50,211 47,976 46,570 27,773 29,388
-------- -------- -------- ------- --------
OPERATING INCOME.............. 19,128 18,792 18,937 11,367 12,599
OTHER INCOME (DEDUCTIONS),
NET.......................... 72 (585) (88) 172 81
INTEREST CHARGES (2).......... (9,898) (9,815) (10,808) (5,324) (4,841)
-------- -------- -------- ------- --------
INCOME FROM CONTINUING
OPERATIONS................... 9,302 8,392 8,041 6,215 7,839
INCOME (LOSS) WITH RESPECT TO
DISCONTINUED OPERATIONS...... 10,504 7,909 4,915 (3,704) 4,724
-------- -------- -------- ------- --------
NET INCOME.................... 19,806 16,301 12,956 2,511 12,563
DIVIDENDS ON PREFERRED STOCK
(2).......................... 4,639 6,462 5,065 1,383 2,644
-------- -------- -------- ------- --------
EARNINGS APPLICABLE TO COMMON
STOCK........................ $ 15,167 $ 9,839 $ 7,891 $ 1,128 $ 9,919
======== ======== ======== ======= ========
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Continuing operations....... $ .90 $ .46 $ .76 $ .87 $ 1.05
Discontinued operations..... 2.02 1.90 1.26 (.67) .95
-------- -------- -------- ------- --------
Total before premium on
redemption of preferred
stock...................... 2.92 2.36 2.02 .20 2.00
Premium on redemption of
preferred stock............ (.19) -- -- -- (.11)
-------- -------- -------- ------- --------
Earnings per share of common
stock...................... $ 2.73 $ 2.36 $ 2.02 $ .20 $ 1.89
======== ======== ======== ======= ========
Cash dividends per share of
common stock................. $ 1.81 $ 2.82 $ 2.54 $ 1.41 $ .71
======== ======== ======== ======= ========
</TABLE>
- --------
See page 8 for an explanation of footnotes
7
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1994 (1) 1993 (1) 1992 (1) 1995 (1) 1994 (1)
-------- -------- -------- -------- --------
(UNAUDITED, AND IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CAPITALIZATION AT END OF PERIOD
Common shareholder's investment. $216,032 $188,011 $158,098 $214,369 $214,175
Preferred stock--
Not subject to mandatory
redemption, net................ 33,615 33,615 33,615 33,615 33,615
Subject to mandatory redemp-
tion.......................... 1,760 31,840 41,920 1,680 16,760
Long-term debt.................. 170,825 125,535 119,040 108,000 108,325
-------- -------- -------- -------- --------
Total capitalization........ $422,232 $379,001 $352,673 $357,664 $372,875
======== ======== ======== ======== ========
UTILITY PLANT AT END OF PERIOD.... $209,672 $198,865 $191,345 $212,403 $201,925
======== ======== ======== ======== ========
TOTAL ASSETS AT END OF PERIOD:
Continuing operations........... $315,139 $315,069 $254,425 $293,196 $287,970
Discontinued operations, net
(3)............................ 203,196 193,002 183,702 197,713 201,355
-------- -------- -------- -------- --------
Total....................... $518,335 $508,071 $438,127 $490,909 $489,325
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Restated to reflect discontinued operations.
(2) None of the dividends on PG&W Preferred Stock has been allocated to the
discontinued operations. Interest charges relating to indebtedness of PG&W
have been allocated to the discontinued operations based on the
relationship of the gross water utility plant of the discontinued
operations to the total of PG&W's gross gas and water utility plant. This
is the same method as has been utilized by PG&W and the PPUC in
establishing the revenue requirements of both PG&W's gas and water utility
operations.
(3) Net of (i) liabilities being assumed by PAWC, (ii) estimated liability for
income taxes on sale of discontinued operations, (iii) with respect to the
six months ended June 30, 1995, the anticipated income from discontinued
operations during the balance of the phase-out period, and (iv) with
respect to periods ended in 1994 and earlier years, other net assets of the
discontinued operations (which were written off as of March 31, 1995). See
Note 2 of Notes to PG&W's Financial Statements included elsewhere in this
Joint Proxy Statement.
PEI AND PG&W UNAUDITED PRO FORMA FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS OF PEI AND PG&W REFLECTING THE USE OF THE
PROCEEDS FROM THE SALE OF THE WATER BUSINESS AND CERTAIN RELATED TRANSACTIONS
ARE INCLUDED ELSEWHERE IN THIS JOINT PROXY STATEMENT AND SHOULD BE READ IN
THEIR ENTIRETY BY PEI SHAREHOLDERS AND PG&W PREFERRED SHAREHOLDERS. SEE "USE OF
CERTAIN PROCEEDS OF THE SALE OF THE WATER BUSINESS", "PEI UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS" AND "PG&W UNAUDITED PRO FORMA FINANCIAL
STATEMENTS."
8
<PAGE>
PEI SPECIAL MEETING
PURPOSE OF MEETING.
This Joint Proxy Statement is being furnished by Pennsylvania Enterprises,
Inc. ("PEI") to holders (the "PEI Shareholders") of its common stock, no par
value, stated value $10 per share ("PEI Common Stock"), in connection with the
solicitation of proxies by the Board of Directors of PEI for use at the
Special Meeting of PEI Shareholders and at any adjournments thereof (the "PEI
Special Meeting"). At the PEI Special Meeting, PEI Shareholders will consider
and vote upon a proposal to approve and adopt the Asset Purchase Agreement
dated as of April 26, 1995 (the "Asset Purchase Agreement"), among PEI,
Pennsylvania Gas and Water Company ("PG&W"), American Water Works Company,
Inc. ("AWWC") and Pennsylvania-American Water Company ("PAWC") pursuant to
which PG&W will sell to PAWC (the "Sale of the Water Business"), PG&W's
regulated water operations and certain related assets (the "Water Business").
The date of this Joint Proxy Statement is September 1, 1995. This Joint
Proxy Statement and the enclosed form of proxy are first being mailed to the
PEI Shareholders on or about September 7, 1995.
THE BOARD OF DIRECTORS OF PEI BELIEVES THAT THE SALE OF THE WATER BUSINESS
IS FAIR TO, AND IN THE BEST INTERESTS OF, PEI AND THE PEI SHAREHOLDERS. THE
BOARD OF DIRECTORS OF PEI HAS UNANIMOUSLY APPROVED THE TERMS OF THE ASSET
PURCHASE AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE PEI SHAREHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE ASSET PURCHASE AGREEMENT.
DATE, TIME AND PLACE OF MEETING.
The PEI Special Meeting will be held at The Woodlands Inn & Resort, 1073
Highway 315, Wilkes-Barre, Pennsylvania on October 11, 1995, at 10:00 a.m.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE AND REQUIRED VOTE.
Only holders of record of PEI Common Stock at the close of business on
August 30, 1995 are entitled to notice of and to vote at the PEI Special
Meeting. As of August 30, 1995, there were 5,753,178 shares of PEI Common
Stock outstanding, which is the only class of capital stock entitled to vote
at the PEI Special Meeting. These shares were held by 8,013 holders of record
on such date.
The presence in person or by proxy of a majority of the outstanding shares
of PEI Common Stock is necessary to constitute a quorum at the PEI Special
Meeting. If there are insufficient votes to constitute a quorum, the PEI
Special Meeting may be adjourned in order to permit further solicitation of
proxies. Broker non-votes, abstentions and withhold authority votes all count
for the purpose of determining a quorum. At the PEI Special Meeting, each PEI
Shareholder is entitled to one vote for each share of PEI Common Stock held.
The affirmative vote of a majority of the votes cast by all PEI Shareholders
at the PEI Special Meeting is required to approve the Asset Purchase
Agreement. The Asset Purchase Agreement must also be approved by the written
consent or affirmative vote of the sole holder of shares of common stock, no
par value, stated value $10 per share of PG&W ("PG&W Common Stock"), and the
affirmative vote of a majority of shares of PG&W Preferred Stock, voting as a
class.
SOLICITATION, REVOCATION AND USE OF PROXIES.
All holders of PEI Common Stock represented at the PEI Special Meeting by
properly executed proxies received prior to or at the PEI Special Meeting,
unless such proxies previously have been revoked, will be voted at the PEI
Special Meeting in accordance with the instructions on the proxies. If no
contrary instructions are indicated, such proxies will be voted FOR the
approval and adoption of the Asset Purchase Agreement.
Pennsylvania law provides that a proxy, unless coupled with an interest (for
example, a vote pooling or similar arrangement among PEI Shareholders; certain
agreements among PEI Shareholders regarding the voting of their shares of PEI
Common Stock; or an unrevoked proxy in favor of an existing or potential
creditor of a
9
<PAGE>
PEI Shareholder), is revocable at will by a shareholder, notwithstanding any
other agreement or any provision in the proxy to the contrary. Proxies with
respect to PEI Common Stock may be revoked by filing with the Secretary of PEI
written notice of revocation bearing a later date than the proxy, by duly
executing a later-dated proxy relating to the same PEI Common Stock or by
attending the PEI Special Meeting and voting in person (although attendance at
the PEI Special Meeting will not in and of itself constitute revocation of a
proxy). Any written notice revoking a proxy with respect to PEI Common Stock
must be sent to Secretary, Pennsylvania Enterprises, Inc., Wilkes-Barre
Center, 39 Public Square, Wilkes-Barre, Pennsylvania 18711-0601.
Proxies will be solicited by use of the mails. Directors, officers and
employees of PEI and PG&W may also solicit proxies by telephone, telecopy,
telegram or personal contact and such persons will receive no additional
compensation for such services. Copies of solicitation materials will be
furnished to fiduciaries, custodians and brokerage houses for forwarding to
beneficial owners of PEI Common Stock held in their names. PEI also has
retained D.F. King & Co., Inc., 77 Water Street, 20th Floor, New York, New
York 10005, 212-269-5550 to aid in the solicitation of proxies with respect to
the Asset Purchase Agreement for a fee estimated to be in the range of $5,500
plus reimbursement for reasonable and customary out-of-pocket expenses. PEI
will bear the cost of preparing and mailing the proxy material in connection
with the PEI Special Meeting, Securities and Exchange Commission ("SEC")
filing fees, the printing costs in connection with this Joint Proxy Statement
and the fees and expenses of the proxy solicitor.
NO DISSENTERS RIGHTS.
Holders of PEI Common Stock do not have statutory appraisal or dissenters
rights with respect to the Asset Purchase Agreement.
SHAREHOLDER PROPOSALS.
PEI Shareholders are entitled to submit proposals on matters appropriate for
shareholder action consistent with regulations of the SEC. Should a PEI
Shareholder intend to present a proposal at the 1996 Annual Meeting of PEI
Shareholders, it must be received by the Secretary of PEI at PEI's Executive
Offices, Wilkes-Barre Center, 39 Public Square, Wilkes-Barre, Pennsylvania,
18711-0601, no later than November 30, 1995, in order to be included in PEI's
proxy statement and form of proxy relating to that meeting. Under the rules of
the SEC, PEI Shareholders submitting such proposals are required to have held
shares of PEI Common Stock amounting to $1,000 in market value for at least
one year prior to the date of submission.
OTHER BUSINESS.
The management of PEI does not intend to present and does not have any
reason to believe that others will present, at the PEI Special Meeting, any
item of business other than those set forth herein. However, if any other
business is properly presented at the PEI Special Meeting and may properly be
considered and acted upon, proxies will be voted by those named on the proxy
card in their best judgment.
TRADING MARKET FOR AND MARKET PRICE OF PEI COMMON STOCK.
On April 25, 1995, the day prior to the date of public announcement of the
proposed Sale of the Water Business, the high and low sales prices of PEI
Common Stock, as reported on the New York Stock Exchange, were $32.125 and
$31.75 per share.
10
<PAGE>
PG&W SPECIAL MEETING
PURPOSE OF MEETING.
This Joint Proxy Statement is being furnished by Pennsylvania Gas and Water
Company ("PG&W") to holders ("PG&W Preferred Shareholders") of shares of its
4.10% Cumulative Preferred Stock, par value $100 per share, 1966 Cumulative
Preferred Stock, par value $100 per share, 9% Cumulative Preferred Stock, par
value $100 per share (collectively, the "PG&W Preferred Stock") and Depositary
Preferred Shares, each representing a 1/4th interest in a share of PG&W 9%
Cumulative Preferred Stock ("PG&W Depositary Preferred Shares") in connection
with the solicitation of proxies by the Board of Directors of PG&W for use at
the Special Meeting of the PG&W Preferred Shareholders and at any adjournments
thereof (the "PG&W Special Meeting"). At the PG&W Special Meeting, PG&W
Preferred Shareholders will consider and vote upon a proposal to approve and
adopt the Asset Purchase Agreement, which provides for the Sale of the Water
Business.
The date of this Joint Proxy Statement is September 1, 1995. This Joint
Proxy Statement and the enclosed form of proxy are first being mailed to the
PG&W Preferred Shareholders on or about September 7, 1995.
THE BOARD OF DIRECTORS OF PG&W BELIEVES THAT THE SALE OF THE WATER BUSINESS
IS FAIR TO, AND IN THE BEST INTERESTS OF, PG&W AND THE PG&W PREFERRED
SHAREHOLDERS. THE BOARD OF DIRECTORS OF PG&W HAS UNANIMOUSLY APPROVED THE
TERMS OF THE ASSET PURCHASE AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT PG&W
PREFERRED SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE ASSET PURCHASE
AGREEMENT.
DATE, TIME AND PLACE OF MEETING.
The Special Meeting of PG&W Preferred Shareholders will be held at The
Woodlands Inn & Resort, 1073 Highway 315, Wilkes-Barre, Pennsylvania on
October 11, 1995, at 11:00 a.m.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE AND REQUIRED VOTE.
Only holders of record of PG&W Preferred Stock and PG&W Depositary Preferred
Shares at the close of business on August 30, 1995 are entitled to notice of
and to vote at the PG&W Special Meeting. As of August 30, 1995, there were
367,600 outstanding shares of PG&W Preferred Stock, which is the only class of
capital stock entitled to vote at the PG&W Special Meeting. These shares were
held by 716 holders of record on such date. Chemical Bank, which serves as
depositary for PG&W's 9% Cumulative Preferred Stock (the "Depositary") is the
only record holder of PG&W's 9% Cumulative Preferred Stock. PG&W Depositary
Preferred Shares were held by 512 holders of record on such date.
The presence in person or by proxy of a majority of the outstanding shares
of PG&W Preferred Stock is necessary to constitute a quorum at the PG&W
Special Meeting. If there are insufficient votes to constitute a quorum, the
PG&W Special Meeting may be adjourned in order to permit further solicitation
of proxies. Broker non-votes, abstentions, and withhold authority votes all
count for the purpose of determining a quorum. At the discretion of the
Depositary, Depositary non-votes will count for the purpose of determining a
quorum.
At the PG&W Special Meeting, each holder of PG&W Preferred Stock is entitled
to one vote for each share held. Each holder of PG&W Depositary Preferred
Shares is entitled to a 1/4th vote for each PG&W Depositary Preferred Share
held. The Depositary will vote all PG&W Depositary Preferred Shares in
accordance with the instructions received from the holders of such shares. The
votes of the PG&W Depositary Preferred Shares will be aggregated and voted by
the Depositary by means of a vote of the PG&W 9% Cumulative Preferred Stock.
The Depositary may not vote any shares of PG&W 9% Cumulative Preferred Stock
absent instructions received from holders of PG&W Depositary Preferred Shares.
Holders of PG&W Depositary Preferred Shares may not vote their PG&W Depositary
Preferred Shares in person at the PG&W Special Meeting.
The written consent or affirmative vote of the sole holder of the
outstanding shares of PG&W Common Stock and the affirmative vote of a majority
of the outstanding shares of PG&W Preferred Stock, voting as a class, is
required to approve the Asset Purchase Agreement. The Asset Purchase Agreement
must also be
11
<PAGE>
approved by the affirmative vote of a majority of the votes cast by all PEI
Shareholders at the PEI Special Meeting. If the Asset Purchase Agreement is
approved by the requisite vote of the holders of PEI Common Stock and PG&W
Preferred Stock, immediately following the PG&W Special Meeting, PEI, as the
sole holder of all of the outstanding shares of PG&W Common Stock, will
execute a written consent approving the Asset Purchase Agreement.
SOLICITATION, REVOCATION AND USE OF PROXIES.
All holders of PG&W Preferred Stock represented at the PG&W Special Meeting
by properly executed proxies received prior to or at the PG&W Special Meeting,
unless such proxies previously have been revoked, will be voted at the PG&W
Special Meeting in accordance with the instructions on the proxies. If no
contrary instructions are indicated, such proxies will be voted FOR the
approval and adoption of the Asset Purchase Agreement.
Pennsylvania law provides that a proxy, unless coupled with an interest (for
example, a vote pooling or similar arrangement among PG&W Preferred
Shareholders; certain agreements among PG&W Preferred Shareholders regarding
the voting of their shares of PG&W Preferred Stock or PG&W Depositary
Preferred Shares; or an unrevoked proxy in favor of an existing or potential
creditor of a PG&W Preferred Shareholder), is revocable at will by a
shareholder, notwithstanding any other agreement or provision in the proxy to
the contrary. Proxies with respect to PG&W's 4.10% Cumulative Preferred Stock
or PG&W's 1966 Cumulative Preferred Stock may be revoked by filing with the
Secretary of PG&W written notice of revocation bearing a later date than the
proxy, by duly executing a later-dated proxy relating to the same PG&W's 4.10%
Cumulative Preferred Stock or PG&W's 1966 Cumulative Preferred Stock or by
attending the PG&W Special Meeting and voting in person (although attendance
at the PG&W Special Meeting will not in and of itself constitute revocation of
a proxy). Once the vote on the adoption and approval of the Asset Purchase
Agreement has been taken, such proxies with respect to the Asset Purchase
Agreement may not be revoked. Any written notice revoking a proxy must be sent
to Secretary, Pennsylvania Gas and Water Company, Wilkes-Barre Center, 39
Public Square, Wilkes-Barre, Pennsylvania 18711-0601. Proxies with respect to
PG&W Depositary Preferred Shares may be revoked by filing with the Depositary
written notice of revocation bearing a later date than the proxy or by duly
executing a later-dated proxy relating to the same PG&W Depositary Preferred
Shares. Any written notice revoking a proxy with respect to PG&W Depositary
Preferred Shares must be sent to Chemical Mellon Shareholder Services, Stock
Transfer Administration--Vice President, 450 West 33rd Street, New York,
New York 10001.
Proxies will be solicited by use of the mails. Directors, officers and
employees of PG&W may also solicit proxies by telephone, telegram, telecopy or
personal contact and such persons will receive no additional compensation for
such services. Copies of solicitation materials will be furnished to
fiduciaries, custodians and brokerage houses for forwarding to beneficial
owners of PG&W Preferred Stock held in their names. PG&W has also retained
D.F. King & Co., Inc., 77 Water Street, 20th Floor, New York, New York 10005,
212-269-5550, to aid in the solicitation of proxies with respect to the Asset
Purchase Agreement for a fee estimated to be in the range of $5,500 plus
reimbursement for reasonable and customary out-of-pocket expenses. PG&W will
bear the cost of preparing and mailing the proxy material in connection with
the PG&W Special Meeting. PEI will bear the cost of the SEC filing fees, the
printing costs in connection with this Joint Proxy Statement and the fees and
expenses of the proxy solicitor.
DISSENTERS RIGHTS.
PG&W Preferred Shareholders who do not vote in favor of the approval of the
Asset Purchase Agreement and comply with the provisions of the Pennsylvania
Business Corporation Law will have the right, if the Sale of the Water
Business is consummated, to dissent from the Sale of the Water Business and
seek payment of the fair value of their shares of PG&W Preferred Stock.
Holders of PG&W Depositary Preferred Shares will also have the right to seek
payment of the fair value of their PG&W Depositary Preferred Shares. See
"DISSENTERS RIGHTS--PG&W Preferred Shareholders."
12
<PAGE>
SHAREHOLDER PROPOSALS.
PG&W is not required by law, or pursuant to its Amended and Restated
Articles of Incorporation or By-Laws, to hold annual meetings of PG&W
Preferred Shareholders. PG&W has no plans to call another special meeting of
PG&W Preferred Shareholders.
OTHER BUSINESS.
The management of PG&W does not intend to present and does not have any
reason to believe that others will present, at the PG&W Special Meeting, any
item of business other than those set forth herein. However, if any other
business is properly presented at the PG&W Special Meeting and may properly be
considered and acted upon, proxies will be voted by those named on the proxy
card in their best judgment.
TRADING MARKET FOR AND MARKET PRICE OF PG&W PREFERRED STOCK.
On April 25, 1995, the day prior to the date of public announcement of the
proposed Sale of the Water Business, (i) the bid price of PG&W's 4.10%
Cumulative Preferred Stock, as reported on the National Association of
Securities Dealers OTC Bulletin Board, was $45.75 per share and (ii) the bid
and asked prices of PG&W Depositary Preferred Shares, as reported on the
National Association of Securities Dealers Automated Quotation System were
$24.50 and $25.75, respectively, per PG&W Depositary Preferred Share. No
trading market currently exists for PG&W's 1966 Cumulative Preferred Stock.
13
<PAGE>
SPECIAL FACTORS
BACKGROUND OF AND REASONS FOR THE SALE OF THE WATER BUSINESS.
At a special meeting of the Boards of Directors of PEI and PG&W on January
18, 1995, Kenneth L. Pollock, Chairman of PEI and PG&W, suggested that PEI and
PG&W consider the sale of the Water Business. Mr. Pollock described meetings
that he had initiated with George W. Johnstone, President and Chief Executive
Officer of AWWC, and Joseph F. Hartnett, Jr., the Vice President and Treasurer
of AWWC concerning the possible sale of the Water Business to AWWC. These
discussions had taken place on several occasions during 1994 and had initially
concerned a sale of the Water Business to AWWC as part of a possible purchase
of PEI by Mr. Pollock. Mr. Pollock told the Boards that he determined not to
pursue such a purchase in late December, 1994, because he could not arrange
the purchase on terms and in a time-frame that would be acceptable to him, but
that based on his earlier discussions with AWWC, he was suggesting that the
Boards of Directors of PEI and PG&W consider the sale of the Water Business.
A Special Water Asset Committee of the PEI and PG&W Boards of Directors (the
"Special Committee") was appointed, consisting of Messrs. Kenneth L. Pollock
(Chairman), Simms, Davis and Ross (alternate) to consider whether a sale of
the Water Business was in the best interests of PEI and PG&W and their
shareholders, customers and employees. Arthur Andersen LLP was asked to review
the accounting treatment of a sale of the Water Business. The Boards also
decided to retain Legg Mason Wood Walker, Incorporated ("Legg Mason") to act
as their financial advisor in connection with a sale of the Water Business.
Legg Mason was familiar with PEI and PG&W and had participated informally in
Mr. Pollock's earlier discussions regarding a possible sale of the Water
Business.
On January 19, 1995, Mr. Johnstone met with the Special Committee to discuss
a potential sale of the Water Business to AWWC and provided the Special
Committee with information about AWWC and PAWC. The Special Committee reviewed
the financial capability and the water utility operational experience
(particularly in Pennsylvania) of AWWC, considered the possible benefits and
disadvantages of a sale and discussed various aspects of a sale.
At its meeting on January 31, 1995, the Special Committee discussed with
representatives of AWWC a draft asset purchase agreement prepared by AWWC.
Arthur Andersen LLP also discussed the accounting treatment of certain
deferred regulatory assets and deferred credits related to the Water Business.
The Special Committee considered various aspects of a sale, including required
consents and real estate and employee issues. It was also decided to add Mr.
Casaday to the Special Committee.
From January 31 to February 22, 1995, representatives of PEI and PG&W and
AWWC and PAWC continued to negotiate the terms of a possible sale of the Water
Business.
At meetings on February 22 and 23, 1995, the Boards of PEI and PG&W
continued their consideration of a possible sale of the Water Business. Mr.
Pollock, on behalf of the Special Committee, briefed the Boards of Directors
of PEI and PG&W on the current state of negotiations with AWWC. Legg Mason
delivered to the Boards a preliminary report regarding the preliminary terms
of the proposed transaction with PAWC and AWWC and its preliminary valuation
analyses for the Water Business based upon then current information, including
financial projections, provided to it by the management of PEI and PG&W. This
report is described below under "--Opinion of PEI and PG&W Financial Advisor."
The Boards of Directors of PEI and PG&W also discussed with Legg Mason
possible recapitalizations of PEI and PG&W in connection with the sale,
including the repurchase of PG&W first mortgage bonds, PG&W Preferred Stock
and PEI Common Stock. The Boards reviewed information about AWWC and PAWC and
financial information about PEI and PG&W.
14
<PAGE>
The Boards then discussed the advantages of a sale of the Water Business,
including the following. The sale would:
. divest an underperforming asset. The Water Business earned only slightly
more than a 2% return on equity during the past three years as compared
with an approximate 12% average annual return for the gas operations over
the past three years. Legg Mason noted that based on management's
financial projections, even given the water rate increases expected over
the next several years, PG&W would still not achieve a full allowable
return on its water assets or reach an industry average;
. eliminate the need to fund the large capital expenditures for the water
operations (then estimated at $112.4 million through 1999);
. eliminate the possible dilution resulting from the need to issue more PEI
Common Stock to fund these expenditures;
. eliminate the uncertainty of the amount and timing of water rate relief;
. give management more time and capital to focus on the growth of the gas
operations; and
. potentially reduce operating expenses. Management of PEI and PG&W felt
that the smaller gas-only entity would give management the opportunity to
explore and evaluate possible efficiencies in the post-sale operations,
but these efficiencies have not yet been quantified.
The Boards of Directors of PEI and PG&W also noted the positive effect the
recapitalizations being considered in connection with the sale of the Water
Business would have on PEI's and PG&W's financial and capital ratios, credit
rating, future equity needs, earnings per share, dividend payout and payout
ratio and stock price.
The Boards also discussed the disadvantages of a sale of the Water Business.
PEI and PG&W would be giving up the long-term potential for revenues and
earnings growth in the water operations following the achievement of a full
allowable return on the water operations or the attainment of the industry
average (although the Boards felt that such rate relief would not be achieved
in the next several years). In addition, PEI and PG&W would be giving up a
large part of their asset base and an offset to its seasonal gas operations.
The Boards of Directors of PEI and PG&W considered the various advantages
and disadvantages of a sale of the Water Business in their totality and did
not quantify or otherwise attempt to assign relative weights to the specific
factors considered in making their respective determinations.
Legg Mason then preliminarily reviewed with the Boards a list of other
entities that might have an interest in acquiring the Water Business. They
were Citizens Utilities Company, Consumers Water Company, Topeka Group
Incorporated, a wholly owned subsidiary of Minnesota Power & Light Company,
Philadelphia Suburban Water Co., United Water Resources, Inc., Utilicorp
United Inc. and Luzerne County, Pennsylvania. The point of the list was to
identify any company that might have both the interest and ability to beat
AWWC's offer. In the Boards' and Legg Mason's analysis, in general, as to the
companies on the list, either the company was not thought to have both the
interest and the ability, or the company had informally suggested to PEI and
PG&W a possible purchase price substantially below the level of the
negotiations with AWWC.
At its March 10 and 13, 1995 meetings, the Special Committee continued its
consideration of the advisability of a sale of the Water Business, reviewed
the status of negotiations with AWWC and considered specific major issues
arising in the negotiations, including the purchase price.
During March, 1995, representatives of PEI and PG&W and AWWC and PAWC met on
several occasions to continue negotiation of a sale of the Water Business.
At the March 29, 1995 PEI and PG&W Board meetings, members of the Special
Committee briefed the Boards of PEI and PG&W on the status of the negotiations
with AWWC and the Boards discussed the major terms and conditions of the
proposed sale and outstanding unresolved issues, including the purchase price
and
15
<PAGE>
the liabilities to be assumed by PAWC. Also, at these meetings, Legg Mason
reported on its assessment of the potential interest and ability of a number
of companies, other than PAWC, and local municipalities to make a competing
offer for the Water Business. Legg Mason noted the financial strength and the
Pennsylvania water utility expertise of AWWC. Legg Mason further noted that
PAWC served contiguous territory to that of PG&W.
At its meetings on April 6, 11 and 24, 1995, the Special Committee reviewed
the status of negotiations and discussed major unresolved issues, including
the purchase price, issues relating to real estate (including the amount of
land around the reservoirs, tanks, pumping stations and water treatment plants
to be sold to PAWC, the process of subdividing plots that would be owned in
part by PG&W and in part by PAWC, and the requirements of a title survey), and
the assumption by PAWC of certain employee benefit obligations.
On April 26, 1995, the PEI and PG&W Boards reviewed the proposed terms and
conditions of the Asset Purchase Agreement and the advantages of the Sale of
the Water Business. Legg Mason delivered to the Boards a report of its
valuation analyses for the assets to be acquired by PAWC pursuant to the Asset
Purchase Agreement. This report is described below under "--Opinion of PEI and
PG&W Financial Advisor." Legg Mason summarized for the Boards the financial
terms of the proposed Sale of the Water Business and discussed its valuation
methodologies. The report concluded that, based upon the then projected
operating performance of the Water Business as provided by the management of
PEI and PG&W, the purchase price range of $400 million to $420 million was
above the median and mean values implied by a comparable company methodology
and a comparable acquisition transaction methodology, and was above or within
substantially the entire range of values implied by a discounted cash flow
analysis. (See "--Opinion of PEI and PG&W Financial Advisor" for an
explanation of these analyses.) Legg Mason then rendered its oral opinion that
the consideration to be received by PG&W in the Sale of the Water Business was
fair to the PEI Shareholders, the PG&W Common Shareholder and the PG&W
Preferred Shareholders from a financial point of view. (Subsequently, Legg
Mason delivered its written opinion dated April 26, 1995 to the same effect.)
See "--Opinion of PEI and PG&W Financial Advisor" and Annex B to this Joint
Proxy Statement.)
Arthur Andersen also reviewed for the Boards the accounting and financial
reporting implications of the Sale of the Water Business.
Meeting separately, the PEI Board of Directors and the PG&W Board of
Directors determined that the Sale of the Water Business is fair to and in the
best interests of PEI and PG&W and their respective shareholders, employees
and customers and unanimously approved the terms of the Asset Purchase
Agreement. The PEI Board also approved a standstill agreement between PEI and
AWWC, pursuant to which AWWC agreed that, until the earlier of (a) two years
following the date of the Asset Purchase Agreement, or (b) the date any person
or entity other than AWWC or its affiliates publicly announces that it has
acquired or has entered into a letter of intent or a definitive agreement with
PEI or PG&W to acquire from PEI or PG&W a significant interest or amount of
the assets of PEI or PG&W or of PG&W's water business or at least 10% of the
outstanding securities of PEI or PG&W with general voting rights to elect
directors of PEI or PG&W, as the case may be, or any right or option to
acquire any of the foregoing, it would not (i) acquire or offer or propose to
acquire from PEI or PG&W any business or assets of or securities issued by PEI
or PG&W or any right or option to acquire any of the foregoing except pursuant
to the Asset Purchase Agreement, (ii) solicit proxies from PEI Shareholders or
seek or propose to influence or control the management or policies of PEI,
(iii) become a member of any "group" (as such term is interpreted under the
Securities Exchange Act of 1934), (iv) enter into any discussions,
negotiations or understandings with any other person with respect to the
foregoing or (v) make any public disclosure of any kind with respect to any of
the foregoing (except as it relates specifically to, and is permitted by, the
Asset Purchase Agreement) or take any other action which might reasonably be
expected to result in any such disclosure.
The Boards of Directors of PEI and PG&W did not consider a spin-off of the
Water Business since the Boards concluded that (i) the revenues of the Water
Business alone (without the revenues and operating income of the gas
operations) would be insufficient to fund the large capital expenditures and
operating expenses of the
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Water Business and (ii) the value to be received by the PEI Shareholders and
the PG&W Preferred Shareholders in the Sale of the Water Business would be
greater than the value to be received by the PEI Shareholders and the PG&W
Preferred Shareholders if PG&W were to continue to operate the Water Business.
In each case, the Boards reached these conclusions because the actual earned
rate of return on the equity applicable to the Water Business, is
significantly lower than the actual earned rate of return on the equity
applicable to PEI or PG&W as a whole. Also, the Boards of Directors of PEI and
PG&W did not consider a liquidation of PEI and PG&W since the Boards had
determined to operate and expand the gas operations.
RECOMMENDATIONS OF THE PEI AND PG&W BOARDS OF DIRECTORS.
THE BOARDS OF DIRECTORS OF PEI AND PG&W BELIEVE THAT THE SALE OF THE WATER
BUSINESS IS FAIR TO, AND IN THE BEST INTERESTS OF, PEI, PG&W AND THEIR
RESPECTIVE SHAREHOLDERS. ACCORDINGLY, THE BOARDS OF DIRECTORS OF PEI AND PG&W
HAVE UNANIMOUSLY APPROVED THE TERMS OF THE ASSET PURCHASE AGREEMENT AND
RECOMMEND THAT HOLDERS OF PEI COMMON STOCK AND PG&W PREFERRED STOCK VOTE FOR
APPROVAL AND ADOPTION OF THE ASSET PURCHASE AGREEMENT.
At regular meetings of the Boards of Directors of PEI and PG&W, each held on
April 26, 1995, the respective Boards of Directors of PEI and PG&W approved
the terms of the Asset Purchase Agreement. This approval followed and was
based upon discussions at previous meetings of the Boards of Directors of PEI
and PG&W and the Special Committee of such Boards to consider matters relating
to the sale of PG&W's Water Business described under "--Background of and
Reasons for the Sale of the Water Business."
In reaching their respective decisions, the Boards of Directors of PEI and
PG&W gave careful consideration to a number of factors. The material factors
were the following: (i) the terms and conditions of the Asset Purchase
Agreement, (ii) the analyses and fairness opinion of Legg Mason concerning the
Sale of the Water Business, (iii) the analyses of the Boards of Directors of
PEI and PG&W of the price offered by PAWC and the prospects (including the
amount and timing of water rate relief) and capital and operating requirements
of the Water Business, (iv) the effects of the possible recapitalizations in
connection with the Sale of the Water Business, (v) the need for capital to
expand the gas operations and (vi) the financial strength and water utility
experience of PAWC. The Boards of Directors of PEI and PG&W considered these
factors in their totality and did not quantify or otherwise attempt to assign
relative weights to the specific factors considered in making their respective
determinations. As the preceding list of material factors indicates, the
Boards considered several additional factors at the April 26 meeting that were
not considered at the February 22 and 23 meetings. At the April 26 meeting,
the Boards considered the terms of the Asset Purchase Agreement (which was
still being negotiated at the time of the earlier meetings); the Boards
reviewed the analyses and the fairness opinion of Legg Mason (which was
prepared for the April 26 meeting); and the Boards considered in greater depth
the financial strength and water utility experience of PAWC.
OPINION OF PEI AND PG&W FINANCIAL ADVISOR.
PEI retained Legg Mason on behalf of itself and PG&W to act as their
financial advisor and, in such capacity, to, among other things, advise the
Boards of Directors of PEI and PG&W concerning opportunities for a sale of
PG&W's Water Business and to give its opinion to the Boards of Directors of
PEI and PG&W regarding the fairness to the holders of PEI Common Stock, PG&W
Common Stock and PG&W Preferred Stock from a financial point of view of the
consideration to be received by PG&W in the Sale of the Water Business. At the
April 26, 1995 meetings of the Boards of Directors of PEI and PG&W, Legg Mason
rendered its oral opinion (which was followed by a written opinion), that, as
of April 26, 1995, the consideration to be received by PG&W in the Sale of the
Water Business was fair to the PEI Shareholders, the PG&W Common Shareholder
and the PG&W Preferred Shareholders from a financial point of view. A copy of
the written opinion of Legg Mason, which sets forth certain of the assumptions
made and matters considered in the review undertaken, is attached to this
Joint Proxy Statement as Annex B. PEI Shareholders and PG&W Shareholders are
urged to read the opinion
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in its entirety. Legg Mason's opinion is directed only to the consideration to
be received by PG&W pursuant to the Sale of the Water Business and does not
constitute a recommendation to any PEI Shareholder or PG&W Preferred
Shareholder as to how such shareholder should vote at the PEI Special Meeting
or the PG&W Special Meeting. The summary of the opinion of Legg Mason set
forth in this Joint Proxy Statement is qualified in its entirety by reference
to the full text of such opinion. No limitations were imposed by the Boards of
Directors of PEI and PG&W upon Legg Mason with respect to the investigation
made or procedures followed in rendering its opinion, except that Legg Mason
was not requested by the Board of Directors of PEI or PG&W, and therefore was
not authorized to, and did not, solicit third party indications of interest
for the acquisition of the Water Business, although Legg Mason expressed to
the Boards of Directors of PEI and PG&W its view on the possible interest and
ability of certain third parties to purchase the Water Business. See "--
Background of and Reasons for the Sale of the Water Business."
In arriving at its opinion, Legg Mason: (1) reviewed the terms of the Asset
Purchase Agreement; (2) reviewed certain publicly available audited and
unaudited financial statements of PEI and PG&W; (3) reviewed certain operating
and financial information, including forecasts and projections, provided by
management of PEI and PG&W with respect to the operations and prospects of the
Water Business; (4) met with the President and Chief Executive Officer, the
Vice President--Finance, the Vice President--Human Resources, the Vice
President--Administration, the Vice President--Operations and Engineering, the
Vice-President--Water Resources and the Controller of PEI and PG&W to discuss
the business and prospects and historical financial statements of PEI and PG&W
to the extent related to the Water Business; (5) analyzed publicly available
financial data and stock market performance data of publicly traded companies
with water utility operations that Legg Mason deemed comparable to the Water
Business; (6) reviewed the terms, to the extent available to Legg Mason, of
recent acquisitions of companies with water utility operations that Legg Mason
considered relevant to its inquiry; and (7) conducted an analysis of PEI's
historical stock market data and a visit to certain facilities of PG&W. The
items set forth in the preceding sentence include all material analyses Legg
Mason conducted and deemed relevant to its opinion.
For the purpose of the Legg Mason opinion, the consideration to be received
by PG&W pursuant to the Sale of the Water Business included the purchase price
to be paid in cash and the assumption by PAWC of certain liabilities
associated with the Water Business. In the course of its review, Legg Mason
relied upon and assumed, without independent verification, the accuracy and
completeness of the financial and other information provided to it by
management of PEI and PG&W or publicly available. In arriving at its opinion,
Legg Mason did not perform or obtain any independent appraisal of the assets
of the Water Business, nor did Legg Mason conduct a physical inspection of
those assets. With respect to forecasts and projections related to the Water
Business, Legg Mason assumed without independent verification that they
reflected the best available estimates and judgments of the management of PEI
and PG&W as to the future performance of such business. Legg Mason's opinion
was based upon conditions as they existed and could be evaluated on the date
of such opinion.
Preliminary Legg Mason Report. At meetings on February 22 and February 23,
1995, at which the Boards of PEI and PG&W considered the sale of the Water
Business, Legg Mason delivered to the Boards a preliminary report (the
"Preliminary Legg Mason Report") regarding the preliminary terms of the
proposed transaction with PAWC and AWWC and its preliminary valuation analyses
for the Water Business based upon then current information, including
financial projections, provided to it by the management of PEI and PG&W. In
connection with its preliminary valuation analyses, Legg Mason employed three
valuation methodologies: a comparison with certain comparable publicly traded
companies, a comparison with certain comparable acquisition transactions and a
discounted cash flow analysis. A description of each of these methodologies is
included in the summary of the Legg Mason Report (as defined below). In the
course of reviewing the transaction and arriving at its opinion, Legg Mason
did not deliver to the Boards a valuation range for the Water Business. Legg
Mason concluded that, based upon the historical and the then projected
financial results of the Water Business and the methodologies used in its
preliminary valuation analyses, it would be able to deliver a fairness opinion
to PEI and PG&W regarding the consideration to be received by PG&W pursuant to
the Sale of the Water Business based on a purchase price between $400 million
and $420 million.
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Legg Mason Report. At meetings on April 26, 1995, at which the Boards of
Directors of PEI and PG&W considered the Sale of the Water Business and the
terms of the Asset Purchase Agreement, Legg Mason delivered to the Boards of
Directors of PEI and PG&W a report (the "Legg Mason Report", and together with
the Preliminary Legg Mason Report, the "Legg Mason Reports") of its valuation
analyses for the Water Business. In connection with the Legg Mason Report,
Legg Mason employed the same three valuation methodologies used by it in
connection with the Preliminary Legg Mason Report.
Analysis of Consideration to be Received by PG&W. In the Legg Mason Report,
Legg Mason summarized for the Boards of Directors of PEI and PG&W the
financial terms of the proposed Sale of the Water Business. Based on
information provided by management of PEI and PG&W, including the projected
assets of the Water Business at the time of Closing and the projected
liabilities to be assumed by PAWC. Legg Mason estimated the purchase price
would be approximately $420 million, or a $6.5 million premium to the
projected book value of the assets of the Water Business at the Closing.
Projections. In performing the analyses included in the Legg Mason Report,
Legg Mason utilized the historical financial statements of the Water Business
and the projections with respect to the Water Business dated February 16,
1995, provided by management of PEI and PG&W.
The following is a brief summary of the analyses performed by Legg Mason in
connection with the Legg Mason Report.
Comparable Public Company Methodology. Legg Mason compared the historical
and projected financial, operating and stock market performance of certain
publicly traded companies that Legg Mason considered comparable to the Water
Business with the historical and projected financial and operating performance
of the Acquired Assets and the Water Business, based upon information provided
by the management of PEI and PG&W. Such comparable companies included AWWC,
Aquarion Company, California Water Service Company, Connecticut Water Service,
Inc., Consumers Water Company, E'Town Corporation, IWC Resources Corporation,
Middlesex Water Company, Philadelphia Suburban Corporation, SJW Corp.,
Southern California Water Company, Southwest Water Company and United Water
Resources Inc.
In performing its analysis, Legg Mason examined both the market value of the
total outstanding common equity (the "Market Value") and the Market Value plus
preferred equity at liquidation value, minority interests (if any) and total
debt net of cash and cash equivalents (the "Market Capitalization") of the
comparable public companies. Using each company's Market Capitalization, Legg
Mason calculated multiples of, among other things, each company's latest
twelve months' ("LTM") earnings before interest and taxes ("EBIT"), LTM
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
LTM revenue and total assets (collectively, the "Market Capitalization
Multiples").
Using each company's Market Value and based on published security analyst
estimates, Legg Mason also calculated multiples of, among other things, each
company's LTM net income available to common stockholders, common
stockholders' equity and projected net income available to common stockholders
(the "Market Value Multiples"). However, Legg Mason concluded and advised the
Boards of Directors of PEI and PG&W that it relied on Market Capitalization
Multiples rather than Market Value Multiples because, in Legg Mason's view,
the implied net income and common stockholders' equity of the Water Business
did not reflect a capitalization consistent with debt and equity ratios
customarily employed in the industry.
Legg Mason applied the Market Capitalization Multiples to projected total
assets and calculated the median and mean of imputed values for the Water
Business of $285.3 million and $289.5 million, respectively. Legg Mason
applied the Market Capitalization Multiples to projected revenues and
calculated the median and mean of imputed values for the Water Business of
$179.5 million and $170.8 million, respectively. Legg Mason applied the Market
Capitalization Multiples to the projected EBITDA of the Water Business and
calculated both the median and mean of implied values for the Water Business
to be $263.6 million. Legg Mason applied the Market Capitalization Multiples
to the projected EBIT of the Water Business and calculated the median and mean
of
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imputed values of the Water Business of $271.9 million and $277.6 million,
respectively. Legg Mason also reviewed values derived by applying Market Value
Multiples to the Water Business implied net income and implied common
stockholders' equity, but, as set forth above, did not rely on such derived
values in its analysis.
The Legg Mason Report concluded that, based upon the then projected
operating performance of the Water Business as provided by the management of
PEI and PG&W, the purchase price range of $400 million to $420 million for the
Water Business was above the median and mean values implied by a comparable
company methodology.
No company utilized in the comparable public company methodology reflected
in the Legg Mason Report was identical to the Water Business. Accordingly, an
analysis of the results of such a comparison is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of such companies and the Water Business.
Comparable Acquisition Transaction Methodology. In preparing the Legg Mason
Report, Legg Mason compared the publicly available financial and operating
performance of certain other water utilities that Legg Mason considered
comparable to the Water Business and that had been acquired in recent
transactions with the historical and projected financial and operating
performance of the Water Business, based upon information provided by the
management of PEI and PG&W. Such transactions included: United Water Resources
Inc./GWC Corp., AWWC/Ohio Suburban Water Company, AWWC/Missouri Cities Water
Company, SJW Corp./Roscoe Moss Co., and GWC Corp./certain assets of AMREP
Corp. In addition, Legg Mason reviewed limited available information on
certain transactions including: Citizens Utilities Co./RHC Holding Corp.,
Inland Resources Inc./Lomax Exploration Company, Ionics Inc./Resources
Conservation Co., Spring Valley Water Co., Inc./certain assets of United Water
Resources Inc. and AWWC/certain divisions of Avatar Holdings, Inc.
In performing its analysis, Legg Mason examined both the amount paid for
each acquired business' common stockholders' equity (the "Purchase Price of
Equity") and the Purchase Price of Equity plus the acquired business' total
debt, preferred equity and minority interest (if any) less cash and cash
equivalents (the "Transaction Value"). Using the Transaction Value of each
such comparable acquisition transaction, Legg Mason calculated multiples of,
among other things, the acquired business' LTM revenues, total assets, LTM
EBITDA and LTM EBIT (collectively, the "LTM Transaction Value Multiples").
Using the Purchase Price of Equity of each acquired business, Legg Mason
calculated a multiple of, among other things, the acquired business' LTM net
income and common stockholders' equity (the "Purchase Price of Equity
Multiples").
Applying the Transaction Value Multiples to the projected revenue associated
with the Water Business, Legg Mason calculated the median and mean of imputed
values for the Water Business of $228.1 million and $229.3 million,
respectively, and, applying the Transaction Value Multiples to the Water
Business' projected assets at the Closing, Legg Mason calculated the median
and mean of imputed values for the Water Business of $290.7 million and $297.3
million, respectively. Applying the Transaction Value Multiples to the Water
Business' projected EBITDA. Legg Mason calculated the median and mean of
imputed values for the Water Business of $298.5 million and $358.5 million,
respectively. Applying the Transaction Value Multiples to the Water Business'
projected EBIT, Legg Mason calculated the median and mean of imputed values
for the Water Business of $321.5 million and $354.3 million, respectively.
Legg Mason also reviewed values derived by applying Purchase Price of Equity
Multiples to the Water Business' implied net income and implied common
shareholders' equity, but, as set forth under "--Comparable Public Company
Methodology", did not rely on such derived values in its analysis.
The Legg Mason Report concluded that, based upon the then projected
operating performance of the Water Business as provided by the management of
PEI and PG&W, the purchase price range of $400 million to $420 million for the
Water Business was above the median and mean values implied by a comparable
acquisition transaction methodology.
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No business utilized in the comparable acquisition transaction methodology
reflected in the Legg Mason Report was identical to the Water Business. An
analysis of the results of this comparison is not mathematical; rather it
involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the
comparable acquired businesses and other factors that could affect the
acquisition value of such businesses and the Water Business.
Discounted Cash Flow Methodology. For purposes of the Legg Mason Report,
Legg Mason also performed a discounted cash flow analysis of the Water
Business premised upon the assumptions described below. The discounted cash
flow analysis was based upon the February 16, 1995, projections provided by
the management of PEI and PG&W and covered fiscal years 1996 through 1999.
Using discount rates ranging from 7.0% to 9.0%, Legg Mason calculated the
present value of the projected stream of Net Unlevered Cash Flow (as defined
below) for fiscal years 1996 through 1999 and the present value of the
terminal value (the "Terminal Value") of the Water Business at December 31,
1999. As used in the Legg Mason Report, "Net Unlevered Cash Flow" means, for
each fiscal year, projected EBIT, less taxes at an estimated rate of 40.0%,
plus projected depreciation and amortization, less projected capital
expenditures, plus or minus projected changes in non-cash working capital. The
Terminal Value was computed by multiplying the projected EBIT with respect to
the Water Business by terminal multiples of 8.0 to 12.0. Legg Mason believed
the ranges of discount rates and terminal multiples were appropriate in light
of the current performance of PEI and PG&W, projections, an analysis of
comparable public companies' Market Capitalization Multiples to EBIT, the
risks inherent in achieving required rate relief, potential capital spending
requirements of the Water Business distribution infrastructure, the current
allowable return on equity, the weighted average cost of capital of the Water
Business and the likely cost of capital.
Based on the range of discount rates and terminal multiples referred to
above, Legg Mason calculated a range of value of $272.3 million to $424.8
million. Based on a discounted cash flow analysis that utilized an after-tax
discount rate of 7.4%, and that reflected allowable returns on the equity of a
water utility, the estimated cost of debt capital for the Water Business, a
capital structure of 60% debt and 40% equity, and a terminal multiple of 9.7,
Legg Mason calculated the net present value of the Water Business to be $343.6
million. The Legg Mason Report concluded that, in Legg Mason's judgment and
based upon the historical and projected operating performance of the Water
Business, a purchase price of $400 million to $420 million was above or within
substantially the entire range of values for the Water Business based on a
discounted cash flow analysis.
The summary set forth above does not purport to be a complete description of
Legg Mason's written opinion or the Legg Mason Report. Legg Mason believes
that its analyses and the summary set forth above must be considered as a
whole and that selecting portions of its analyses or of the factors considered
by it, without considering all analyses and factors, could create an
incomplete view of the process underlying its opinion and such analyses. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analysis or summary description. In its analyses, Legg
Mason made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
the control of PEI and PG&W. Any estimates in the Legg Mason Reports are not
necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth in the Legg Mason Reports. Estimates of
values of companies do not purport to be appraisals or necessarily reflect the
prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, none of PEI, PG&W, Legg Mason or any other
person assumes responsibility for their accuracy.
Legg Mason is a nationally recognized investment banking firm engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions and for other purposes. The Board of Directors of PEI selected
Legg Mason as its financial advisor and as financial advisor to PG&W because
it is a nationally recognized investment banking firm with substantial
experience in divestiture transactions and has substantial knowledge regarding
the Water Business derived during its service to PEI and PG&W as underwriter
in numerous capital financing transactions over the last few years.
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Under its engagement letter with Legg Mason, PEI agreed to pay Legg Mason
for its financial advisory services in connection with the Sale of the Water
Business, upon consummation of such sale, a fee of $2.5 million (the "Sale
Fee"). Of this amount, $250,000 was paid upon the engagement of Legg Mason as
financial advisor to PEI and PG&W. PEI has also agreed to reimburse Legg Mason
for its reasonable out-of-pocket expenses (including reasonable fees and
disbursements of its legal counsel). Legg Mason has agreed that the Sale Fee
will be reduced by the amount of any such out-of-pocket expense reimbursement,
up to a maximum reduction of $200,000. In addition, PEI has agreed to
indemnify Legg Mason, its affiliates and their respective officers, directors,
employees and agents and any persons controlling Legg Mason or any of its
affiliates against certain liabilities relating to or arising out of the Sale
of the Water Business or its engagement, including liabilities arising under
federal securities laws.
Legg Mason has provided investment banking services to PEI and PG&W from
time to time in the past for which it has received customary fees. During the
past two years Legg Mason has provided the following investment banking
services to PEI and PG&W: (i) service as underwriter with respect to the sale
of $30.0 million aggregate principal amount of Luzerne County Industrial
Development Authority Exempt Facilities Revenue Refunding Bonds, 1994 Series A
(the "1994 Series A Bonds"), which was consummated in November, 1994, (ii)
service as underwriter with respect to the sale of $19.0 million aggregate
principal amount of Luzerne County Industrial Development Authority Exempt
Facilities Revenue Refunding Bonds, 1993 Series A (the "1993 Series A Bonds"),
which was consummated in December, 1993, (iii) service as underwriter with
respect to the sale of 1,250,000 shares of PEI Common Stock, which was
consummated in October, 1993. In addition, during 1994 Legg Mason advised,
without any formal engagement and without receiving any fee, Kenneth L.
Pollock, Chairman of the Boards of Directors of PEI and PG&W, in his
consideration of the possibility of making an offer for all or substantially
all of PEI. See "--Background of and Reasons for the Sale of the Water
Business." In the ordinary course of its business, Legg Mason also actively
trades in securities of PEI and PG&W for its own account and for the account
of its customers and makes a market in those securities and, accordingly, may
at any time hold a long and/or short position in any such security.
ACCOUNTING TREATMENT.
The Sale of the Water Business will result in the disposal of a business
segment for financial reporting purposes by each of PEI and PG&W. In
accordance with generally accepted accounting principles, the estimated loss
of $5.8 million on the Sale of the Water Business net of the anticipated
income of $6.9 million from the Water Business during the phase-out period
(assuming that the Closing occurs on December 31, 1995) was recorded as of
March 31, 1995, and the financial statements of both PEI and PG&W for 1994 and
prior years have been restated to reflect the operations of the Water Business
as "discontinued operations." See "PEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Discontinued Operations" and
"PG&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Discontinued Operations."
FEDERAL INCOME TAX CONSEQUENCES.
Federal Income Tax Consequences to PEI Shareholders and PG&W Preferred
Shareholders
The consummation of the Sale of the Water Business pursuant to the Asset
Purchase Agreement will not have any federal income tax consequences to PEI
Shareholders or PG&W Preferred Shareholders.
Federal Income Tax Consequences to PEI and PG&W
PEI, PG&W and PEI's other subsidiaries file a consolidated federal income
tax return. The consummation of the Sale of the Water Business pursuant to the
Asset Purchase Agreement will be a taxable transaction to PG&W. PG&W will
recognize a taxable gain to the extent the amount received for the Water
Business exceeds PG&W's adjusted tax basis in the assets to be acquired by
PAWC pursuant to the Asset Purchase Agreement. PEI believes the Sale of the
Water Business will result in an estimated federal and state income tax
liability of $55.3 million, an amount for which deferred income taxes have
been previously provided.
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THE SALE OF THE WATER BUSINESS
BASIC TERMS OF THE ASSET PURCHASE AGREEMENT.
The description of the Asset Purchase Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the
Asset Purchase Agreement attached as Annex A to this Joint Proxy Statement and
incorporated herein by reference.
Description of the Assets Sold and Liabilities Assumed.
Under the terms of the Asset Purchase Agreement, PEI has agreed to cause
PG&W to sell to PAWC all of PG&W's regulated water operations and certain
related assets, including (i) 10 water treatment plants, 36 reservoirs, and
approximately 7,000 acres of watershed land, for a more complete description
of the properties to be sold see "DESCRIPTION OF PROPERTY TO BE SOLD," (ii)
all equipment and other tangible personal property used exclusively in the
Water Business, (iii) certain water appropriation and flowage rights related
to the reservoirs to be sold, (iv) all accounts receivable from customers,
accrued utility revenues, materials and supplies and prepayments attributable
exclusively to the Water Business, (v) all unamortized debt expense related to
PG&W indebtedness to be assumed by PAWC, deferred treatment plant costs and
carrying costs, deferred water utility billings and other deferred charges
attributable exclusively to the Water Business of which recovery in future
rates is probable, (vi) all intellectual property used exclusively in
connection with the Water Business and goodwill, licenses and sublicenses
granted and obtained with respect thereto, (vii) to the extent any third party
consents are obtained, all contracts, commitments, agreements and instruments
related exclusively to the Water Business, (viii) to the extent any third
party consents are obtained, all permits, franchises, approvals,
authorizations, licenses, orders, registrations, certificates and variances
relating exclusively to the conduct of the Water Business, (ix) all books and
records relating exclusively to the Water Business, the Acquired Assets (as
defined below) or the employees to whom PAWC offers employment and who accept
such employment (the "Transferred Employees"), (x) all rights or choses in
action which are exclusively related to any of the Acquired Assets, including
third party warranties and guarantees and all related claims, credits, rights
of recovery and set-off, as to third parties held by or in favor of PEI or
PG&W, (xi) certain rights to insurance and condemnation proceeds relating to
the damage, destruction, taking or other impairment of the Acquired Assets,
(xii) certain assets of specified PEI and PG&W employee benefit plans which
shall be transferred to trusts established under employment benefit plans
maintained by PAWC or AWWC, as applicable, see "--Employees" and (xiii)
certain office furniture, tools and transportation, stores, shop, garage,
power operated, communications and other equipment assigned to or utilized by
the Transferred Employees up to a maximum value of $4,000,000. (These assets
are collectively referred to herein as the "Acquired Assets.")
At the date of the consummation of the Sale of the Water Business (the
"Closing"), PAWC will assume the following obligations and liabilities
(individually, an "Assumed Liability" and collectively, the "Assumed
Liabilities") of PEI and PG&W: (a) obligations and liabilities arising after
the Closing in respect of contracts and permits assigned or transferred to
PAWC pursuant to the Asset Purchase Agreement; (b) certain specific
obligations and liabilities relating to the Transferred Employees and certain
former employees of PG&W (collectively, the "Employee Benefit Obligations"),
see "--Employees"; (c) all obligations and liabilities of PG&W arising from
and after the date of Closing with respect to (1) the Luzerne County
Industrial Development Authority Exempt Facilities Revenue Refunding Bonds
1992 Series A (the "1992 Series A Bonds"), Luzerne County Industrial
Development Authority Exempt Facilities Revenue Bonds 1992 Series B (the "1992
Series B Bonds"), the 1993 Series A Bonds and the 1994 Series A Bonds and the
related project facilities agreements (the "IDA Financings"), and (2) a Loan
Agreement between PG&W and the Pennsylvania Water Facilities Loan Board and
five Loan Agreements between PG&W and the Pennsylvania Infrastructure
Investment Authority (the "PENNVEST Indebtedness" and, collectively with the
IDA Financings, the "Assumed Indebtedness") (subject to the receipt of
consents, approvals and releases required to enable PAWC to assume PG&W's
obligations under the Assumed Indebtedness); (d) certain obligations or
liabilities for environmental conditions on the real estate transferred to
PAWC pursuant to the Asset Purchase Agreement from and after the tenth
anniversary of the date of the Closing; and (e) advances existing on the date
of the Closing for construction of facilities relating to the Acquired Assets.
PEI and PG&W estimate that the aggregate dollar amount of the Assumed
Liabilities was $155,575,000 as of June 30, 1995.
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Purchase Price.
The $409,143,000 purchase price for the Water Business (the "Purchase
Price") will be determined, adjusted and paid by PAWC as follows: (i) PAWC
will pay $254,555,000 in cash (the "Base Cash Purchase Price") which amount
will be increased or decreased by the amount by which PG&W's calculation of
the Adjusted Net Assets (as defined below) as of the last day of the latest
calendar month prior to the Closing for which financial statements are
available (the "Estimated Adjusted Net Assets") is greater than or less than
$248,055,000 (the Base Cash Purchase Price as so adjusted is referred to as
the "Initial Cash Payment"), and (ii) PAWC will assume the Assumed
Liabilities. "Adjusted Net Assets" means (1) all assets constituting Acquired
Assets, minus (2) all Assumed Liabilities (other than liabilities assumed by
PAWC pursuant to PAWC's assumption of the Employee Benefit Obligations, but
including accrued interest on the Assumed Indebtedness), minus (3) an amount
equal to the aggregate difference between: (i) the cost of each Transferred
Employee's vacation entitlement for the year in which the Closing occurs
multiplied by a fraction, the numerator of which is the number of days in such
year on or before the Closing and the denominator of which is 365, and (ii)
the cost of the vacation days each Transferred Employee has taken on or before
the Closing, minus (4) the excess of contributed property related to the Water
Business over $10,104,000. The Purchase Price payable at the Closing shall
also be adjusted to reflect prorations for certain expenses.
Post-Closing Adjustment.
Within 90 days after the Closing, PAWC shall prepare a statement of net
assets (the "Closing Statement of Net Assets") which reflects the Adjusted Net
Assets as of midnight immediately preceding the date of the Closing, and a
calculation of PAWC's determination of the amount of increase or decrease in
the amount of the Adjusted Net Assets from December 31, 1994 to the date of
the Closing which is derived from the Closing Statement of Net Assets ("PAWC's
Adjustment Amount").
PG&W may dispute any amounts reflected on the Closing Statement of Net
Assets or in PAWC's Adjustment Amount. In the event of a dispute, PAWC and
PG&W shall submit any disputed amounts to an independent accounting firm which
shall determine and resolve such remaining disputed amounts and such
determination and resolution shall be binding on PAWC and PG&W. PG&W and PAWC
do not anticipate choosing such a firm unless and until such a dispute arises.
PAWC's Adjustment Amount, if undisputed or PAWC's Adjustment Amount, as
adjusted after a resolution of all disputes with respect thereto, shall be
referred to as the "Final Net Asset Adjustment." If the Base Cash Purchase
Price plus (or minus) the Final Net Asset Adjustment exceeds the Initial Cash
Payment, then PAWC shall pay to PG&W the amount of such excess together with
interest. If the Initial Cash Payment exceeds the sum of the Base Cash
Purchase Price plus (or minus) the Final Net Asset Adjustment, PG&W shall pay
to PAWC the amount of such excess together with interest.
Conditions to Sale.
The obligations of PAWC and AWWC to consummate the transactions contemplated
by the Asset Purchase Agreement are subject to the satisfaction of the
following conditions (any one or more of which may be waived in writing in
whole or in part by PAWC or AWWC): (i) PEI and PG&W shall have performed in
all material respects all agreements to have been performed prior to the
Closing and all representations and warranties of PEI and PG&W made in the
Asset Purchase Agreement shall have been true and correct in all material
respects; (ii) the applicable waiting period under the Hart-Scott Rodino
Antitrust Improvements Act of 1976 (the "HSR Act") with respect to the
transactions contemplated hereby shall have expired or been terminated; (iii)
the Pennsylvania Public Utility Commission (the "PPUC") shall have issued an
order approving the transactions contemplated by the Asset Purchase Agreement
and affirming that the same regulatory treatment with respect to the Water
Business shall continue following the consummation of the transactions
contemplated by the Asset Purchase Agreement and such order shall not contain
any restrictions (other than those in effect on the date of the Asset Purchase
Agreement) which would have a material adverse effect on the Acquired Assets
or the Water Business; (iv) PG&W shall have obtained all other statutory and
regulatory consents which are required under the laws or regulations of any
governmental or regulatory entity in order to consummate the transactions
contemplated by the Asset Purchase Agreement and to permit PAWC to conduct the
Water Business in substantially the same manner it was conducted by PG&W prior
to the Closing (other than those consents the
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failure of which to obtain would not have a material adverse effect on the
Water Business); (v) PG&W shall have obtained all consents, including, without
limitation, the consent of a majority of the holders of each of the 1992
Series A Bonds, the 1992 Series B Bonds, the 1993 Series A Bonds and the 1994
Series A Bonds, required to enable PAWC to assume the IDA Financings; (vi)
PG&W shall have obtained all consents required pursuant to the Indenture of
Mortgage and Deed of Trust dated as of March 15, 1946 from PG&W to First Trust
Company of New York, as successor to Morgan Guaranty Trust Company of New
York, as trustee, as supplemented (the "Mortgage Indenture") relating to,
among other things, the release of the real property included in the Acquired
Assets and the real property which is the subject of the Operating Easement
Agreement (as defined below) from the lien of the Mortgage Indenture,
including, without limitation, the consent of the holders of no less than (a)
60% of the aggregate principal amount of PG&W's First Mortgage Bonds 9.23%
Series due 1999, PG&W's First Mortgage Bonds 9.34% Series due 2019 and PG&W's
First Mortgage Bonds 8.375% Series due 2002 voting as one class and (b) 60% of
the aggregate principal amount of PG&W's First Mortgage Bonds 7.20% Series due
2017, PG&W's First Mortgage Bonds 7.125% Series due 2022, PG&W's First
Mortgage Bonds 6.05% Series due 2019 and PG&W's First Mortgage Bonds 7% Series
due 2017 voting as one class; (vii) PG&W shall have obtained all other
consents required to be obtained by PG&W pursuant to the Asset Purchase
Agreement including, without limitation, consents to the assignment of certain
software used at the water treatment plants which are included as part of the
Acquired Assets to PAWC; (viii) no statute, rule, regulation or order shall be
in effect which restrains or prohibits the transactions contemplated by the
Asset Purchase Agreement nor shall there be any pending litigation which would
be expected to materially adversely affect PAWC's ownership of the Acquired
Assets; (ix) PG&W and PAWC shall have executed an operating easement agreement
(the "Operating Easement Agreement"), with respect to (a) the use after the
Closing by PAWC of certain real property not included as part of the Acquired
Assets and (b) the use after the Closing by PG&W of certain real property
included as part of the Acquired Assets, see "-Transactions Between PG&W and
PAWC After the Sale of the Water Business" for a description of the Operating
Easement Agreement; (x) the real estate transferred to PAWC pursuant to the
Asset Purchase Agreement and the rights granted to PAWC pursuant to the
Operating Easement Agreement shall be adequate to operate the Water Business
consistent with past practice; and (xi) the Asset Purchase Agreement and the
transactions contemplated thereby shall have been approved by (a) the holders
of a majority of the votes cast by all PEI Shareholders at the PEI Special
Meeting, (b) the holders of a majority of the issued and outstanding shares
entitled to vote thereon of PG&W Preferred Stock, voting as a separate class
and (c) the sole holder of the shares of PG&W Common Stock. PAWC and AWWC have
informed PEI and PG&W that they do not intend to waive the condition that the
Asset Purchase Agreement be approved by the PEI Shareholders, the PG&W Common
Shareholder and the PG&W Preferred Shareholders.
The obligations of PEI and PG&W to consummate the transactions contemplated
by the Asset Purchase Agreement are subject to the satisfaction of the
following conditions (any one or more of which may be waived in writing in
whole or in part by PEI or PG&W): (i) PAWC and AWWC shall have performed all
material respects with all agreements to have been performed prior to the
Closing, and all representations and warranties of PAWC and AWWC made in the
Asset Purchase Agreement shall have been true and correct in all material
respects; (ii) the applicable waiting period under the HSR Act with respect to
the transactions contemplated hereby shall have expired or been terminated;
(iii) the PPUC shall have issued an order approving the transactions
contemplated by the Asset Purchase Agreement and such order shall not contain
any conditions or restrictions that would have a material adverse effect on
PG&W or PEI; (iv) PAWC shall have obtained all statutory and regulatory
consents which are required under the laws or regulations of any governmental
or regulatory entity in order to consummate the transactions contemplated by
the Asset Purchase Agreement other than those that would not have a material
adverse effect on PG&W or PEI; (v) PG&W shall have obtained all consents
required to enable PAWC to assume the IDA Financings, including, without
limitation, the consent of a majority of the holders of each of the 1992
Series A Bonds, the 1992 Series B Bonds, the 1993 Series A Bonds and the 1994
Series A Bonds; (vi) PG&W shall have obtained all consents required pursuant
to the Mortgage Indenture relating to, among other things, the release of the
real property included in the Acquired Assets from the Mortgage Indenture,
including, without limitation, the consent of no less than (a) 60% of the
aggregate principal amount of PG&W's First Mortgage Bonds 9.23% Series due
1999, PG&W's First Mortgage Bonds 9.34% Series due 2019 and PG&W's First
Mortgage Bonds 8.375% Series due 2002 voting as one class and (b)
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60% of the aggregate principal amount of PG&W's First Mortgage Bonds 7.20%
Series due 2017, PG&W's First Mortgage Bonds 7.125% Series due 2022, PG&W's
First Mortgage Bonds 6.05% Series due 2019 and PG&W's First Mortgage Bonds 7%
Series due 2017 voting as one class; (vii) PG&W shall have obtained all other
consents required to be obtained by PG&W pursuant to the Asset Purchase
Agreement including, without limitation, the consents of certain PEI and PG&W
lenders under (a) PG&W's revolving credit agreement and three other bank lines
of credit and (b) PEI's term loan agreement, see "PEI MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources," for a description of these agreements; (viii) no statute,
rule, regulation or order shall be in effect which restrains or prohibits the
transactions contemplated by the Asset Purchase Agreement or which would be
expected to materially adversely affect PG&W's or PEI's ownership of any of
its properties nor shall there by any pending litigation which would be
expected to materially adversely affect PG&W's or PEI's ownership of any of
its properties; (ix) PG&W and PAWC shall have executed the Operating Easement
Agreement, see "--Transactions Between PG&W and PAWC After the Sale of the
Water Business" for a description of the Operating Easement Agreement, and
PAWC shall have caused the release from the lien of the Indenture of Mortgage
dated as of May 1, 1968 from PAWC to the Fidelity Bank, as trustee, as
supplemented (the "PAWC Mortgage") of the real property which is the subject
of the Operating Easement Agreement; and (x) the Asset Purchase Agreement and
the transactions contemplated thereby shall have been approved by (a) the
holders of a majority of the votes cast by all PEI Shareholders at the PEI
Special Meeting, (b) the holders of a majority of the issued and outstanding
shares entitled to vote thereon of PG&W Preferred Stock, voting as one class
and (c) the sole holder of the shares of PG&W Common Stock. Although neither
PEI nor PG&W intends to waive the condition that the Asset Purchase Agreement
be approved by the PEI Shareholders, the PEI Common Shareholder and the PG&W
Preferred Shareholders, PEI and PG&W have the right to waive such condition to
the extent permitted by law.
Certain Covenants.
PEI and PG&W have agreed that, except as otherwise permitted by the terms of
the Asset Purchase Agreement, or approved by PAWC prior to the Closing, PG&W
and/or PEI shall not (i) change in any material respect existing credit and
collection policies with respect to accounts receivable, (ii) enter into any
contract , waive any right or enter into any other transaction (except in the
ordinary course of business) which would have a material adverse effect on the
Water Business or the Acquired Assets, (iii) commit to acquire subsequent to
the Closing on behalf of the Water Business any capital asset or group of
capital assets costing in excess of $1,000,000 which, if so acquired, would be
included in the Acquired Assets or sell or lease or dispose of any asset
included in the Acquired Assets or necessary to conduct the Water Business,
(iv) subject any of the Acquired Assets to any lien, (v) change any
compensation or benefits or grant any new compensation or benefits payable to
or in respect of any Transferred Employee, except as required by law or a
collective bargaining agreement or in the ordinary course of business, or (vi)
make or issue any public announcement concerning the Asset Purchase Agreement
or the transactions contemplated thereby.
PEI and PG&W have agreed that prior to the Closing, they will not solicit or
initiate or (subject to the fiduciary duties of the Board of Directors of PEI
to the PEI Shareholders under applicable law as advised by counsel)
participate in any discussions or negotiations with or enter into any letter
of intent or definitive agreement with any person or group of persons other
than AWWC or its affiliates concerning any acquisition, merger, consolidation
or other similar transaction that would result in the transfer to such person
or group of persons of at least 10% of the Acquired Assets or any other
transaction if that transaction would be inconsistent with their respective
obligations under the terms of the Asset Purchase Agreement (a "Competing
Transaction").
PEI and/or PG&W have agreed that prior to the Closing they will (i) promptly
make or cause to be made all filings applicable to it as may be required to
consummate the transactions contemplated by the Asset Purchase Agreement; (ii)
obtain and deliver to PAWC a survey of the real property included in the
Acquired Assets; and (iii) arrange for certain insurance coverage for events
occurring prior to the Closing but reported within five years of the date of
the Closing.
PAWC or AWWC have agreed that prior to the Closing they will (i) promptly
make or cause to be made all filings and submissions under laws, rules or
regulations applicable to it or its affiliates as may be required to
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consummate the transactions contemplated by the Asset Purchase Agreement; (ii)
use their reasonable efforts to assist PEI in obtaining full releases on
certain guarantees made by PEI of PG&W's obligations with respect to the
PENNVEST Indebtedness; and (iii) use their reasonable efforts to assist PG&W
in obtaining all consents and taking such other actions as may be required to
enable PAWC to assume at the Closing all of PG&W's obligations under the
Assumed Indebtedness.
Employees.
As of the date of the Asset Purchase Agreement, PG&W allocated 420 employees
to the Water Business. PAWC has agreed to offer employment to at least 294 of
these employees. If PAWC does not offer employment to all 420 of these
employees, PAWC shall reimburse PG&W for 50% of the benefits payable under
PG&W's severance plan to all such employees who are not offered employment by
PAWC and are terminated by PG&W within a specified period after the Closing.
Subject to applicable collective bargaining obligations, PAWC will provide
each Transferred Employee with compensation and employee benefits which are
substantially comparable to those provided by PAWC to its other similarly
situated employees and credit the service of each Transferred Employee with
PEI and PG&W for all purposes under PAWC's employee benefit plans other than
for benefit accrual purposes under PAWC's pension plan. For a period of two
years after the Closing, PEI and PG&W shall not solicit or offer employment to
any Transferred Employee then employed by PAWC or its affiliates, nor shall
PAWC solicit or otherwise offer employment to any person then employed by PEI
or PG&W.
The American Water System Pension Plan (the "AWWC Pension Plan") will assume
the liability for all benefits accrued by Transferred Employees under the
Employees' Retirement Plan of Pennsylvania Enterprises, Inc. (the "PEI Pension
Plan") as of the Closing. Within 120 days after the Closing, an amount equal
to the amount of those benefit liabilities plus interest on such amount at the
prime rate from the Closing will be transferred from the PEI Pension Plan to
the AWWC Pension Plan. All Transferred Employees will become 100% vested in
their account balances under the Pennsylvania Enterprises, Inc. Savings Plan
(the "PEI Savings Plan") as of the Closing. Prior to the Closing, Transferred
Employees will be permitted to elect to retain their PEI stock accounts in the
PEI Savings Plan. Within 120 days after the Closing, all accounts in the PEI
Savings Plan attributable to Transferred Employees, other than PEI stock
accounts which Transferred Employees elect to retain in the PEI Savings Plan,
will be transferred to the Savings Plan for Employees of American Water Works
Company, Inc., in cash and promissory notes representing participant loans.
PAWC will assume the obligation to provide post-retirement health care and
life insurance benefits incurred after the Closing by certain former employees
of PEI and PG&W to the extent the PPUC has authorized recovery for the expense
of such benefits in PG&W's water rates as of the Closing. Within 60 days after
the Closing, PG&W will cause the transfer from trusts established by PG&W to
fund post-retirement health care and life insurance benefits to trusts
established by PAWC of all assets attributable to the former employees and
Transferred Employees. PAWC will assume the liability for accrued but unused
vacation of Transferred Employees for the year in which the Closing occurs.
Representations and Warranties.
Each of PG&W and PEI has made representations and warranties to PAWC
concerning organization and qualification to do business of PEI and PG&W,
investment interests of PEI and PG&W included in the Acquired Assets,
corporate power and authority of PEI and PG&W, enforceability of the Asset
Purchase Agreement against PEI and PG&W, compliance with laws and agreements,
financial statements, changes in conduct of business, contracts, permits,
environmental matters, title to the Acquired Assets, consents required to be
obtained, real estate matters, tax matters, intellectual property rights,
accounts receivable, labor relations, employee benefit plans, absence of
undisclosed liabilities, litigation, proceedings and judgments, adequate
supply of utilities, insurance matters, WARN Act matters, operating condition
of the Acquired Assets and the tangible assets of the Water Business,
relationships with customers, brokerage fees and assets necessary to conduct
the Water Business in substantially the same manner it was conducted prior to
the Closing. Each of PAWC and AWWC has made representations and warranties to
PG&W concerning organization and qualification to do business of PAWC and
AWWC, corporate power and authority of PAWC and AWWC, enforceability of the
Asset Purchase Agreement against PAWC and AWWC, compliance with laws and
agreements, consents required to be obtained, financing to pay the Purchase
Price and brokerage fees.
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Amendments and Termination.
The Asset Purchase Agreement may be amended only by the written consent of
each of PEI, PG&W, AWWC and PAWC. The Asset Purchase Agreement may be
terminated, among other instances, (i) by mutual written consent of PEI, PG&W,
AWWC and PAWC; (ii) by PEI and/or PG&W if PEI or PG&W receives a proposal to
acquire from PEI or PG&W all or most of the assets of PEI or PG&W or the Water
Business or at least a majority of the outstanding securities of PEI or PG&W
with general voting rights to elect directors of PEI or PG&W, or any right or
option to acquire any of the foregoing that PEI's Board of Directors
determines in good faith is more favorable to the PEI Shareholders than the
transactions contemplated by the Asset Purchase Agreement; (iii) by PEI, PG&W,
AWWC or PAWC if (a) the vote of the PEI Shareholders or PG&W Preferred
Shareholders to approve the Asset Purchase Agreement and the transactions
contemplated thereby is not obtained at the PEI Special Meeting or the PG&W
Special Meeting or adjournments thereof, (b) any governmental or regulatory
body shall have determined not to grant its consent and all appeals of such
determination have been taken and been unsuccessful, (c) a court of competent
jurisdiction shall have issued an order or judgment prohibiting the
transactions contemplated by the Asset Purchase Agreement and such order shall
have become final and nonappealable, or (d) the Closing shall not have
occurred on or prior to April 26, 1996; (iv) by PAWC or AWWC if PEI or PG&W
enters into any letter of intent or definitive agreement regarding a Competing
Transaction; (v) by PAWC or AWWC if the Board of Directors of PEI or PG&W
withdraws its recommendation to the PEI Shareholders or the PG&W Preferred
Shareholders, as the case may be, to vote in favor of approval and adoption of
the Asset Purchase Agreement; or (vi) by PG&W or PAWC if they are unable to
resolve disputes regarding the survey of the real property included in the
Acquired Assets which is required to be performed prior to the Closing.
Termination Payments and Expense Reimbursements.
If (i) PEI or PG&W terminates the Asset Purchase Agreement after receiving a
proposal to acquire all or most of the assets of PEI or PG&W or the Water
Business or at least a majority of the outstanding securities of PEI or PG&W
with general voting rights to elect directors of PEI or PG&W (or a proposal to
acquire an option to acquire any of the foregoing) that PEI's Board of
Directors determines in good faith to be more favorable to the PEI
Shareholders than the transactions contemplated by the Asset Purchase
Agreement; (ii) any party to the Asset Purchase Agreement terminates the Asset
Purchase Agreement because the Asset Purchase Agreement is not approved by the
PEI Shareholders or the PG&W Preferred Shareholders and within 3 months after
the date of such termination PEI or PG&W enters into a letter of intent or
definitive agreement with respect to a Competing Transaction or consummates a
Competing Transaction or (iii) if AWWC or PAWC terminates the Asset Purchase
Agreement due to PEI's or PG&W's breach of certain of its obligations with
respect to this Joint Proxy Statement which is not cured, or the withdrawal of
the recommendations of the Boards of Directors of PEI or PG&W in favor of the
transactions contemplated by the Asset Purchase Agreement and PEI enters into
a letter of intent or definitive agreement or consummates a Competing
Transaction, within 6 months after the date of such termination, PG&W has
agreed to pay to PAWC a breakup fee of $9,000,000 and reimburse PAWC and AWWC
for all reasonable out of pocket expenses (up to a maximum of $1,500,000)
incurred by PAWC and AWWC in connection with the transactions contemplated by
the Asset Purchase Agreement.
REGULATORY FILINGS AND APPROVALS.
The Water Business is regulated by the PPUC with respect to utility rates,
service and facilities, accounts, issuance of certain securities, the
encumbering or disposition of public utility properties, the design,
installation, testing, construction and maintenance of PG&W's pipeline
facilities and various other matters associated with broad regulatory
authority. PEI and PG&W must obtain prior approval of the PPUC to sell the
Water Business to PAWC. A Joint Application of PEI, PG&W, PAWC and AWWC was
filed with the PPUC on June 30, 1995 (the "Joint Application"), pursuant to
which the joint applicants requested the PPUC's approval of (i) the transfer,
by sale, of substantially all of the water works and rights of PG&W to PAWC
including the subdivision of transferred real estate; (ii) the commencement by
PAWC of water service in the certificated territory of PG&W and; (iii)
abandonment by PG&W of water service to the public and (iv) such other
approvals as are necessary and appropriate to complete the proposed
transactions. The Office of Consumer Advocate of the Commonwealth
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of Pennsylvania ("OCA") has filed a Protest and Public Statement regarding the
Joint Application with the PPUC requesting among other things, that the PPUC
hold public hearings on the Joint Application in certain locations in PG&W's
water service area. Also, two customers of PG&W have filed interventions in
the proceeding. The PPUC has not taken any formal action regarding the Joint
Application.
In addition to the PPUC, the principal agency having regulatory authority
over PG&W's Water Business is the Pennsylvania Department of Environmental
Protection (the "DEP") (which was formerly known as the Department of
Environmental Resources) which has jurisdiction, among other matters,
concerning water rights, sources of supply, the design and construction of
waterworks, the physical, chemical and biological characteristics of drinking
water and the safety of dams. PG&W must obtain approval from the DEP for the
transfer of various permits to PAWC and to this end, PG&W, AWWC and PAWC have
initiated the process to obtain the appropriate DEP approvals.
The Sale of the Water Business is also subject to the requirements of the
HSR Act and the rules and regulations thereunder, which provide that certain
transactions may not be consummated until required information has been
furnished to the Federal Trade Commission and Antitrust Division of the United
States Department of Justice and certain waiting periods have expired or been
terminated.
TRANSACTIONS BETWEEN PG&W AND PAWC AFTER THE SALE OF THE WATER BUSINESS.
After the consummation of the Sale of the Water Business, it is anticipated
that certain relationships will exist between PG&W and PAWC.
Pursuant to the Operating Easement Agreement to be entered into at the
Closing by PG&W and PAWC, (i) PG&W will provide PAWC with certain rights of
way and easements, free and clear of the lien of the Mortgage Indenture, over
certain of PG&W's real property not included in the Acquired Assets for use,
after the Closing, by PAWC in connection with the Acquired Assets and the
Water Business, and (ii) PAWC will provide PG&W with certain rights of way and
easements, free and clear of the lien of the PAWC Mortgage, over certain of
the real property included in the Acquired Assets for use by PG&W principally
in connection with its gas business.
At the Closing, PG&W and PAWC may enter into a 5 year lease (subject to
renewal at the option of PAWC for an additional 5 year term) with respect to
certain common plant assets, if any, which PG&W and PAWC determine are
reasonably required for the operation by PAWC of its water utility operations
after the Closing.
Pursuant to the Asset Purchase Agreement, PG&W has agreed to allow PAWC to
use for a period of 180 days after the Closing, all of the logos, trademarks
and trade identification of PG&W as are located at the real property to be
transferred to PAWC or on the Acquired Assets.
In addition, pursuant to the Asset Purchase Agreement, PEI and PG&W have
agreed to indemnify and hold harmless PAWC and AWWC from and against all
losses, liabilities, obligations and damages in excess of $3,000,000 (the
"Basket Amount") arising out of or resulting from (i) any breach of any
representation, warranty, covenant or agreement made by PEI or PG&W in the
Asset Purchase Agreement or in any document or certificate required to be
furnished to PAWC by PEI or PG&W pursuant to the Asset Purchase Agreement,
(ii) any assets of PG&W not transferred to PAWC pursuant to the Asset Purchase
Agreement or any liabilities of PG&W not assumed by PAWC pursuant to the Asset
Purchase Agreement ("Retained Liabilities") and (iii) the ownership, operation
or use of any of PG&W's businesses or assets (or any businesses or assets of
PG&W's affiliates) other than the Water Business whether before, on or after
the date of the Closing. The Asset Purchase Agreement provides that PEI's and
PG&W's aggregate indemnity obligations shall not exceed $40,000,000 (the
"Ceiling") and that PEI and PG&W's aggregate indemnity obligations with
respect to a failure to obtain subdivision approvals shall not exceed
$1,000,000. The limitations with respect to the Basket Amount and the Ceiling
shall not apply, however, with respect to losses, liabilities, obligations and
damages suffered by PAWC and AWWC including with respect to certain breaches
by PEI and PG&W of their obligations regarding due authorization, taxes and
employee benefit plans or in the case of any intentional or willful breaches
by PEI and PG&W of any of their representations and warranties under the Asset
Purchase Agreement. The limitations with respect to the Basket Amount shall
also not apply with respect to losses, liabilities, obligations and damages
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suffered by PAWC and AWWC due to the failure of PG&W to obtain subdivision
approvals for the transfer of the real property included as part of the
Acquired Assets from all applicable governmental authorities. PAWC and AWWC
have agreed to indemnify and hold harmless PEI and PG&W from and against all
losses, liabilities, obligations and damages arising out of or resulting from
(i) any breach of any representation, warranty, covenant or agreement made by
PAWC or AWWC in the Asset Purchase Agreement or in any document or certificate
required to be furnished to PG&W by PAWC or AWWC pursuant to the Asset
Purchase Agreement, (ii) any Assumed Liabilities after the date of the
Closing, (iii) the ownership, operation or use of the Water Business after the
date of the Closing (except to the extent resulting from Retained Liabilities
or to the extent resulting from breaches by PEI or PG&W of representations,
warranties, covenants or agreements made pursuant to the Asset Purchase
Agreement or certain other agreements contemplated by the Asset Purchase
Agreement and (iv) any claim by a Transferred Employee or certain former
employees of PG&W or the beneficiaries of such employees or former employees
for post-retirement health care or life insurance benefits incurred after the
Closing.
PG&W's representations and warranties, covenants and obligations under the
Asset Purchase Agreement will survive for various periods ranging from
termination on the date of the Closing to survival for an unlimited period of
time with respect to corporate power and authority of PEI and PG&W and the
related indemnity obligations.
Pursuant to the Asset Purchase Agreement, PG&W has agreed that, except for
the sale to three specified customers of untreated water taken from PG&W
reservoirs which are not included in the Acquired Assets, for a period of 15
years after the Closing, neither PG&W nor any of its affiliates shall directly
or indirectly own, manage, operate, control or participate in the ownership,
management, operation or control of or be otherwise connected in any
substantial manner with any entity engaged in the business of storing,
supplying and distributing water in Pennsylvania, whether or not such business
is subject to regulation by the PPUC.
USE OF CERTAIN PROCEEDS OF THE SALE OF THE WATER BUSINESS
At meetings of the Board of Directors of PEI and PG&W, each held on August
7, 1995, (a) the Board of Directors of PG&W determined that, following the
consummation of the Sale of the Water Business and subject to a review of
market conditions at that time, that PG&W utilize a portion of the net
proceeds of the Sale of the Water Business to (i) repay a $50.0 million bridge
loan that PG&W currently seeks to obtain, see "PEI MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources--Interim Financing Practices," for the purpose of redeeming
the $50.0 million principal amount of PG&W's First Mortgage Bonds 9.57% Series
due 1996, (ii) repurchase approximately 225,000 shares of PG&W's 9% Cumulative
Preferred Stock (equivalent to 900,000 PG&W Depositary Preferred Shares) at an
aggregate repurchase price of $24,300,000 (equivalent to $108.00 per share),
(iii) repurchase approximately 80,000 shares of PG&W's 4.10% Cumulative
Preferred Stock at an aggregate repurchase price of $4,000,000 (equivalent to
$50.00 per share), (iv) repay approximately $33.2 million of PG&W's bank
borrowings, (v) repurchase approximately 2,035,000 shares of PG&W Common Stock
from PEI for an approximate aggregate repurchase price of $81,400,000
(equivalent to $40.00 per share) and (vi) further reduce its common
shareholder's investment by $30.0 million by issuing to PEI a $30.0 million
10.125% promissory note due June 15, 1999, and (b) the Board of Directors of
PEI determined that following the consummation of the Sale of the Water
Business and subject to a review of market conditions at that time, that PEI
utilize approximately $81,400,000 of the cash it receives from PG&W as a
result of PG&W's aforementioned repurchase from PEI of PG&W Common Stock to
repurchase approximately 2,200,000 shares of PEI Common Stock from the public
at an aggregate repurchase price of $81,400,000 (equivalent to $37.00 per
share). See "PG&W UNAUDITED PRO FORMA FINANCIAL STATEMENTS" and "PEI UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS" for a description of the effects
of these transactions on PEI and PG&W. Since the foregoing transactions are
subject to further review by the PEI and PG&W Boards of Directors at the time
of the consummation of the Sale of the Water Business, there can be no
assurance that any of the foregoing transactions will be consummated or if
they are consummated that they will be consummated on the prices and/or in the
amounts set forth above.
30
<PAGE>
DISSENTERS RIGHTS
PG&W PREFERRED SHAREHOLDERS.
The following summarizes all material terms of the provisions of Sections
1571-1580, and Section 1932 of the Pennsylvania Business Corporation Law (the
"PBCL") but does not purport to be a complete statement of the provisions of
Sections 1571-1580 and 1932 of the PBCL. The following summary is qualified in
its entirety by reference to such Sections of the PBCL, which are set forth in
full as Annex C to this Joint Proxy Statement. Such provisions must be
strictly complied with or the dissenters rights may be lost.
A record owner of shares of PG&W Preferred Stock has the rights of a
dissenting shareholder under Sections 1571-1580, and Section 1932 of the PBCL
to object to the approval of the Asset Purchase Agreement and demand in
writing to be paid in cash the fair value of such shares as of the time
immediately prior to the Closing without regard to any depreciation or
appreciation of the shares in consequence of the Sale of the Water Business,
provided, that in the event that the Sale of the Water Business is not
consummated, no PG&W Preferred Shareholder shall be entitled to any dissenters
rights.
A person who is a record owner of shares of PG&W Preferred Stock may assert
dissenters rights as to fewer than all of the shares of PG&W Preferred Stock
registered in his name only if he dissents with respect to all the shares of
the same class or series beneficially owned by any one person and discloses
the name and address of the person or persons on whose behalf he dissents. In
that event, his rights will be determined as if the shares as to which he has
dissented and his other shares were registered in the names of different
shareholders.
A person who is a beneficial owner, but not a record owner, of shares of
PG&W Preferred Stock and who desires to assert the rights of a dissenting
shareholder can do so in his own name but only if he submits to PG&W, no later
than the time of the assertion of dissenters rights, a written consent of the
record owner. A beneficial owner may not dissent with respect to some but less
than all of such beneficially owned shares of the same class or series of PG&W
Preferred Stock owned by the record owner, whether or not the shares so owned
by him are registered in his name. A holder of PG&W Depositary Preferred
Shares who desires to assert the rights of a dissenting shareholder can do so
in his own name but only if he submits to PG&W, no later than the time of the
assertion of dissenters rights, a written consent of the Depositary. A holder
of PG&W Depositary Preferred Shares may not dissent with respect to some but
less than all of the PG&W Depositary Preferred Shares owned by him.
In the event a record or beneficial owner of PG&W Preferred Stock or an
owner of PG&W Depositary Preferred Shares elects to exercise the right to
dissent (and, in the case of a beneficial owner of PG&W Preferred Stock or an
owner of PG&W Depositary Preferred Shares, obtains the consent of the record
owner), such owner must satisfy all the following conditions in order to
perfect rights as a dissenting shareholder.
1. Such owner must file with PG&W a written notice of intention to demand
that he be paid the fair value for his shares of PG&W Preferred Stock, if
the Asset Purchase Agreement is approved, before commencement of voting
upon approval of the Asset Purchase Agreement. Neither a vote in person or
by proxy against approval of the Asset Purchase Agreement nor an abstention
from voting with respect to, nor a failure to vote for approval of, the
Asset Purchase Agreement will constitute such a written notice of intention
to demand payment for his shares.
2. Such owner must effect no change in the beneficial ownership of his
shares of PG&W Preferred Stock between the date of filing the notice of
intention to demand payment for his shares and the Closing.
3. Such owner must not vote for approval of the Asset Purchase Agreement
in person or by proxy. Neither an abstention from voting with respect to,
nor failure to vote in person or by proxy against approval of, the Asset
Purchase Agreement will constitute a vote for approval of the Asset
Purchase Agreement. A SIGNED PROXY THAT IS PRESENTED AT THE PG&W SPECIAL
MEETING BUT WHICH DOES NOT CONTAIN ANY INSTRUCTION AS TO HOW THE PROXY
SHOULD BE VOTED WILL BE VOTED IN FAVOR OF APPROVAL OF THE ASSET PURCHASE
AGREEMENT AND THE PG&W SHAREHOLDER ON WHOSE BEHALF SUCH PROXY IS PRESENTED
WILL NOT THEREAFTER BE ENTITLED TO THE RIGHTS OF A DISSENTING SHAREHOLDER.
31
<PAGE>
4. If the Asset Purchase Agreement is approved by the required vote at
the PG&W Special Meeting and by the sole holder of the PG&W Common Stock,
PG&W will mail a notice to all owners of shares of PG&W Preferred Stock who
gave due notice of intention to demand payment of the fair value of their
shares of PG&W Preferred Stock and who refrained from voting in favor of
the approval of the Asset Purchase Agreement. Such notice shall state,
among other things, where and when a demand for payment must be sent and
certificates for certificated shares of PG&W Preferred Stock must be
deposited in order to obtain payment. Such owner must make a written demand
on PG&W for payment of the fair value of the shares of PG&W Preferred Stock
with respect to which the dissent is made, and must submit the certificate
or certificates representing such shares to PG&W by such date specified in
the notice, which date shall not be less than 30 days after the date of
mailing of the notice by PG&W. If the beneficial owner is not the record
owner of the shares of PG&W Preferred Stock as to which a dissent is made,
the beneficial owner should insure that the record owner submits the
certificates to PG&W. In the case of PG&W Depositary Preferred Shares, a
holder of such PG&W Depositary Preferred Shares should notify the
Depositary to submit the certificates representing the underlying shares of
PG&W 9% Cumulative Preferred Stock to PG&W. The written demand must state
the number of shares of PG&W Preferred Stock or PG&W Depositary Preferred
Shares with respect to which the dissent is made. Upon making the written
demand, a record owner will be entitled only to payment in cash of the fair
value of the shares of PG&W Preferred Stock or PG&W Depositary Preferred
Shares as to which dissent is made and will not be entitled to vote or to
exercise any other rights of a PG&W Preferred Shareholder as to such shares
of PG&W Preferred Stock or PG&W Depositary Preferred Shares.
Unless such owner of PG&W Preferred Stock both timely files the written
notice of intention to demand payment for shares and makes the timely written
demand for fair value as provided above, he will be conclusively presumed to
have consented to the approval of the Asset Purchase Agreement and will be
bound by its terms. Each written notice of intention to demand payment for
shares and written demand for fair value must be sent to Pennsylvania Gas and
Water Company, Wilkes-Barre Center, 39 Public Square, Wilkes-Barre,
Pennsylvania 18711-0601, Attention: Secretary. In addition, failure by a
record owner to submit to PG&W the certificates representing the shares of
PG&W Preferred Stock as to which the dissent is made will terminate the rights
of such owner as a dissenting shareholder.
Within 60 days after the date for demanding payment and depositing
certificates, if PG&W has not effected the Sale of the Water Business it shall
return any certificates that have been deposited to the record owners.
Promptly after the Closing PG&W will pay to each holder of PG&W Preferred
Stock or PG&W Depositary Preferred Shares who has made written demand and has
otherwise perfected dissenters right in accordance with Sections 1571-1580 of
the PBCL an amount deemed by PG&W to be the fair value of such PG&W Preferred
Stock or PG&W Depositary Preferred Shares ("PG&W Dissenting Shares") or give
written notice that no payment will be made. No payment will be required to be
made by PG&W if PG&W deems the fair value of the PG&W Dissenting Shares to be
equal to zero. The payment or written notice will be accompanied by a
consolidated balance sheet of PG&W and its subsidiaries for a fiscal year
ending not more than 16 months before the date of payment or notice together
with the latest available interim financial statements, a statement of PG&W's
estimate of the fair value of the shares, and a notice of the right of
dissenters to demand payment or supplemental payment, as the case may be, for
their PG&W Dissenting Shares.
If PG&W gives notice of its estimate of the fair value of the shares of PG&W
Preferred Stock without making payment to a holder of PG&W Dissenting Shares
of that amount or makes a payment to a holder of PG&W Dissenting Shares of its
estimate of the fair value of the PG&W Preferred Stock, and any holder if PG&W
Preferred Stock disagrees with PG&W as to the fair value of the PG&W
Dissenting Shares, such holder of PG&W Dissenting Shares may at any time
within 30 days after the mailing of the notice of estimate or payment by PG&W,
send to PG&W his own estimate of the fair value of the PG&W Preferred Stock.
Such estimate shall be deemed a demand for payment of the amount of the
deficiency. If the holder of PG&W Dissenting Shares fails to file such
estimate with PG&W within the 30-day period, such holder of PG&W Dissenting
Shares shall be entitled to no more than the amount stated in the notice or
paid to him by PG&W.
32
<PAGE>
Within 60 days after the last to occur of (1) the Closing, (2) the timely
receipt of any notices to demand payment of fair value or (3) the timely
receipt of any estimates by holders of PG&W Dissenting Shares of the fair
value of PG&W Preferred Stock, if any demands for payment remain unsettled,
PG&W may file a petition in the Court of Common Pleas of Luzerne County,
Pennsylvania (the "Court") to secure a determination of the fair value of the
shares of PG&W Preferred Stock. If PG&W has not instituted such a proceeding,
any holder of PG&W Dissenting Shares may do so in the name of PG&W within 30
days after the expiration of such 60-day period. All remaining holders of PG&W
Dissenting Shares whose demands have not been settled will be made parties to
the proceeding. The Court may, if it elects, appoint one or more appraisers to
receive evidence and recommend a decision on the question of fair value.
All holders of PG&W Dissenting Shares who remain parties to the proceeding
will be entitled to a judgment against PG&W for the amount of the fair value
of their PG&W Preferred Stock as of the time immediately prior to the Closing
plus interest without regard to any depreciation or appreciation of the shares
in consequence of the Sale of the Water Business. The costs and expenses of
the proceeding to determine the fair value of the PG&W Preferred Stock held by
the holders of PG&W Dissenting Shares shall be determined by the Court and
assessed against PG&W, but all or any part of such costs and expenses may be
apportioned and assessed, as the court may deem equitable, against any or all
of the holders of PG&W Dissenting Shares if the Court shall find that the
action of the holders of PG&W Dissenting Shares, in demanding supplemental
payment, was dilatory, obdurate, arbitrary, vexatious or not in good faith.
The expenses of the proceeding shall include reasonable compensation and
reasonable expenses of the appraisers but shall exclude the fees and expenses
of counsel for, and experts employed by, any party, but if the Court
determines that a lack of good faith appears on the part of any party against
whom fees and expenses are assessed or that PG&W failed to comply
substantially with the requirements of the PBCL, the Court in its discretion
may award to PG&W or any holder of PG&W Dissenting Shares, as the case may be,
such sum as the Court may deem to be reasonable compensation to such party's
counsel or any expert or experts employed by such party in the proceeding. If
the Court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and should not be
assessed against PG&W, the Court may award to that counsel reasonable fees to
be paid out of the amounts payable to the dissenters who were benefited. PG&W
SHAREHOLDERS WISHING TO DISSENT SHOULD CONSULT THEIR OWN COUNSEL.
33
<PAGE>
PEI SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below have been derived
from PEI's unaudited consolidated financial statements as restated to reflect
PG&W's water utility operations as "discontinued operations" effective March
31, 1995. Operating results for the six months ended June 30, 1995, are not
indicative of the results that may be expected for the entire year ending
December 31, 1995, due to the seasonal nature of PG&W's business. See Note 13
of Notes to PEI's Consolidated Financial Statements included elsewhere in this
Joint Proxy Statement. The selected consolidated financial data set forth
below do not purport to be complete and should be read in conjunction with
"PEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and PEI's Consolidated Financial Statements and the notes
thereto included elsewhere in this Joint Proxy Statement. IN PREPARING THIS
SELECTED CONSOLIDATED FINANCIAL DATA, ALL OF PEI'S INTEREST CHARGES AND ALL OF
PG&W'S PREFERRED STOCK DIVIDENDS HAVE BEEN ALLOCATED TO CONTINUING OPERATIONS
(SEE NOTE 2 BELOW).
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1994 (1) 1993 (1) 1992 (1) 1991 (1) 1990 (1) 1995 (1) 1994 (1)
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED, AND IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES...... $ 167,992 $ 153,325 $ 143,227 $ 138,465 $ 135,185 $ 93,421 $ 106,801
Cost of gas............ 98,653 86,557 77,720 77,801 75,711 54,281 64,814
--------- --------- --------- --------- --------- -------- ---------
OPERATING MARGIN........ 69,339 66,768 65,507 60,664 59,474 39,140 41,987
--------- --------- --------- --------- --------- -------- ---------
OTHER OPERATING
EXPENSES:
Operation.............. 22,652 21,797 21,514 20,589 21,061 11,281 11,304
Maintenance............ 4,436 3,695 3,405 3,957 4,086 2,280 2,194
Depreciation........... 6,667 6,388 6,087 5,545 5,325 3,576 3,340
Income taxes........... 4,290 4,935 4,962 2,513 2,464 3,292 4,962
Taxes other than income
taxes................. 10,807 10,055 9,670 8,663 8,458 6,535 6,999
--------- --------- --------- --------- --------- -------- ---------
Total other operating
expenses............ 48,852 46,870 45,638 41,267 41,394 26,964 28,799
--------- --------- --------- --------- --------- -------- ---------
OPERATING INCOME........ 20,487 19,898 19,869 19,397 18,080 12,176 13,188
OTHER INCOME
(DEDUCTIONS), NET...... 258 (472) (92) 604 (805) 412 194
INTEREST CHARGES (2).... (13,793) (12,888) (13,164) (14,722) (12,598) (7,669) (6,499)
--------- --------- --------- --------- --------- -------- ---------
INCOME FROM CONTINUING
OPERATIONS............. 6,952 6,538 6,613 5,279 4,677 4,919 6,883
--------- --------- --------- --------- --------- -------- ---------
DISCONTINUED OPERATIONS:
Income from
discontinued
operations, net of
related income taxes.. 10,504 7,909 4,915 3,130 315 2,127 4,724
Estimated loss on
disposal of
discontinued
operations, net of
anticipated income
during the phase-out
period................ -- -- -- -- -- (5,831) --
--------- --------- --------- --------- --------- -------- ---------
Income (loss) with
respect to
discontinued
operations............ 10,504 7,909 4,915 3,130 315 (3,704) 4,724
--------- --------- --------- --------- --------- -------- ---------
INCOME BEFORE
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS........ 17,456 14,447 11,528 8,409 4,992 1,215 11,607
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (2).... 4,639 6,462 5,065 4,236 4,323 1,383 2,644
--------- --------- --------- --------- --------- -------- ---------
NET INCOME (LOSS)....... $ 12,817 $ 7,985 $ 6,463 $ 4,173 $ 669 $ (168) $ 8,963
========= ========= ========= ========= ========= ======== =========
</TABLE>
- --------
See page 35 for an explanation of footnotes.
34
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- -----------------------
1994 (1) 1993 (1) 1992 (1) 1991 (1) 1990 (1) 1995 (1) 1994 (1)
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED, AND IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK INFORMATION:
Weighted average number
of shares outstanding
in thousands.......... 5,457 4,395 4,011 2,734 2,719 5,695 5,420
========== ========== ========== ========== =========== ========== ==========
Earnings (loss) per
share of common stock:
Continuing operations
(2)................... $ .43 $ .02 $ .39 $ .38 $ .13 $ .62 $ .78
Discontinued opera-
tions ................ 1.92 1.80 1.22 1.15 .12 (.65) .87
---------- ---------- ---------- ---------- ----------- ---------- ----------
Net income (loss) be-
fore premium on re-
demption of
subsidiary's pre-
ferred stock.......... 2.35 1.82 1.61 1.53 .25 (.03) 1.65
Premium on redemption
of subsidiary's
preferred stock....... (.18) -- -- -- -- -- (.10)
---------- ---------- ---------- ---------- ----------- ---------- ----------
Earnings (loss) per
share of common
stock................. $ 2.17 $ 1.82 $ 1.61 $ 1.53 $ .25 $ (.03) $ 1.55
========== ========== ========== ========== =========== ========== ==========
Cash dividends per
share of common
stock................. $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 1.10 $ 1.10
========== ========== ========== ========== =========== ========== ==========
CAPITALIZATION AT END OF PERIOD:
Amounts--
Common shareholders'
investment............ $ 172,012 $ 165,775 $ 135,144 $ 109,965 $ 111,360 $ 168,455 $ 168,875
Preferred stock of
PG&W--
Not subject to
mandatory
redemption, net ..... 33,615 33,615 33,615 9,916 9,916 33,615 33,615
Subject to mandatory
redemption .......... 1,760 31,840 41,920 42,000 42,080 1,680 16,760
Long-term debt......... 220,705 155,388 148,866 128,267 61,286 157,893 158,191
---------- ---------- ---------- ---------- ----------- ---------- ----------
Total capitalization. $ 428,092 $ 386,618 $ 359,545 $ 290,148 $ 224,642 $ 361,643 $ 377,441
========== ========== ========== ========== =========== ========== ==========
Ratios--
Common shareholders'
investment ........... 40.2% 42.9% 37.6% 37.9% 49.6% 46.6% 44.7%
Preferred stock of
PG&W--
Not subject to
mandatory
redemption, net...... 7.8 8.7 9.3 3.4 4.4 9.3 8.9
Subject to mandatory
redemption........... 0.4 8.2 11.7 14.5 18.7 0.5 4.5
Long-term debt......... 51.6 40.2 41.4 44.2 27.3 43.6 41.9
---------- ---------- ---------- ---------- ----------- ---------- ----------
Total................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== =========== ========== ==========
UTILITY PLANT AT END OF PERIOD:
Total utility plant.... $ 284,080 $ 269,819 $ 256,663 $ 246,323 $ 239,036 $ 288,071 $ 272,047
Accumulated deprecia-
tion.................. 74,408 70,954 65,318 61,628 57,180 75,668 70,122
---------- ---------- ---------- ---------- ----------- ---------- ----------
Net utility plant.... $ 209,672 $ 198,865 $ 191,345 $ 184,695 $ 181,856 $ 212,403 $ 201,925
========== ========== ========== ========== =========== ========== ==========
TOTAL ASSETS AT END OF PERIOD:
Continuing operations.. $ 321,236 $ 318,057 $ 257,458 $ 247,538 $ 247,758 $ 296,126 $ 291,220
Discontinued opera-
tions, net (3)........ 203,196 193,002 183,702 144,815 124,774 197,713 201,355
---------- ---------- ---------- ---------- ----------- ---------- ----------
Total................ $ 524,432 $ 511,059 $ 441,160 $ 392,353 $ 372,532 $ 493,839 $ 492,575
========== ========== ========== ========== =========== ========== ==========
</TABLE>
- --------
(1) Restated to reflect discontinued operations.
(2) None of PEI's interest charges nor any of PG&W's Preferred Stock dividends
have been allocated to the discontinued operations. Interest charges
relating to indebtedness of PG&W have been allocated to the discontinued
operations based on the relationship of the gross water utility plant of
the discontinued operations to the total of PG&W's gross gas and water
utility plant. This is the same method as has been utilized by PG&W and
the PPUC in establishing the revenue requirements of both PG&W's gas and
water utility operations.
(3) Net of (i) liabilities being assumed by PAWC, (ii) estimated liability for
income taxes on sale of discontinued operations, (iii) with respect to the
six months ended June 30, 1995, the anticipated income from discontinued
operations during the balance of the phase-out period, and (iv) with
respect to periods ended in 1994 and earlier years, other net assets of
the discontinued operations (which were written off as of March 31, 1995).
See Note 2 of Notes to PEI's Consolidated Financial Statements included
elsewhere in this Joint Proxy Statement.
35
<PAGE>
PEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On April 26, 1995, PEI and PG&W entered into the Asset Purchase Agreement
with AWWC and PAWC which provides for the Sale of the Water Business. Until
the Closing, PG&W will continue to operate the Water Business.
The Purchase Price for the Water Business reflects a $6.5 million premium
over the book value of the Acquired Assets. However, after the payment of
transaction costs and the write-off of certain deferred regulatory assets and
deferred credits, the Sale of the Water Business will result in an estimated
after-tax loss of $5 to 8 million, net of the expected income from the water
operations during the phase-out period (which, for financial reporting
purposes, commenced on April 1, 1995) to the date of Closing (which has been
assumed to be December 31, 1995).
PEI and PG&W intend to use the net cash proceeds from the Sale of the Water
Business of approximately $201 million, after the payment of an estimated $55
million of income taxes, to retire debt, to repurchase stock and for working
capital for their continuing operations. See "PEI UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS" and "USE OF CERTAIN PROCEEDS OF THE SALE OF
THE WATER BUSINESS." After the sale, the principal assets of PEI and PG&W will
consist of PG&W's gas utility operations and approximately 46,000 acres of
land. Until the Closing, PG&W intends to utilize its existing bank lines of
credit for the external financing requirements of the Water Business, which
PEI believes will be adequate for such purposes.
Operating revenues from PG&W's water utility operations decreased by
$516,000 (1.6%) from $33.0 million for the six-month period ended June 30,
1994, to $32.5 million for the six-month period ended June 30, 1995. This
decrease in revenues was principally the result of a 0.3% decrease in customer
consumption. Operating expenses related to the water utility operations,
excluding income taxes, decreased $505,000 (2.7%) from $18.6 million for the
six-month period ended June 30, 1994, to $18.1 million for the six-month
period ended June 30, 1995. The major reason for this decrease was a $314,000
(3.6%) decrease in other operation expenses, primarily as a result of
decreases in the provision for injuries and damages and the amortization of
rate case expense, the effects of which were partially offset by an increase
in payroll costs. Income taxes with respect to the water utility operations
decreased by $134,000 (4.0%) from $3.4 million in the first six months of 1994
to $3.2 million in the first six months of 1995 due to a lower level of income
before income taxes (for this purpose, operating income net of interest
charges) and a decrease in the Pennsylvania Corporate Net Income Tax rate. As
a result of the foregoing, operating income of the water utility operations
increased $123,000 (1.1%) from $10.9 million for the six-month period ended
June 30, 1994, to $11.1 million for the six-month period ended June 30, 1995.
After interest charges, the income from the water utility operations increased
$61,000 (1.3%) from 4.7 million for the six-month period ended June 30, 1994,
to $4.8 million for the six-month period ended June 30, 1995.
Operating revenues from PG&W's water utility operations increased by $13.4
million (25.1%) from $53.4 million in 1993 to $66.7 million in 1994. This
increase in revenues was principally the result of various rate increases
allowed by the PPUC during 1993. Operating expenses related to the water
utility operations, excluding income taxes, increased $3.6 million (11.0%)
from $33.1 million in 1993 to $36.7 million in 1994. The major reasons for
this increase were a $1.8 million (29.8%) increase in depreciation expense
(primarily because of capital additions and the change in December, 1993, from
a 4% compound interest to a straight-line method of depreciation with respect
to certain water plant) and a $1.9 million increase in other operating
expenses, largely as a result of increased payroll and other postemployment
benefit costs, the effects of which were partially offset by a decrease in the
amortization of rate case expense. Income taxes with respect to the water
utility operations increased by $3.9 million from $2.9 million in 1993 to $6.9
million in 1994 due to a higher level of income before income taxes (for this
purpose, operating income net of interest charges). As a result of the
foregoing,
36
<PAGE>
operating income of the water utility operations increased $5.8 million
(33.6%) from $17.4 million in 1993 to $23.2 million in 1994. After allocated
interest charges (see Note 2 to PEI's Consolidated Financial Statements
included elsewhere in this Joint Proxy Statement), the income from the water
utility operations increased $2.6 million (32.8%) from $7.9 million in 1993 to
$10.5 million in 1994.
Operating revenues from PG&W's water utility operations increased by $4.7
million (9.7%) from $48.7 million in 1992 to $53.4 million in 1993. This
increase in revenues was principally the result of various rate increases
allowed by the PPUC during 1993. Operating expenses related to the water
utility operations, excluding income taxes, increased $1.8 million (5.7%) from
$31.3 million in 1992 to $33.1 million in 1993. The major reasons for this
increase were a $1.1 million increase in depreciation expense (primarily as a
result of capital additions and the change from a 4% compound interest to a
straight-line method of depreciation with respect to certain water plant) and
a $645,000 increase in other operating expenses, largely as a result of
increased provisions for sludge removal and the amortization of rate case
expense. Income taxes with respect to the water utility operations increased
by $537,000 (22.3%) from $2.4 million in 1992 to $2.9 million in 1993 due to a
higher level of income before income taxes (for this purpose, operating income
net of interest charges). As a result of the foregoing, operating income of
the water utility operations increased $2.4 million (15.9%) from $15.0 million
in 1992 to $17.4 million in 1993. After allocated interest charges (see Note 2
to PEI's Consolidated Financial Statements included elsewhere in this Joint
Proxy Statement), the income from the water utility operations increased $3.0
million (60.9%) from $4.9 million in 1992 to $7.9 million in 1993.
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, PEI'S
CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN RESTATED TO REFLECT PG&W'S WATER
UTILITY OPERATIONS AS "DISCONTINUED OPERATIONS EFFECTIVE MARCH 31, 1995," AND
THE FOLLOWING SECTIONS OF PEI MANAGEMENT'S DISCUSSION AND ANALYSIS GENERALLY
RELATE ONLY TO PEI'S CONTINUING OPERATIONS, WHICH CONSIST PRIMARILY OF PG&W'S
GAS UTILITY OPERATIONS. FOR ADDITIONAL INFORMATION REGARDING THE DISCONTINUED
OPERATIONS, SEE NOTE 2 OF THE NOTES TO PEI'S CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS JOINT PROXY STATEMENT.
37
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in PEI's consolidated statements
of income as percentages of total operating revenues for each of the six-month
periods ended June 30, 1995, and June 30, 1994, and each of the calendar years
ended December 31, 1994, 1993 and 1992. See PEI's Consolidated Financial
Statements and the notes thereto included elsewhere in this Joint Proxy
Statement. ALL OF PEI'S INTEREST CHARGES AND ALL OF PG&W'S PREFERRED STOCK
DIVIDENDS HAVE BEEN ALLOCATED TO CONTINUING OPERATIONS. SEE NOTE (1)
<TABLE>
<CAPTION>
PERCENTAGE OF OPERATING REVENUES
-----------------------------------------
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- -----------------
1994 1993 1992 1995 1994
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of gas....................... 58.7 56.5 54.2 58.1 60.7
------ ------ ------ ------- -------
OPERATING MARGIN.................... 41.3 43.5 45.8 41.9 39.3
------ ------ ------ ------- -------
OTHER OPERATING EXPENSES:
Operation......................... 13.5 14.2 15.0 12.1 10.6
Maintenance....................... 2.6 2.4 2.4 2.4 2.0
Depreciation...................... 4.0 4.2 4.2 3.8 3.1
Income taxes...................... 2.6 3.2 3.5 3.5 4.6
Taxes other than income taxes..... 6.4 6.5 6.8 7.0 6.6
------ ------ ------ ------- -------
Total other operating expenses.... 29.1 30.5 31.9 28.8 26.9
------ ------ ------ ------- -------
OPERATING INCOME.................... 12.2 13.0 13.9 13.1 12.4
OTHER INCOME (DEDUCTIONS), NET...... 0.1 (0.3) (0.1) 0.4 0.2
INTEREST CHARGES(1)................. (8.2) (8.4) (9.2) (8.2) (6.1)
------ ------ ------ ------- -------
INCOME FROM CONTINUING OPERATIONS... 4.1 4.3 4.6 5.3 6.5
INCOME (LOSS) WITH RESPECT TO
DISCONTINUED OPERATIONS............ 6.3 5.1 3.4 (4.0) 4.4
------ ------ ------ ------- -------
INCOME BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS.................... 10.4 9.4 8.0 1.3 10.9
SUBSIDIARY'S PREFERRED STOCK DIVI-
DENDS(1)........................... 2.8 4.2 3.5 1.5 2.5
------ ------ ------ ------- -------
NET INCOME.......................... 7.6% 5.2% 4.5% (0.2)% 8.4%
====== ====== ====== ======= =======
</TABLE>
- --------
(1) None of PEI's interest charges and none of PG&W's Preferred Stock
dividends have been allocated to the discontinued operations. Interest
charges relating to indebtedness of PG&W have been allocated to the
discontinued operations based on the relationship of the gross water
utility plant of the discontinued operations to the total of PG&W's gross
gas and water utility plant. This is the same method as has been utilized
by PG&W and the PPUC in establishing the revenue requirements of both
PG&W's gas and water utility operations.
Six Months Ended June 30, 1995, Compared With Six Months Ended June 30, 1994
Operating Revenues. Operating revenues decreased $13.4 million (12.5%) from
$106.8 million for the six-month period ended June 30, 1994, to $93.4 million
for the six-month period ended June 30, 1995. This decrease was primarily the
result of a 1.6 billion cubic feet (10.8%) decrease in sales to residential
and commercial heating customers, caused by a 590 degree (14.2%) decrease in
heating degree days*. There were 3,570 heating degree days (90.3% of normal)
during the first six months of 1995 compared to 4,160 (105.2% of normal)
during the first six months of 1994.
- --------
* A heating degree day ("degree day") represents each degree by which the
average of the high and low temperatures for a given day is below 65(degrees)
Fahrenheit. Actual degree days represent the sum of the degree days for the
period.
38
<PAGE>
Cost of Gas. The cost of gas decreased $10.5 million (16.3%) from $64.8
million for the six-month period ended June 30, 1994, to $54.3 million for the
six-month period ended June 30, 1995, primarily because of the reduced
consumption by residential and commercial heating customers.
Operating Margin. The operating margin decreased $2.8 million (6.8%) from
$42.0 million in the six-month period ended June 30, 1994 to $39.1 million in
the six-month period ended June 30, 1995. However, as a percentage of
operating revenues, the margin increased from 39.3% in the first six months of
1994 to 41.9% in the first six months of 1995 primarily as a result of the
higher average charge per cubic foot to residential and commercial heating
customers because of their lower consumption due to the warmer weather.
Other Operating Expenses. Other operating expenses decreased $1.8 million
(6.4%) from $28.8 million for the six-month period ended June 30, 1994, to
$27.0 million for the six-month period ended June 30, 1995. This decrease was
primarily the result of a $1.7 million (33.7%) decrease in income taxes from
$5.0 million in the first six months of 1994 to $3.3 million in the first six
months of 1995 due to a decrease in income before income taxes (for this
purpose, operating income net of interest charges) and a reduction in the
Pennsylvania corporate net income tax rate. Also contributing to the decrease
in other operating expenses was a $464,000 (6.6%) decrease in taxes other than
income taxes, primarily because of a decrease in gross receipts tax as a
result of the lower level of operating revenues. The effect of the decreases
in taxes was partially offset by a $236,000 (7.1%) increase in depreciation
expense, as a result of additions to utility plant, and a $63,000 (0.5%)
increase in operating and maintenance expenses. Notwithstanding the decrease
in other operating expenses, such expenses increased as a percentage of
operating revenues from 26.9% during the first six months of 1994 to 28.8%
during the first six months of 1995 because of the relatively greater decrease
in revenues.
Operating Income. As a result of the above, total operating income decreased
by $1.0 million (7.7%) from $13.2 million for the six-month period ended June
30, 1994, to $12.2 million for the six-month period ended June 30, 1995.
Nonetheless, operating income increased as a percentage of total operating
revenues for such periods from 12.4% in 1994 to 13.1% in 1995, primarily
because of the decrease in the cost of gas as a percentage of operating
revenues, the effect of which was partially offset by the lower levels of
taxes.
Interest Charges. Interest charges increased by $1.2 million (18.0%) from
$6.5 million for the six-month period ended June 30, 1994, to $7.7 million for
the six-month period ended June 30, 1995. This increase was largely
attributable to interest on overcollections of purchased gas costs and
increased borrowings primarily under the Loan Agreement dated May 31, 1994,
among PEI, the banks parties thereto and PNC Bank, National Association, as
agent (the "Term Loan Agreement"). None of the interest expense on borrowings
under PEI's Term Loan Agreement or PEI's 10.125% Senior Notes have been
allocated to the discontinued operations.
Income From Continuing Operations. Income from continuing operations
decreased $2.0 million (28.5%) from $6.9 million for the six months ended June
30, 1994, to $4.9 million for the six months ended June 30, 1995. This
decrease was largely the result of the matters discussed above, principally
the decrease in operating margin resulting from the lower level of sales to
residential and commercial heating customers. The effect of the decreased
operating margin was partially offset by the lower levels of taxes.
Subsidiary's Preferred Stock Dividends. Dividends on PG&W's preferred stock
decreased $1.3 million (47.7%) from $2.6 million for the six-month period
ended June 30, 1994, to $1.4 million for the six-month period ended June 30,
1995, as a result of the redemption by PG&W on May 31, 1994, of 150,000 shares
($15.0 million) of its 9.50% Cumulative Preferred Stock, $100 par value, and
on December 16, 1994, of 150,000 shares ($15.0 million) of its 8.90%
Cumulative Preferred Stock, $100 par value. No dividends on PG&W's Preferred
Stock have been allocated to the discontinued operations.
Net Income. The decrease in net income of $9.1 million (101.9%) from income
of $9.0 million for the six-month period ended June 30, 1994, to a loss of
$168,000 for the six-month period ended June 30, 1995, as well as the decrease
in earnings per share of PEI Common Stock of $1.58 from earnings of $1.55 per
share for the six months ended June 30, 1994 (after a $.10 per share charge
for the premium on redemption of PG&W's Preferred Stock), to a loss of ($.03)
per share for the six months ended June 30, 1995, were largely the result of
the estimated loss (equivalent to $1.02 per share) on the disposal of
discontinued operations, as discussed above.
39
<PAGE>
Also contributing to the decreases in net income and earnings per share for
the six months ended June 30, 1995, was the lower income from continuing
operations. The effects of these factors were partially offset by the reduced
dividends on PG&W Preferred Stock and, in the case of earnings per share, the
absence of any premium on the redemption of PG&W Preferred Stock.
Year Ended December 31, 1994, Compared With Year Ended December 31, 1993
Operating Revenues. Operating revenues increased by $14.7 million (9.6%)
from $153.3 million for 1993 to $168.0 million for 1994, primarily as a result
of a price increase averaging 19.0% (designed to total $28.8 million on an
annual basis) effective December 1, 1993, due to increased costs of purchased
gas. See "--Rate Matters--Rate Filings." Also contributing to the increase in
operating revenues in 1994 was a 224 million cubic feet (1.0%) increase in
sales to residential and commercial heating customers. This increase was
attributable to the addition of approximately 2,200 new customers and occurred
despite heating degree days that were 2.1% lower than normal and 0.3% less
than in 1993. Additionally, the implementation of surcharges to recover
Federal Energy Regulatory Commission ("FERC") Order 636 transition costs (as
more fully discussed below under "--Rate Matters--Rate Filings") acted to
increase gas operating revenues by $1.8 million in 1994. The effects of the
price increase and the surcharges on operating revenues were partially offset
by the switching of certain commercial and industrial customers from sales to
transportation service and a price decrease averaging 1.1%, designed to total
$1.8 million on an annual basis effective December 1, 1994, due to decreased
costs of purchased gas, see "--Rate Matters--Rate Filings."
Cost of Gas. The cost of gas increased $12.1 million (14.0%) from $86.6
million for 1993 to $98.7 million for 1994. The effect of this increase, which
was the result of higher costs for purchased gas and the implementation of
surcharges to recover FERC Order 636 transition costs, see "--Rate Matters--
Rate Filings", was partially offset by a 9.0% (2.6 billion cubic feet)
decrease in the volume of gas sold during 1994 compared to 1993. This
decreased volume was largely attributable to the aforementioned switching of
certain customers from sales to transportation service.
Operating Margin. The operating margin increased $2.6 million or 3.9% from
$66.8 million in 1993 to $69.3 million in 1994, primarily as a result of the
increased sales to residential and commercial heating customers. However, as a
percentage of operating revenues, the margin decreased from 43.5% in 1993 to
41.3% in 1994 primarily because of the increased cost of purchased gas.
Other Operating Expenses. Other operating expenses increased $2.0 million
(4.2%) from $46.9 million for 1993 to $48.9 million for 1994. This increase
was largely attributable to a $729,000 increase in gross receipts tax as a
result of the higher level of gas revenues, an $855,000 increase in operation
expenses (primarily because of a $285,000 increase in payroll costs and
increased provisions for uncollectible accounts of $603,000) and a $741,000
increase in maintenance expenses (principally as a result of a $319,000
increase in payroll costs and a $146,000 increase in maintenance of gas mains
and services attributable to the extremely cold weather experienced in January
and February, 1994). Income taxes decreased by $645,000 (13.1%) from $4.9
million in 1993 to $4.3 million in 1994 due to a lower level of income before
income taxes (for this purpose, operating income net of interest charges).
Notwithstanding the increase in other operating expenses, such expenses
decreased as a percentage of operating revenues, from 30.5% during 1993 to
29.1% during 1994 because of the relatively greater increase in operating
revenues.
Operating Income. As a result of the above, total operating income increased
by $589,000 (3.0%) from $19.9 million for 1993 to $20.5 million for 1994.
However, as a percentage of operating revenues, operating income decreased
from 13.0% in 1993 to 12.2% in 1994 primarily as a result of the increase in
the cost of gas as a percentage of operating revenues.
Other Income (Deductions), Net. Other income (deductions), net increased
$730,000 from a deduction of $472,000 in 1993 to income of $258,000 in 1994,
primarily as a result of a $409,000 gain ($268,000 net of related income
taxes) on the sale of PG&W's interest in an oil and gas joint venture, a
$254,000 increase ($145,000 net of related income taxes) in gains on the sale
of land and other property and a $239,000 decrease in the net interest expense
associated with the unexpended portion of the proceeds from the issuance of
certain debt held in a construction fund.
40
<PAGE>
Interest Charges. Interest charges increased by $905,000 (7.0%) from $12.9
million for 1993 to $13.8 million for 1994, primarily as a result of
borrowings under PEI's Term Loan Agreement, see "--Liquidity and Capital
Resources--Long-Term Debt and Capital Stock Financings." None of the interest
expense on borrowings under PEI's Term Loan Agreement or PEI's 10.125% Senior
Notes due 1999 (the "PEI Senior Notes") has been allocated to the discontinued
operations.
Income from Continuing Operations. Income from continuing operations
increased $414,000 (6.3%) from $6.5 million for 1993 to $7.0 million for 1994.
This increase was the result of the matters discussed above, principally the
increase in operating margin resulting from the higher level of sales to
residential and commercial heating customers, the effect of which was
partially offset by increases in other operating expenses and interest
charges.
Subsidiary's Preferred Stock Dividends. Dividends on PG&W Preferred Stock
decreased $1.8 million (28.2%) from $6.5 million for 1993 to $4.6 million for
1994, primarily as a result of the redemption by PG&W on December 23, 1993, of
100,000 shares ($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0
million), of its 9.50% Cumulative Preferred Stock, $100 par value. No
dividends on PG&W Preferred Stock have been allocated to the discontinued
operations.
Net Income. Net income increased $4.8 million (60.5%) from $8.0 million for
1993 to $12.8 million for 1994. The increased earnings in 1994 were the result
of a $2.6 million increase in income from the discontinued operations and the
matters discussed above relating to the continuing operations, principally the
increase in operating margin resulting primarily from the higher level of
sales to residential and commercial heating customers, increases in other
income (deductions), net and the decrease in PG&W's Preferred Stock dividends.
The effects of these factors were partially offset by increases in other
operating expenses and interest charges.
Before the $534,000 premium paid on the redemption of 150,000 shares of
PG&W's 9.50% Cumulative Preferred Stock on May 31, 1994, and the $446,000
premium paid on the redemption of 150,000 shares of PG&W's 8.90% Cumulative
Preferred Stock on December 16, 1994, the earnings per share of PEI Common
Stock increased $.53 (29.1%) from $1.82 per share for 1993 to $2.35 per share
for 1994. This improvement was the result of the 60.5% increase in net income
and occurred despite a 24.2% increase in the weighted average number of shares
outstanding in 1994 that was caused primarily by PEI's offering of 1,250,000
shares of PEI Common Stock in October, 1993. While premiums on the redemption
of PG&W Preferred Stock are charged to retained earnings and are not a
determinant of net income, the premiums associated with any redemptions
occurring subsequent to January 20, 1994, must be taken into account in
calculating the earnings per share of PEI Common Stock. As a consequence, the
premiums on the redemption of the 150,000 shares of PG&W's 9.50% Cumulative
Preferred Stock and the 150,000 shares of PG&W's 8.90% Cumulative Preferred
Stock acted to reduce PEI's earnings per share for 1994 by $.18 per share,
resulting in earnings of $2.17 per share of PEI Common Stock for the year, an
increase of $.35 per share (19.2%) over the earnings of $1.82 per share for
the year ended December 31, 1993.
Year Ended December 31, 1993, Compared With Year Ended December 31, 1992
Operating Revenues. Operating revenues increased by $10.1 million (7.1%)
from $143.2 million for 1992 to $153.3 million for 1993, primarily as a result
of price increases averaging 6.8% (designed to total $9.5 million on an annual
basis) effective December 1, 1992, and 19.0% (designed to total $28.8 million
on an annual basis) effective December 1, 1993, due to increased costs of
purchased gas. Also contributing to the increase in operating revenues in 1993
was an 840 million cubic feet (3.9%) increase in sales to residential and
commercial heating customers. Although heating degree days were 1.8% lower
than normal during 1993, they were 0.7% higher than in 1992. The effect of the
price increases and colder weather on operating revenues were partially offset
by the switching of certain commercial and industrial customers from sales to
transportation service.
Cost of Gas. The cost of gas increased $8.8 million (11.4%) from $77.7
million for 1992 to $86.6 million for 1993. The effect of this increase, which
was the result of higher costs for purchased gas, was partially offset
41
<PAGE>
by a 2.7% (797 thousand cubic feet) decrease in the volume of gas sold during
1993 compared to 1992. This decreased volume was largely attributable to the
aforementioned switching of customers from sales to transportation service.
Operating Margin. The operating margin increased $1.3 million (1.9%) from
$65.5 million in 1992 to $66.8 million in 1993, primarily as a result of the
increased sales to residential and commercial heating customers due to the
colder weather experienced in 1993. However, as a percentage of operating
revenues, the margin decreased from 45.8% in 1992 to 43.5% in 1993 largely
because of the increased cost of gas.
Other Operating Expenses. Other operating expenses increased $1.2 million
(2.7%) from $45.6 million for 1992 to $46.9 million for 1993, primarily as a
result of increased payroll charges, depreciation (as a result of property
additions) and taxes other than income taxes (principally gross receipts tax
as a result of the higher level of revenues). Notwithstanding the increase in
other operating expenses, such expenses decreased as a percentage of operating
revenues from 31.9% during 1992 to 30.5% during 1993 because of the relatively
greater increase in operating revenues.
Operating Income. As a result of the above, total operating income remained
relatively unchanged in 1993 from 1992, increasing by $29,000 (0.1%). However
as a percentage of operating revenues, operating income decreased from 13.9%
in 1992 to 13.0% in 1993, primarily as a result of the increase in cost of gas
as a percentage of operating revenues.
Other Income (Deductions), Net. Other income (deductions), net decreased
$380,000 from a deduction of $92,000 in 1992 to a deduction of $472,000 in
1993, primarily as a result of a $320,000 increase in the net interest expense
associated with the unexpended portion of the proceeds from the issuance of
certain debt held in a construction fund.
Interest Charges. Interest charges decreased by $276,000 (2.1%) from $13.2
million for 1992 to $12.9 million for 1993, largely as a result of a lower
level of interest expense incurred during 1993 in connection with
overcollections from PG&W's customers with respect to the cost of purchased
gas. None of the interest expense on PEI's Senior Notes has been allocated to
the discontinued operations.
Income from Continuing Operations. Income from continuing operations
decreased $133,000 (2.0%) from $6.6 million in 1992 to $6.5 million in 1993.
This decrease was the result of the matters discussed above, primarily the
increase in other operating expenses and the decrease in other income
(deductions), net. The effect of these factors was partially offset by the
increase in operating margin resulting from the higher levels of sales to
residential and commercial heating customers and the decrease in interest
charges.
Subsidiary's Preferred Stock Dividends. Dividends on PG&W Preferred Stock
increased $1.4 million (27.6%) from $5.1 million in 1992, to $6.5 million in
1993, as a result of the issuance by PG&W of 250,000 shares of its 9%
Cumulative Preferred Stock, on August 18, 1992. No dividends on PG&W Preferred
Stock have been allocated to the discontinued operations.
Net Income. Net income increased $1.5 million (23.5%) from $6.5 million
($1.61 per share) for the year ended December 31, 1992, to $8.0 million ($1.82
per share) for the year ended December 31, 1993. The increased earnings in
1993 were the result of a $3.0 million increase in income from the
discontinued operations and the matters discussed above relating to the
continuing operations, primarily the increase in operating margin resulting
from the higher levels of sales to residential and commercial heating
customers. The effect of the higher sales was partially offset by increases in
other operating expenses and dividends on PG&W's Preferred Stock and the
decrease in other income (deductions), net.
The earnings per share for the year ended December 31, 1993, increased
13.0%, compared to the similar period in 1992, as a result of the 23.5%
increase in net income and despite the 9.6% increase in the weighted average
number of shares outstanding during 1993, primarily because of PEI's offering
of 1,250,000 shares of PEI Common Stock in October, 1993.
42
<PAGE>
RATE MATTERS
Rate Filings. Pursuant to the provisions of the Pennsylvania Public Utility
Code (the "Code"), which require that the tariffs of larger gas distribution
companies, such as PG&W, be adjusted on an annual basis to reflect changes in
their purchased gas costs, the PPUC ordered PG&W to make the following changes
during 1994, 1993 and 1992 to the gas costs contained in its gas tariff rates:
<TABLE>
<CAPTION>
CHANGE IN
RATE PER MCF CALCULATED
EFFECTIVE ------------- INCREASE (DECREASE)
DATE FROM TO IN ANNUAL REVENUE
--------- ------------- -------------------
<S> <C> <C> <C>
December 1, 1994....................... $ 3.74 $ 3.68 $(1,800,000)
December 1, 1993....................... 2.79 3.74 28,800,000
December 1, 1992....................... 2.46 2.79 9,500,000
</TABLE>
In accordance with the same provisions of the Code, the PPUC allowed PG&W to
implement a purchased gas cost rate of $2.42 per thousand cubic feet effective
May 16, 1995, in order to refund overcollections from customers caused by
lower than anticipated purchased gas costs and the receipt of supplier refunds
during the first quarter of 1995. The changes in gas rates on account of
purchased gas costs have no effect on PEI's earnings since the changes in
revenue are offset by corresponding changes in the cost of gas.
The PPUC has adopted regulations effective June 14, 1995, that provide for
the quarterly adjustment of the purchased gas cost rate of larger local gas
distribution companies, including PG&W. Except for reducing the amount of any
over or undercollections of gas costs, the adoption of these regulations will
not have any material effect on PG&W's financial position or results of
operations, and PG&W will still be required to file an annual purchased gas
cost rate.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of FERC Order 636 transition costs.
The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filings
made with the PPUC by PG&W and other larger local gas distribution companies.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs are subject to full
recovery by local distribution companies through the filing of a tariff
pursuant to either the existing surcharge or base rate provisions of the Code.
The PGC Order further stated that all such filings would be evaluated on a
case-by-case basis.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month
period ended January 31, 1995, through an increase in its PGC rate. PG&W will
seek recovery of the remaining $252,000 of Gas Transition Costs in its annual
PGC rate that is effective December 1, 1995.
By Order of the PPUC entered August 26, 1994, PG&W began recovering the Non-
Gas Transition Costs that it estimates it will ultimately be billed pursuant
to FERC Order 636 through the billing of a surcharge to its customers
effective September 12, 1994. It is currently estimated that $9.4 million of
Non-Gas Transition Costs will be billed to PG&W, generally over a four-year
period extending through the fourth quarter of 1997, of which $5.0 million had
been billed to PG&W and $3.0 million had been recovered from its customers as
of June 30, 1995. PG&W has recorded the estimated Non-Gas Transition Costs
that remain to be billed to it and the amounts remaining to be recovered from
its customers.
Effects of Inflation. When utility property reaches the end of its useful
life and must be replaced, PG&W will incur replacement costs in amounts that
due to the effects of inflation would materially exceed either the original
cost or the accrued depreciation of such property as reflected on its books of
account. However, the cost of such replacement property would be includable in
PG&W's rate base, and PG&W would be entitled to recover depreciation expense
and earn a return thereon, to the extent that its investment in such property
was prudently incurred and the property is used and useful in furnishing
public utility service.
43
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary capital needs of PEI are the funding of PG&W's construction
program and the seasonal funding of PG&W's gas purchases and increases in its
customer accounts receivable. PG&W's revenues are highly seasonal and weather-
sensitive, with approximately 75% of its revenues being realized in the first
and fourth quarters of the calendar year when the temperatures in its service
area are the coldest.
The cash flow from PG&W's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG&W to use bank borrowings to
fund such expenditures, pending the periodic issuance of stock and long-term
debt. Bank borrowings are also used by PG&W for the seasonal funding of its
gas purchases and increases in customer accounts receivable.
PEI relies on a number of sources, primarily cash dividends from PG&W, to
provide the funds necessary to pay dividends on PEI Common Stock, to pay
interest on its outstanding debt, and to meet all of its other obligations
(other than the repayment of debt for which PEI principally relies upon
periodic refinancings or sales of securities).
Because of limitations imposed by the terms of PG&W's Restated Articles of
Incorporation, as amended, PG&W is prohibited, without the consent of the
holders of a majority of the outstanding shares of PG&W Preferred Stock, from
issuing more than $12.0 million of unsecured debt due on demand or within one
year from issuance. PG&W had $2.0 million of unsecured debt due on demand or
within one year from issuance outstanding as of June 30, 1995.
PEI believes that PG&W will be able to raise in a timely manner such funds
as are required for its future construction expenditures, refinancings and
other working capital requirements.
Interim Financing Practices
In order to finance certain of its construction expenditures and to meet its
seasonal borrowing requirements, and also to provide funding required for its
discontinued operations, PG&W has made arrangements for a total of $75.5
million of unsecured revolving bank credit. Specifically, PG&W has entered
into a revolving bank credit agreement (the "Credit Agreement") with a group
of six banks under the terms of which $60.0 million is available for borrowing
by PG&W. The Credit Agreement terminates on May 31, 1996, at which time any
borrowings outstanding thereunder are due and payable. The interest rate on
borrowings under the Credit Agreement is generally less than prime. The Credit
Agreement also requires the payment of a commitment fee of 0.195% per annum on
the average daily amount of the unused portion of the available funds. As of
August 30, 1995, $39 million of borrowings were outstanding under the Credit
Agreement.
PG&W currently has five additional bank lines of credit with an aggregate
borrowing capacity of $15.5 million which provide for borrowings at interest
rates generally less than prime. Borrowings outstanding under these bank lines
of credit are due and payable at various rates during 1996, the earliest of
which is March 31, 1996. As of August 30, 1995, PG&W had $10.5 million of
borrowings outstanding under these additional bank lines of credit.
PG&W is currently negotiating the terms of a $50.0 million bank loan, the
proceeds of which would be used to redeem the $50.0 million principal amount
of its First Mortgage Bonds 9.57% Series due 1996 (the "9.57% Series First
Mortgage Bonds"). PG&W has not reached any definitive agreement regarding this
proposed loan nor has it obtained the required approval of the PPUC.
Accordingly, there can be no assurance that such loan and the related
refunding of the 9.57% Series First Mortgage Bonds will necessarily occur.
CURRENT MATURITIES OF LONG-TERM DEBT AND PREFERRED STOCK
As of June 30, 1995, $36.7 million of PG&W Preferred Stock and long-term
debt was required to be repaid within twelve months. Such amount included
borrowings of $29.0 million under the Credit Agreement and $2.5
44
<PAGE>
million under an additional bank line of credit, both of which expire on May
31, 1996, and $1.8 million under another bank line of credit which expires on
June 30, 1996. Prior to their respective expirations, PG&W intends to renew
the Credit Agreement and its other bank lines of credit to the extent the
related borrowing capacity is required. Also included in current maturities of
long-term debt and preferred stock as of June 30, 1995, was $3.3 million of
PG&W's First Mortgage Bonds 8% Series due 1997 (the "8% Series First Mortgage
Bonds"). These bonds, representing all of the 8% Series First Mortgage Bonds
still outstanding, were redeemed by PG&W on July 10, 1995, at a price of
100.34% of principal (plus accrued interest to the redemption date), which
included a voluntary redemption premium aggregating $11,305, with funds from
bank borrowings.
Long-Term Debt and Capital Stock Financings
Both PEI and PG&W periodically engage in long-term debt and capital stock
financings in order to obtain funds required for construction expenditures,
the refinancing of existing debt and various working capital purposes. Set
forth below is a summary of such financings, exclusive of interim bank
borrowings and debt issuances that are being assumed by PAWC in connection
with its purchase of PG&W's water utility operations, consummated by PEI and
PG&W since the beginning of 1993.
On October 20, 1993, PEI issued 1,250,000 shares of PEI Common Stock for
aggregate net proceeds of $31.9 million. The net proceeds from the issuance of
these shares of PEI Common Stock were used by PEI to purchase PG&W Common
Stock. PG&W utilized the $31.9 million so received from PEI to repay bank
borrowings. These borrowings had been incurred primarily to finance
construction expenditures with respect to both the continuing and discontinued
operations.
On May 31, 1994, PEI borrowed $20.0 million pursuant to the Term Loan
Agreement, which matures on May 31, 1999. Borrowings under the Term Loan
Agreement bear interest at LIBOR ("London Interbank Offered Rates") plus one-
half of one percent (6.5625% as of June 19, 1995). Under the provisions of the
Term Loan Agreement, PEI can choose interest rate periods of one, two, three
or six months. PEI utilized the proceeds from such loan to purchase $20.0
million of PG&W Common Stock. PG&W used a portion of the proceeds it so
received to redeem $15.0 million of its 9.50% Cumulative Preferred Stock and
to fund the $534,375 premium in connection with such redemption. The remaining
$4.5 million of proceeds were used by PG&W to repay a portion of its bank
borrowings and for working capital purposes.
On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the
"Customer Plan") which provided the residential customers of PG&W with a
method of purchasing newly-issued shares of PEI Common Stock at a 5% discount
from the market price. Under the terms of the Customer Plan, 88,231 shares
($2.4 million) and 59,537 shares ($1.7 million) of PEI Common Stock were
issued in 1995 (through May 8) and 1994, respectively. The proceeds from the
issuance of shares through the Customer Plan were used by PEI to purchase PG&W
Common Stock. Effective May 9, 1995, PEI suspended the Customer Plan because
of the significant reduction in its capital requirements that will result from
the Sale of the Water Business.
Through PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRIP"),
PEI Shareholders may reinvest cash dividends and/or make cash investments in
PEI Common Stock. Under the DRIP, 62,271 shares ($1.8 million), 15,988 shares
($465,000) and 14,129 shares ($385,000) of PEI Common Stock were issued during
1994, 1993 and 1992, respectively. Additionally, during the six-month period
ended June 30, 1995, PEI issued 97,589 shares of PEI Common Stock for an
aggregate consideration of $2.7 million pursuant to the DRIP. PEI uses the
proceeds from the DRIP to purchase PG&W Common Stock. The DRIP was amended on
May 5, 1994, to provide PEI Shareholders with a method of reinvesting cash
dividends and making cash investments to purchase newly-issued shares of PEI
Common Stock at a 5% discount from the market price. Prior to such amendment,
cash dividends were reinvested at 100% of the market price in newly-issued
shares and cash investments were used to purchase shares of PEI's Common Stock
on the open market. Effective May 9, 1995, PEI suspended the cash investment
feature of the DRIP and the 5% discount from the market price on the
reinvestment of dividends under the DRIP because of the significant reduction
in its capital requirements that will result from the Sale of the Water
Business.
45
<PAGE>
Under PEI's Employees' Savings Plan (a section 401(k) plan) which became
effective January 1, 1992, PEI issued an additional 10,408 shares ($312,000)
of PEI Common Stock in 1995 (through June 30, 1995), 18,100 shares of PEI
Common Stock ($540,000) in 1994, 16,478 shares of PEI Common Stock ($481,000)
in 1993 and 4,871 shares of PEI Common Stock ($136,000) in 1992.
Construction Expenditures and Related Financing
Expenditures for the construction of utility plant totaled $8.8 million,
$19.6 million, $15.1 million and $14.1 million during the first six months of
1995 and in 1994, 1993 and 1992, respectively. PG&W's construction
expenditures during the period 1992 through June 30, 1995, were financed with
internally-generated funds and bank borrowings, pending the periodic issuance
of stock and long-term debt.
PEI currently estimates that PG&W's capital expenditures will be $16.0
million during the remainder of 1995, and will total $30.4 million and $26.5
million, respectively, for 1996 and 1997. It is anticipated that such
expenditures will be financed with internally generated funds and bank
borrowings, pending the periodic issuance of stock and long-term debt.
Long-Lived Assets
In March 1995, Financial Accounting Standards Board ("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 June 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 not be recoverable. In addition, FASB Statement 121 requires that
regulatory assets meet the recovery criteria of FASB Statement 71, "Accounting
for the 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 PEI or PG&W since the carrying
amount of all assets, including regulatory assets, is considered recoverable.
46
<PAGE>
PEI UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following PEI unaudited pro forma consolidated financial statements have
been prepared based on PEI's consolidated statement of income for the twelve
months ended December 31, 1994, and PEI's unaudited consolidated balance sheet
as of June 30, 1995, and unaudited consolidated statement of income for the
six months then ended, each as adjusted to reflect the Sale of the Water
Business and, based on the Initial Cash Payment as of June 30, 1995, of $255.8
million, PEI's use of the proceeds from the Sale of the Water Business of
$200.5 million (after the payment of an estimated $55.3 million of federal and
state income taxes on the sale). PEI and PG&W intend to use such proceeds
together with $780,000 of net tax benefits resulting from an estimated $8.3
million of transaction costs (which transaction costs include an $800,000
premium on the redemption of PG&W's 9.57% Series First Mortgage Bonds, as
described below), and a $6.5 million premium over book value on the Sale of
the Water Business, to (i) repay a $50.0 million bridge loan which PG&W is
attempting to obtain (the "Bridge Loan"), the proceeds of which will be used
to redeem the $50.0 million principal amount of PG&W's 9.57% Series First
Mortgage Bonds, (ii) repurchase approximately 225,000 shares of PG&W's 9%
Cumulative Preferred Stock at an aggregate repurchase price of $24,300,000
(equivalent to $108.00 per share), which includes an aggregate repurchase
premium of $1,800,000 (equivalent to $8.00 per share), (iii) repurchase 80,000
shares of PG&W's 4.10% Cumulative Preferred Stock at an aggregate repurchase
price of $4,000,000 (equivalent to $50.00 per share), (iv) repay $33.2 million
of PG&W's bank borrowings, (v) repurchase 2,200,000 shares of PEI Common Stock
at an aggregate repurchase price of $81,400,000 (equivalent to $37.00 per
share), and (vi) pay an estimated $8.3 million of transaction costs (including
an $800,000 premium on the redemption of PG&W's 9.57% Series First Mortgage
Bonds). Pursuant to the terms of the applicable debt instruments of PG&W and
PEI, PEI and PG&W will be able to consummate the transactions referred to in
items (i) and (iv) above either prior to or concurrently with the Closing.
However, the repurchases referred to in items (ii), (iii) and (v), which PEI
and PG&W intend to consummate within the first three months after the Closing,
involve voluntary sales to PEI and PG&W by the holders of these securities.
Therefore, the number and price of the securities purchased may vary depending
on market conditions at the time of the repurchases.
The unaudited pro forma consolidated financial statements also reflect the
redemption, primarily utilizing bank borrowings, of PG&W's 8% Series First
Mortgage Bonds, of which (a) $3,325,000 principal amount of the 8% Series
First Mortgage Bonds were redeemed on July 10, 1995, in connection with the
Sale of the Water Business, at an aggregate redemption price of $3,336,305
which included an aggregate redemption premium of $11,305, and (b) $210,000
principal amount of the 8% Series First Mortgage Bonds were redeemed on each
of June 1, 1994, and June 1, 1995, pursuant to annual sinking fund
requirements of such bonds, as if such redemption had occurred at the
beginning of the period of the respective financial statements.
Additionally, the unaudited pro forma consolidated statement of income for
the twelve months ended December 31, 1994, reflects (i) the redemption of
150,000 shares of PG&W's 8.90% Cumulative Preferred Stock at an aggregate
redemption price of $15,445,500 (equivalent to $102.97 per share), which
includes an aggregate redemption premium of $445,500 (equivalent to $2.97 per
share), as if it had occurred at the beginning of the period (such shares, the
proceeds from the issuance of which were used to provide capital for the Water
Business, were redeemed on December 16, 1994, utilizing bank borrowings and
would have been redeemed in connection with the Sale of the Water Business had
such shares not been redeemed on December 16, 1994), and (ii) the redemption
of 150,000 shares of PG&W's 9.50% Cumulative Preferred Stock at an aggregate
redemption price of $15,534,375 (equivalent to $103.5625 per share), which
includes an aggregate redemption premium of $534,375 (equivalent to $3.5625
per share), as if it had occurred at the beginning of the period (such shares
were redeemed on May 31, 1994, utilizing proceeds from a $20 million term loan
to PEI).
The following PEI unaudited pro forma consolidated statements of income
reflect the results of PEI's continuing operations as if the transactions
described herein had occurred at the beginning of the respective periods. The
PEI unaudited pro forma consolidated balance sheet as of June 30, 1995,
reflects the financial position of PEI as if the transactions described herein
had occurred on such date. Each of the PEI unaudited pro forma consolidated
statements of income and consolidated balance sheet include estimates of
transaction costs which may differ from the costs ultimately incurred.
These PEI unaudited pro forma consolidated financial statements should be
read in conjunction with PEI's consolidated financial statements and the notes
thereto included elsewhere in this Joint Proxy Statement.
The PEI unaudited pro forma financial statements have been included herein
as required by the rules of the SEC and are provided for comparative purposes
only. The PEI unaudited pro forma financial statements do not purport to be
indicative of the results which would have been obtained if the Sale of the
Water Business had been effected on the date or dates indicated or which may
be obtained in the future. No pro forma adjustment has been made to reflect
any interest income that may be earned on the Initial Cash Payment.
47
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE OF REFLECT SALE OF AFTER SALE OF
WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
-------------- --------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
OPERATING REVENUES............ $ 167,992 $ -- $ 167,992
Cost of gas................. 98,653 -- 98,653
---------- ---------- ---------
OPERATING MARGIN.............. 69,339 -- 69,339
---------- ---------- ---------
OTHER OPERATING EXPENSES:
Operation................... 22,652 -- 22,652
Maintenance................. 4,436 -- 4,436
Depreciation................ 6,667 -- 6,667
Income taxes................ 4,290 1,089 (2) 5,379
Taxes other than income
taxes...................... 10,807 -- 10,807
---------- ---------- ---------
Total other operating
expenses............... 48,852 1,089 49,941
---------- ---------- ---------
OPERATING INCOME.............. 20,487 (1,089) 19,398
OTHER INCOME, NET............. 258 226 (3) 484
---------- ---------- ---------
INCOME BEFORE INTEREST
CHARGES...................... 20,745 (863) 19,882
---------- ---------- ---------
INTEREST CHARGES:
Interest on long-term debt.. 12,591 (2,553)(2) 10,038
Other interest.............. 1,223 8 (2) 1,231
Allowance for borrowed funds
used during construction... (21) -- (21)
---------- ---------- ---------
Total interest charges.. 13,793 (2,545) 11,248
---------- ---------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE
SUBSIDIARY'S PREFERRED STOCK
DIVIDENDS.................... 6,952 1,682 8,634
SUBSIDIARY'S PREFERRED STOCK
DIVIDENDS.................... 4,639 (4,224)(4) 415
---------- ---------- ---------
INCOME FROM CONTINUING
OPERATIONS APPLICABLE TO
COMMON STOCK................. $ 2,313 $ 5,906 $ 8,219
========== ========== =========
COMMON STOCK
Earnings per share of common
stock from continuing
operations:
Before premium on
redemption of
subsidiary's preferred
stock.................... $ .43 $ 2.52
Premium on redemption of
subsidiary's preferred
stock.................... (.18) -- (5)
---------- ---------
Earnings per share of
common stock from
continuing operations.... $ .25 $ 2.52
========== =========
Weighted average number of
shares outstanding......... 5,456,568 (2,200,000)(6) 3,256,568
========== ========== =========
</TABLE>
- --------
See page 49 for an explanation of footnotes.
48
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
(1) Adjustments reflect the Sale of the Water Business as if it had taken
place at the beginning of the period.
(2) Represents the adjustments to interest on long-term debt and amortization
of debt expense, and the related income tax effect, necessary to reflect
the annual interest on indebtedness, including $15.4 million of bank
borrowings utilized to redeem the $15.0 million principal amount of PG&W's
8.90% Cumulative Preferred Stock and $15.5 million of bank borrowings
utilized to redeem the $15.0 million principal amount of PG&W's 9.50%
Cumulative Preferred Stock, outstanding after (a) the application of
proceeds from the Sale of the Water Business to (i) repay the Bridge Loan,
the proceeds of which will be used to redeem the $50.0 million principal
amount of PG&W's 9.57% Series First Mortgage Bonds and (ii) repay $33.2
million of PG&W's bank borrowings and (b) the redemption in connection
with the Sale of the Water Business and pursuant to annual sinking fund
requirements of the $3.7 million principal amount of PG&W's 8% Series
First Mortgage Bonds outstanding as of January 1, 1994. The adjustments to
interest on long-term debt may be summarized as follows:
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS
--------------------
<S> <C> <C>
Interest on long-term debt for the twelve months
ended December 31, 1994:
Allocated to continuing operations, as per
accompanying consolidated statement of income..... $ 12,591
Allocated to discontinued operations............... 12,309
----------
24,900
Deduct:
Interest on debt to be assumed by PAWC............. $ 9,347
Interest on debt to be redeemed or repaid in
connection with Sale of the Water Business
9.57% Series First Mortgage Bonds*............... 4,785
Bank borrowings.................................. 1,752
8% Series First Mortgage Bonds................... 290 (16,174)
---------
Add:
Interest on bank borrowings to reflect the
redemption of $15.0 million principal of PG&W's
8.90% Cumulative Preferred Stock and the payment
of a $445,500 premium in connection therewith as
if it occurred at the beginning of the period
instead of December 16, 1994...................... 780
Interest on bank borrowings to reflect the
redemption of $15.0 million principal of PG&W's
9.50% Cumulative Preferred Stock and the payment
of a $534,375 premium in connection therewith as
if it occurred at the beginning of the period
instead of May 31, 1994........................... 341
Interest on bank borrowings to reflect the
redemption of PG&W's 8% Series First Mortgage
Bonds as if it occurred at the beginning of the
period............................................ 191 1,312
--------- ----------
Pro forma interest on long-term debt, as per
accompanying consolidated statement of income....... $ 10,038
==========
</TABLE>
* The Bridge Loan that PG&W intends to utilize for redemption of the 9.57%
Series First Mortgage Bonds has not been reflected in this summary since
it would have no effect on the net adjustment to interest on long-term
debt.
(3) Represents elimination of the amortization of capital stock expense, net
of the related tax effect, relative to PG&W's 9.50% Cumulative Preferred
Stock ($90,000) and PG&W's 8.90% Cumulative Preferred Stock ($136,000).
(4) Represents elimination of preferred stock dividends of (i) $2.0 million to
reflect the repurchase of 225,000 shares of PG&W's 9% Cumulative Preferred
Stock, (ii) $328,000 to reflect the repurchase of 80,000 shares of PG&W's
4.10% Cumulative Preferred Stock, (iii) $591,000 on the $15.0 million
principal amount of PG&W's 9.50% Cumulative Preferred Stock from January
1, 1994 to May 31, 1994, the date of redemption of such stock and (iv)
$1.3 million on the $15.0 million principal amount of PG&W's 8.90%
Cumulative Preferred Stock from January 1, 1994 to December 16, 1994, the
date of redemption of such stock.
(5) Reflects elimination of the premiums on the redemption of PG&W's 8.90%
Cumulative Preferred Stock ($445,500) and 9.50% Cumulative Preferred Stock
($534,375) from the calculation of the earnings per share of PEI Common
Stock.
(6) Represents the reduction in the number of shares of PEI Common Stock
outstanding resulting from the application of $81.4 million of the
proceeds from the Sale of the Water Business to repurchase 2,200,000
shares of PEI Common Stock at an average price of $37.00 per share.
49
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE OF REFLECT SALE OF AFTER SALE OF
WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
-------------- --------------- -------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES............. $ 93,421 $ -- $ 93,421
Cost of gas.................. 54,281 -- 54,281
---------- ----------- ----------
OPERATING MARGIN............... 39,140 -- 39,140
---------- ----------- ----------
OTHER OPERATING EXPENSES:
Operation.................... 11,281 -- 11,281
Maintenance.................. 2,280 -- 2,280
Depreciation................. 3,576 -- 3,576
Income taxes................. 3,292 770 (2) 4,062
Taxes other than income
taxes....................... 6,535 -- 6,535
---------- ----------- ----------
Total other operating
expenses................ 26,964 770 27,734
---------- ----------- ----------
OPERATING INCOME............... 12,176 (770) 11,406
OTHER INCOME, NET.............. 412 -- 412
---------- ----------- ----------
INCOME BEFORE INTEREST CHARGES. 12,588 (770) 11,818
---------- ----------- ----------
INTEREST CHARGES:
Interest on long-term debt... 6,848 (1,842)(2) 5,006
Other interest............... 843 (13)(2) 830
Allowance for borrowed funds
used during construction.... (22) -- (22)
---------- ----------- ----------
Total interest charges... 7,669 (1,855) 5,814
---------- ----------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE SUBSIDIARY'S
PREFERRED STOCK DIVIDENDS..... 4,919 1,085 6,004
SUBSIDIARY'S PREFERRED STOCK
DIVIDENDS..................... 1,383 (1,177)(3) 206
---------- ----------- ----------
INCOME FROM CONTINUING
OPERATIONS APPLICABLE TO
COMMON STOCK.................. $ 3,536 $ 2,262 $ 5,798
========== =========== ==========
COMMON STOCK
Earnings per share of common
stock from continuing
operations.................. $ .62 $ 1.66
========== ==========
Weighted average number of
shares outstanding.......... 5,695,312 (2,200,000)(4) 3,495,312
========== =========== ==========
</TABLE>
- --------
See page 51 for an explanation of footnotes.
50
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE SIX
MONTHS ENDED JUNE 30, 1995
(1) Adjustments reflect the Sale of the Water Business as if it had taken
place at the beginning of the period.
(2) Represents the adjustments to interest on long-term debt and amortization
of debt expense, and the related income tax effect, necessary to reflect
the interest on indebtedness outstanding during the period after (a)
application of proceeds from the Sale of the Water Business to (i) repay
the Bridge Loan, the proceeds of which will be used to redeem the $50.0
million principal amount of PG&W's 9.57% Series First Mortgage Bonds and
(ii) repay $33.2 million of PG&W's bank borrowings and (b) the redemption
in connection with the Sale of the Water Business and pursuant to annual
sinking fund requirements of the $3.5 million principal amount of PG&W's
8% Series First Mortgage Bonds outstanding as of January 1, 1995. The
adjustments to interest on long-term debt may be summarized as follows:
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS
--------------------
<S> <C> <C>
Interest on long-term debt for the six months ended
June 30, 1995:
Allocated to continuing operations, as per
accompanying consolidated statement of income...... $ 6,848
Allocated to discontinued operations................ 6,434
----------
13,282
Deduct:
Interest on debt to be assumed by PAWC.............. $ 4,751
Interest on debt to be redeemed or repaid in
connection with Sale of the Water Business
9.57% Series First Mortgage Bonds*................ 2,393
Bank borrowings................................... 1,109
8% Series First Mortgage Bonds.................... 140 (8,393)
---------
Add:
Interest on bank borrowings to reflect the
redemption of
PG&W's 8% Series First Mortgage Bonds as if it
occurred at the beginning of the period............ 117
----------
Pro forma interest on long-term debt, as per
accompanying consolidated statement of income........ $ 5,006
==========
</TABLE>
* The Bridge Loan that PG&W intends to utilize for redemption of the 9.57%
Series First Mortgage Bonds has not been reflected in this summary since
it would have no effect on the net adjustment to interest on long-term
debt.
(3) Represents elimination of preferred stock dividends of (i) $1,013,000 to
reflect the repurchase of 225,000 shares of PG&W's 9% Cumulative Preferred
Stock and (ii) $164,000 to reflect the repurchase of 80,000 shares of
PG&W's 4.10% Cumulative Preferred Stock.
(4) Represents the reduction in the number of shares of PEI Common Stock
outstanding resulting from the application of $81.4 million of the
proceeds from the Sale of the Water Business to repurchase 2,200,000
shares of PEI Common Stock at an average price of $37.00 per share.
51
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE OF REFLECT SALE OF AFTER SALE OF
WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
-------------- --------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
- ------
UTILITY PLANT:
At original cost, less
acquisition adjustments of
$386,000..................... $288,071 $ -- $288,071
Accumulated depreciation...... (75,668) -- (75,668)
-------- --------- --------
212,403 -- 212,403
-------- --------- --------
OTHER PROPERTY AND INVESTMENTS.. 3,989 -- 3,989
-------- --------- --------
CURRENT ASSETS:
Cash.......................... 368 255,845 (2a)
(55,315)(2c)
(200,530)(3)
60 (3h)
(36)(4) 392
Accounts receivable--
Customers................... 11,341 -- 11,341
Others...................... 645 -- 645
Reserve for uncollectible
accounts................... (1,339) -- (1,339)
Accrued utility revenues...... 1,390 -- 1,390
Materials and supplies, at
average cost................. 2,758 -- 2,758
Gas held by suppliers, at
average cost................. 12,838 -- 12,838
Natural gas transition costs
collectible.................. 4,342 -- 4,342
Prepaid expenses and other.... 6,265 -- 6,265
-------- --------- --------
38,608 24 38,632
-------- --------- --------
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible... 29,942 -- 29,942
Natural gas transition costs
collectible................. 1,991 -- 1,991
Other........................ 2,825 -- 2,825
Unamortized debt expense...... 3,150 (215)(6)
(5)(6) 2,930
Other......................... 3,218 -- 3,218
-------- --------- --------
41,126 (220) 40,906
-------- --------- --------
NET ASSETS OF DISCONTINUED OPER-
ATIONS......................... 197,713 (197,713)(2e) --
-------- --------- --------
TOTAL ASSETS.................... $493,839 $(197,909) $295,930
======== ========= ========
</TABLE>
- --------
See page 54 for an explanation of footnotes.
52
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE OF REFLECT SALE OF AFTER SALE OF
WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
-------------- --------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common shareholders'
investment................... $168,455 $ (3,683)(2b) $
(81,400)(3a)
(1,800)(3b)
4,000 (3c)
(6)(4)
(722)(5)
(126)(6)
(3)(6) 84,715
Preferred stock--
Not subject to mandatory
redemption, net............ 33,615 (22,500)(3b)
(8,000)(3c)
1,247 (5) 4,362
Subject to mandatory
redemption................. 1,680 -- 1,680
Long-term debt................ 157,893 (50,000)(3d) 107,893
-------- --------- --------
361,643 (162,993) 198,650
-------- --------- --------
CURRENT LIABILITIES:
Current portion of long-term
debt and preferred stock
subject to mandatory
redemption................... 36,670 (33,200)(3e)
3,300 (4)
(3,325)(4) 3,445
Note payable to bank.......... 2,000 -- 2,000
Accounts payable.............. 14,770 -- 14,770
Deferred cost of gas and
supplier refunds, net........ 9,056 -- 9,056
Accrued general business and
realty taxes................. 668 -- 668
Accrued income taxes.......... 969 (5)(4)
(525)(5)
(89)(6)
(2)(6) 348
Accrued interest.............. 3,105 -- 3,105
Accrued natural gas transition
costs........................ 2,158 -- 2,158
Other......................... 2,862 6,500 (2d)
(8,350)(3f) 1,012
-------- --------- --------
72,258 (35,696) 36,562
-------- --------- --------
DEFERRED CREDITS:
Deferred income taxes......... 46,726 780 (3g) 47,506
Accrued natural gas transition
costs........................ 2,170 -- 2,170
Unamortized investment tax
credits...................... 5,024 -- 5,024
Operating reserves............ 2,191 -- 2,191
Other......................... 3,827 -- 3,827
-------- --------- --------
59,938 780 60,718
-------- --------- --------
TOTAL CAPITALIZATION AND
LIABILITIES.................... $493,839 $(197,909) $295,930
======== ========= ========
</TABLE>
- --------
See page 54 for an explanation of footnotes.
53
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1995
(1) Adjustments reflect the Sale of the Water Business as if it had taken
place as of the date of the balance sheet.
(2) Represents (a) receipt of cash proceeds of $255.8 million from the Sale of
the Water Business, (b) elimination from common shareholders' investment
of the $3.7 million of estimated income from PG&W's Water Business during
the balance of the phase-out period (from July 1 to the estimated closing
date of December 31, 1995) that was reflected as of June 30, 1995, as an
offset against the estimated loss on the Sale of the Water Business, (c)
payment of the estimated federal and state income tax liability of $55.3
million on the Sale of the Water Business, (d) recording of the $6.5
million premium of the Purchase Price over the book value of the assets to
be acquired by PAWC as a credit to other current liabilities, the account
to which it was charged as of June 30, 1995, as an offset against the
liability for the estimated expenses on the Sale of the Water Business and
(e) elimination of the $197.7 million of net assets of the Water Business.
(3) Reflects the application of the proceeds from the Sale of the Water
Business of $200.5 million, after the payment of the estimated federal and
state income tax liability of $55.3 million on the Sale of the Water
Business, in the following manner: (a) the repurchase (for an aggregate
consideration of $81.4 million) of 2,200,000 shares of PEI Common Stock at
an average price of $37.00 per share, (b) the repurchase (for an aggregate
consideration of $24.3 million) of 225,000 shares of PG&W's 9% Cumulative
Preferred Stock (having an aggregate book value of $22.5 million) at a
price of $108.00 per share, which includes a premium of $8.00 per share
($1,800,000 in the aggregate), (c) the repurchase (for an aggregate
consideration of $4.0 million) of 80,000 shares of PG&W's 4.10% Cumulative
Preferred Stock (having an aggregate book value of $8.0 million) at a
price of $50.00 per share, which reflects a $4.0 million aggregate ($50.00
per share) discount from book value, (d) the repayment of the Bridge Loan,
the proceeds of which will be used to redeem the $50.0 million principal
amount of PG&W's 9.57% Series First Mortgage Bonds, (e) repayment of $33.2
million of PG&W's bank borrowings, (f) payment of transaction costs of
$8.3 million, which include an $800,000 premium on the redemption of the
9.57% Series First Mortgage Bonds, (g) recording of the $780,000 net tax
benefit resulting from transaction costs and the premium over book value
on the Sale of the Water Business and (h) the addition of the remaining
proceeds of $60,000 to PG&W's cash accounts.
(4) Reflects the redemption, utilizing $3,300,000 of bank borrowings and
$36,305 of PG&W's cash, of $3,325,000 aggregate principal amount of PG&W's
8% Series First Mortgage Bonds which were redeemed on July 10, 1995, in
connection with the Sale of the Water Business, at an aggregate redemption
price of $3,336,305, which includes an aggregate redemption premium of
$11,305 ($6,541 after related income tax benefits of $4,764).
(5) Reflects the write-off of $1.2 million ($722,000 after related income tax
benefits of $525,000) of issuance costs relative to the 225,000 shares of
PG&W's 9% Cumulative Preferred Stock which PG&W intends to repurchase with
proceeds from the Sale of the Water Business.
(6) Reflects the write-off of $215,000 ($126,000 after related income tax
benefits of $89,000) of issuance costs relating to PG&W's 9.57% Series
First Mortgage Bonds which PG&W intends to redeem in connection with the
Sale of the Water Business, and $5,000 ($3,000 after related income tax
benefits of $2,000) of issuance costs relating to PG&W's 8% Series First
Mortgage Bonds which PG&W redeemed in connection with the Sale of the
Water Business.
54
<PAGE>
PG&W SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from PG&W's
unaudited financial statements as restated to reflect PG&W's water utility
operations as "discontinued operations" effective March 31, 1995. Operating
results for the six months ended June 30, 1995, are not indicative of the
results that may be expected for the entire year ending December 31, 1995, due
to the seasonal nature of PG&W's business. See Note 13 of Notes to PG&W's
Financial Statements included elsewhere in this Joint Proxy Statement. The
selected financial data set forth below do not purport to be complete and
should be read in conjunction with "PG&W MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and PG&W's Financial
Statements and the notes thereto included elsewhere in this Joint Proxy
Statement. IN PREPARING THIS SELECTED FINANCIAL DATA, ALL OF PG&W'S PREFERRED
STOCK DIVIDENDS HAVE BEEN ALLOCATED TO CONTINUING OPERATIONS (SEE NOTE 2
BELOW).
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1994 (1) 1993 (1) 1992 (1) 1991 (1) 1990 (1) 1995 (1) 1994 (1)
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED, AND IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES...... $ 167,992 $ 153,325 $ 143,227 $ 138,465 $ 135,185 $93,421 $106,801
Cost of gas............. 98,653 86,557 77,720 77,801 75,711 54,281 64,814
--------- --------- --------- --------- --------- -------- ---------
OPERATING MARGIN........ 69,339 66,768 65,507 60,664 59,474 39,140 41,987
--------- --------- --------- --------- --------- -------- ---------
OTHER OPERATING
EXPENSES:
Operation............... 22,652 21,797 21,514 20,589 21,061 11,281 11,304
Maintenance............. 4,436 3,695 3,405 3,957 4,086 2,280 2,194
Depreciation............ 6,667 6,388 6,087 5,545 5,325 3,576 3,340
Income taxes............ 5,649 6,041 5,894 3,731 3,749 4,101 5,551
Taxes other than income
taxes.................. 10,807 10,055 9,670 8,663 8,458 6,535 6,999
--------- --------- --------- --------- --------- -------- ---------
Total other operating
expenses............... 50,211 47,976 46,570 42,485 42,679 27,773 29,388
--------- --------- --------- --------- --------- -------- ---------
OPERATING INCOME........ 19,128 18,792 18,937 18,179 16,795 11,367 12,599
OTHER INCOME
(DEDUCTIONS), NET...... 72 (585) (88) 1,082 50 172 81
INTEREST CHARGES (2).... (9,898) (9,815) (10,808) (11,261) (8,924) (5,324) (4,841)
--------- --------- --------- --------- --------- -------- ---------
INCOME FROM CONTINUING
OPERATIONS............. 9,302 8,392 8,041 8,000 7,921 6,215 7,839
--------- --------- --------- --------- --------- -------- ---------
DISCONTINUED OPERATIONS:
Income from discontinued
operations, net of
related income taxes... 10,504 7,909 4,915 3,130 315 2,127 4,724
Estimated loss on
disposal of
discontinued
operations, net of
anticipated income
during the phase-out
period................. -- -- -- -- -- (5,831) --
--------- --------- --------- --------- --------- -------- ---------
Income (loss) with
respect to discontinued
operations............. 10,504 7,909 4,915 3,130 315 (3,704) 4,724
--------- --------- --------- --------- --------- -------- ---------
NET INCOME.............. 19,806 16,301 12,956 11,130 8,236 2,511 12,563
DIVIDENDS ON PREFERRED
STOCK (2).............. 4,639 6,462 5,065 4,236 4,323 1,383 2,644
--------- --------- --------- --------- --------- -------- ---------
EARNINGS APPLICABLE TO
COMMON STOCK........... $ 15,167 $ 9,839 $ 7,891 $ 6,894 $ 3,913 $ 1,128 $ 9,919
========= ========= ========= ========= ========= ======== =========
COMMON STOCK
INFORMATION:
Weighted average number
of shares outstanding
in thousands........... 5,189 4,176 3,908 3,688 3,656 5,549 4,957
========= ========= ========= ========= ========= ======== =========
Earnings (loss) per
share of common stock:
Continuing operations... $ .90 $ .46 $ .76 $ 1.02 $ .98 $ .87 $ 1.05
Discontinued operations. 2.02 1.90 1.26 .85 .09 (.67) .95
--------- --------- --------- --------- --------- -------- ---------
Total before premium on
redemption of preferred
stock.................. 2.92 2.36 2.02 1.87 1.07 .20 2.00
Premium on redemption of
preferred stock........ (.19) -- -- -- -- -- (.11)
--------- --------- --------- --------- --------- -------- ---------
Earnings per share of
common stock........... $ 2.73 $ 2.36 $ 2.02 $ 1.87 $ 1.07 $ .20 $ 1.89
========= ========= ========= ========= ========= ======== =========
Cash dividends per share
of common stock........ $ 1.81 $ 2.82 $ 2.54 $ 2.40 $ 2.54 $ 1.41 $ .71
========= ========= ========= ========= ========= ======== =========
</TABLE>
- --------
See page 56 for an explanation of footnotes.
55
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- ------------------------
1994 (1) 1993 (1) 1992 (1) 1991 (1) 1990 (1) 1995 (1) 1994 (1)
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED, AND IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITALIZATION AT END OF
PERIOD:
Amounts--
Common shareholder's
investment............ $ 216,032 $ 188,011 $158,098 $ 147,678 $ 149,188 $214,369 $ 214,175
Preferred stock--
Not subject to
mandatory
redemption, net...... 33,615 33,615 33,615 9,916 9,916 33,615 33,615
Subject to mandatory
redemption........... 1,760 31,840 41,920 42,000 42,080 1,680 16,760
Long-term debt......... 170,825 125,535 119,040 128,267 46,286 108,000 108,325
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total capitalization. $ 422,232 $ 379,001 $352,673 $327,861 $ 247,470 $357,664 $ 372,875
=========== =========== =========== =========== =========== =========== ===========
Ratios--
Common shareholder's
investment............ 51.2% 49.6% 44.8% 45.1% 60.3% 59.9% 57.4%
Preferred stock--
Not subject to
mandatory
redemption, net...... 8.0 8.9 9.5 3.0 4.0 9.4 9.0
Subject to mandatory
redemption........... 0.4 8.4 11.9 12.8 17.0 0.5 4.5
Long-term debt......... 40.4 33.1 33.8 39.1 18.7 30.2 29.1
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== =========== =========== =========== ===========
UTILITY PLANT AT END OF
PERIOD:
Total utility plant.... $ 284,080 $ 269,819 $256,663 $ 246,323 $ 239,036 $288,071 $ 272,047
Accumulated
depreciation.......... 74,408 70,954 65,318 61,628 57,180 75,668 70,122
-----------
----------- ----------- ----------- ----------- ----------- -----------
Net utility plant.... $ 209,672 $ 198,865 $191,345 $ 184,695 $ 181,856 $212,403 $ 201,925
=========== =========== =========== =========== =========== =========== ===========
TOTAL ASSETS AT END OF
PERIOD:
Continuing operations.. $ 315,139 $ 315,069 $254,425 $ 260,954 $ 246,942 $293,196 $ 287,970
Discontinued
operations, net (3)... 203,196 193,002 183,702 144,815 124,774 197,713 201,355
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ $ 518,335 $ 508,071 $438,127 $ 405,769 $ 371,716 $490,909 $ 489,325
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
- --------
(1) Restated to reflect discontinued operations.
(2) None of the dividends on PG&W Preferred Stock has been allocated to the
discontinued operations. Interest charges relating to indebtedness of PG&W
have been allocated to the discontinued operations based on the
relationship of the gross water utility plant of the discontinued
operations to the total of PG&W's gross gas and water utility plant. This
is the same method as has been utilized by PG&W and the PPUC in
establishing the revenue requirements of both PG&W's gas and water utility
operations.
(3) Net of (i) liabilities being assumed by PAWC, (ii) estimated liability for
income taxes on sale of discontinued operations, (iii) with respect to the
six months ended June 30, 1995, the anticipated income from discontinued
operations during the balance of the phase-out period, and (iv) with
respect to periods ended in 1994 and earlier years, other net assets of
the discontinued operations (which were written off as of March 31, 1995).
See Note 2 of Notes to PG&W's Financial Statements included elsewhere in
this Joint Proxy Statement.
56
<PAGE>
PG&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On April 26, 1995, PEI and PG&W entered into the Asset Purchase Agreement
with AWWC and PAWC which provides for the Sale of the Water Business. Until
the Closing, PG&W will continue to operate the Water Business.
The Purchase Price for the Water Business reflects a $6.5 million premium
over the book value of the Acquired Assets. However, after the payment of
transaction costs and the write-off of certain deferred regulatory assets and
deferred credits, the Sale of the Water Business will result in an estimated
after-tax loss of $5 to 8 million, net of the expected income from the water
operations during the phase-out period (which, for financial reporting
purposes commenced on April 1, 1995) to the date of Closing (which has been
assumed to be December 31, 1995).
PEI and PG&W intend to use the net cash proceeds from the Sale of the Water
Business of approximately $201 million, after the payment of an estimated $55
million of income taxes, to retire debt, to repurchase stock and for working
capital for its continuing operations. See "PG&W UNAUDITED PRO FORMA FINANCIAL
STATEMENTS" and "USE OF CERTAIN PROCEEDS OF THE SALE OF THE WATER BUSINESS."
After the sale, the principal assets of PEI and PG&W will consist of PG&W's
gas utility operations and approximately 46,000 acres of land. Until the
Closing, PG&W intends to utilize its existing bank lines of credit for the
external financing requirements of the water utility operations, which PG&W
believes will be adequate for such purposes.
Operating revenues from PG&W's water utility operations decreased by
$516,000 (1.6%) from $33.0 million for the six-month period ended June 30,
1994, to $32.5 million for the six-month period ended June 30, 1995. This
decrease in revenues was principally the result of a 0.3% decrease in customer
consumption. Operating expenses related to the water utility operations,
excluding income taxes, decreased $505,000 (2.7%) from $18.6 million for the
six-month period ended June 30, 1994, to $18.1 million for the six-month
period ended June 30, 1995. The major reason for this decrease was a $314,000
(3.6%) decrease in other operation expenses, primarily as a result of
decreases in the provision for injuries and damages and the amortization of
rate case expense, the effects of which were partially offset by an increase
in payroll costs. Income taxes with respect to the water utility operations
decreased by $134,000 (4.0%) from $3.4 million in the first six months of 1994
to $3.2 million in the first six months of 1995 due to a lower level of income
before income taxes (for this purpose, operating income net of interest
charges) and a decrease in the Pennsylvania Corporate Net Income Tax rate. As
a result of the foregoing, operating income of the water utility operations
increased $123,000 (1.1%) from $10.9 million for the six-month period ended
June 30, 1994, to $11.1 million for the six-month period ended June 30, 1995.
After interest charges, the income from the water utility operations increased
$61,000 (1.3%) from $4.7 million for the six-month period ended June 30, 1994,
to $4.8 million for the six-month period ended June 30, 1995.
Operating revenues from PG&W's water utility operations increased by $13.4
million (25.1%) from $53.4 million in 1993 to $66.7 million in 1994. This
increase in revenues was principally the result of various rate increases
allowed by the PPUC during 1993. Operating expenses related to the water
utility operations, excluding income taxes, increased $3.6 million (11.0%)
from $33.1 million in 1993 to $36.7 million in 1994. The major reasons for
this increase were a $1.8 million (29.8%) increase in depreciation expense
(primarily because of capital additions and the change in December, 1993, from
a 4% compound interest to a straight-line method of depreciation with respect
to certain water plant) and a $1.9 million increase in other operating
expenses, largely as a result of increased payroll and other postemployment
benefit costs, the effects of which were partially offset by a decrease in the
amortization of rate case expense. Income taxes with respect to the water
utility operations increased by $3.9 million from $2.9 million in 1993 to $6.8
million in 1994 due to a higher level of income before income taxes (for this
purpose, operating income net of interest charges). As a result of the
foregoing, operating income of the water utility operations increased $5.8
million (33.6%) from $17.4 million in 1993 to
57
<PAGE>
$23.2 million in 1994. After allocated interest charges (see Note 2 to PG&W's
Financial Statements included elsewhere in this Joint Proxy Statement), the
income from the water utility operations increased $2.6 million (32.8%) from
$7.9 million in 1993 to $10.5 million in 1994.
Operating revenues from PG&W's water utility operations increased by $4.7
million (9.7%) from $48.7 million in 1992 to $53.4 million in 1993. This
increase in revenues was principally the result of various rate increases
allowed by the PPUC during 1993. Operating expenses related to the water
utility operations, excluding income taxes, increased $1.8 million (5.7%) from
$31.3 million in 1992 to $33.1 million in 1993. The major reasons for this
increase were a $1.1 million increase in depreciation expense (primarily as a
result of capital additions and the change from a 4% compound interest to a
straight-line method of depreciation with respect to certain water plant) and
a $645,000 increase in other operating expenses, largely as a result of
increased provisions for sludge removal and the amortization of rate case
expense. Income taxes with respect to the water utility operations increased
by $537,000 (22.3%) from $2.4 million in 1992 to $2.9 million in 1993 due to a
higher level of income before income taxes (for this purpose, operating income
net of interest charges). As a result of the foregoing, operating income of
the water utility operations increased $2.4 million (15.9%) from $15.0 million
in 1992 to $17.4 million in 1993. After allocated interest charges (see Note 2
to PG&W's Financial Statements included elsewhere in this Joint Proxy
Statement), the income from the water utility operations increased $3.0
million (60.9%) from $4.9 million in 1992 to $7.9 million in 1993.
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, PG&W'S
FINANCIAL STATEMENTS HAVE BEEN RESTATED TO REFLECT ITS WATER UTILITY
OPERATIONS AS "DISCONTINUED OPERATIONS EFFECTIVE MARCH 31, 1995," AND THE
FOLLOWING SECTIONS OF PG&W MANAGEMENT'S DISCUSSION AND ANALYSIS GENERALLY
RELATE ONLY TO PG&W'S CONTINUING OPERATIONS, WHICH CONSIST PRIMARILY OF ITS
GAS UTILITY OPERATIONS. FOR ADDITIONAL INFORMATION REGARDING THE DISCONTINUED
OPERATIONS, SEE NOTE 2 OF THE NOTES TO PG&W'S FINANCIAL STATEMENTS INCLUDED
ELSEWHERE IN THIS JOINT PROXY STATEMENT.
58
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in PG&W's statements of income
as percentages of total operating revenues for each of the six-month periods
ended June 30, 1995, and June 30, 1994, and each of the calendar years ended
December 31, 1994, 1993 and 1992. See PG&W's Financial Statements and the
notes thereto included elsewhere in this Joint Proxy Statement. ALL OF PG&W'S
PREFERRED STOCK DIVIDENDS HAVE BEEN ALLOCATED TO CONTINUING OPERATIONS. SEE
NOTE (1)
<TABLE>
<CAPTION>
PERCENTAGE OF OPERATING REVENUES
----------------------------------------
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- ----------------
1994 1993 1992 1995 1994
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of gas........................ 58.7 56.5 54.2 58.1 60.7
------ ------ ------ ------- -------
OPERATING MARGIN..................... 41.3 43.5 45.8 41.9 39.3
------ ------ ------ ------- -------
OTHER OPERATING EXPENSES:
Operation.......................... 13.5 14.2 15.0 12.1 10.6
Maintenance........................ 2.6 2.4 2.4 2.4 2.0
Depreciation....................... 4.0 4.2 4.2 3.8 3.1
Income taxes....................... 3.4 3.9 4.1 4.4 5.2
Taxes other than income taxes...... 6.4 6.5 6.8 7.0 6.6
------ ------ ------ ------- -------
Total other operating expenses... 29.9 31.2 32.5 29.7 27.5
------ ------ ------ ------- -------
OPERATING INCOME..................... 11.4 12.3 13.3 12.2 11.8
OTHER INCOME (DEDUCTIONS), NET....... -- (0.4) (0.1) .2 .1
INTEREST CHARGES(1).................. (5.9) (6.4) (7.6) (5.7) (4.5)
------ ------ ------ ------- -------
INCOME FROM CONTINUING OPERATIONS.... 5.5 5.5 5.6 6.7 7.4
INCOME (LOSS) WITH RESPECT TO
DISCONTINUED OPERATIONS............. 6.3 5.1 3.4 (4.0) 4.4
------ ------ ------ ------- -------
NET INCOME........................... 11.8 10.6 9.0 2.7 11.8
DIVIDENDS ON PREFERRED STOCK(1)...... 2.8 4.2 3.5 1.5 2.5
------ ------ ------ ------- -------
EARNINGS APPLICABLE TO COMMON STOCK.. 9.0% 6.4% 5.5% 1.2% 9.3%
====== ====== ====== ======= =======
</TABLE>
- --------
(1) None of the dividends on PG&W Preferred Stock has been allocated to the
discontinued operations. Interest charges relating to indebtedness of PG&W
have been allocated to the discontinued operations based on the
relationship of the gross water utility plant of the discontinued
operations to the total of PG&W's gross gas and water utility plant. This
is the same method as has been utilized by PG&W and the PPUC in
establishing the revenue requirements of both PG&W's gas and water utility
operations.
Six Months Ended June 30, 1995, Compared With Six Months Ended June 30, 1994
Operating Revenues. Operating revenues decreased $13.4 million (12.5%) from
$106.8 million for the six-month period ended June 30, 1994, to $93.4 million
for the six-month period ended June 30, 1995. This decrease was primarily the
result of a 1.6 billion cubic feet (10.8%) decrease in sales to residential
and commercial heating customers, caused by a 590 degree (14.2%) decrease in
heating degree days. There were 3,570 heating degree days (90.3% of normal)
during the first six months of 1995 compared to 4,160 (105.2% of normal)
during the first six months of 1994.
Cost of Gas. The cost of gas decreased $10.5 million (16.3%) from $64.8
million for the six-month period ended June 30, 1994, to $54.3 million for the
six-month period ended June 30, 1995, primarily because of the reduced
consumption by residential and commercial heating customers.
Operating Margin. The operating margin decreased $2.8 million (6.8%) from
$42.0 million in the six-month period ended June 30, 1994 to $39.1 million in
the six-month period ended June 30, 1995. However, as a percentage of
operating revenues, the margin increased from 39.3% in the first six months of
1994 to 41.9% in
59
<PAGE>
the first six months of 1995 primarily as a result of the higher average
charge per cubic foot to residential and commercial heating customers because
of their lower consumption due to the warmer weather.
Other Operating Expenses. Other operating expenses decreased $1.6 million
(5.5%) from $29.4 million for the six-month period ended June 30, 1994, to
$27.8 million for the six-month period ended June 30, 1995. This decrease was
primarily the result of a $1.5 million (26.1%) decrease in income taxes from
$5.6 million in the first six months of 1994 to $4.1 million in the first six
months of 1995 due to a decrease in income before income taxes (for this
purpose, operating income net of interest charges) and a reduction in the
Pennsylvania corporate net income tax rate. Also contributing to the decrease
in other operating expenses was a $464,000 (6.6%) decrease in taxes other than
income taxes, primarily because of a decrease in gross receipts tax as a
result of the lower level of operating revenues. The effect of the decreases
in taxes was partially offset by a $236,000 (7.1%) increase in depreciation
expense, as a result of additions to utility plant, and a $63,000 (0.5%)
increase in operation and maintenance expenses. Notwithstanding the decrease
in other operating expenses, such expenses increased as a percentage of
operating revenues from 27.5% during the first six months of 1994 to 29.7%
during the first six months of 1995 because of the relatively greater decrease
in revenues.
Operating Income. As a result of the above, total operating income decreased
by $1.2 million (9.8%) from $12.6 million for the six-month period ended June
30, 1994, to $11.4 million for the six-month period ended June 30, 1995.
Nonetheless, operating income increased as a percentage of total operating
revenues for such periods from 11.8% in 1994 to 12.2% in 1995, primarily
because of the decrease in the cost of gas as a percentage of operating
revenues, the effect of which was partially offset by the lower levels of
taxes.
Interest Charges. Interest charges increased by $483,000 (10.0%) from $4.8
million for the six-month period ended June 30, 1994, to $5.3 million for the
six-month period ended June 30, 1995, as a result of a $359,000 (8.3%)
increase in interest on long-term debt from $4.3 million during the six-month
period ended June 30, 1994, to $4.7 million during the six-month period ended
June 30, 1995, and a $243,000 increase in interest on overcollections of
purchased gas costs.
Income From Continuing Operations. Income from continuing operations
decreased $1.6 million (20.7%) from $7.8 million for the six months ended June
30, 1994, to $6.2 million for the six months ended June 30, 1995. This
decrease was largely the result of the matters discussed above, principally
the decrease in operating margin resulting from the lower level of sales to
residential and commercial heating customers. The effect of the decreased
operating margin was partially offset by the lower levels of taxes.
Net Income. The decrease in net income of $10.1 million (80.0%) from $12.6
million for the six-month period ended June 30, 1994, to $2.5 million for the
six-month period ended June 30, 1995, was largely the result of the estimated
loss on the disposal of discontinued operations, as discussed above. Also
contributing to the decrease in net income was the lower income from
continuing operations.
Dividends on Preferred Stock. Dividends on PG&W's preferred stock decreased
$1.3 million (47.7%) from $2.6 million for the six-month period ended June 30,
1994, to $1.4 million for the six-month period ended June 30, 1995, as a
result of the redemption by PG&W on May 31, 1994, of 150,000 shares ($15.0
million) of its 9.50% Cumulative Preferred Stock, $100 par value, and on
December 16, 1994, of 150,000 shares ($15.0 million) of its 8.90% Cumulative
Preferred Stock, $100 par value. No dividends on PG&W Preferred Stock have
been allocated to the discontinued operations.
Earnings Applicable to PG&W Common Stock. The decrease in earnings
applicable to PG&W Common Stock of $8.8 million (88.6%) from $9.9 million for
the six-month period ended June 30, 1994, to $1.1 million for the six-month
period ended June 30, 1995, as well as the decrease in earnings per share of
PG&W Common Stock of $1.69 from $1.89 per share for the six months ended June
30, 1994 (after an $.11 per share charge for the premium on redemption of
PG&W's preferred stock), to $.20 per share for the six months ended June 30,
1995, were largely the result of the estimated loss (equivalent to $1.05 per
share) on the disposal of discontinued operations, as discussed above. Also
contributing to the decreases in earnings applicable to PG&W Common Stock and
earnings per share for the six months ended June 30, 1995, was the lower
income from continuing operations. The effects of these factors were partially
offset by the reduced dividends on PG&W Preferred Stock and, in the case of
earnings per share, the absence of any premium on the redemption of PG&W
Preferred Stock.
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Year Ended December 31, 1994, Compared With Year Ended December 31, 1993
Operating Revenues. Operating revenues increased by $14.7 million (9.6%)
from $153.3 million for 1993 to $168.0 million for 1994, primarily as a result
of a price increase averaging 19.0% (designed to total $28.8 million on an
annual basis) effective December 1, 1993, due to increased costs of purchased
gas. See "--Rate Matters--Rate Filings." Also contributing to the increase in
operating revenues in 1994 was a 224 million cubic feet (1.0%) increase in
sales to residential and commercial heating customers. This increase was
attributable to the addition of approximately 2,200 new customers and occurred
despite heating degree days that were 2.1% lower than normal and 0.3% less
than in 1993. Additionally, the implementation of surcharges to recover FERC
Order 636 transition costs (as more fully discussed below under "--Rate
Matters--Rate Filings") acted to increase gas operating revenues by $1.8
million in 1994. The effects of the price increase and the surcharges on
operating revenues were partially offset by the switching of certain
commercial and industrial customers from sales to transportation service and a
price decrease averaging 1.1% designed to total $1.8 million on an annual
basis effective December 1, 1994, due to decreased costs of purchased gas, see
"--Rate Matters--Rate Filings."
Cost of Gas. The cost of gas increased $12.1 million (14.0%) from $86.6
million for 1993 to $98.7 million for 1994. The effect of this increase, which
was the result of higher costs for purchased gas and the implementation of
surcharges to recover FERC Order 636 transition costs, see "--Rate Matters--
Rate Filings", was partially offset by a 9.0% (2.6 billion cubic feet)
decrease in the volume of gas sold during 1994 compared to 1993. This
decreased volume was largely attributable to the aforementioned switching of
certain customers from sales to transportation service.
Operating Margin. The operating margin increased $2.6 million or 3.9% from
$66.8 million in 1993 to $69.3 million in 1994, primarily as a result of the
increased sales to residential and commercial heating customers. However, as a
percentage of operating revenues, the margin decreased from 43.5% in 1993 to
41.3% in 1994 primarily because of the increased cost of purchased gas.
Other Operating Expenses. Other operating expenses increased $2.2 million
(4.7%) from $48.0 million for 1993 to $50.2 million for 1994. This increase
was largely attributable to a $729,000 increase in gross receipts tax as a
result of the higher level of gas revenues, an $855,000 increase in operation
expenses (primarily because of a $285,000 increase in payroll costs and
increased provisions for uncollectible accounts of $603,000) and a $741,000
increase in maintenance expenses (principally as a result of a $319,000
increase in payroll costs and a $146,000 increase in maintenance of gas mains
and services attributable to the extremely cold weather experienced in January
and February, 1994). Income taxes decreased by $392,000 (6.5%) from $6.0
million in 1993 to $5.6 million in 1994 due to a lower level of income before
income taxes (for this purpose, operating income net of interest charges).
Notwithstanding the increase in other operating expenses, such expenses
decreased as a percentage of operating revenues, from 31.2% during 1993 to
29.9% during 1994 because of the relatively greater increase in operating
revenues.
Operating Income. As a result of the above, total operating income increased
by $336,000 (1.8%) from $18.8 million for 1993 to $19.1 million for 1994.
However, as a percentage of operating revenues, operating income decreased
from 12.3% in 1993 to 11.4% in 1994 primarily as a result of the increase in
the cost of gas as a percentage of operating revenues.
Other Income (Deductions), Net. Other income (deductions), net increased
$657,000 from a deduction of $585,000 in 1993 to income of $72,000 in 1994,
primarily as a result of a $409,000 gain ($268,000 net of related income
taxes) on the sale of PG&W's interest in an oil and gas joint venture, a
$254,000 increase ($145,000 net of related income taxes) in gains on the sale
of land and other property and a $239,000 decrease in the net interest expense
associated with the unexpended portion of the proceeds from the issuance of
certain debt held in a construction fund.
Income from Continuing Operations. Income from continuing operations
increased $910,000 (10.8%) from $8.4 million for 1993 to $9.3 million for
1994. This increase was the result of the matters discussed above,
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<PAGE>
principally the increase in operating margin resulting from the higher level
of sales to residential and commercial heating customers, the effect of which
was partially offset by the increase in other operating expenses.
Net Income. Net income increased $3.5 million (21.5%) from $16.3 million for
1993 to $19.8 million for 1994. The increased earnings in 1994 were the result
of a $2.6 million increase in income from discontinued operations and the
matters discussed above relating to the continuing operations, principally the
increase in operating margin resulting primarily from the higher level of
sales to residential and commercial heating customers and the increase in
other income (deductions), net. The effects of these factors were partially
offset by the increase in other operating expenses.
Dividends on PG&W Preferred Stock. Dividends on PG&W Preferred Stock
decreased $1.8 million (28.2%) from $6.5 million for 1993 to $4.6 million for
1994, primarily as a result of the redemption by PG&W on December 23, 1993, of
100,000 shares ($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0
million), of its 9.50% Cumulative Preferred Stock, $100 par value. No
dividends on PG&W Preferred Stock have been allocated to the discontinued
operations.
Earnings Applicable to PG&W Common Stock. Earnings applicable to PG&W Common
Stock increased $5.3 million (54.2%) from $9.8 million for 1993 to $15.2
million for 1994. The increased earnings in 1994 were the result of a $2.6
million increase in income from discontinued operations and the matters
discussed above relating to continuing operations, principally the increase in
operating margin resulting primarily from the higher level of sales to
residential and commercial heating customers, the increase in other income
(deductions), net, and the decrease in dividends on preferred stock. The
effects of these factors were partially offset by the increase in other
operating expenses.
Before the $534,000 premium paid on the redemption of 150,000 shares of
PG&W's 9.50% Cumulative Preferred Stock on May 31, 1994, and the $446,000
premium paid on the redemption of 150,000 shares of PG&W's 8.90% Cumulative
Preferred Stock on December 16, 1994, the earnings per share of PG&W Common
Stock increased $.56 (23.7%) from $2.36 per share for 1993 to $2.92 per share
for 1994. This improvement was the result of the 54.2% increase in earnings
applicable to PG&W Common Stock and occurred despite a 24.3% increase in the
weighted average number of shares outstanding during 1994 primarily as a
result of PG&W's sale of 834,000 shares of PG&W Common Stock to PEI on October
27, 1993. While premiums on the redemption of preferred stock are charged to
retained earnings and are not a determinant of earnings applicable to PG&W
Common Stock, the premiums associated with any redemptions occurring
subsequent to January 20, 1994, must be taken into account in calculating the
earnings per share of PG&W Common Stock. As a consequence, the premiums on the
redemption of the 150,000 shares of PG&W's 9.50% Cumulative Preferred Stock
and the 150,000 shares of PG&W's 8.90% Cumulative Preferred Stock acted to
reduce PG&W's earnings per share for 1994 by $.19 per share, resulting in
earnings of $2.73 per share of PG&W Common Stock for the year, an increase of
$.37 per share (15.7%) over the earnings of $2.36 per share for the year ended
December 31, 1993.
Year Ended December 31, 1993, Compared With Year Ended December 31, 1992
Operating Revenues. Operating revenues increased by $10.1 million (7.1%)
from $143.2 million for 1992 to $153.3 million for 1993, primarily as a result
of price increases averaging 6.8% (designed to total $9.5 million on an annual
basis) effective December 1, 1992, and 19.0% (designed to total $28.8 million
on an annual basis) effective December 1, 1993, due to increased costs of
purchased gas. Also contributing to the increase in operating revenues in 1993
was an 840 million cubic feet (3.9%) increase in sales to residential and
commercial heating customers. Although heating degree days were 1.8% lower
than normal during 1993, they were 0.7% higher than in 1992. The effect of the
price increases and colder weather on operating revenues were partially offset
by the switching of certain commercial and industrial customers from sales to
transportation service.
Cost of Gas. The cost of gas increased $8.8 million (11.4%) from $77.7
million for 1992 to $86.6 million for 1993. The effect of this increase, which
was the result of higher costs for purchased gas, was partially offset by a
2.7% (797 thousand cubic feet) decrease in the volume of gas sold during 1993
compared to 1992. This
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decreased volume was largely attributable to the aforementioned switching of
customers from sales to transportation service.
Operating Margin. The operating margin increased $1.3 million (1.9%) from
$65.5 million in 1992 to $66.8 million in 1993, primarily as a result of the
increased sales to residential and commercial heating customers due to the
colder weather experienced in 1993. However, as a percentage of operating
revenues, the margin decreased from 45.8% in 1992 to 43.5% in 1993 largely
because of the increased cost of gas.
Other Operating Expenses. Other operating expenses increased $1.4 million
(3.0%) from $46.6 million for 1992 to $48.0 million for 1993, primarily as a
result of increased payroll charges, depreciation (as a result of property
additions) and taxes other than income taxes (principally gross receipts tax
resulting from the higher level of operating revenues). Notwithstanding the
increase in other operating expenses, such expenses decreased as a percentage
of operating revenues from 32.5% during 1992 to 31.2% during 1993 because of
the relatively greater increase in operating revenues.
Operating Income. As a result of the above, total operating income decreased
$145,000 (0.8%) from $18.9 million in 1992 to $18.8 million in 1993. As a
percentage of operating revenues, operating income decreased from 13.3% in
1992 to 12.3% in 1993, primarily as a result of the increase in cost of gas as
a percentage of operating revenues.
Other Income (Deductions), Net. Other income (deductions), net decreased
$497,000 from a deduction of $88,000 in 1992 to a deduction of $585,000 in
1993, primarily as a result of a $320,000 increase in the net interest expense
associated with the unexpended portion of the proceeds from the issuance of
certain debt held in a construction fund, and a $144,000 decrease ($82,000 net
of related income taxes) in gains on the sale of land and other property.
Interest Charges. Interest charges decreased by $993,000 (9.2%) from $10.8
million for 1992 to $9.8 million for 1993, largely as a result of a lower
level of interest expense incurred during 1993 in connection with
overcollections from customers with respect to the cost of purchased gas.
Income from Continuing Operations. Income from continuing operations
increased $351,000 (4.4%) from $8.0 million in 1992 to $8.4 million in 1993.
This increase was the result of the matters discussed above, primarily an
increase in operating margin resulting from the higher levels of sales to
residential and commercial heating customers and the decrease in interest
charges. The effects of these factors were partially offset by the increase in
other operating expenses and the decrease in other income (deductions), net.
Net Income. Net income increased $3.3 million (25.8%) from $13.0 million for
the year ended December 31, 1992, to $16.3 million for the year ended December
31, 1993. The increase in 1993 was the result of a $3.1 million increase in
income from discontinued operations and the matters discussed above relating
to continuing operations, primarily the increase in operating margin resulting
from higher levels of sales to residential and commercial heating customers
and the decrease in interest charges. The effects of these factors were
partially offset by increases in other operating expenses and the decrease in
other income (deductions), net.
Dividends on PG&W Preferred Stock. Dividends on PG&W Preferred Stock
increased $1.4 million (27.6%) from $5.1 million in 1992, to $6.5 million in
1993, as a result of the issuance by PG&W of 250,000 shares of its 9%
Cumulative Preferred Stock, on August 18, 1992. No dividends on PG&W Preferred
Stock have been allocated to the discontinued operations.
Earnings Applicable to PG&W Common Stock. Earnings applicable to PG&W Common
Stock increased $1.9 million (24.7%) from $7.9 million ($2.02 per share) for
the year ended December 31, 1992, to $9.8 million ($2.36 per share) for the
year ended December 31, 1993. The increased earnings in 1993 were the result
of a $3.1 million increase in income from discontinued operations and the
matters discussed above, primarily the increase in operating margin resulting
from the higher levels of sales to residential and commercial heating
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<PAGE>
customers, and the decrease in interest charges. The effects of these factors
were partially offset by increases in other operating expenses and dividends
on PG&W Preferred Stock and the decrease in other income (deductions), net.
The earnings per share for the year ended December 31, 1993, increased
16.8%, compared to the similar period in 1992, as a result of the 24.7%
increase in earnings applicable to common stock and despite the 6.9% increase
in the weighted average number of shares outstanding during 1993, primarily
because of PG&W's sale of 834,000 shares of PG&W Common Stock to PEI on
October 27, 1993.
RATE MATTERS
Rate Filings. See "PEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION--Rate Matters--Rate Filings."
Effects of Inflation. See "PEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--Rate Matters--Effects of
Inflation."
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary capital needs of PG&W are its construction program and the
seasonal funding of its gas purchases and increases in customer accounts
receivable. PG&W's revenues are highly seasonal and weather-sensitive, with
approximately 75% of its revenues being realized in the first and fourth
quarters of the calendar year when the temperatures in its service area are
the coldest.
The cash flow from PG&W's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG&W to use bank borrowings to
fund such expenditures, pending the periodic issuance of stock and long-term
debt. Bank borrowings are also used by PG&W for the seasonal funding of its
gas purchases and increases in customer accounts receivable.
Because of limitations imposed by the terms of PG&W's Restated Articles of
Incorporation, as amended, PG&W is prohibited, without the consent of the
holders of a majority of the outstanding shares of its Preferred Stock, from
issuing more than $12.0 million of unsecured debt due on demand or within one
year from issuance. PG&W had $2.0 million of unsecured debt due on demand or
within one year from issuance outstanding as of June 30, 1995.
PG&W believes that it will be able to raise in a timely manner such funds as
are required for its future construction expenditures, refinancings and other
working capital requirements.
Interim Financing Practices. See "PEI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PEI'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION--Liquidity and Capital
Resources--Interim Financing Practices."
Current Maturities of Long-Term Debt and Preferred Stock. See "PEI
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PEI'S RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--Liquidity and Capital Resources--Current Maturities of
Long-Term Debt and Preferred Stock."
Long-Term Debt and Capital Stock Financings
PG&W periodically engages in long-term debt and capital stock financings in
order to obtain funds required for construction expenditures, the refinancing
of existing debt and various working capital purposes. Set forth below is a
summary of such financings, exclusive of interim bank borrowings and debt
issuances that are being
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assumed by PAWC in connection with the Sale of the Water Business, consummated
by PG&W since the beginning of 1993.
On October 27, 1993, PG&W issued to PEI 834,000 shares of PG&W Common Stock
for aggregate net proceeds of $31.9 million. PG&W utilized such funds to repay
bank borrowings. These borrowings had been incurred primarily to finance
construction expenditures with respect to both the continuing and discontinued
operations.
On May 31, 1994, PG&W issued 500,000 shares of PG&W Common Stock to PEI for
aggregate net proceeds of $20.0 million. PG&W used a portion of the proceeds
it so received to redeem $15.0 million of its 9.50% Cumulative Preferred Stock
and to fund the $534,375 premium in connection with such redemption. The
remaining $4.5 million of proceeds were used by PG&W to repay a portion of its
bank borrowings and for working capital purposes.
On July 28, 1994, PEI implemented the Customer Plan, which provided the
residential customers of PG&W with a method of purchasing newly-issued shares
of PEI Common Stock at a 5% discount from the market price. PEI used proceeds
from the issuance of shares through the Customer Plan to purchase PG&W Common
Stock. During 1995 (through May 8) and 1994, PG&W realized $2.4 million and
$1.7 million, respectively, from the issuance of PG&W Common Stock to PEI in
connection with the Customer Plan. Effective May 9, 1995, PEI suspended the
Customer Plan because of the significant reduction in capital requirements
that will result from the Sale of the Water Business.
Through PEI's DRIP, PEI Shareholders may reinvest cash dividends paid with
respect to PEI Common Stock and/or make cash investments in PEI Common Stock.
The DRIP was amended on May 5, 1994, to provide PEI Shareholders with a method
of reinvesting cash dividends and making cash investments to purchase newly-
issued shares of PEI Common Stock at a 5% discount from the market price.
Prior to such amendment, cash dividends were reinvested at 100% of the market
price in newly-issued shares and cash investments were used to purchase shares
of PEI Common Stock on the open market. PEI uses the proceeds from the DRIP to
purchase PG&W Common Stock. During the six-month period ended June 30, 1995,
and during 1994, 1993 and 1992, PG&W realized $2.7 million, $1.8 million,
$465,000 and $385,000, respectively, from the issuance of PG&W Common Stock to
PEI in connection with the DRIP. Effective May 9, 1995, PEI suspended the cash
investment feature of the DRIP and the 5% discount from the market price on
the reinvestment of dividends under the DRIP because of the significant
reduction in capital requirements that will result from the Sale of the Water
Business.
Construction Expenditures and Related Financing. See "PEI MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--
Liquidity and Capital Resources--Construction Expenditures and Related
Financing."
Long-Lived Assets. See "PEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION--Liquidity and Capital Resources--Long-
Lived Assets."
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PG&W UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following PG&W unaudited pro forma financial statements have been
prepared based on PG&W's statements of income for the twelve months ended
December 31, 1994, and PG&W's unaudited balance sheet as of June 30, 1995, and
unaudited statement of income for the six months then ended, each as adjusted
to reflect the Sale of the Water Business and, based on the Initial Cash
Payment (as defined under "The Sale of the Water Business--Basic Terms of the
Asset Purchase Agreement--Purchase Price") as of June 30, 1995, of $255.8
million, PG&W's use of the proceeds from the Sale of the Water Business of
$200.5 million (after the payment of an estimated $55.3 million of federal and
state income taxes on the sale). PG&W intends to use such proceeds, together
with $780,000 of net tax benefits resulting from an estimated $8.3 million of
transaction costs (which transaction costs include an $800,000 premium on the
redemption of PG&W's 9.57% Series First Mortgage Bonds, as described below),
and the $6.5 million premium over book value on the Sale of the Water
Business, to (i) repay the Bridge Loan, for the purpose of redeeming the $50.0
million principal amount of PG&W's 9.57% Series First Mortgage Bonds, (ii)
repurchase 225,000 shares of PG&W's 9% Cumulative Preferred Stock at an
aggregate repurchase price of $24,300,000 (equivalent to $108.00 per share),
which includes an aggregate repurchase premium of $1,800,000 (equivalent to
$8.00 per share), (iii) repurchase 80,000 shares of PG&W's 4.10% Cumulative
Preferred Stock at an aggregate repurchase price of $4,000,000 (equivalent to
$50.00 per share), (iv) repay $33.2 million of PG&W's bank borrowings, (v)
repurchase 2,035,000 shares of PG&W Common Stock from PEI at an aggregate
repurchase price of $81,400,000 (equivalent to $40.00 per share), and (vi) pay
an estimated $8.3 million of transaction costs (including an $800,000 premium
on the redemption of PG&W's 9.57% Series First Mortgage Bonds). Pursuant to
the terms of the applicable debt instruments of PG&W, PG&W will be able to
consummate the transactions referred to in items (i), (iv) and (v) above
either prior to or concurrently with the Closing. However, the repurchases
referred to in items (ii) and (iii), which PG&W intends to consummate within
the first three months after the Closing, involve voluntary sales to PG&W by
the holders of these securities. Therefore, the number and price of securities
purchased may vary depending on market conditions at the time of the
repurchases.
The unaudited pro forma financial statements also reflect (i) the
redemption, primarily utilizing bank borrowings, of PG&W's 8% Series First
Mortgage Bonds, of which (a) $3,325,000 principal amount of the 8% Series
First Mortgage Bonds were redeemed on July 10, 1995, in connection with the
Sale of the Water Business, at an aggregate redemption price of $3,336,305,
which included an aggregate redemption premium of $11,305, and (b) $210,000
principal amount of the 8% Series First Mortgage Bonds were redeemed on each
of June 1, 1994, and June 1, 1995, pursuant to annual sinking fund
requirements of such bonds and (ii) the issuance, in connection with the Sale
of the Water Business, of a $30.0 million common stock dividend by PG&W to PEI
in the form of a $30.0 million 10.125% promissory note due June 15, 1999, as
if such transactions had occurred at the beginning of the period of the
respective financial statements.
Additionally, the unaudited pro forma statement of income for the twelve
months ended December 31, 1994, reflects (i) the redemption of 150,000 shares
of PG&W's 8.90% Cumulative Preferred Stock at an aggregate redemption price of
$15,445,500 (equivalent to $102.97 per share), which includes an aggregate
redemption premium of $445,500 (equivalent to $2.97 per share), as if it had
occurred at the beginning of the period (such shares, the proceeds from the
issuance of which were used to provide capital for the Water Business, were
redeemed on December 16, 1994, utilizing bank borrowings and would have been
redeemed in connection with the Sale of the Water Business had such shares not
been redeemed on December 16, 1994), and (ii) the redemption of 150,000 shares
of PG&W's 9.50% Cumulative Preferred Stock at an aggregate redemption price of
$15,534,375 (equivalent to $103.5625 per share), which includes an aggregate
redemption premium of $534,375 (equivalent to $3.5625 per share), as if it had
occurred at the beginning of the period (such shares were redeemed on May 31,
1994, utilizing proceeds from a $20 million term loan to PEI).
The following PG&W unaudited pro forma statements of income reflect the
results of PG&W's continuing operations as if the transactions described
herein had occurred at the beginning of the respective periods. The PG&W
unaudited pro forma balance sheet as of June 30, 1995, reflects the financial
position of PG&W as if the transactions described herein had occurred on such
date. Each of the PG&W unaudited pro forma statements of income and balance
sheet include estimates of transaction costs which may differ from the costs
ultimately incurred.
These PG&W unaudited pro forma financial statements should be read in
conjunction with PG&W's financial statements and the notes thereto included
elsewhere in this Joint Proxy Statement.
The PG&W unaudited pro forma financial statements have been included herein
as required by the rules of the SEC and are provided for comparative purposes
only. The PG&W unaudited pro forma financial statements do not purport to be
indicative of the results which would have been obtained if the Sale of the
Water Business had been effected on the date or dates indicated or which may
be obtained in the future. No pro forma adjustment has been made to reflect
any interest income that may be earned on the Initial Cash Payment.
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PENNSYLVANIA GAS AND WATER COMPANY
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE REFLECT SALE OF AFTER SALE OF
OF WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
----------- --------------- -------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES................. $ 167,992 $ -- $ 167,992
Cost of gas...................... 98,653 -- 98,653
--------- ---------- ---------
OPERATING MARGIN................... 69,339 -- 69,339
--------- ---------- ---------
OTHER OPERATING EXPENSES:
Operation........................ 22,652 -- 22,652
Maintenance...................... 4,436 -- 4,436
Depreciation..................... 6,667 -- 6,667
Income taxes..................... 5,649 (211)(2) 5,438
Taxes other than income taxes.... 10,807 -- 10,807
--------- ---------- ---------
Total other operating
expenses.................... 50,211 (211) 50,000
--------- ---------- ---------
OPERATING INCOME................... 19,128 211 19,339
OTHER INCOME, NET.................. 72 226 (3) 298
--------- ---------- ---------
INCOME BEFORE INTEREST CHARGES..... 19,200 437 19,637
--------- ---------- ---------
INTEREST CHARGES:
Interest on long-term debt....... 8,914 485 (2) 9,399
Other interest................... 1,005 8 (2) 1,013
Allowance for borrowed funds used
during construction............. (21) -- (21)
--------- ---------- ---------
Total interest charges....... 9,898 493 10,391
--------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS.. 9,302 (56) 9,246
DIVIDENDS ON PREFERRED STOCK....... 4,639 (4,224)(4) 415
--------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS
APPLICABLE TO COMMON STOCK........ $ 4,663 $ 4,168 $ 8,831
========= ========== =========
COMMON STOCK
Earnings per share of common
stock from continuing
operations:
Before premium on redemption of
preferred stock............... $ .90 $ 2.80
Premium on redemption of pre-
ferred stock.................. (.19) -- (5)
--------- ---------
Earnings per share of common
stock from continuing opera-
tions......................... $ .71 $ 2.80
========= =========
Weighted average number of shares
outstanding..................... 5,189,108 (2,035,000)(6) 3,154,108
========= ========== =========
</TABLE>
- --------
See page 68 for an explanation of footnotes.
67
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1994
(1) Adjustments reflect the Sale of the Water Business as if it had taken
place at the beginning of the period.
(2) Represents the adjustments to interest on long-term debt and amortization
of debt expense, and the related income tax effect, necessary to reflect
the annual interest on indebtedness, including $15.4 million of bank
borrowings utilized to redeem the $15.0 million principal amount of PG&W's
8.90% Cumulative Preferred Stock and $15.5 million of bank borrowings
utilized to redeem the $15.0 million principal amount of PG&W's 9.50%
Cumulative Preferred Stock, outstanding after (a) the application of
proceeds from the Sale of the Water Business to (i) repay the Bridge Loan,
the proceeds of which will be used to redeem the $50.0 million principal
amount of PG&W's 9.57% Series First Mortgage Bonds and (ii) repay $33.2
million of PG&W's bank borrowings, (b) the redemption in connection with
the Sale of the Water Business and pursuant to annual sinking fund
requirements of the $3.7 million principal amount of PG&W's 8% Series
First Mortgage Bonds outstanding as of January 1, 1994, and (c) the
issuance of a $30.0 million common stock dividend by PG&W to PEI in the
form of a $30.0 million 10.125% promissory note. The adjustments to
interest on long-term debt may be summarized as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
DOLLARS
--------------
<S> <C> <C>
Interest on long-term debt for the twelve months ended
December 31, 1994:
Allocated to continuing operations, as per accompanying
statement of income..................................... $ 8,914
Allocated to discontinued operations..................... 12,309
-------
21,223
Deduct:
Interest on debt to be assumed by PAWC................... $9,347
Interest on debt to be redeemed or repaid in connection
with Sale of the Water Business
9.57% Series First Mortgage Bonds*..................... 4,785
Bank borrowings........................................ 1,752
8% Series First Mortgage Bonds......................... 290 (16,174)
------
Add:
Interest on PG&W's $30.0 million 10.125% promissory note. 3,038
Interest on bank borrowings to reflect the redemption of
$15.0 million principal of PG&W's 8.90% Cumulative
Preferred Stock and the payment of a $445,500 premium in
connection therewith as if it occurred at the beginning
of the period instead of December 16, 1994.............. 780
Interest on bank borrowings to reflect the redemption of
$15.0 million principal of PG&W's 9.50% Cumulative
Preferred Stock and the payment of a $534,375 premium in
connection therewith as if it occurred at the beginning
of the period instead of May 31, 1994................... 341
Interest on bank borrowings to reflect the redemption of
PG&W's 8% Series First Mortgage Bonds as if it occurred
at the beginning of the period.......................... 191 4,350
------ -------
Pro forma interest on long-term debt, as per accompanying
statement of income....................................... $ 9,399
=======
</TABLE>
* The Bridge Loan that PG&W intends to utilize for redemption of the 9.57%
Series First Mortgage Bonds has not been reflected in this summary since
it would have no effect on the net adjustment to interest on long-term
debt.
(3) Represents elimination of the amortization of capital stock expense, net
of the related tax effect, relative to PG&W's 9.50% Cumulative Preferred
Stock ($90,000) and 8.90% Cumulative Preferred Stock ($136,000).
(4) Represents elimination of preferred stock dividends of (i) $2.0 million to
reflect the repurchase of 225,000 shares of PG&W's 9% Cumulative Preferred
Stock, (ii) $328,000 to reflect the repurchase of 80,000 shares of PG&W's
4.10% Cumulative Preferred Stock, (iii) $591,000 on the $15.0 million
principal amount of PG&W's 9.50% Cumulative Preferred Stock from January
1, 1994 to May 31, 1994, the date of redemption of such stock and (iv)
$1.3 million on the $15.0 million principal amount of PG&W's 8.90%
Cumulative Preferred Stock from January 1, 1994 to December 16, 1994, the
date of redemption of such stock.
(5) Reflects elimination of the premiums on the redemption of PG&W's 8.90%
Cumulative Preferred Stock ($445,500) and PG&W's 9.50% Cumulative
Preferred Stock ($534,375) from the calculation of the earnings per share
of PG&W Common Stock.
(6) Represents the reduction in the number of shares of PG&W Common Stock
outstanding resulting from the application of $81.4 million of proceeds
from the Sale of the Water Business to repurchase 2,035,000 shares of PG&W
Common Stock from PEI at an average price of $40.00 per share.
68
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE OF REFLECT SALE OF AFTER SALE OF
WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
-------------- --------------- -------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES................ $93,421 $ -- $93,421
Cost of gas..................... 54,281 -- 54,281
------- ------ -------
OPERATING MARGIN.................. 39,140 -- 39,140
------- ------ -------
OTHER OPERATING EXPENSES:
Operation....................... 11,281 -- 11,281
Maintenance..................... 2,280 -- 2,280
Depreciation.................... 3,576 -- 3,576
Income taxes.................... 4,101 139(2) 4,240
Taxes other than income taxes... 6,535 -- 6,535
------- ------ -------
Total other operating ex-
penses..................... 27,773 139 27,912
------- ------ -------
OPERATING INCOME.................. 11,367 (139) 11,228
OTHER INCOME, NET................. 172 -- 172
------- ------ -------
INCOME BEFORE INTEREST CHARGES.... 11,539 (139) 11,400
------- ------ -------
INTEREST CHARGES:
Interest on long-term debt...... 4,659 (323)(2) 4,336
Other interest.................. 687 (13)(2) 674
Allowance for borrowed funds
used during construction....... (22) -- (22)
------- ------ -------
Total interest charges...... 5,324 (336) 4,988
------- ------ -------
INCOME FROM CONTINUING OPERATIONS. 6,215 197 6,412
DIVIDENDS ON PREFERRED STOCK...... 1,383 (1,177)(3) 206
------- ------ -------
INCOME FROM CONTINUING OPERATIONS
APPLICABLE TO COMMON STOCK....... $ 4,832 $1,374 $ 6,206
======= ====== =======
</TABLE>
- --------
See page 70 for an explanation of footnotes.
69
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(1) Adjustments reflect the Sale of the Water Business as if it had taken
place at the beginning of the period.
(2) Represents the adjustments to interest on long-term debt and amortization
of debt expense, and the related income tax effect, necessary to reflect
the interest on indebtedness outstanding during the period after (a) the
application of proceeds from the Sale of Water Business to (i) repay the
Bridge Loan, the proceeds of which will be used to redeem the $50.0
million principal amount of PG&W's 9.57% Series First Mortgage Bonds and
(ii) repay $33.2 million of PG&W's bank borrowings, (b) the redemption in
connection with the Sale of the Water Business and pursuant to annual
sinking fund requirements of the $3.5 million principal amount of PG&W's
8% Series First Mortgage Bonds outstanding as of January 1, 1995, and (c)
the issuance of a $30.0 million common stock dividend by PG&W to PEI in
the form of a $30.0 million 10.125% promissory note. The adjustments to
interest on long-term debt may be summarized as follows:
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS
--------------------
<S> <C> <C>
Interest on long-term debt for the six months ended
June 30, 1995:
Allocated to continuing operations, as per
accompanying statement of income................... $ 4,659
Allocated to discontinued operations................ 6,434
----------
11,093
Deduct:
Interest on debt to be assumed by PAWC.............. $ 4,751
Interest on debt to be redeemed or repaid in
connection with Sale of the Water Business
9.57% Series First Mortgage Bonds*................ 2,393
Bank borrowings................................... 1,109
8% Series First Mortgage Bonds.................... 140 (8,393)
---------
Add:
Interest on PG&W's $30.0 million 10.125% promissory
note............................................... 1,519
Interest on bank borrowings to reflect the
redemption of
PG&W's 8% Series First Mortgage Bonds as if it
occurred at the beginning of the period............ 117 1,636
--------- ----------
Pro forma interest on long-term debt, as per
accompanying statement of income..................... $ 4,336
==========
</TABLE>
* The Bridge Loan that PG&W intends to utilize for redemption of the 9.57%
Series First Mortgage Bonds has not been reflected in this summary since it
would have no effect on the net adjustment to interest on long-term debt.
(3) Represents elimination of preferred stock dividends of (i) $1,013,000 to
reflect the repurchase of 225,000 shares of PG&W's 9% Cumulative Preferred
Stock and (ii) $164,000 to reflect the repurchase of 80,000 shares of
PG&W's 4.10% Cumulative Preferred Stock.
(4) Represents the reduction in the number of shares of PG&W Common Stock
outstanding resulting from the application of $81.4 million of the
proceeds from the Sale of the Water Business to repurchase 2,035,000
shares of PG&W Common Stock from PEI at an average price of $40.00 per
share.
70
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
UNAUDITED PRO FORMA BALANCE SHEET AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE OF REFLECT SALE OF AFTER SALE OF
WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
-------------- --------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
- ------
UTILITY PLANT:
At original cost, less acqui-
sition adjustments of
$386,000..................... $288,071 $ -- $288,071
Accumulated depreciation...... (75,668) -- (75,668)
-------- --------- --------
212,403 -- 212,403
-------- --------- --------
OTHER PROPERTY AND INVESTMENTS.. 3,289 -- 3,289
-------- --------- --------
CURRENT ASSETS:
Cash.......................... 234 255,845 (2a)
(55,315)(2c)
(200,530)(3)
60 (3h)
(36)(4) 258
Accounts receivable--
Customers................... 10,787 -- 10,787
Others...................... 645 -- 645
Reserve for uncollectible
accounts................... (1,322) -- (1,322)
Accrued utility revenues...... 1,390 -- 1,390
Materials and supplies, at av-
erage cost................... 2,713 -- 2,713
Gas held by suppliers, at av-
erage cost................... 12,838 -- 12,838
Natural gas transition costs
collectible.................. 4,342 -- 4,342
Prepaid expenses and other.... 6,232 -- 6,232
-------- --------- --------
37,859 24 37,883
-------- --------- --------
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible... 29,942 -- 29,942
Natural gas transition costs
collectible................. 1,991 -- 1,991
Other........................ 2,825 -- 2,825
Unamortized debt expense...... 1,669 (215)(7)
(5)(7) 1,449
Other......................... 3,218 -- 3,218
-------- --------- --------
39,645 (220) 39,425
-------- --------- --------
NET ASSETS OF DISCONTINUED OPER-
ATIONS......................... 197,713 (197,713)(2e) --
-------- --------- --------
TOTAL ASSETS.................... $490,909 $(197,909) $293,000
======== ========= ========
</TABLE>
- --------
See page 73 for an explanation of footnotes.
71
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
UNAUDITED PRO FORMA BALANCE SHEET AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
BEFORE SALE OF REFLECT SALE OF AFTER SALE OF
WATER WATER WATER
BUSINESS BUSINESS (1) BUSINESS
-------------- --------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common shareholder's invest-
ment......................... $214,369 $ (3,683)(2b) $
(81,400)(3a)
(1,800)(3b)
4,000 (3c)
(6)(4)
(30,000)(5)
(722)(6)
(126)(7)
(3)(7) 100,629
Preferred stock--
Not subject to mandatory
redemption, net............ 33,615 (22,500)(3b)
(8,000)(3c)
1,247 (6) 4,362
Subject to mandatory redemp-
tion ...................... 1,680 -- 1,680
Long-term debt................ 108,000 (50,000)(3d)
30,000 (5) 88,000
-------- --------- --------
357,664 (162,993) 194,671
-------- --------- --------
CURRENT LIABILITIES:
Current portion of long-term
debt and preferred stock
subject to mandatory
redemption................... 36,670 (33,200)(3e)
(3,325)(4)
3,300 (4) 3,445
Note payable to bank.......... 2,000 -- 2,000
Accounts payable--
Suppliers................... 14,483 -- 14,483
Affiliates, net ............ 1,541 -- 1,541
Deferred cost of gas and sup-
plier refunds, net........... 9,056 -- 9,056
Accrued general business and
realty taxes................. 779 -- 779
Accrued income taxes.......... 946 (5)(4)
(525)(6)
(89)(7)
(2)(7) 325
Accrued interest.............. 2,974 -- 2,974
Accrued natural gas transition
costs........................ 2,158 -- 2,158
Other......................... 2,860 6,500 (2d)
(8,350)(3f) 1,010
-------- --------- --------
73,467 (35,696) 37,771
-------- --------- --------
DEFERRED CREDITS:
Deferred income taxes......... 46,747 780 (3g) 47,527
Accrued natural gas transition
costs........................ 2,170 -- 2,170
Unamortized investment tax
credits...................... 5,024 -- 5,024
Operating reserves............ 2,191 -- 2,191
Other......................... 3,646 -- 3,646
-------- --------- --------
59,778 780 60,558
-------- --------- --------
TOTAL CAPITALIZATION AND LIABIL-
ITIES.......................... $490,909 $(197,909) $293,000
======== ========= ========
</TABLE>
- --------
See page 73 for an explanation of footnotes.
72
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1995
(1) Adjustments reflect the Sale of the Water Business as if it had taken
place as of the date of the balance sheet.
(2) Represents (a) receipt of cash proceeds of $255.8 million from the Sale of
the Water Business, (b) elimination from common shareholder's investment
of the $3.7 million of estimated income from the Water Business during the
balance of the phase-out period (from July 1 to the estimated closing date
of December 31, 1995) that was reflected as of June 30, 1995, as an offset
against the estimated loss on the Sale of the Water Business, (c) payment
of the estimated federal and state income tax liability of $55.3 million
on the Sale of the Water Business, (d) recording of the $6.5 million
premium of the Purchase Price over the book value of the assets to be
acquired by PAWC as a credit to other current liabilities, the account to
which it was charged as of June 30, 1995, as an offset against the
liability for the estimated expenses on the Sale of the Water Business and
(e) elimination of the $197.7 million of net assets of the Water Business.
(3) Reflects the application of the proceeds from the Sale of the Water
Business of $200.5 million, after the payment of the estimated federal and
state income tax liability of $55.3 million on the sale, in the following
manner: (a) the repurchase from PEI (for an aggregate consideration of
$81.4 million) of 2,035,000 shares of PG&W Common Stock at an average
price of $40.00 per share, (b) the repurchase (for an aggregate
consideration of $24.3 million) of 225,000 shares of PG&W's 9% Cumulative
Preferred Stock (having an aggregate book value of $22.5 million) at a
price of $108.00 per share, which includes a premium of $8.00 per share
($1,800,000 in the aggregate), (c) the repurchase (for an aggregate
consideration of $4.0 million) of 80,000 shares of PG&W's 4.10% Cumulative
Preferred Stock (having an aggregate book value of $8.0 million) at a
price of $50.00 per share, which reflects a $4.0 million aggregate ($50.00
per share) discount from book value, (d) the repayment of the Bridge Loan,
the proceeds of which will be used to redeem the $50.0 million principal
amount of PG&W's 9.57% Series First Mortgage Bonds, (e) repayment of $33.2
million of PG&W's bank borrowings, (f) payment of transaction costs of
$8.3 million, which include an $800,000 premium on the redemption of the
9.57% Series First Mortgage Bonds, (g) recording of the $780,000 net tax
benefit relative to transaction costs and the premium over book value on
the Sale of the Water Business and (h) the addition of the remaining
proceeds of $60,000 to PG&W's cash accounts.
(4) Reflects the redemption, utilizing $3,300,000 of bank borrowings and
$36,305 of PG&W's cash, of $3,325,000 aggregate principal amount of PG&W's
8% Series First Mortgage Bonds which were redeemed on July 10, 1995, in
connection with the Sale of the Water Business, at an aggregate redemption
price of $3,336,305, which includes an aggregate redemption premium of
$11,305 ($6,541 after related income tax benefits of $4,764).
(5) Reflects the issuance of a $30.0 million common stock dividend by PG&W to
PEI in the form of a $30.0 million 10.125% promissory note in order to
further reduce PG&W's common equity and thereby provide a more appropriate
capital structure.
(6) Reflects the write-off of $1.2 million ($722,000 after related income tax
benefits of $525,000) of issuance costs relative to the 225,000 shares of
PG&W's 9% Cumulative Preferred Stock which PG&W intends to repurchase with
proceeds from the Sale of the Water Business.
(7) Reflects the write-off of $215,000 ($126,000 after related income tax
benefits of $89,000) of issuance costs relating to PG&W's 9.57% Series
First Mortgage Bonds which PG&W intends to redeem with proceeds from the
Sale of the Water Business, and $5,000 ($3,000 after related income tax
benefits of $2,000) of issuance costs relating to PG&W's 8% Series First
Mortgage Bonds which PG&W redeemed in connection with the Sale of the
Water Business.
73
<PAGE>
DESCRIPTION OF PROPERTY TO BE SOLD
Pursuant to the Asset Purchase Agreement, PG&W will sell to PAWC (i) 36
active and standby reservoirs located in the counties of Luzerne, Lackawanna,
Wayne and Susquehanna, Pennsylvania, together with certain buffer zones
surrounding such reservoirs, (ii) 10 water treatment plants of which five (the
Scranton Area, Chinchilla, Fallbrook, Brownell and Forest City Water Treatment
Plants) are located in PG&W's Scranton Division, which comprises portions of
the counties of Wayne, Susquehanna and Lackawanna, Pennsylvania and five (the
Ceasetown, Watres, Hillside, Crystal Lake and Nesbitt Water Treatment Plants)
are located in PG&W's Spring Brook Division, which comprises portions of the
counties of Luzerne and Lackawanna, Pennsylvania, together with certain buffer
zones surrounding such water treatment plants and (iii) 47 pumping stations,
45 storage tanks and 9 wells utilized in the Water Business, together, in the
case of such facilities not located within the lands surrounding a reservoir
or water treatment plant, a buffer zone of 50 feet from the perimeter of each
pumping station, 100 feet from the perimeter of each tank and 500 feet from
the perimeter of each well. In the aggregate, approximately 7,000 acres of
watershed land is included in the foregoing.
PRINCIPAL HOLDERS OF PEI AND PG&W COMMON STOCK
AND PG&W PREFERRED STOCK
As of August 30, 1995, no person known to PEI owned beneficially more than
5% of the outstanding shares of PEI Common Stock. As of August 30, 1995, no
person known to PG&W owned beneficially more than 5% of the outstanding shares
of PG&W Preferred Stock. PEI is the owner of all of the outstanding shares of
PG&W Common Stock.
SECURITY OWNERSHIP OF PEI AND PG&W MANAGEMENT
The following table shows, as of August 30, 1995, the number and percent of
the shares of PEI Common Stock and PG&W Preferred Stock owned directly or
indirectly by each director and certain officers of PEI and PG&W required to
be named in PEI's and PG&W's Annual Reports on Form 10-K and by all directors
and officers of PG&W and PEI as a group, including those shares which persons
have the right to acquire within 60 days of that date by the exercise of stock
options (the members of the Board of Directors and officers of PG&W are the
same as the members of the Board of Directors and officers of PEI):
<TABLE>
<CAPTION>
NAME OF NUMBER PERCENT
TITLE OF CLASS BENEFICIAL OWNER OF SHARES OF CLASS
- -------------- -------------------------- --------- --------
<S> <C> <C> <C>
PEI Common Stock............ Dean T. Casaday 16,403(1) *
William D. Davis 3,271 *
Robert J. Keating 3,027(2) *
John D. McCarthy 1,305(3) *
Kenneth L. Pollock 160,454(4)(5) 2.79
Kenneth M. Pollock 112,711(5)(6) 1.96
James A. Ross 1,250(7) *
Ronald W. Simms 54,910(8) *
John F. Kell, Jr. 7,678(9) *
All directors and officers
as a group (17 persons) 274,919(10) 4.78
PG&W 9% Cumulative Preferred
Stock...................... William D. Davis 500(11) --
Robert J. Keating 100(12) --
All directors and officers
as a group (17 persons) 715(13) --
</TABLE>
- --------
* Less than 1.0%.
74
<PAGE>
(1) Includes 9,000 shares that could be purchased within 60 days by Mr.
Casaday under the Pennsylvania Enterprises Inc., 1992 Stock Option Plan.
(2) Does not include 194 shares of Common Stock owned by Mr. Keating's wife.
Mr. Keating disclaims beneficial ownership of this stock.
(3) Includes 105 shares owned by Mrs. J. J. McCarthy, mother of Mr. McCarthy,
for whom Mr. McCarthy has a power of attorney.
(4) Includes 8,202 shares that Mr. Pollock owns jointly with his wife, 83,183
shares jointly with his son, Kenneth M. Pollock, 7,076 shares jointly
with his daughter, 23,085 shares jointly with his son and daughter, and
8,441 as custodian for his grandchildren, 6,243 of which are for the
children of Kenneth M. Pollock.
(5) Shares held jointly by Mr. Kenneth L. Pollock and Mr. Kenneth M. Pollock,
and by Mr. Kenneth L. Pollock for Mr. Kenneth M. Pollock's children are
reported in the total shares for each of them but are reported one time,
on an unduplicated basis, in the total shares owned by all directors and
officers as a group. 160,654 shares are beneficially owned by Mr. Kenneth
L. Pollock and Mr. Kenneth M. Pollock on an unduplicated basis.
(6) Includes 83,183 shares held jointly with his father, Mr. Kenneth L.
Pollock, 23,085 shares held jointly with his father and sister, and 6,243
shares held by his father as custodian for his children.
(7) Does not include 300 shares owned by Mr. Ross' wife. Mr. Ross disclaims
beneficial ownership of this stock. Includes 300 shares owned by a
charitable foundation of which Mr. Ross is a trustee. Mr. Ross shares
voting and investment power and disclaims beneficial ownership of such
shares.
(8) Includes 19,416 shares owned by Mr. Simms' wife.
(9) Includes 3,500 shares that could be purchased within 60 days by Mr. Kell
under the Pennsylvania Enterprises Inc., 1992 Stock Option Plan.
(10) Includes 30,000 shares that could be purchased within 60 days by officers
under the Pennsylvania Enterprises Inc., 1992 Stock Option Plan. Also
included are 8,906 shares which were allocated to the accounts of all
officers under the Employees' Savings Plan at June 30, 1995 (including
1,174 shares in those shown for Mr. Casaday, 1,476 for Mr. Kell, and 646
for Kenneth L. Pollock). Does not include 52,081 shares of PEI Common
Stock held by the Pennsylvania Enterprises Inc., Employees' Retirement
Plan, as to which investment power is exercised by the Investment
Committee (composed of Messrs. McCarthy and Ross) under the Plan. Messrs.
McCarthy and Ross disclaim beneficial ownership of these shares.
(11) Mr. Davis is the owner of 2,000 PG&W Depositary Preferred Shares which
represent 500 shares of PG&W's 9% Cumulative Preferred Stock.
(12) Mr. Keating is the owner of 400 PG&W Depositary Preferred Shares which
represent 100 shares of PG&W's 9% Cumulative Preferred Stock. Does not
include 100 PG&W Depositary Preferred Shares which represent 25 shares of
PG&W's 9% Cumulative Preferred Stock owned by Mr. Keating's wife. Mr.
Keating disclaims beneficial ownership of this stock.
(13) Does not include 100 shares of PG&W's 4.10% Cumulative Preferred Stock
held by the Pennsylvania Enterprises Inc., Employees' Retirement Plan, as
to which investment power is exercised by the Investment Committee under
the Plan. Messrs. McCarthy and Ross disclaim beneficial ownership of
these shares.
INDEPENDENT PUBLIC ACCOUNTANTS OF PEI AND PG&W
Representatives of Arthur Andersen LLP are expected to be present at the PEI
Special Meeting and at the PG&W Special Meeting, will be given an opportunity
to make a statement if they desire to do so, and will be available to respond
to appropriate questions by PEI Shareholders and PG&W Preferred Shareholders.
75
<PAGE>
INCORPORATION BY REFERENCE
This Joint Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. Incorporated by reference in this
Joint Proxy Statement as of the date of filing, and subject in each case to
information contained in this Joint Proxy Statement, are the following
documents filed by PEI and PG&W with the SEC pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"):
(i) PEI Annual Report on Form 10-K for the fiscal year ended December 31,
1994;
(ii) PEI Quarterly Report on Form 10-Q for the quarter ended March 31,
1995;
(iii) PEI Quarterly Report on Form 10-Q for the quarter ended June 30,
1995;
(iv) PEI Current Report on Form 8-K dated May 10, 1995;
(v) PEI Proxy Statement dated March 29, 1995 with respect to the 1995
Annual Meeting of PEI Shareholders;
(vi) Registration Statement on Form 8-A dated May 10, 1995 with respect
to PEI Common Stock Purchase Rights;
(vii) PG&W Annual Report on Form 10-K for the fiscal year ended December
31, 1994;
(viii) PG&W Quarterly Report on Form 10-Q for the quarter ended March 31,
1995; and
(ix) PG&W Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
PEI will provide without charge to each person to whom this Joint Proxy
Statement is delivered, upon the written or oral request of such person, a
copy of any and all of the documents incorporated by reference herein (other
than exhibits and schedules to such documents unless such exhibits or
schedules are specifically incorporated by reference in such documents). Such
request should be directed to Secretary, Pennsylvania Enterprises, Inc.,
Wilkes-Barre Center, 39 Public Square, Wilkes-Barre, Pennsylvania 18711-0601
(telephone (717) 829-8843). In order to ensure timely delivery of the
documents, requests should be made by , 1995.
All documents filed by PEI or PG&W pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Joint Proxy Statement
and prior to October 11, 1995, shall be deemed to be incorporated by reference
in this Joint Proxy Statement and to be a part hereof from the date of filing
such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be modified or superseded, for
purposes of this Joint Proxy Statement, to the extent that a statement
contained herein or in any subsequently filed document which is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Joint Proxy Statement.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF PEI
Report of Independent Public Accountants................................ F- 2
Consolidated Financial Statements as of December 31, 1994 and 1993 and
for Each of the Three Years in the Period Ended December 31, 1994...... F- 3
Unaudited Consolidated Balance Sheet as of June 30, 1995, and Unaudited
Statements of Consolidated Income and of Consolidated Cash Flows for
Each of the Six-Month Periods Ended June 30, 1995 and 1994............. F-26
FINANCIAL STATEMENTS OF PG&W
Report of Independent Public Accountants................................ F-36
Financial Statements as of December 31, 1994 and 1993 and for Each of
the Three Years in the Period Ended December 31, 1994.................. F-37
Unaudited Balance Sheet as of June 30, 1995, and Unaudited Statements of
Income and Cash Flows for Each of the Six-Month Periods Ended June 30,
1995 and 1994.......................................................... F-59
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Pennsylvania Enterprises, Inc. (a
Pennsylvania corporation) and subsidiaries (the "Company") as of December 31,
1994 and 1993, and the related consolidated statements of income, common
shareholders' investment, and cash flows for each of the three years in the
period ended December 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Pennsylvania Enterprises, Inc. and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 10, effective January 1, 1993, the Company
changed its method of accounting for income taxes and postretirement benefits
other than pensions pursuant to standards promulgated by the Financial
Accounting Standards Board.
ARTHUR ANDERSEN LLP
New York, N.Y.
April 26, 1995
F-2
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994* 1993* 1992*
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
OPERATING REVENUES............................ $ 167,992 $ 153,325 $ 143,227
Cost of gas................................. 98,653 86,557 77,720
--------- --------- ---------
OPERATING MARGIN.............................. 69,339 66,768 65,507
--------- --------- ---------
OTHER OPERATING EXPENSES:
Operation................................... 22,652 21,797 21,514
Maintenance................................. 4,436 3,695 3,405
Depreciation................................ 6,667 6,388 6,087
Income taxes................................ 4,290 4,935 4,962
Taxes other than income taxes............... 10,807 10,055 9,670
--------- --------- ---------
Total other operating expenses............ 48,852 46,870 45,638
--------- --------- ---------
OPERATING INCOME.............................. 20,487 19,898 19,869
OTHER INCOME (DEDUCTIONS), NET (Note 4)....... 258 (472) (92)
--------- --------- ---------
INCOME BEFORE INTEREST CHARGES................ 20,745 19,426 19,777
--------- --------- ---------
INTEREST CHARGES:
Interest on long-term debt.................. 12,591 11,636 10,481
Other interest.............................. 1,223 1,299 2,766
Allowance for borrowed funds used during
construction............................... (21) (47) (83)
--------- --------- ---------
Total interest charges.................... 13,793 12,888 13,164
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS............. 6,952 6,538 6,613
INCOME FROM DISCONTINUED OPERATIONS
(net of related income taxes of $6,850,000,
$2,948,000 and $2,411,000, respectively)..... 10,504 7,909 4,915
--------- --------- ---------
INCOME BEFORE SUBSIDIARY'S PREFERRED STOCK
DIVIDENDS.................................... 17,456 14,447 11,528
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS........ 4,639 6,462 5,065
--------- --------- ---------
NET INCOME.................................... $ 12,817 $ 7,985 $ 6,463
========= ========= =========
COMMON STOCK:
Earnings per share of common stock (Note 5):
Continuing operations...................... $ .43 $ .02 $ .39
Discontinued operations.................... 1.92 1.80 1.22
--------- --------- ---------
Net income before premium on redemption of
subsidiary's preferred stock.............. 2.35 1.82 1.61
Premium on redemption of subsidiary's pre-
ferred stock.............................. (.18) -- --
--------- --------- ---------
Earnings per share of common stock......... $ 2.17 $ 1.82 $ 1.61
========= ========= =========
Weighted average number of shares outstand-
ing........................................ 5,456,568 4,394,953 4,011,098
========= ========= =========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994* 1993*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
UTILITY PLANT:
At original cost less acquisition adjustments of
$386,000.......................................... $ 284,080 $ 269,819
Accumulated depreciation........................... (74,408) (70,954)
----------- -----------
209,672 198,865
----------- -----------
OTHER PROPERTY AND INVESTMENTS....................... 3,481 3,841
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents.......................... 330 2,749
Restricted cash--common stock subscribed (Note 5).. 2,532 --
Accounts receivable--
Customers......................................... 16,883 15,773
Others............................................ 1,474 1,325
Reserve for uncollectible accounts................ (937) (817)
Accrued utility revenues........................... 9,004 11,571
Materials and supplies, at average cost............ 2,797 2,379
Gas held by suppliers, at average cost............. 20,025 26,650
Deferred cost of gas and supplier refunds, net..... 8,475 12,752
Prepaid expenses and other......................... 1,483 1,306
----------- -----------
62,066 73,688
----------- -----------
DEFERRED CHARGES:
Regulatory Assets:
Deferred taxes collectible........................ 31,696 31,277
Natural gas transition costs collectible (Note 3). 4,099 --
Other............................................. 3,131 2,853
Unamortized debt expense........................... 3,539 3,588
Other.............................................. 3,552 3,945
----------- -----------
46,017 41,663
----------- -----------
NET ASSETS OF DISCONTINUED OPERATIONS................ 203,196 193,002
----------- -----------
----------- -----------
TOTAL ASSETS......................................... $ 524,432 $ 511,059
=========== ===========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994* 1993*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements):
Common shareholders' investment (Notes 5 and 8)...... $ 172,012 $ 165,775
Preferred stock of PG&W (Note 6)--
Not subject to mandatory redemption, net............ 33,615 33,615
Subject to mandatory redemption..................... 1,760 31,840
Long-term debt (Note 7).............................. 220,705 155,388
----------- -----------
428,092 386,618
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt and preferred stock
subject to mandatory redemption (Notes 6, 7 and 9).. 3,290 31,135
Notes payable to bank (Note 9)....................... -- 2,000
Accounts payable..................................... 17,781 23,286
Accrued general business and realty taxes............ 3,315 2,599
Accrued income taxes................................. 3,136 4,954
Accrued interest..................................... 2,850 2,790
Accrued natural gas transition costs (Note 3)........ 2,356 --
Other................................................ 2,398 1,528
----------- -----------
35,126 68,292
----------- -----------
DEFERRED CREDITS:
Deferred income taxes................................ 46,600 45,394
Accrued natural gas transition costs (Note 3)........ 3,250 --
Unamortized investment tax credits................... 5,110 5,283
Operating reserves................................... 2,383 1,863
Other................................................ 3,871 3,609
----------- -----------
61,214 56,149
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
TOTAL CAPITALIZATION AND LIABILITIES................... $ 524,432 $ 511,059
=========== ===========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994* 1993* 1992*
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends........ $ 2,313 $ 76 $ 1,548
Effects of noncash charges to income--
Depreciation................................. 6,693 6,413 6,106
Deferred income taxes, net................... 752 (2,472) (43)
Provisions for self insurance................ 1,030 1,510 776
Other, net................................... 3,074 2,418 2,702
Changes in working capital, exclusive of cash
and current portion of long-term debt--
Receivables and accrued utility revenues..... 1,435 (2,099) (1,633)
Gas held by suppliers........................ 6,625 (5,038) (1,586)
Accounts payable............................. (4,375) (1,233) 2,687
Deferred cost of gas and supplier refunds,
net......................................... 5,784 (13,307) (11,429)
Other current assets and liabilities, net.... (763) 1,187 2,095
Other operating items, net..................... (6,588) (4,014) (3,394)
-------- -------- --------
Net cash provided (used) by continuing
operations................................ 15,980 (16,559) (2,171)
Net cash provided (used) by discontinued
operations (Note 2)........................... 552 (837) (34,264)
-------- -------- --------
Net cash provided (used) by operating
activities................................ 16,532 (17,396) (36,435)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant .................... (16,960) (14,011) (12,391)
Other, net..................................... 1,098 201 595
-------- -------- --------
Net cash used for investing activities..... (15,862) (13,810) (11,796)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock....................... 3,887 32,807 29,284
Issuance of preferred stock of PG&W............ -- -- 23,615
Common stock subscribed, net (Note 5).......... 2,515 -- --
Redemption of preferred stock of PG&W.......... (30,080) (10,080) (80)
Dividends on common stock...................... (12,002) (9,805) (9,063)
Issuance of long-term debt..................... 50,027 19,027 59,826
Repayment of long-term debt.................... (31,055) (30,678) (6,664)
Net increase (decrease) in bank borrowings..... 15,370 32,247 (45,167)
Other, net..................................... (1,751) (626) (3,184)
-------- -------- --------
Net cash provided (used) for financing
activities................................ (3,089) 32,892 48,567
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (2,419) 1,686 336
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR... 2,749 1,063 727
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 330 $ 2,749 $ 1,063
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)......... $ 24,622 $ 23,992 $ 19,180
======== ======== ========
Income taxes................................. $ 7,460 $ 6,931 $ 3,815
======== ======== ========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994* 1993*
--------------- ---------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
COMMON SHAREHOLDERS' INVESTMENT (Notes 5 and
8):
Common stock, no par value (stated value $10
per share)
Authorized--15,000,000 shares
Outstanding--5,553,915 shares and 5,414,007
shares, respectively...................... $ 55,539 $ 54,140
Common stock subscribed...................... 2,515 --
Additional paid-in capital................... 45,493 43,005
Retained earnings............................ 68,465 68,630
-------- --------
Total common shareholders' investment.. 172,012 40.2% 165,775 42.9%
-------- --------
PREFERRED STOCK of PG&W, par value $100 per
share
Authorized--997,500 shares (Note 6):
Not subject to mandatory redemption, net--
4.10% cumulative preferred, 100,000
shares issued........................... 10,000 10,000
9% cumulative preferred, 250,000 shares
outstanding, net of issuance costs...... 23,615 23,615
-------- --------
Total preferred stock not subject to
mandatory redemption, net............. 33,615 7.8% 33,615 8.7%
-------- --------
Subject to mandatory redemption--
5.75% cumulative preferred, 18,400 and
19,200 shares outstanding, respectively. 1,840 1,920
8.90% cumulative preferred, 150,000
shares outstanding in 1993.............. -- 15,000
9.50% 1988 series cumulative preferred,
150,000 shares outstanding in 1993...... -- 15,000
Less current redemption requirements..... (80) (80)
-------- --------
Total preferred stock subject to
mandatory redemption.................. 1,760 0.4% 31,840 8.2%
-------- --------
LONG-TERM DEBT (Note 7):
First mortgage bonds......................... 108,535 108,745
Notes........................................ 115,380 77,698
Less current maturities and sinking fund
requirements................................ (3,210) (31,055)
-------- --------
Total long-term debt................... 220,705 51.6% 155,388 40.2%
-------- ----- -------- -----
TOTAL CAPITALIZATION......................... $428,092 100.0% $386,618 100.0%
======== ===== ======== =====
</TABLE>
- --------
*See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON ADDITIONAL
COMMON STOCK PAID-IN RETAINED
STOCK SUBSCRIBED CAPITAL EARNINGS TOTAL
------- ---------- ---------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991. $27,417 $ -- $ 9,127 $ 73,421 $109,965
Net income for 1992.......... -- -- -- 6,463 6,463
Issuance of common stock..... 13,898 -- 13,914 -- 27,812
Loss on sale of preferred
stock of PG&W held in
treasury.................... -- -- (18) (15) (33)
Cash dividends on common
stock ($2.20 per share)..... -- -- -- (9,063) (9,063)
------- ------ ------- -------- --------
Balance at December 31, 1992. 41,315 -- 23,023 70,806 135,144
Net income for 1993.......... -- -- -- 7,985 7,985
Issuance of common stock..... 12,825 -- 19,982 -- 32,807
Premium on redemption of pre-
ferred stock of PG&W........ -- -- -- (356) (356)
Cash dividends on common
stock ($2.20 per share)..... -- -- -- (9,805) (9,805)
------- ------ ------- -------- --------
Balance at December 31, 1993. 54,140 -- 43,005 68,630 165,775
Net income for 1994.......... -- -- -- 12,817 12,817
Issuance of common stock..... 1,399 -- 2,488 -- 3,887
Common stock subscribed, net
(Note 5).................... -- 2,515 -- -- 2,515
Premium on redemption of pre-
ferred stock of PG&W........ -- -- -- (980) (980)
Cash dividends on common
stock ($2.20 per share)..... -- -- -- (12,002) (12,002)
------- ------ ------- -------- --------
Balance at December 31, 1994. $55,539 $2,515 $45,493 $ 68,465 $172,012
======= ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries: Pennsylvania Gas and Water
Company, Pennsylvania Energy Resources, Inc. ("PERI"), Pennsylvania Energy
Marketing Company ("PEM") and Theta Land Corporation. All material
intercompany accounts have been eliminated in consolidation.
Pennsylvania Gas and Water Company ("PG&W"), a wholly-owned subsidiary of
Pennsylvania Enterprises, Inc., is a regulated public utility subject to the
jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for rate
and accounting purposes. The financial statements of PG&W that are
incorporated in these consolidated financial statements 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.
The operations of PERI, PEM and Theta, which are summarized in Note 4 to
these consolidated financial statements, are not significant to the operations
of the Company and are reflected in the consolidated financial statements in
"Other Income (deductions), Net."
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll,
administrative and general costs, an allowance for funds used during
construction, and the plant acquisition adjustments. The plant acquisition
adjustments represent the difference between the cost to PG&W of plant
acquired as a system and the cost of such plant when first devoted to public
service.
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 consolidated statements of
income. 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 7% in 1994, 8% in 1993 and 7% in 1992.
PG&W provides for depreciation on a straight-line basis. Exclusive of
transportation and work equipment, the annual provision for depreciation, as
related to the average depreciable original cost of utility plant, was 2.77%
in 1994, 2.81% in 1993 and 2.77% in 1992, respectively.
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 and Cost of Gas. PG&W bills its customers monthly based on
estimated or actual meter readings on cycles that extend throughout the month.
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.
PG&W generally passes on to its customers increases or decreases in gas
costs from those reflected in its tariff charges. In accordance with this
procedure, PG&W defers any current under or over-recoveries of gas costs and
collects or refunds such amounts in subsequent periods.
Deferred Charges/Regulatory Assets. PG&W 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
F-9
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the
Company, will be recoverable in future rates, based on such rate orders. In
addition to deferred taxes collectible and natural gas transition costs
collectible, the following deferred charges are included as "Other" regulatory
assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
<S> <C> <C>
Computer software costs....................................... $1,006 $ 325
Early retirement plan charges................................. 756 802
Corrosion control cost........................................ 489 637
Low income usage reduction program............................ 441 494
Other......................................................... 439 595
------ ------
Total....................................................... $3,131 $2,853
====== ======
</TABLE>
The Company also records, as deferred charges, the direct financing costs
incurred in connection with the issuance of long-term debt and redeemable
preferred stock and equitably amortizes such amounts over the life of such
securities.
Cash and Cash Equivalents. For the purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt instruments
purchased, which generally have a maturity of three months or less, to be cash
equivalents. Such instruments are carried at cost, which approximates market
value.
Income Taxes. Effective January 1, 1993, the Company adopted the provisions
of FASB Statement 109, "Accounting for Income Taxes," which superseded
previously issued income tax accounting standards. The adoption of FASB
Statement 109 did not have a significant effect on PG&W's results of
operations. In accordance with the provisions of FASB Statement 109, the
Company recorded as of January 1, 1993, an additional deferred tax liability
and an asset, representing the probable future rate recovery of the previously
unrecorded deferred taxes, primarily relating to certain temporary differences
in the basis of utility plant which had not previously been recorded because
of the regulatory rate practices of the PPUC.
The components of the Company's net deferred income tax liability as of
December 31, 1994 and 1993, are shown below:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility plant basis differences.................... $ 49,638 $ 48,171
FERC Order 636 transition costs.................... 1,371 --
Alternative minimum tax............................ (2,213) (2,176)
Operating reserves................................. (1,020) (816)
Other.............................................. (1,176) 215
----------- -----------
Net deferred income tax liability................ $ 46,600 $ 45,394
=========== ===========
</TABLE>
F-10
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Included in operating expenses:
Currently payable--
Federal......................................... $ 1,654 $4,535 $ 3,197
State........................................... 1,128 2,021 1,817
------- ------- -------
Total currently payable....................... 2,782 6,556 5,014
------- ------- -------
Deferred, net--
Federal......................................... 1,785 (515) 592
State........................................... (105) (934) (472)
------- ------- -------
Total deferred, net........................... 1,680 (1,449) 120
------- ------- -------
Amortization of investment tax credits........... (172) (172) (172)
------- ------- -------
Total included in operating expenses.......... 4,290 4,935 4,962
------- ------- -------
Included in other income, net:
Currently payable--
Federal......................................... 345 93 153
State........................................... 170 35 99
------- ------- -------
Total currently payable....................... 515 128 252
------- ------- -------
Deferred, net--
Federal......................................... 10 7 53
State........................................... 12 6 6
------- ------- -------
Total deferred, net........................... 22 13 59
------- ------- -------
Total included in other income, net........... 537 141 311
------- ------- -------
Total provision for income taxes.............. $ 4,827 $5,076 $ 5,273
======= ======= =======
</TABLE>
The components of deferred income taxes, which are recorded consistent with
the treatment allowed by the PPUC for ratemaking purposes, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Excess of tax depreciation over depreciation for
accounting purposes............................ $ 1,197 $ 1,023 $ 913
FERC Order 636 transition costs................. 1,371 -- --
Take-or-pay costs, net.......................... (652) (1,126) (446)
Other, net...................................... (214) (1,333) (288)
------- -------- ------
Total deferred taxes, net................... $ 1,702 $ (1,436) $ 179
======= ======== ======
Included in:
Operating expenses............................ $ 1,680 $ (1,449) $ 120
Other income, net............................. 22 13 59
------- -------- ------
Total deferred taxes, net................... $ 1,702 $ (1,436) $ 179
======= ======== ======
</TABLE>
F-11
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The total provision for income taxes shown in the accompanying consolidated
statements 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:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income before income taxes....................... $11,828 $11,687 $12,017
======= ======= =======
Tax expense at statutory federal income tax rate. $ 4,140 $ 4,090 $ 4,086
Increases (reductions) in taxes resulting from--
State income taxes, net of federal income tax
benefit....................................... 942 924 1,151
Amortization of investment tax credits......... (172) (172) (172)
Other, net..................................... (83) 234 208
------- ------- -------
Total provision for income taxes................. $ 4,827 $ 5,076 $ 5,273
======= ======= =======
</TABLE>
(2) DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PG&W signed a definitive agreement (the
"Agreement") with American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, providing for the sale to Pennsylvania-American of
substantially all of the assets, properties and rights of PG&W's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the
assumption of $155 million of PG&W's liabilities, including $141 million of
its long-term debt. This price is subject to adjustment for changes in the
assets of PG&W's water utility operations and the liabilities to be assumed by
Pennsylvania-American between December 31, 1994, and the date of closing,
which currently is expected to take place in December, 1995. Until the
closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result
in an estimated after tax loss of $5 to 8 million, net of the expected income
from the water operations during the phase-out period to the date of closing
(which has been assumed to be December 31, 1995). The sale will involve a gain
for income tax purposes, primarily because of the accelerated depreciation
that has been claimed by PG&W with respect to the water utility plant that is
being sold. It is currently estimated that the income taxes payable on the
sale, for which deferred income taxes have previously been provided, will be
approximately $55 million.
The net cash proceeds from the sale of approximately $201 million, after the
payment of income taxes, will be used by the Company and PG&W to retire debt,
to repurchase stock and for working capital for their continuing operations.
After the sale, the principal assets of the Company and PG&W will consist of
PG&W's gas utility operations and approximately 46,000 acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the PPUC, approval of the stockholders and certain debt
holders of both the Company and PG&W, termination of the waiting period under
federal antitrust laws, and various other regulatory approvals and certain
other conditions.
The accompanying consolidated financial statements reflect PG&W's water
utility operations as "discontinued operations." Interest charges relating to
indebtedness of PG&W have been allocated to the discontinued operations based
on the relationship of the gross water utility plant that is being sold to the
total of
F-12
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PG&W's gross gas and water utility plant. This is the same method as has been
utilized by PG&W and the PPUC in establishing the revenue requirements of both
PG&W's gas and water utility operations. None of the dividends on PG&W's
preferred stock nor any of the Company's interest expense has been allocated
to the discontinued operations.
Selected financial information with respect to the discontinued operations
as of December 31, 1994 and 1993, and for the years ended December 31, 1994,
1993 and 1992 is set forth below:
NET ASSETS OF DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Net utility plant................................. $ 359,399 $ 348,025
Current assets (primarily accounts receivable and
accrued revenues)................................ 12,141 11,865
Deferred charges and other assets................. 31,103 33,460
----------- -----------
Total assets being acquired by Pennsylvania-Ameri-
can.............................................. 402,643 393,350
----------- -----------
Liabilities being assumed by Pennsylvania-American
Long-term debt.................................. 141,420 148,254
Other........................................... 13,168 12,175
----------- -----------
154,588 160,429
----------- -----------
Net assets being acquired by Pennsylvania-Ameri-
can.............................................. 248,055 232,921
Estimated liability for income taxes on sale of
discontinued operations.......................... (55,542) (49,947)
Other net assets of discontinued operations
(written off as of March 31, 1995)............... 10,683 10,028
----------- -----------
Total net assets of discontinued operations....... $ 203,196 $ 193,002
=========== ===========
</TABLE>
INCOME FROM DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating revenues............................... $66,731 $53,363 $ 48,651
------- ------- --------
Operating expenses, excluding income taxes
Depreciation................................... 7,672 5,911 4,769
Other operating expenses....................... 29,005 27,140 26,495
------- ------- --------
36,677 33,051 31,264
------- ------- --------
Operating income before income taxes............. 30,054 20,312 17,387
Income taxes................................... 6,850 2,948 2,411
------- ------- --------
Operating income................................. 23,204 17,364 14,976
Other income................................... 49 71 131
Allocated interest charges..................... (12,749) (9,526) (10,192)
------- ------- --------
Income from discontinued operations.............. $10,504 $ 7,909 $ 4,915
======= ======= ========
</TABLE>
F-13
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1993 1992
------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income from discontinued operations............ $10,504 $ 7,909 $ 4,915
Noncash charges (credits) to income:
Depreciation................................. 7,672 5,911 4,774
Deferred treatment plant costs, net.......... 581 (3,560) (756)
Deferred income taxes........................ 5,146 4,170 2,111
Deferred water utility billings.............. (5,574) (582) (969)
Changes in working capital, exclusive of cash
and current portion of long-term debt........ 353 (2,041) (1,359)
Additions to utility plant.................... (20,980) (32,515) (45,933)
(Receipt) utilization of restricted funds..... 9,753 15,868 (27,994)
Net increase (decrease) in long-term debt..... (6,834) 1,640 29,292
Other, net.................................... (69) 2,363 1,655
------- -------- --------
Net cash provided (used) for discontinued
operations.................................... $ 552 $ (837) $(34,264)
======= ======== ========
</TABLE>
(3) RATE MATTERS
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code, which require that the tariffs of gas distribution
companies, such as PG&W, be adjusted on an annual basis to reflect changes in
their purchased gas costs, the PPUC ordered PG&W to make the following changes
during 1994, 1993 and 1992 to the gas costs contained in its gas tariff rates:
<TABLE>
<CAPTION>
CHANGE IN
RATE PER MCF CALCULATED
------------- INCREASE (DECREASE)
EFFECTIVE DATE FROM TO IN ANNUAL REVENUE
-------------- ------------- -------------------
<S> <C> <C> <C>
December 1, 1994........................... $3.74 $3.68 $(1,800,000)
December 1, 1993........................... 2.79 3.74 28,800,000
December 1, 1992........................... 2.46 2.79 9,500,000
</TABLE>
The annual changes in gas rates on account of purchased gas costs have no
effect on PG&W's earnings since the change in revenue is offset by a
corresponding change in the cost of gas.
Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC
adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding
recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition
costs. The PGC Order stated that Gas Transition Costs are subject to recovery
through the annual PGC rate filing. PG&W was billed a total of $1.1 million of
Gas Transition Costs by its interstate pipelines over a nineteen-month period
extending through March 31, 1995. Of this amount, $858,000 was recovered by
PG&W over a twelve-month period ended January 31, 1995, through an increase in
its PGC rate. PG&W will seek recovery of the remaining $252,000 of Gas
Transition Costs in its annual PGC rate that is effective December 1, 1995.
The PGC Order also indicated that while Non-Gas Transition Costs are not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
such costs are subject to full recovery by local distribution companies
through the filing of a tariff pursuant to either the existing surcharge or
base rate provisions of the
F-14
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pennsylvania Public Utility Code. By Order of the PPUC entered August 26,
1994, PG&W began recovering the Non-Gas Transition Costs that it estimates it
will ultimately be billed pursuant to FERC Order 636 through the billing of a
surcharge to its customers effective September 12, 1994. It is currently
estimated that $9.4 million of Non-Gas Transition Costs will be billed to
PG&W, generally over a four-year period extending through the fourth quarter
of 1997, of which $4.5 million had been billed to PG&W and $2.4 million had
been recovered from its customers as of March 31, 1995. PG&W has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
(4) OTHER INCOME (DEDUCTIONS), NET
Other income (deductions), net was comprised of the following elements:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Earnings of non-regulated subsidiaries........... $ 395 $ 316 $ 598
Gain on sale of investment in joint venture, net
of related income taxes......................... 268 -- --
Gain on sale of land and other property, net of
related income taxes............................ 165 20 102
Amortization of preferred stock issuance costs,
net of related income tax benefits.............. (227) (126) (66)
Holding company expenses, net of related income
tax benefits.................................... (209) (203) (469)
Premium on retirement/defeasance of debt......... (40) (81) (127)
Net interest expense with respect to proceeds
from the issuance of debt held in a construction
fund............................................ (91) (330) (10)
Other............................................ (3) (68) (120)
------- ------- -------
Total........................................ $ 258 $ (472) $ (92)
======= ======= =======
Summary financial data for non-regulated subsidi-
aries:
Revenues....................................... $ 9,127 $ 6,574 $ 6,291
Expenses....................................... 8,732 6,258 5,693
------- ------- -------
Net income..................................... $ 395 $ 316 $ 598
======= ======= =======
Total assets (including, $294,000, $817,000
and $2.3 million, respectively, eliminated
in consolidation)........................... $ 1,753 $ 2,534 $ 4,370
======= ======= =======
</TABLE>
(5) COMMON STOCK
Public Offerings. On January 30, 1992, the Company issued 1,370,847 shares
of its common stock, without nominal or par value, with a stated value of $10
per share, for aggregate net proceeds of approximately $28.1 million.
Additionally, on October 20, 1993, the Company issued 1,250,000 shares of its
common stock, without nominal or par value, with a stated value of $10 per
share, for aggregate net proceeds of $31.9 million.
Customer Stock Purchase Plan. On July 28, 1994, the Company implemented a
Customer Stock Purchase Plan (the "Customer Plan") which provides the
residential customers of PG&W with a method of purchasing newly-issued shares
of the Company's common stock at a 5% discount from the market price. On
October 3, 1994, the Company issued 59,537 shares of its common stock for an
aggregate consideration of $1.7 million with respect to payments received
pursuant to the Customer Plan during the September, 1994, subscription period.
Additionally, on January 3, 1995, the Company issued 45,360 shares of its
common stock for an aggregate consideration of $1.2 million with respect to
payments received pursuant to the Customer Plan during the December, 1994,
subscription period. The payments so received during December are reflected
under the captions "Restricted cash--common stock subscribed" and "Common
shareholders' investment--Common stock subscribed" in these consolidated
financial statements as of December 31, 1994.
F-15
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Dividend Reinvestment and Stock Purchase Plan. Through the Company's
Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders of shares of
the Company's common stock may reinvest cash dividends and/or make cash
investments in the common stock of the Company. Under the DRP, 62,271 shares
($1.8 million), 15,988 shares ($465,000) and 14,129 shares ($385,000) of
common stock were issued during 1994, 1993 and 1992, respectively.
Additionally, on January 3, 1995, the Company issued 51,565 shares of its
common stock for an aggregate consideration of $1.3 million with respect to
cash investments made pursuant to the DRP during the fourth quarter of 1994.
The investments made during the fourth quarter are reflected under the
captions "Restricted cash--common stock subscribed" and "Common shareholders'
investment--Common stock subscribed" in these consolidated financial
statements as of December 31, 1994. The DRP was amended on May 5, 1994, to
provide the Company's shareholders with a method of reinvesting cash dividends
and making cash investments to purchase newly-issued shares of the Company's
common stock at a 5% discount from the market price. Prior to such amendment,
cash dividends were reinvested at 100% of the market price in newly-issued
shares and cash investments were used to purchase shares of the Company's
common stock on the open market.
Employees' Savings Plan. Under the Company's Employees' Savings Plan (a
section 401(k) plan) which became effective January 1, 1992, the Company
issued an additional 18,100 shares ($540,000) in 1994, 16,478 shares
($481,000) in 1993 and 4,871 shares ($136,000) of common stock in 1992.
Stock Option Plan. On June 3, 1992, the Company's shareholders approved the
Pennsylvania Enterprises, Inc. 1992 Stock Option Plan (the "Plan"). Under the
terms of the Plan, a total of 200,000 shares of authorized but unissued common
stock are reserved and available for distribution to eligible employees. Stock
options awarded under the Plan may be either Incentive Stock Options or Non-
qualified Stock Options. On April 7, 1993, Non-qualified Stock Options to
purchase 45,000 shares of common stock were issued to eligible employees at an
exercise price of $30 per share (the fair market value of the common stock on
such date). These options, which expire on April 6, 2003, could not be
exercised prior to April 7, 1994. As of December 31, 1994, the options for 400
such shares had expired and the remaining 44,600 options remain outstanding.
In addition, 155,000 additional shares of authorized but unissued common stock
were reserved for distribution to eligible employees under the terms of the
Plan as of such date.
Shareholder Rights Plan. On April 26, 1995, the Company adopted a
Shareholder Rights Plan under the terms of which each shareholder of record at
the close of business on May 16, 1995, will receive a dividend distribution of
one right ("Right" or "Rights") for each share of common stock held.
Each Right will entitle shareholders to purchase from the Company one-half
of a share of common stock. No less than two Rights, and only integral
multiples of two Rights, may be exercised by holders of Rights at an exercise
price of $100 per share of common stock (equivalent to $50 for each one-half
share of common stock), subject to certain adjustments. The Rights will become
exercisable only if a person or group acquires 15% or more of the Company's
common stock, or commences a tender or exchange offer which, if consummated,
would result in that person or group owning at least 15% of the common stock.
Prior to that time, the Rights will not trade separately from the common
stock.
If a person or group acquires 15% or more of the Company's common stock, all
other holders of Rights will then be entitled to purchase, by payment of the
$100 exercise price upon the exercise of two Rights, the Company's common
stock (or a common stock equivalent) with a value of twice the exercise price.
In addition, at any time after a 15% position is acquired and prior to the
acquisition by any person or group of 50% or more of the outstanding common
stock, the Company's Board of Directors may, at its option, require each
outstanding Right (other than Rights held by the acquiring person or group) to
be exchanged for one share of common stock (or one common stock equivalent).
If, following an acquisition of 15% or more of the Company's common stock,
the Company is acquired by any person in a merger or other business
combination transaction or sells more than 50% of its assets or earning
F-16
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
power to any person (other than the currently-pending sale of PG&W's water
utility operations to Pennsylvania-American or, if such sale is not
consummated, any other sale of PG&W's water utility operations, if and as
approved by the Company's Board of Directors), all other holders of Rights
will then be entitled to purchase, by payment of the $100 exercise price upon
the exercise of two Rights, common stock of the acquiring company with a value
of twice the exercise price.
The Company may redeem the Rights at $.005 per Right at any time prior to
the time that a person or group has acquired 15% or more of its common stock.
The Rights, which expire on May 16, 2005, do not have voting or dividend
rights and, until they become exercisable, have no dilutive effect on the
earnings per share of the Company.
(6) PREFERRED STOCK
Preferred Stock of PG&W Subject to Mandatory Redemption
On December 23, 1993, PG&W redeemed 100,000 shares of its 9.50% 1988 series
cumulative preferred stock at a price of $103.5625 per share (plus accrued
dividends to the redemption date), which included a voluntary redemption
premium of $3.5625 per share ($356,250 in the aggregate). On May 31, 1994,
PG&W redeemed the remaining 150,000 outstanding shares of its 9.50% 1988
series cumulative preferred stock, $100 par value, at a price of $103.5625 per
share, which included a voluntary redemption premium of $3.5625 per share
($534,375 in the aggregate), plus accrued dividends.
On December 16, 1994, PG&W redeemed all 150,000 shares of its 8.90%
cumulative preferred stock at a price of $102.97 per share, which included a
voluntary redemption premium of $2.97 per share ($445,500 in the aggregate).
The holders of the 5.75% cumulative preferred stock have a noncumulative
right each year to tender to PG&W and to require it to purchase at a per share
price not exceeding $100, up to (a) that number of shares of the 5.75%
cumulative preferred stock which can be acquired for an aggregate purchase
price of $80,000 less (b) the number of such shares which PG&W may already
have purchased during the year at a per share price of not more than $100.
Eight hundred such shares were acquired and cancelled by PG&W in each of the
three years in the period ended December 31, 1994, for an aggregate purchase
price in each year of $80,000.
As of December 31, 1994, the sinking fund requirements relative to PG&W's
5.75% cumulative preferred stock (the only series of preferred stock subject
to mandatory redemption that was outstanding as of such date) were $80,000 for
each of the years 1995 through 1999.
At PG&W's option, the 5.75% cumulative preferred stock may currently be
redeemed at a price of $102.00 per share ($1,876,800 in the aggregate.)
Preferred Stock of PG&W Not Subject to Mandatory Redemption
On August 18, 1992, PG&W issued 250,000 shares of its 9% cumulative
preferred stock, par value $100 per share, for aggregate net proceeds of
approximately $23.6 million. The 9% cumulative preferred stock is not
redeemable by PG&W prior to September 15, 1997. Thereafter, it is redeemable
at the option of PG&W, in whole or in part, upon not less than 30 days'
notice, at $100 per share plus accrued dividends to the date of redemption and
at a premium of $8 per share if redeemed from September 15, 1997, to September
14, 1998, and a premium of $4 per share if redeemed from September 15, 1998,
to September 14, 1999.
At PG&W's option, the 4.10% cumulative preferred stock may currently be
redeemed at a redemption price of $105.50 per share or for an aggregate
redemption price of $10,550,000.
F-17
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Dividend Information
The dividends on the preferred stock of PG&W in each of the three years in
the period ended December 31, 1994, were as follows:
<TABLE>
<CAPTION>
SERIES 1994 1993 1992
------ ------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
4.10%................................................ $ 410 $ 410 $ 409
5.75%................................................ 108 113 117
8.90%................................................ 1,280 1,335 1,335
9.00%................................................ 2,250 2,250 829
9.50% 1988 series.................................... 591 2,354 2,375
------- ------- -------
Total.............................................. $ 4,639 $ 6,462 $ 5,065
======= ======= =======
</TABLE>
Dividends on all series of PG&W's preferred stock are cumulative, and if
dividends in an amount equivalent to four full quarterly dividends on all
shares of preferred stock then outstanding are in default and until all such
dividends have been paid, the holders of the preferred stock, voting
separately as one class, shall be entitled to elect a majority of the Board of
Directors of PG&W. Additionally, PG&W may not declare dividends on its common
stock if any dividends on shares of preferred stock then outstanding are in
default.
(7) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1994
and 1993:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Indebtedness of the Company:
10.125% senior notes, due 1999, net of
unamortized discount........................... $ 29,880 $ 29,853
Term loan, due 1999............................. 20,000 --
----------- -----------
49,880 29,853
----------- -----------
Indebtedness of PG&W:
First mortgage bonds--
8 % Series, due 1997........................ 3,535 3,745
8.375% Series, due 2002........................ 30,000 30,000
9.23 % Series, due 1999........................ 10,000 10,000
9.34 % Series, due 2019........................ 15,000 15,000
9.57 % Series, due 1996........................ 50,000 50,000
----------- -----------
108,535 108,745
----------- -----------
Notes--
1%, due 1994 (Small Business Administration)... -- 845
Bank borrowings, at weighted average interest
rates of 5.28% and 4.31%, respectively (Note
9)............................................ 65,500 47,000
----------- -----------
65,500 47,845
----------- -----------
Less current maturities and sinking fund
requirements..................................... (3,210) (31,055)
----------- -----------
Total long-term debt of PG&W.................... 170,825 125,535
----------- -----------
Total consolidated long-term debt............... $ 220,705 $ 155,388
=========== ===========
</TABLE>
F-18
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Term Loan Agreement. On May 31, 1994, the Company borrowed $20.0 million
pursuant to a five-year term loan agreement (the "Term Loan Agreement"), which
loan matures on May 31, 1999. Borrowings under the Term Loan Agreement bear
interest at LIBOR ("London Interbank Offered Rates") plus one-half of one
percent (6.5625% as of April 26, 1995). Under the terms of the Term Loan
Agreement, the Company can choose interest rate periods of one, two, three or
six months. The Company utilized the proceeds from such loan to purchase $20.0
million of PG&W common stock. PG&W used a portion of the proceeds it so
received to redeem $15.0 million of its 9.50% cumulative preferred stock and
to fund the $534,375 premium in connection with such redemption. The remaining
$4.5 million of proceeds were used by PG&W to repay a portion of its bank
borrowings and for working capital purposes.
Maturities and Sinking Fund Requirements. As of December 31, 1994, the
aggregate annual maturities and sinking fund requirements of long-term debt
for each of the next five years ending December 31, were:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
1995.................................................... $ 3,210,000
1996.................................................... $112,710,000(a)
1997.................................................... $ 3,115,000
1998.................................................... $ --
1999.................................................... $ 60,000,000(b)
</TABLE>
- --------
(a) Includes $62.5 million of PG&W bank borrowings outstanding as of December
31, 1994, due May 31, 1996, and PG&W's 9.57% Series First Mortgage Bonds
in the principal amount of $50.0 million due September 1, 1996.
(b) Includes the $20.0 million of borrowings outstanding as of December 31,
1994 under the Company's Term Loan Agreement due May 31, 1999, the
Company's 10.125% Senior Notes in the principal amount of $30.0 million
due June 15, 1999, and PG&W's 9.23% Series First Mortgage Bonds in the
principal amount of $10.0 million due September 1, 1999.
(8) DIVIDEND RESTRICTIONS
There are no dividend restrictions in the Restated Articles of Incorporation
of the Company. However, the preferred stock provisions of PG&W's Restated
Articles of Incorporation and certain of the agreements under which the
Company and PG&W have issued long-term debt provide for certain dividend
restrictions. As of December 31, 1994, $37,357,000 of the consolidated
retained earnings of the Company were restricted against the payment of cash
dividends on common stock under the most restrictive of these covenants.
(9) BANK NOTES PAYABLE
PG&W has entered into a revolving bank credit agreement (the "Credit
Agreement") with a group of six banks under the terms of which $60.0 million
is available for borrowing by PG&W. The Credit Agreement terminates on May 31,
1996, at which time any borrowings outstanding thereunder are due and payable.
The interest rate on borrowings under the Credit Agreement is generally less
than prime. The Credit Agreement also requires the payment of a commitment fee
of .195% per annum on the average daily amount of the unused portion of the
available funds. As of April 26, 1995, $29.0 million of borrowings were
outstanding under the Credit Agreement. PG&W currently has three additional
bank lines of credit with an aggregate borrowing capacity of $7.5 million
which provide for borrowings at interest rates generally less than prime.
Borrowings outstanding under two of these bank lines of credit with borrowing
capacities of $2.0 million and $3.0 million mature on May 31, 1995, and June
30, 1995, respectively. Borrowings outstanding under the third bank line of
credit with a borrowing capacity of $2.5 million mature on May 31, 1996. As of
April 26, 1995, PG&W had $5.2 million of borrowings outstanding under these
additional bank lines of credit. The commitment fees paid by
F-19
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PG&W with respect to its revolving bank credit agreements totaled $97,000 in
1994, $113,000 in 1993 and $152,000 in 1992.
Because of limitations imposed by the terms of PG&W's preferred stock, PG&W
is prohibited, without the consent of the holders of a majority of the
outstanding shares of its preferred stock, from issuing more than $12.0
million of unsecured debt due on demand or within one year from issuance. PG&W
had no unsecured debt due on demand or within one year from issuance
outstanding as of December 31, 1994.
Information relating to PG&W's bank lines of credit and borrowings under
those lines of credit is set forth below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Borrowings under lines of credit
Short-term...................................... $ -- $ 2,000 $ --
Long-term....................................... 65,500 47,000 17,000
------- ------- -------
$65,500 $49,000 $17,000
======= ======= =======
Unused lines of credit
Short-term...................................... $ -- $ 5,000 $ --
Long-term....................................... 2,000 13,000 28,000
------- ------- -------
$ 2,000 $18,000 $28,000
======= ======= =======
Total lines of credit
Prime rate...................................... $ -- $ 2,000 $45,000
Other than prime rate........................... 67,500 65,000 --
------- ------- -------
$67,500 $67,000 $45,000
======= ======= =======
Short-term bank borrowings (a)
Maximum amount outstanding...................... $ 5,692 $ 5,666 $ --
Daily average amount outstanding................ $ 441 $ 637 $ --
Weighted daily average interest rate............ 3.984% 4.046% --
Weighted average interest rate at year-end...... -- 4.208% --
Range of interest rates......................... 3.700- 3.750- --
6.000% 6.000% --
</TABLE>
- --------
(a) PG&W did not incur any short-term bank borrowings during the year ended
December 31, 1992, and had no short-term bank borrowings outstanding as of
December 31, 1992, or December 31, 1994.
(10) POSTEMPLOYMENT BENEFITS
Pension Benefits
The Company'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. The Company'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.
F-20
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Agreement regarding the sale of PG&W's water utility
operations, Pennsylvania-American will assume the accumulated benefit
obligations relating to employees of PG&W who accept employment with
Pennsylvania-American (the "Transferred Employees") and plan assets in an
amount equal to the actuarial present value of accumulated plan benefits
relative to the Transferred Employees will be transferred to the American
pension plan. Since the Transferred Employees have not yet been specifically
identified, it is not currently possible to calculate either the accumulated
benefit obligations or the amount of plan assets relating to the discontinued
operations. The Company will recognize both a settlement gain and a gain on
curtailment of the pension plan, which are currently estimated to total $3.2
million ($1.9 million net of related income taxes), primarily because of the
elimination of projected salary increases relative to the Transferred
Employees.
Net pension costs, including amounts capitalized and related to discontinued
operations, were $562,000, $443,000 and $333,000 in 1994, 1993 and 1992,
respectively. The following items were the components of such net pension
costs:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Present value of benefits earned during the
year........................................... $ 999 $ 854 $ 789
Interest cost on projected benefit obligations.. 2,545 2,402 2,262
Return on plan assets........................... 973 (3,127) (2,646)
Net amortization and deferral................... (101) (97) (93)
Deferral of investment (loss) gain.............. (3,854) 411 21
------- ------- -------
Net pension cost.............................. $ 562 $ 443 $ 333
======= ======= =======
</TABLE>
The funded status of the plan as of December 31, 1994 and 1993, was as
follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of the projected benefit
obligations:
Accumulated benefit obligations:
Vested........................................ $ 21,592 $ 24,265
Nonvested..................................... 77 125
----------- -----------
Total....................................... 21,669 24,390
Provision for future salary increases.......... 7,565 9,769
----------- -----------
Projected benefit obligations.................. 29,234 34,159
Market value of plan assets, primarily invested
in equities and bonds.......................... 30,457 32,471
----------- -----------
Plan assets in excess of (less than) projected
benefit obligations............................ 1,223 (1,688)
Unrecognized net transition asset as of January
1, 1986, being amortized over 20 years......... (2,528) (2,758)
Unrecognized prior service costs................ 2,150 2,279
Unrecognized net (gain) loss.................... (1,644) 1,710
----------- -----------
Accrued pension cost at year-end................ $ (799) $ (457)
=========== ===========
</TABLE>
The discount rate used to determine the actuarial present value of the
projected benefit obligations was 8 3/4% in 1994 and 8% in both 1993 and 1992.
An expected long-term rate of return on plan assets of 9% and a 5 1/2%
projected increase in future compensation levels were assumed in determining
the net pension cost for 1994, 1993 and 1992.
Other Postretirement Benefits
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees. Substantially all of the
Company's employees may become eligible for those benefits if they
F-21
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reach retirement age while working for the Company. Prior to January 1, 1993,
the cost of retiree health care and life insurance, which totaled $870,000 in
1992, was expensed as the premiums were paid under insurance contracts.
Effective January 1, 1993, the Company adopted the provisions of FASB
Statement 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The provisions of FASB Statement 106 require that the Company
record 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, as was the Company's prior practice.
Under the terms of the Agreement regarding the sale of PG&W's water utility
operations, Pennsylvania-American will assume the accumulated benefit
obligation relating to employees of PG&W who accept employment with
Pennsylvania-American (the "Transferred Employees") and also certain retired
employees, and the plan assets will be transferred to trusts established by
Pennsylvania-American since such assets relate solely to the discontinued
operations. Because the Transferred Employees and retirees for whom
Pennsylvania-American will assume the obligation for postretirement benefits
other than pensions have not yet been specifically identified, it is not
currently possible to calculate the accumulated benefit obligation relative to
the discontinued operations. However, the Company does not expect to recognize
either a gain or a loss relative to the transfer of such obligations.
The following items were the components of the net cost of postretirement
benefits other than pensions for the years 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Present value of benefits earned during the year.. $ 269 $ 226
Interest cost on accumulated benefit obligation... 967 967
Return on plan assets............................. (6) --
Net amortization and deferral..................... 654 617
----------- -----------
Net cost of postretirement benefits other than
pensions......................................... 1,884 1,810
Less disbursements for benefits................... (987) (983)
----------- -----------
Increase in liability for postretirement benefits
other than pensions.............................. $ 897 $ 827
=========== ===========
Reconciliations of the accumulated benefit obligation to the accrued
liability for postretirement benefits other than pensions as of December 31,
1994 and 1993, follow:
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Accumulated benefit obligation:
Retirees........................................ $ 9,021 $ 10,149
Fully eligible active employees................. 1,628 1,735
Other active employees.......................... 1,305 1,222
----------- -----------
11,954 13,106
Plan assets at fair value......................... 839 --
----------- -----------
Accumulated benefit obligation in excess of plan
assets........................................... 11,115 13,106
Unrecognized transition obligation being amortized
over 20 years.................................... (11,108) (11,725)
Unrecognized net gain (loss)...................... 885 (554)
----------- -----------
Accrued liability for postretirement benefits
other than pensions.............................. $ 892 $ 827
=========== ===========
</TABLE>
F-22
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assumptions used to calculate the costs to be accrued by the Company
under FASB Statement 106 included discount rates of 8 3/4% and 8% in 1994 and
1993, respectively, and a 5 1/2% projected annual increase in future
compensation levels. It was also assumed that the per capita cost of covered
health care benefits would increase at an annual rate of 10 1/2% in 1994 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 transition obligation as of January 1, 1994, by approximately
$778,000 and the aggregate of the service and interest cost components of the
net cost of postretirement benefits other than pensions for the year 1994 by
approximately $64,000.
Because PG&W has not sought to increase its base gas rates since January 1,
1993, it has not recorded a regulatory asset relative to the costs incurred
pursuant to FASB Statement 106. The $447,000 ($256,000 net of related income
taxes) and $407,000 ($232,000 net of related income taxes) of additional cost
incurred in 1994 and 1993, respectively, as a result of the adoption of the
provisions of FASB Statement 106 were expensed without any adjustment in its
gas rates.
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. The
Company consistently recorded liabilities for benefits of this nature prior to
the effectiveness of FASB Statement 112 and, as a result, the provisions of
FASB Statement 112, which the Company adopted effective January 1, 1994, did
not have a material impact on its financial position or results of operations.
(11) CONSTRUCTION EXPENDITURES
PG&W estimates the cost of its 1995 construction program will be $24.8
million. It is anticipated that such expenditures will be financed with
internally generated funds and bank borrowings, pending the periodic issuance
of stock and long-term debt.
(12) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W to survey its gas
distribution system to verify the location and spacing of its gas shut off
valves, to add or repair valves where needed and to establish programs for the
periodic inspection and maintenance of all such valves and the verification of
all gas service line information. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PG&W for complying with the Emergency Order.
PG&W does not believe that compliance with the terms of such Order will have a
material adverse effect on its financial position or results of operations.
Environmental Matters
PG&W, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of
these plants has been in operation since 1960, and several of the plant sites
are no longer owned by PG&W. Pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed
notices with the United States Environmental Protection Agency (the "EPA")
with respect to the former plant sites. None of the sites is or
F-23
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
was formerly on the proposed or final National Priorities List. The EPA has
conducted site inspections and made preliminary assessments of each site and
has concluded that no further remedial action is planned. While this
conclusion does not constitute a legal prohibition against further regulatory
action under CERCLA or other applicable federal or state law, the Company does
not believe that additional costs, if any, related to these manufactured gas
plant sites would be material to its financial position or results of
operations since environmental remediation costs generally are recoverable
through rates over a period of time.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
------------ ------------ -------------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues........ $80,233 $26,568 $14,356 $46,835
Operating income.......... 10,884 2,047 339 7,217
Income (loss) from contin-
uing operations.......... 6,469 (2,260) (4,108) 2,212
Income from discontinued
operations............... 2,079 2,675 2,985 2,765
Net income (loss)......... 8,548 415 (1,123) 4,977
Earnings (loss) per share
of common stock:
Continuing operations... 1.20 (.41) (.76) .40
Discontinued operations. .38 .49 .55 .50
Net income (loss) before
premium on redemption
of subsidiary's
preferred stock........ 1.58 .08 (.21) .90
Premium on redemption of
subsidiary's preferred
stock.................. -- (.10) -- (.08)
Earnings (loss) per
share of common stock.. 1.58 (.02) (.21) .82
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1993 1993 1993 1993
------------ ------------ -------------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues........ $66,931 $24,060 $13,015 $ 49,319
Operating income (loss)... 10,152 1,634 (127) 8,239
Income (loss) from contin-
uing operations.......... 5,306 (3,068) (4,761) 2,599
Income from discontinued
operations............... 1,012 1,617 2,806 2,474
Net income (loss)......... 6,318 (1,451) (1,955) 5,073
Earnings (loss) per share
of common stock: (a)
Continuing operations... 1.29 (.74) (1.15) .55
Discontinued operations. .24 .39 .68 .44
Earnings (loss) per
share of common stock
(a).................... 1.53 (.35) (.47) .99
</TABLE>
- --------
(a) The total of the earnings per share for the quarters does not equal the
earnings per share for the year, as shown elsewhere in the consolidated
financial statements and supplementary data of this report, as a result of
the Company's issuance of additional shares of common stock at various
dates during the year.
Because of the seasonal nature of PG&W's gas heating business, there are
substantial variations in operations reported on a quarterly basis.
F-24
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
. Long-term debt. The fair value of both the Company's and PG&W's long-
term debt has been estimated based on the quoted market price as of the
respective dates for the portion of such debt which is publicly traded and,
with respect to the portion of such debt which is not publicly traded, on
the estimated borrowing rate as of the respective dates for long-term debt
of comparable credit quality with similar terms and maturities.
. Preferred stock subject to mandatory redemption. The fair value of
PG&W's preferred stock subject to mandatory redemption has been estimated
based on the market value as of the respective dates for preferred stock of
comparable credit quality with similar terms and maturities.
The carrying amounts and estimated fair values of the Company's and PG&W's
financial instruments at December 31, 1994 and 1993, were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-term debt (including current
portion):
Company........................... $49,880 $50,000 $29,853 $30,300
PG&W.............................. 174,035 177,027 156,590 167,803
Preferred stock of PG&W subject to
mandatory redemption (including
current portion)................... 1,840 1,877 31,920 33,087
</TABLE>
The Company believes that the regulatory treatment of any excess or
deficiency of fair value relative to the carrying amounts of these items, if
such items were settled at amounts approximating those above, would dictate
that these amounts be used to increase or reduce PG&W's rates over a
prescribed amortization period. Accordingly, any settlement would not result
in a material impact on PG&W's financial position or the results of operations
of either the Company or PG&W.
F-25
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
------------------------
1995* 1994*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING REVENUES................................... $ 93,421 $ 106,801
Cost of gas......................................... 54,281 64,814
----------- -----------
OPERATING MARGIN..................................... 39,140 41,987
----------- -----------
OTHER OPERATING EXPENSES:
Operation........................................... 11,281 11,304
Maintenance......................................... 2,280 2,194
Depreciation........................................ 3,576 3,340
Income taxes........................................ 3,292 4,962
Taxes other than income taxes....................... 6,535 6,999
----------- -----------
Total other operating expenses...................... 26,964 28,799
----------- -----------
OPERATING INCOME..................................... 12,176 13,188
OTHER INCOME, NET.................................... 412 194
----------- -----------
INCOME BEFORE INTEREST CHARGES....................... 12,588 13,382
----------- -----------
INTEREST CHARGES:
Interest on long-term debt.......................... 6,848 5,903
Other interest...................................... 843 606
Allowance for borrowed funds used during
construction....................................... (22) (10)
----------- -----------
Total interest charges.............................. 7,669 6,499
----------- -----------
INCOME FROM CONTINUING OPERATIONS.................... 4,919 6,883
----------- -----------
DISCONTINUED OPERATIONS (Note 2):
Income from discontinued operations ................ 2,127 4,724
Estimated loss on disposal of discontinued
operations, net of anticipated income during phase-
out period of 6,855,000 (net of related income
taxes of $5,316,000)............................... (5,831) --
----------- -----------
Income (loss) with respect to discontinued
operations......................................... (3,704) 4,724
----------- -----------
INCOME BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS. 1,215 11,607
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS............... 1,383 2,644
----------- -----------
NET INCOME (LOSS).................................... $ (168) $ 8,963
=========== ===========
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations............................... $ .62 $ .78
Discontinued operations............................. (.65) .87
----------- -----------
Net income (loss) before premium on redemption of
subsidiary's preferred stock....................... (.03) 1.65
Premium on redemption of subsidiary's preferred
stock.............................................. -- (.10)
----------- -----------
Earnings (loss) per share of common stock........... $ (.03) $ 1.55
=========== ===========
Weighted average shares outstanding................. 5,695,312 5,420,288
=========== ===========
Cash dividends per share............................ $ 1.10 $ 1.10
=========== ===========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of prior
period consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
(PAGE INTENTIONALLY LEFT BLANK)
F-27
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995* 1994*
----------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT:
At original cost, less acquisition adjustments of
$386,000........................................ $288,071 $284,080
Accumulated depreciation......................... (75,668) (74,408)
----------- -----------
212,403 209,672
----------- -----------
OTHER PROPERTY AND INVESTMENTS..................... 3,989 3,481
----------- -----------
CURRENT ASSETS:
Cash............................................. 368 330
Restricted cash--common stock subscribed (Note
4).............................................. -- 2,532
Accounts receivable--
Customers....................................... 11,341 16,883
Others.......................................... 645 1,474
Reserve for uncollectible accounts.............. (1,339) (937)
Accrued utility revenues......................... 1,390 9,004
Materials and supplies, at average cost.......... 2,758 2,797
Gas held by suppliers, at average cost........... 12,838 20,025
Natural gas transition costs collectible......... 4,342 4,708
Deferred cost of gas and supplier refunds, net... -- 3,767
Prepaid expenses and other....................... 6,265 1,483
----------- -----------
38,608 62,066
----------- -----------
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible...................... 29,942 31,696
Natural gas transition costs collectible........ 1,991 4,099
Other........................................... 2,825 3,131
Unamortized debt expense......................... 3,150 3,539
Other............................................ 3,218 3,552
----------- -----------
41,126 46,017
----------- -----------
NET ASSETS OF DISCONTINUED OPERATIONS.............. 197,713 203,196
----------- -----------
TOTAL ASSETS....................................... $493,839 $524,432
=========== ===========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of prior
period consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995* 1994*
----------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common shareholders' investment (Notes 4 and 5).... $ 168,455 $ 172,012
Preferred stock--
Not subject to mandatory redemption, net.......... 33,615 33,615
Subject to mandatory redemption................... 1,680 1,760
Long-term debt..................................... 157,893 220,705
----------- -----------
361,643 428,092
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt and preferred
stock subject to mandatory redemption............. 36,670 3,290
Note payable to bank............................... 2,000 --
Accounts payable................................... 14,770 17,781
Deferred cost of gas and supplier refunds, net..... 9,056 --
Accrued general business and realty taxes.......... 668 3,315
Accrued income taxes............................... 969 3,136
Accrued interest................................... 3,105 2,850
Accrued natural gas transition costs............... 2,158 2,356
Other.............................................. 2,862 2,398
----------- -----------
72,258 35,126
----------- -----------
DEFERRED CREDITS:
Deferred income taxes.............................. 46,726 46,600
Accrued natural gas transition costs............... 2,170 3,250
Unamortized investment tax credits................. 5,024 5,110
Operating reserves................................. 2,191 2,383
Other.............................................. 3,827 3,871
----------- -----------
59,938 61,214
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES................. $ 493,839 $ 524,432
=========== ===========
</TABLE>
- --------
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-29
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------
1995* 1994*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends............. $ 3,536 $ 4,239
Effects of noncash charges to income--
Depreciation....................................... 3,596 3,353
Deferred income taxes, net......................... (121) 757
Provisions for self insurance...................... 526 735
Other, net......................................... 1,410 1,701
Changes in working capital, exclusive of cash and
current portion of long-term debt--
Receivables and accrued utility revenues........... 16,919 12,644
Gas held by suppliers.............................. 7,187 14,642
Accounts payable................................... (4,176) (4,591)
Deferred cost of gas and supplier refunds, net..... 14,019 5,492
Other current assets and liabilities, net.......... (8,838) (3,094)
Other operating items, net......................... 520 (735)
----------- -----------
Net cash provided by continuing operations......... 34,578 35,143
Net cash provided (used) by discontinued operations
(Note 2)........................................... 3,764 (3,308)
----------- -----------
Net cash provided by operating activities.......... 38,342 31,835
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction)............. (8,304) (7,777)
Other, net.......................................... (246) 35
----------- -----------
Net cash used for investing activities............. (8,550) (7,742)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock............................ 2,876 632
Redemption of preferred stock of PG&W............... (80) (15,080)
Dividends on common stock........................... (6,265) (5,961)
Issuance of long-term debt.......................... 13 20,013
Repayment of long-term debt......................... (210) (1,054)
Net decrease in bank borrowings..................... (26,070) (23,014)
Other, net.......................................... (18) (1,264)
----------- -----------
Net cash used for financing activities............. (29,754) (25,728)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. 38 (1,635)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 330 2,749
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 368 $ 1,114
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)............... $ 13,461 $ 11,586
=========== ===========
Income taxes....................................... $ 8,175 $ 4,369
=========== ===========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of prior
period consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
F-30
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The interim consolidated financial statements included herein for
Pennsylvania Enterprises, Inc. (the "Company") and its subsidiaries:
Pennsylvania Gas and Water Company, Pennsylvania Energy Marketing Company,
Pennsylvania Energy Resources, Inc. and Theta Land Corporation, have been
prepared by the Company without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather on the Company's operating utility, Pennsylvania Gas and Water Company
("PG&W"). However, in the opinion of management, all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the results for
the interim periods have been reflected in the consolidated financial
statements. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K.
(2) DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PG&W signed a definitive agreement (the
"Agreement") with American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, providing for the sale to Pennsylvania-American of
substantially all of the assets, properties and rights of PG&W's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the
assumption of $155 million of PG&W's liabilities, including $141 million of
its long-term debt. This price is subject to adjustment for changes in the
assets of PG&W's water utility operations and the liabilities to be assumed by
Pennsylvania-American between December 31, 1994, and the date of closing,
which currently is expected to take place in December, 1995. Until the
closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result
in an estimated after tax loss of $5 to 8 million, net of the expected income
from the water operations during the phase-out period to the date of closing
(which has been assumed to be December 31, 1995). The sale will involve a gain
for income tax purposes, primarily because of the accelerated depreciation
that has been claimed by PG&W with respect to the water utility plant that is
being sold. It is currently estimated that the income taxes payable on the
sale, for which deferred income taxes have previously been provided, will be
approximately $55 million.
The net cash proceeds from the sale of approximately $201 million, after the
payment of income taxes, will be used by the Company and PG&W to retire debt,
to repurchase stock and for working capital for their continuing operations.
After the sale, the principal assets of the Company and PG&W will consist of
PG&W's gas utility operations and approximately 46,000 acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the Pennsylvania Public Utility Commission ("PPUC"),
approval of the stockholders and certain debt holders of both the Company and
PG&W, termination of the waiting period under federal antitrust laws, and
various other regulatory approvals and certain other conditions.
F-31
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying consolidated financial statements reflect PG&W's water
utility operations as "discontinued operations" effective March 31, 1995.
Interest charges of PG&W have been allocated to the discontinued operations
based on the relationship of the gross water utility plant that is being sold
to the total of PG&W's gross gas and water utility plant. This is the same
method as has been utilized by PG&W and the PPUC in establishing the revenue
requirements of both PG&W's gas and water utility operations. None of the
dividends on PG&W's preferred stock nor any of the Company's interest expense
has been allocated to the discontinued operations.
Selected financial information with respect to the discontinued operations
is set forth below:
NET ASSETS OF DISCONTINUED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1995 1994
----------- -------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Net utility plant............................... $ 364,518 $ 359,399
Current assets (primarily accounts receivable
and accrued revenues).......................... 13,291 12,141
Deferred charges and other assets............... 27,111 31,103
----------- -----------
Total assets being acquired by Pennsylvania-
American....................................... 404,920 402,643
----------- -----------
Liabilities being assumed by Pennsylvania-Ameri-
can
Long-term debt................................ 141,295 141,420
Other......................................... 14,280 13,168
----------- -----------
155,575 154,588
----------- -----------
Net assets being acquired by Pennsylvania-Ameri-
can............................................ 249,345 248,055
Estimated liability for income taxes on sale of
discontinued operations........................ (55,315) (55,542)
Anticipated income from discontinued operations
during balance of phase-out period............. 3,683 --
Other net assets of discontinued operations
(written off as of March 31, 1995)............. -- 10,683
----------- -----------
Total net assets of discontinued operations..... $ 197,713 $ 203,196
=========== ===========
</TABLE>
INCOME FROM DISCONTINUED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
-----------------------
1995* 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Operating revenues.................................. $ 15,640 $ 32,966
----------- -----------
Operating expenses, excluding income taxes
Depreciation...................................... 1,946 3,964
Other operating expenses.......................... 6,929 14,685
----------- -----------
8,875 18,649
----------- -----------
Operating income before income taxes................ 6,765 14,317
Income taxes...................................... 1,403 3,370
----------- -----------
Operating income.................................... 5,362 10,947
Allocated interest and other charges.............. 3,235 6,223
----------- -----------
Income from discontinued operations................. $ 2,127 $ 4,724
=========== ===========
</TABLE>
- --------
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG&W's water utility operations for financial statement
purposes.
F-32
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------
1995* 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Income from discontinued operations............... $ 2,127 $ 4,724
Noncash charges (credits) to income:
Depreciation.................................... 1,946 3,964
Deferred treatment plant costs.................. 145 291
Deferred income taxes........................... 447 2,152
Deferred water utility billings................. -- (2,909)
Changes in working capital, exclusive of cash and
current portion of long-term debt................ 1,648 485
Additions to utility plant........................ (2,276) (8,676)
Utilization of proceeds from issuance of long-term
debt to be assumed by Pennsylvania-American...... 1,137 4,240
Repayment of water facility loans................. (127) (7,279)
Other, net........................................ (1,283) (300)
----------- -----------
Net cash provided (used) by discontinued
operations....................................... $ 3,764 $ (3,308)
=========== ===========
</TABLE>
- --------
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG&W's water utility operations for financial statement
purposes.
(3) RECOVERY OF ORDER 636 TRANSITION COSTS
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that Gas
Transition Costs are subject to recovery through the annual PGC rate filing.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month
period ended January 31, 1995, through an increase in its PGC rate. PG&W will
seek recovery of the remaining $252,000 of Gas Transition Costs in its annual
PGC rate that is effective December 1, 1995.
The PGC Order also indicated that while Non-Gas Transition Costs are not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
such costs are subject to full recovery by local distribution companies
through the filing of a tariff pursuant to either the existing surcharge or
base rate provisions of the Code. By Order of the PPUC entered August 26,
1994, PG&W began recovering the Non-Gas Transition Costs that it estimates it
will ultimately be billed pursuant to FERC Order 636 through the billing of a
surcharge to its customers effective September 12, 1994. It is currently
estimated that $9.4 million of Non-Gas Transition Costs will be billed to
PG&W, generally over a four-year period extending through the fourth quarter
of 1997, of which $5.0 million had been billed to PG&W and $3.0 million had
been recovered from its customers as of June 30, 1995. PG&W has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
(4) RESTRICTED CASH--COMMON STOCK SUBSCRIBED
On July 28, 1994, the Company implemented a Customer Stock Purchase Plan
(the "Customer Plan") which provides the residential customers of PG&W with a
method of purchasing newly-issued shares of the Company's common stock at a 5%
discount from the market price. On January 3, 1995, the Company issued
F-33
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
45,360 shares of its common stock for an aggregate consideration of $1.2
million with respect to payments received pursuant to the Customer Plan during
the December, 1994, subscription period. The payments so received during
December, 1994, are reflected under captions "Restricted cash--common stock
subscribed" and "Common shareholders' investment" in these consolidated
financial statements as of December 31, 1994. Effective May 9, 1995, the
Company suspended the Customer Plan because of the significant reduction in
its capital requirements that will result from the currently-pending sale of
PG&W's water utility operations to Pennsylvania-American.
Through the Company's Dividend Reinvestment and Stock Purchase Plan (the
"DRP"), holders of shares of the Company's common stock may reinvest cash
dividends and/or make cash investments in the common stock of the Company. On
January 3, 1995, the Company issued 51,565 shares of its common stock for an
aggregate consideration of $1.3 million with respect to cash investments made
pursuant to the DRP during the fourth quarter of 1994. The investments so
received during December, 1994, are reflected under the captions "Restricted
cash--common stock subscribed" and "Common shareholders' investment" in these
consolidated financial statements as of December 31, 1994. Effective May 9,
1995, the Company suspended the cash investment feature of the DRP because of
the significant reduction in capital requirements that will result from the
currently-pending sale of PG&W's water utility operations to Pennsylvania-
American.
(5) COMMON STOCK
On April 26, 1995, the Company adopted a Shareholder Rights Plan under the
terms of which each shareholder of record at the close of business on May 16,
1995, received a dividend distribution of one right ("Right" or "Rights") for
each share of common stock held.
Each Right entitles shareholders to purchase from the Company one-half of a
share of common stock. No less than two Rights, and only integral multiples of
two Rights, may be exercised by holders of Rights at an exercise price of $100
per share of common stock (equivalent to $50 for each one-half share of common
stock), subject to certain adjustments. The Rights will become exercisable
only if a person or group acquires 15% or more of the Company's common stock,
or commences a tender or exchange offer which, if consummated, would result in
that person or group owning at least 15% of the common stock. Prior to that
time, the Rights will not trade separately from the common stock.
If a person or group acquires 15% or more of the Company's common stock, all
other holders of Rights will then be entitled to purchase, by payment of the
$100 exercise price upon the exercise of two Rights, the Company's common
stock (or a common stock equivalent) with a value of twice the exercise price.
In addition, at any time after a 15% position is acquired and prior to the
acquisition by any person or group of 50% or more of the outstanding common
stock, the Company's Board of Directors may, at its option, require each
outstanding Right (other than Rights held by the acquiring person or group) to
be exchanged for one share of common stock (or one common stock equivalent).
If, following an acquisition of 15% or more of the Company's common stock,
the Company is acquired by any person in a merger or other business
combination transaction or sells more than 50% of its assets or earning power
to any person (other than the currently-pending sale of PG&W's water utility
operations to Pennsylvania-American or, if such sale is not consummated, any
other sale of PG&W's water utility operations, if and as approved by the
Company's Board of Directors), all other holders of Rights will then be
entitled to purchase, by payment of the $100 exercise price upon the exercise
of two Rights, common stock of the acquiring company with a value of twice the
exercise price.
The Company may redeem the Rights at $.005 per Right at any time prior to
the time that a person or group has acquired 15% or more of its common stock.
The Rights, which expire on May 16, 2005, do not have voting or dividend
rights and, until they become exercisable, have no dilutive effect on the
earnings per share of the Company.
F-34
<PAGE>
(6) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W to survey its gas
distribution system to verify the location and spacing of its gas shut off
valves, to add or repair valves where needed and to establish programs for the
periodic inspection and maintenance of all such valves and the verification of
all gas service line information. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PG&W for complying with the Emergency Order.
PG&W does not believe that compliance with the terms of such Order will have a
material adverse effect on its financial position or results of operations.
Environmental Matters
PG&W, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of
these plants has been in operation since 1960, and several of the plant sites
are no longer owned by PG&W. Pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed
notices with the United States Environmental Protection Agency (the "EPA")
with respect to the former plant sites. None of the sites is or was formerly
on the proposed or final National Priorities List. The EPA has conducted site
inspections and made preliminary assessments of each site and has concluded
that no further remedial action is planned. While this conclusion does not
constitute a legal prohibition against further regulatory action under CERCLA
or other applicable federal or state law, the Company does not believe that
additional costs, if any, related to these manufactured gas plant sites would
be material to its financial position or results of operations since
environmental remediation costs generally are recoverable through rates over a
period of time.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Gas and Water Company:
We have audited the accompanying balance sheets and statements of
capitalization of Pennsylvania Gas and Water Company (the "Company") (a
Pennsylvania corporation and a wholly-owned subsidiary of Pennsylvania
Enterprises, Inc.) as of December 31, 1994 and 1993, and the related
statements of income, common shareholder's investment, and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pennsylvania Gas and Water
Company as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 10, effective January 1, 1993, the Company
changed its method of accounting for income taxes and postretirement benefits
other than pensions pursuant to standards promulgated by the Financial
Accounting Standards Board.
ARTHUR ANDERSEN LLP
New York, N.Y.
April 26, 1995
F-36
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994* 1993* 1992*
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
OPERATING REVENUES............................ $ 167,992 $ 153,325 $ 143,227
Cost of gas................................. 98,653 86,557 77,720
--------- --------- ---------
OPERATING MARGIN.............................. 69,339 66,768 65,507
--------- --------- ---------
OTHER OPERATING EXPENSES:
Operation................................... 22,652 21,797 21,514
Maintenance................................. 4,436 3,695 3,405
Depreciation................................ 6,667 6,388 6,087
Income taxes................................ 5,649 6,041 5,894
Taxes other than income taxes............... 10,807 10,055 9,670
--------- --------- ---------
Total other operating expenses............ 50,211 47,976 46,570
--------- --------- ---------
OPERATING INCOME.............................. 19,128 18,792 18,937
OTHER INCOME (DEDUCTIONS), NET (Note 4)....... 72 (585) (88)
--------- --------- ---------
INCOME BEFORE INTEREST CHARGES................ 19,200 18,207 18,849
--------- --------- ---------
INTEREST CHARGES:
Interest on long-term debt.................. 8,914 8,615 8,140
Other interest.............................. 1,005 1,247 2,751
Allowance for borrowed funds used during
construction............................... (21) (47) (83)
--------- --------- ---------
Total interest charges.................... 9,898 9,815 10,808
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS............. 9,302 8,392 8,041
INCOME FROM DISCONTINUED OPERATIONS
(net of related income taxes of $6,850,000,
$2,948,000 and $2,411,000 respectively)...... 10,504 7,909 4,915
--------- --------- ---------
NET INCOME.................................... 19,806 16,301 12,956
DIVIDENDS ON PREFERRED STOCK.................. 4,639 6,462 5,065
--------- --------- ---------
EARNINGS APPLICABLE TO COMMON STOCK........... $ 15,167 $ 9,839 $ 7,891
========= ========= =========
COMMON STOCK:
Earnings per share of common stock (Note 5):
Continuing operations...................... $ .90 $ .46 $ .76
Discontinued operations.................... 2.02 1.90 1.26
--------- --------- ---------
Income before premium on redemption of pre-
ferred stock.............................. 2.92 2.36 2.02
Premium on redemption of preferred stock... (.19) -- --
--------- --------- ---------
Earnings per share of common stock.......... $ 2.73 $ 2.36 $ 2.02
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING. 5,189,108 4,176,087 3,908,351
========= ========= =========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of financial
statements.
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994* 1993*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT:
At original cost less acquisition adjustments of
$386,000.......................................... $ 284,080 $ 269,819
Accumulated depreciation........................... (74,408) (70,954)
----------- -----------
209,672 198,865
----------- -----------
OTHER PROPERTY AND INVESTMENTS....................... 2,872 3,291
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents.......................... 304 2,714
Accounts receivable--
Customers......................................... 15,676 14,754
Others............................................ 1,474 1,258
Reserve for uncollectible accounts................ (921) (811)
Accrued utility revenues........................... 9,004 11,571
Materials and supplies, at average cost............ 2,743 2,335
Gas held by suppliers, at average cost............. 20,025 26,650
Deferred cost of gas and supplier refunds, net..... 8,475 12,752
Prepaid expenses and other......................... 1,470 1,294
----------- -----------
58,250 72,517
----------- -----------
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible....................... 31,696 31,277
Natural gas transition costs collectible (Note
3).............................................. 4,099 --
Other............................................ 3,131 2,853
Unamortized debt expense........................... 1,867 2,324
Other.............................................. 3,552 3,942
----------- -----------
44,345 40,396
----------- -----------
NET ASSETS OF DISCONTINUED OPERATIONS................ 203,196 193,002
----------- -----------
TOTAL ASSETS......................................... $ 518,335 $ 508,071
=========== ===========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of financial
statements.
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994* 1993*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION (see accompanying statements):
Common shareholders' investment (Notes 5 and 8)...... $ 216,032 $ 188,011
Preferred stock of PG&W (Note 6)--
Not subject to mandatory redemption, net............ 33,615 33,615
Subject to mandatory redemption..................... 1,760 31,840
Long-term debt (Note 7).............................. 170,825 125,535
----------- -----------
422,232 379,001
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt and preferred stock
subject to mandatory redemption (Notes 6, 7 and 9).. 3,290 31,135
Notes payable--
Bank................................................ -- 2,000
Parent.............................................. -- 3,680
Accounts payable--
Suppliers........................................... 16,762 22,401
Affiliates, net..................................... 788 1,888
Accrued general business and realty taxes............ 3,381 2,574
Accrued income taxes................................. 3,185 4,984
Accrued interest..................................... 2,713 2,668
Accrued natural gas transition costs (Note 3)........ 2,356 --
Other................................................ 2,395 1,526
----------- -----------
34,870 72,856
----------- -----------
DEFERRED CREDITS:
Deferred income taxes................................ 46,627 45,448
Accrued natural gas transition costs (Note 3)........ 3,250 --
Unamortized investment tax credits................... 5,110 5,283
Operating reserves................................... 2,383 1,863
Other................................................ 3,863 3,620
----------- -----------
61,233 56,214
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
TOTAL CAPITALIZATION AND LIABILITIES................... $ 518,335 $ 508,071
=========== ===========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of financial
statements.
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994* 1993* 1992*
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations............... $ 9,302 $ 8,392 $ 8,041
Effects of noncash charges to income--
Depreciation................................... 6,693 6,413 6,106
Deferred income taxes, net..................... 725 (2,492) (63)
Provisions for self insurance.................. 1,030 1,510 776
Other, net..................................... 2,755 2,185 2,467
Changes in working capital, exclusive of cash
and current portion of long-term debt--
Receivables and accrued utility revenues....... 1,546 (1,495) (1,486)
Gas held by suppliers.......................... 6,625 (5,038) (1,586)
Accounts payable............................... (5,609) (515) 2,377
Deferred cost of gas and supplier refunds, net. 5,784 (13,307) (11,429)
Other current assets and liabilities, net...... (658) 1,293 2,331
Other operating items, net...................... (4,020) (3,988) (3,558)
-------- -------- --------
Net cash provided (used) by continuing
operations.................................... 24,173 (7,042) 3,976
Net cash provided (used) by discontinued
operations (Note 2)........................... 552 (837) (34,264)
-------- -------- --------
Net cash provided (used) by operating
activities.................................... 24,725 (7,879) (30,288)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant ..................... (16,960) (14,011) (12,391)
Other, net...................................... 1,098 201 595
-------- -------- --------
Net cash used for investing activities......... (15,862) (13,810) (11,796)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock........................ 23,439 32,366 12,905
Issuance of preferred stock..................... -- -- 23,615
Redemption of preferred stock................... (30,080) (10,080) (80)
Dividends on common and preferred stock......... (14,244) (18,398) (14,940)
Issuance of long-term debt...................... 30,000 19,000 30,000
Repayment of long-term debt..................... (31,055) (30,678) (6,664)
(Repayment) issuance of note payable to parent.. (3,680) -- 3,680
Intercompany advance............................ -- -- 15,000
Net increase (decrease) in bank borrowings...... 15,370 32,247 (20,167)
Other, net...................................... (1,023) (624) (1,353)
-------- -------- --------
Net cash provided (used) for financing
activities.................................... (11,273) 23,833 41,996
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (2,410) 2,144 (88)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR... 2,714 570 658
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 304 $ 2,714 $ 570
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)........... $ 21,001 $ 21,092 $ 16,972
======== ======== ========
Income taxes................................... $ 7,353 $ 6,790 $ 3,667
======== ======== ========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of financial
statements.
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994* 1993*
--------------- ---------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
COMMON SHAREHOLDER'S INVESTMENT (Notes 5 and
8):
Common stock, no par value (stated value
$10 per share)
Authorized--15,000,000 shares
Outstanding--5,456,665 shares and
4,868,718 shares, respectively............ $ 54,567 $ 48,687
Additional paid-in capital................. 90,201 72,642
Retained earnings.......................... 71,264 66,682
-------- --------
Total common shareholder's investment..... 216,032 51.2% 188,011 49.6%
-------- --------
PREFERRED STOCK of PG&W, par value $100 per
share Authorized--997,500 shares (Note 6):
Not subject to mandatory redemption, net--
4.10% cumulative preferred, 100,000
shares issued............................ 10,000 10,000
9% cumulative preferred, 250,000 shares
outstanding, net of issuance costs...... 23,615 23,615
-------- --------
Total preferred stock not subject to man-
datory redemption, net................... 33,615 8.0% 33,615 8.9%
-------- --------
Subject to mandatory redemption--
5.75% cumulative preferred, 18,400 and
19,200 shares outstanding, respectively. 1,840 1,920
8.90% cumulative preferred, 150,000
shares outstanding in 1993.............. -- 15,000
9.50% 1988 series cumulative preferred,
150,000 shares outstanding in 1993...... -- 15,000
Less current redemption requirements..... (80) (80)
-------- --------
Total preferred stock subject to mandatory
redemption............................... 1,760 0.4% 31,840 8.4%
-------- --------
LONG-TERM DEBT (Note 7):
First mortgage bonds....................... 108,535 108,745
Notes...................................... 65,500 47,845
Other......................................
Less current maturities and sinking fund
requirements.............................. (3,210) (31,055)
-------- --------
Total long-term debt...................... 170,825 40.4% 125,535 33.1%
-------- ----- -------- -----
TOTAL CAPITALIZATION........................ $422,232 100.0% $379,001 100.0%
======== ===== ======== =====
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of financial
statements.
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ---------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance at December 31, 1991............ $36,957 $39,587 $ 71,134 $147,678
Net income for 1992..................... -- -- 12,956 12,956
Issuance of common stock................ 3,230 9,207 -- 12,437
Loss on sale of preferred stock held in
treasury............................... -- (18) (15) (33)
Dividends on:
Preferred stock (Note 6).............. -- -- (5,065) (5,065)
Common stock ($2.54 per share)........ -- -- (9,875) (9,875)
------- ------- -------- --------
Balance at December 31, 1992............ 40,187 48,776 69,135 158,098
Net income for 1993..................... -- -- 16,301 16,301
Issuance of common stock................ 8,500 23,866 -- 32,366
Premium on redemption of preferred
stock.................................. -- -- (356) (356)
Dividends on:
Preferred stock (Note 6).............. -- -- (6,462) (6,462)
Common stock ($2.8225 per share)...... -- -- (11,936) (11,936)
------- ------- -------- --------
Balance at December 31, 1993............ 48,687 72,642 66,682 188,011
Net income for 1994..................... -- -- 19,806 19,806
Issuance of common stock................ 5,880 17,559 -- 23,439
Premium on redemption of preferred
stock.................................. -- -- (980) (980)
Dividends on:
Preferred stock (Note 6).............. -- -- (4,639) (4,639)
Common stock ($1.81 per share)........ -- -- (9,605) (9,605)
------- ------- -------- --------
Balance at December 31, 1994............ $54,567 $90,201 $ 71,264 $216,032
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pennsylvania Gas and Water Company ("PG&W"), a wholly-owned subsidiary of
Pennsylvania Enterprises, Inc. ("PEI"), is a regulated public utility subject
to the jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for
rate and accounting purposes. The financial statements of PG&W 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.
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll,
administrative and general costs, an allowance for funds used during
construction, and the plant acquisition adjustments. The plant acquisition
adjustments represent the difference between the cost to PG&W of plant
acquired as a system and the cost of such plant when first devoted to public
service.
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 statements of income. 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 7% in 1994, 8% in 1993 and 7% in 1992.
PG&W provides for depreciation on a straight-line basis. Exclusive of
transportation and work equipment, the annual provision for depreciation, as
related to the average depreciable original cost of utility plant, was 2.77%
in 1994, 2.81% in 1993 and 2.77% in 1992, respectively.
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 and Cost of Gas. PG&W bills its customers monthly based on
estimated or actual meter readings on cycles that extend throughout the month.
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.
PG&W generally passes on to its customers increases or decreases in gas
costs from those reflected in its tariff charges. In accordance with this
procedure, PG&W defers any current under or over-recoveries of gas costs and
collects or refunds such amounts in subsequent periods.
Deferred Charges/Regulatory Assets. PG&W 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 PG&W, will be recoverable in
future rates, based on such orders. In addition to deferred taxes collectible
and natural gas transition costs collectible, the following deferred charges
are included as "Other" regulatory assets.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
<S> <C> <C>
Computer software costs....................................... $1,006 $ 325
Early retirement plan charges................................. 756 802
Corrosion control costs....................................... 489 637
Low income usage reduction program............................ 441 494
Other......................................................... 439 595
------ ------
Total....................................................... $3,131 $2,853
====== ======
</TABLE>
F-43
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PG&W also records, as deferred charges, the direct financing costs incurred
in connection with the issuance of long-term debt and redeemable preferred
stock and equitably amortizes such amounts over the life of such securities.
Cash and Cash Equivalents. For the purposes of the statements of cash flows,
PG&W considers all highly liquid debt instruments purchased, which generally
have a maturity of three months or less, to be cash equivalents. Such
instruments are carried at cost, which approximates market value.
Income Taxes. Effective January 1, 1993, PG&W adopted the provisions of FASB
Statement 109, "Accounting for Income Taxes," which superseded previously
issued income tax accounting standards. The adoption of FASB Statement 109 did
not have a significant effect on PG&W's results of operations. In accordance
with the provisions of FASB Statement 109, PG&W recorded as of January 1,
1993, an additional deferred tax liability and an asset, representing the
probable future rate recovery of the previously unrecorded deferred taxes,
primarily relating to certain temporary differences in the basis of utility
plant which had not previously been recorded because of the regulatory rate
practices of the PPUC.
The components of PG&W's net deferred income tax liability as of December
31, 1994 and 1993, are shown below:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility plant basis differences.................... $ 49,638 $ 48,171
FERC Order 636 transition costs.................... 1,371 --
Alternative minimum tax............................ (2,213) (2,176)
Operating reserves................................. (1,020) (816)
Other.............................................. (1,149) 269
----------- -----------
Net deferred income tax liability................ $ 46,627 $ 45,448
=========== ===========
</TABLE>
F-44
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1994 1993 1992
------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Included in operating expenses:
Currently payable--
Federal........................................ $3,013 $ 5,641 $4,129
State.......................................... 1,128 2,021 1,817
------- -------- -------
Total currently payable...................... 4,141 7,662 5,946
------- -------- -------
Deferred, net--
Federal........................................ 1,785 (515) 592
State.......................................... (105) (934) (472)
------- -------- -------
Total deferred, net.......................... 1,680 (1,449) 120
------- -------- -------
Amortization of investment tax credits.......... (172) (172) (172)
------- -------- -------
Total included in operating expenses......... 5,649 6,041 5,894
------- -------- -------
Included in other income, net:
Currently payable--
Federal........................................ 213 (44) (29)
State.......................................... 85 (28) (26)
------- -------- -------
Total currently payable...................... 298 (72) (55)
------- -------- -------
Deferred, net--
Federal........................................ (5) (6) 39
State.......................................... -- -- --
------- -------- -------
Total deferred, net.......................... (5) (6) 39
------- -------- -------
Total included in other income, net.......... 293 (78) (16)
------- -------- -------
Total provision for income taxes............. $5,942 $ 5,963 $5,878
======= ======== =======
</TABLE>
The components of deferred income taxes, which are recorded consistent with
the treatment allowed by the PPUC for ratemaking purposes, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Excess of tax depreciation over depreciation for
accounting purposes............................ $1,197 $ 1,023 $ 913
FERC Order 636 transition costs................. 1,371 -- --
Take-or-pay costs, net.......................... (652) (1,126) (446)
Other, net...................................... (241) (1,352) (308)
------- -------- ------
Total deferred taxes, net................... $1,675 $ (1,455) $ 159
======= ======== ======
Included in:
Operating expenses............................ $1,680 $ (1,449) $ 120
Other income, net............................. (5) (6) 39
------- -------- ------
Total deferred taxes, net................... $1,675 $ (1,455) $ 159
======= ======== ======
</TABLE>
F-45
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total provision for income taxes shown in the accompanying statements 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:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income before income taxes....................... $15,293 $14,428 $14,050
======= ======= =======
Tax expense at statutory federal income tax rate. $ 5,353 $ 5,050 $ 4,777
Increases (reductions) in taxes resulting from--
State income taxes, net of federal income tax
benefit....................................... 879 878 1,065
Amortization of investment tax credits......... (172) (172) (172)
Other, net..................................... (118) 207 208
------- ------- -------
Total provision for income taxes................. $ 5,942 $ 5,963 $ 5,878
======= ======= =======
</TABLE>
(2) DISCONTINUED OPERATIONS
On April 26, 1995, PEI and PG&W signed a definitive agreement (the
"Agreement") with American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, providing for the sale to Pennsylvania-American of
substantially all of the assets, properties and rights of PG&W's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the
assumption of $155 million of PG&W's liabilities, including $141 million of
its long-term debt. This price is subject to adjustment for changes in the
assets of PG&W's water utility operations and the liabilities to be assumed by
Pennsylvania-American between December 31, 1994, and the date of closing,
which currently is expected to take place in December, 1995. Until the
closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result
in an estimated after tax loss of $5 to 8 million, net of the expected income
from the water operations during the phase-out period to the date of closing
(which has been assumed to be December 31, 1995). The sale will involve a gain
for income tax purposes, primarily because of the accelerated depreciation
that has been claimed by PG&W with respect to the water utility plant that is
being sold. It is currently estimated that the income taxes payable on the
sale, for which deferred income taxes have previously been provided, will be
approximately $55 million.
The net cash proceeds from the sale of approximately $201 million, after the
payment of income taxes, will be used by PEI and PG&W to retire debt, to
repurchase stock and for working capital for their continuing operations.
After the sale, the principal assets of PG&W will consist of PG&W's gas
utility operations and approximately 46,000 acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the PPUC, approval of the stockholders and certain debt
holders of both PEI and PG&W, termination of the waiting period under federal
antitrust laws, and various other regulatory approvals and certain other
conditions.
The accompanying financial statements reflect PG&W's water utility
operations as "discontinued operations." Interest charges relating to
indebtedness of PG&W have been allocated to the discontinued
F-46
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
operations based on the relationship of the gross water utility plant that is
being sold to the total of PG&W's gross gas and water utility plant. This is
the same method as has been utilized by PG&W and the PPUC in establishing the
revenue requirements of both PG&W's gas and water utility operations. None of
the dividends on PG&W's preferred stock has been allocated to the discontinued
operations.
Selected financial information with respect to the discontinued operations
as of December 31, 1994 and 1993, and for the years ended December 31, 1994,
1993 and 1992 is set forth below:
NET ASSETS OF DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Net utility plant................................. $ 359,399 $ 348,025
Current assets (primarily accounts receivable and
accrued revenues)................................ 12,141 11,865
Deferred charges and other assets................. 31,103 33,460
----------- -----------
Total assets being acquired by Pennsylvania-Ameri-
can.............................................. 402,643 393,350
----------- -----------
Liabilities being assumed by Pennsylvania-American
Long-term debt.................................. 141,420 148,254
Other........................................... 13,168 12,175
----------- -----------
154,588 160,429
----------- -----------
Net assets being acquired by Pennsylvania-Ameri-
can.............................................. 248,055 232,921
Estimated liability for income taxes on sale of
discontinued operations.......................... (55,542) (49,947)
Other net assets of discontinued operations (writ-
ten off as of March 31, 1995).................... 10,683 10,028
----------- -----------
Total net assets of discontinued operations....... $ 203,196 $ 193,002
=========== ===========
</TABLE>
INCOME FROM DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating revenues............................... $66,731 $53,363 $ 48,651
------- ------- --------
Operating expenses, excluding income taxes
Depreciation................................... 7,672 5,911 4,769
Other operating expenses....................... 29,005 27,140 26,495
------- ------- --------
36,677 33,051 31,264
------- ------- --------
Operating income before income taxes............. 30,054 20,312 17,387
Income taxes................................... 6,850 2,948 2,411
------- ------- --------
Operating income................................. 23,204 17,364 14,976
Other income................................... 49 71 131
Allocated interest charges..................... (12,749) (9,526) (10,192)
------- ------- --------
Income from discontinued operations.............. $10,504 $ 7,909 $ 4,915
======= ======= ========
</TABLE>
F-47
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income from discontinued operations........... $ 10,504 $ 7,909 $ 4,915
Noncash charges (credits) to income:
Depreciation................................ 7,672 5,911 4,774
Deferred treatment plant costs, net......... 581 (3,560) (756)
Deferred income taxes....................... 5,146 4,170 2,111
Deferred water utility billings............. (5,574) (582) (969)
Changes in working capital, exclusive of cash
and current portion of long-term debt........ 353 (2,041) (1,359)
Additions to utility plant.................... (20,980) (32,515) (45,933)
(Receipt) utilization of restricted funds..... 9,753 15,868 (27,994)
Net increase (decrease) in long-term debt..... (6,834) 1,640 29,292
Other, net.................................... (69) 2,363 1,655
-------- -------- --------
Net cash provided (used) for discontinued
operations................................... $ 552 $ (837) $(34,264)
======== ======== ========
</TABLE>
(3) RATE MATTERS
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code, which require that the tariffs of gas distribution
companies, such as PG&W, be adjusted on an annual basis to reflect changes in
their purchased gas costs, the PPUC ordered PG&W to make the following changes
during 1994, 1993 and 1992 to the gas costs contained in its gas tariff rates:
<TABLE>
<CAPTION>
CHANGE IN
RATE PER MCF CALCULATED
------------- INCREASE (DECREASE)
EFFECTIVE DATE FROM TO IN ANNUAL REVENUE
-------------- ------------- -------------------
<S> <C> <C> <C>
December 1, 1994.......................... $ 3.74 $ 3.68 $(1,800,000)
December 1, 1993.......................... 2.79 3.74 28,800,000
December 1, 1992.......................... 2.46 2.79 9,500,000
</TABLE>
The annual changes in gas rates on account of purchased gas costs have no
effect on PG&W's earnings since the change in revenue is offset by a
corresponding change in the cost of gas.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that Gas
Transition Costs are subject to recovery through the annual PGC rate filing.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month
period ended January 31, 1995, through an increase in its PGC rate. PG&W will
seek recovery of the remaining $252,000 of Gas Transition Costs in its annual
PGC rate that is effective December 1, 1995.
This PGC Order also indicated that while Non-Gas Transition Costs are not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
such costs are subject to full recovery by local distribution companies
through the filing of a tariff pursuant to either the existing surcharge or
base rate provisions of the
F-48
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Pennsylvania Public Utility Code. By Order of the PPUC entered August 26,
1994, PG&W began recovering the Non-Gas Transition Costs that it estimates it
will ultimately be billed pursuant to FERC Order 636 through the billing of a
surcharge to its customers effective September 12, 1994. It is currently
estimated that $9.4 million of Non-Gas Transition Costs will be billed to
PG&W, generally over a four-year period extending through the fourth quarter
of 1997, of which $4.5 million had been billed to PG&W and $2.4 million had
been recovered from its customers as of March 31, 1995. PG&W has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
(4) OTHER INCOME (DEDUCTIONS), NET
Other income (deductions), net was comprised of the following elements:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Gain on sale of investment in joint venture, net
of related income taxes........................ $ 268 $ -- $ --
Gain on sale of land and other property, net of
related income taxes........................... 165 20 102
Amortization of preferred stock issuance costs,
net of related income tax benefits............. (227) (126) (66)
Premium on retirement/defeasance of debt........ (40) (81) (127)
Net interest expense with respect to proceeds
from the issuance of debt held in a
construction fund.............................. (91) (330) (10)
Other........................................... (3) (68) 13
------- ------- -------
Total......................................... $ 72 $ (585) $ (88)
======= ======= =======
</TABLE>
(5) COMMON STOCK
Since January 1, 1992, PG&W has issued the following amounts of common stock
to PEI, its parent company, in addition to shares issued in connection with
PEI's Dividend Reinvestment and Stock Purchase Plan and Customer Stock
Purchase Plan:
<TABLE>
<CAPTION>
ISSUANCE PRICE
------------------------
DATE ISSUED NUMBER OF SHARES PER SHARE* AGGREGATE
----------- ---------------- ---------- -------------
<S> <C> <C> <C>
March 23, 1992..................... 171,779 $40.75 $ 7.0 million
June 19, 1992...................... 137,143 $40.25 $ 5.5
October 27, 1993................... 834,000 $38.25 $31.9
May 31, 1994....................... 500,000 $40.00 $20.0
--------- -------------
Total............................ 1,642,922 $64.4 million
========= =============
</TABLE>
- --------
* Approximately equal to the book value of PG&W's common stock at the date of
issuance.
The proceeds from the shares issued on June 19, 1992, and October 27, 1993,
were used to repay bank borrowings which had been incurred primarily to
finance construction expenditures. The shares issued on March 23, 1992,
represented capitalization of the $7.0 million contribution made by PEI to
PG&W on January 30, 1992, which had been temporarily treated as an
intercompany advance pending approval by the PPUC of the issuance of shares of
common stock relative to such contribution. Upon its receipt, the $7.0 million
contribution was utilized to repay bank borrowings incurred primarily to
finance construction expenditures. The proceeds from the shares issued on May
31, 1994, were used by PG&W to redeem $15.0 million of its 9.50% 1988 series
cumulative preferred stock, to fund the $534,375 premium in connection with
such redemption, to repay a portion of its bank borrowings and for working
capital purposes.
F-49
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the
"Customer Plan") which provides the residential customers of PG&W with a
method of purchasing newly-issued shares of PEI common stock at a 5% discount
from the market price. PEI uses proceeds from the issuance of shares through
the Customer Plan to purchase common stock of PG&W. During 1994, PG&W realized
$1.7 million from the issuance of common stock to PEI in connection with the
Customer Plan. Additionally, on January 3, 1995, PG&W realized $1.2 million
from the issuance of common stock to PEI in connection with the Customer Plan.
Through PEI's Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders
of shares of PEI common stock may reinvest cash dividends and/or make cash
investments in the common stock of PEI. The DRP was amended on May 5, 1994, to
provide PEI's shareholders with a method of reinvesting cash dividends and
making cash investments to purchase newly-issued shares of PEI's common stock
at a 5% discount from the market price. Prior to such amendment, cash
dividends were reinvested at 100% of the market price in newly-issued shares
and cash investments were used to purchase shares of PEI common stock on the
open market. PEI uses the proceeds from the DRP to purchase common stock of
PG&W. During 1994, 1993 and 1992, PG&W realized $1.8 million, $465,000 and
$385,000, respectively, from the issuance of common stock to PEI in connection
with the DRP. Additionally, on January 3, 1995, PG&W realized $1.3 million
from the issuance of common stock to PEI in connection with the DRP.
(6) PREFERRED STOCK
Preferred Stock of PG&W Subject to Mandatory Redemption
On December 23, 1993, PG&W redeemed 100,000 shares of its 9.50% 1988 series
cumulative preferred stock at a price of $103.5625 per share (plus accrued
dividends to the redemption date), which included a voluntary redemption
premium of $3.5625 per share ($356,250 in the aggregate). On May 31, 1994,
PG&W redeemed the remaining 150,000 outstanding shares of its 9.50% 1988
series cumulative preferred stock, $100 par value, at a price of $103.5625 per
share, which included a voluntary redemption premium of $3.5625 per share
($534,375 in the aggregate), plus accrued dividends.
On December 16, 1994, PG&W redeemed all 150,000 shares of its 8.90%
cumulative preferred stock at a price of $102.97 per share, which included a
voluntary redemption premium of $2.97 per share ($445,500 in the aggregate).
The holders of the 5.75% cumulative preferred stock have a noncumulative
right each year to tender to PG&W and to require it to purchase at a per share
price not exceeding $100, up to (a) that number of shares of the 5.75%
cumulative preferred stock which can be acquired for an aggregate purchase
price of $80,000 less (b) the number of such shares which PG&W may already
have purchased during the year at a per share price of not more than $100.
Eight hundred such shares were acquired and cancelled by PG&W in each of the
three years in the period ended December 31, 1994, for an aggregate purchase
price in each year of $80,000.
As of December 31, 1994, the sinking fund requirements relative to PG&W's
5.75% cumulative preferred stock (the only series of preferred stock subject
to mandatory redemption that was outstanding as of such date) were $80,000 for
each of the years 1995 through 1999.
At PG&W's option, the 5.75% cumulative preferred stock may currently be
redeemed at a price of $102.00 per share ($1,876,800 in the aggregate).
Preferred Stock of PG&W Not Subject to Mandatory Redemption
On August 18, 1992, PG&W issued 250,000 shares of its 9% cumulative
preferred stock, par value $100 per share, for aggregate net proceeds of
approximately $23.6 million. The 9% cumulative preferred stock is not
F-50
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
redeemable by PG&W prior to September 15, 1997. Thereafter, it is redeemable
at the option of PG&W, in whole or in part, upon not less than 30 days'
notice, at $100 per share plus accrued dividends to the date of redemption and
at a premium of $8 per share if redeemed from September 15, 1997, to September
14, 1998, and a premium of $4 per share if redeemed from September 15, 1998,
to September 14, 1999.
At PG&W's option, the 4.10% cumulative preferred stock may currently be
redeemed at a redemption price of $105.50 per share or for an aggregate
redemption price of $10,550,000.
Dividend Information
The dividends on the preferred stock of PG&W in each of the three years in
the period ended December 31, 1994, were as follows:
<TABLE>
<CAPTION>
SERIES 1994 1993 1992
------ ------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
4.10%................................................ $ 410 $ 410 $ 409
5.75%................................................ 108 113 117
8.90%................................................ 1,280 1,335 1,335
9.00%................................................ 2,250 2,250 829
9.50% 1988 series.................................... 591 2,354 2,375
------- ------- -------
Total................................................ $ 4,639 $ 6,462 $ 5,065
======= ======= =======
</TABLE>
Dividends on all series of PG&W's preferred stock are cumulative, and if
dividends in an amount equivalent to four full quarterly dividends on all
shares of preferred stock then outstanding are in default and until all such
dividends have been paid, the holders of the preferred stock, voting
separately as one class, shall be entitled to elect a majority of the Board of
Directors of PG&W. Additionally, PG&W may not declare dividends on its common
stock if any dividends on shares of preferred stock then outstanding are in
default.
(7) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1994
and 1993:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
First mortgage bonds--
8 % Series, due 1997......................... $ 3,535 $ 3,745
8.375% Series, due 2002......................... 30,000 30,000
9.23 % Series, due 1999......................... 10,000 10,000
9.34 % Series, due 2019......................... 15,000 15,000
9.57 % Series, due 1996......................... 50,000 50,000
----------- -----------
108,535 108,745
----------- -----------
Notes--
1%, due 1994 (Small Business Administration).... -- 845
Bank borrowings, at weighted average interest
rates of 5.28% and 4.31%, respectively (Note
9)............................................. 65,500 47,000
----------- -----------
65,500 47,845
----------- -----------
Less current maturities and sinking fund
requirements..................................... (3,210) (31,055)
----------- -----------
Total long-term debt of PG&W.................... $ 170,825 $ 125,535
=========== ===========
</TABLE>
F-51
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Maturities and Sinking Fund Requirements. As of December 31, 1994, the
aggregate annual maturities and sinking fund requirements of long-term debt
for each of the next five years ending December 31, were:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
1995.................................................... $ 3,210,000
1996.................................................... $112,710,000(a)
1997.................................................... $ 3,115,000
1998.................................................... $ --
1999.................................................... $ 10,000,000
</TABLE>
--------
(a) Includes $62.5 million of bank borrowings outstanding as of
December 31, 1994, due May 31, 1996, and the 9.57% Series
First Mortgage Bonds in the principal amount of $50.0 million
due September 1, 1996.
(8) DIVIDEND RESTRICTIONS
The preferred stock provisions of PG&W's Restated Articles of Incorporation
and certain of the agreements under which PG&W has issued long-term debt
provide for certain dividend restrictions. As of December 31, 1994,
$37,357,000 of the retained earnings of PG&W were restricted against the
payment of cash dividends on common stock under the most restrictive of these
covenants.
(9) BANK NOTES PAYABLE
PG&W has entered into a revolving bank credit agreement (the "Credit
Agreement") with a group of six banks under the terms of which $60.0 million
is available for borrowing by PG&W. The Credit Agreement terminates on May 31,
1996, at which time any borrowings outstanding thereunder are due and payable.
The interest rate on borrowings under the Credit Agreement is generally less
than prime. The Credit Agreement also requires the payment of a commitment fee
of .195% per annum on the average daily amount of the unused portion of the
available funds. As of April 26, 1995, $29.0 million of borrowings were
outstanding under the Credit Agreement. PG&W currently has three additional
bank lines of credit with an aggregate borrowing capacity of $7.5 million
which provide for borrowings at interest rates generally less than prime.
Borrowings outstanding under two of these bank lines of credit with borrowing
capacities of $2.0 million and $3.0 million mature on May 31, 1995, and June
30, 1995, respectively. Borrowings outstanding under the third bank line of
credit with a borrowing capacity of $2.5 million mature on May 31, 1996. As of
April 26, 1995, PG&W had $5.2 million of borrowings outstanding under these
additional bank lines of credit. The commitment fees paid by PG&W with respect
to its revolving bank credit agreements totaled $97,000 in 1994, $113,000 in
1993 and $152,000 in 1992.
Because of limitations imposed by the terms of PG&W's preferred stock, PG&W
is prohibited, without the consent of the holders of a majority of the
outstanding shares of its preferred stock, from issuing more than $12.0
million of unsecured debt due on demand or within one year from issuance. PG&W
had no unsecured debt due on demand or within one year from issuance
outstanding as of December 31, 1994.
F-52
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Information relating to PG&W's bank lines of credit and borrowings under
those lines of credit is set forth below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Borrowings under lines of credit
Short-term...................................... $ -- $ 2,000 $ --
Long-term....................................... 65,500 47,000 17,000
------- ------- -------
$65,500 $49,000 $17,000
======= ======= =======
Unused lines of credit
Short-term...................................... $ -- $ 5,000 $ --
Long-term....................................... 2,000 13,000 28,000
------- ------- -------
$ 2,000 $18,000 $28,000
======= ======= =======
Total lines of credit
Prime rate...................................... $ -- $ 2,000 $45,000
Other than prime rate........................... 67,500 65,000 --
------- ------- -------
$67,500 $67,000 $45,000
======= ======= =======
Short-term bank borrowings (a)
Maximum amount outstanding...................... $ 5,692 $ 5,666 $ --
Daily average amount outstanding................ $ 441 $ 637 $ --
Weighted daily average interest rate............ 3.984% 4.046% --
Weighted average interest rate at year-end...... -- 4.208% --
Range of interest rates......................... 3.700- 3.750- --
6.000% 6.000% --
</TABLE>
- --------
(a) PG&W did not incur any short-term bank borrowings during the year ended
December 31, 1992, and had no short-term bank borrowings outstanding as of
December 31, 1992, or December 31, 1994.
(10) POSTEMPLOYMENT BENEFITS
Pension Benefits
Substantially all employees of PG&W are covered by PEI's trusteed,
noncontributory, defined benefit pension plan. Pension benefits are based on
years of service and average final salary. PG&W'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.
Under the terms of the Agreement regarding the sale of PG&W's water
operations, Pennsylvania-American will assume the accumulated benefit
obligations relating to employees of PG&W who accept employment with
Pennsylvania-American (the "Transferred Employees") and plan assets in an
amount equal to the actuarial present value of accumulated plan benefits
relative to the Transferred Employees will be transferred to the American
pension plan. Since the Transferred Employees have not yet been specifically
identified, it is not currently possible to calculate either the accumulated
benefit obligations or the amount of plan assets relating to the discontinued
operations. PG&W will recognize both a settlement gain and a gain on
curtailment of the pension plan, which are currently estimated to total $3.2
million ($1.9 million net of related income taxes), primarily because of the
elimination of projected salary increases relative to the Transferred
Employees.
F-53
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net pension costs, including amounts capitalized and related to discontinued
operations, were $562,000, $443,000 and $333,000 in 1994, 1993 and 1992,
respectively. The following items were the components of such net pension
costs:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Present value of benefits earned during the
year........................................... $ 999 $ 854 $ 789
Interest cost on projected benefit obligations.. 2,545 2,402 2,262
Return on plan assets........................... 973 (3,127) (2,646)
Net amortization and deferral................... (101) (97) (93)
Deferral of investment (loss) gain.............. (3,854) 411 21
------- ------- -------
Net pension cost.............................. $ 562 $ 443 $ 333
======= ======= =======
</TABLE>
The funded status of the plan as of December 31, 1994 and 1993, was as
follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of the projected benefit
obligations:
Accumulated benefit obligations
Vested.......................................... $ 21,592 $ 24,265
Nonvested....................................... 77 125
----------- -----------
Total......................................... 21,669 24,390
Provision for future salary increases............ 7,565 9,769
----------- -----------
Projected benefit obligations.................... 29,234 34,159
Market value of plan assets, primarily invested in
equities and bonds............................... 30,457 32,471
----------- -----------
Plan assets in excess of (less than) projected
benefit obligations.............................. 1,223 (1,688)
Unrecognized net transition asset as of January 1,
1986, being amortized over 20 years.............. (2,528) (2,758)
Unrecognized prior service costs.................. 2,150 2,279
Unrecognized net (gain) loss...................... (1,644) 1,710
----------- -----------
Accrued pension cost at year-end.................. $ (799) $ (457)
=========== ===========
</TABLE>
The discount rate used to determine the actuarial present value of the
projected benefit obligations was 8 3/4% in 1994 and 8% in both 1993 and 1992.
An expected long-term rate of return on plan assets of 9% and a 5 1/2%
projected increase in future compensation levels were assumed in determining
the net pension cost for 1994, 1993 and 1992.
Other Postretirement Benefits
In addition to pension benefits, PG&W provides certain health care and life
insurance benefits for retired employees. Substantially all of PG&W's
employees may become eligible for those benefits if they reach retirement age
while working for PG&W. Prior to January 1, 1993, the cost of retiree health
care and life insurance, which totaled $870,000 in 1992, was expensed as the
premiums were paid under insurance contracts.
Effective January 1, 1993, PG&W adopted the provisions of FASB Statement
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The provisions of FASB Statement 106 require that PG&W record 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, as was
PG&W's prior practice.
F-54
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Agreement regarding the sale of PG&W's water utility
operations, Pennsylvania-American will assume the accumulated benefit
obligation relating to employees of PG&W who accept employment with
Pennsylvania-American (the "Transferred Employees") and also certain retired
employees, and the plan assets will be transferred to trusts established by
Pennsylvania-American since such assets relate solely to the discontinued
operations. Because the Transferred Employees and retirees for whom
Pennsylvania-American will assume the obligation for postretirement benefits
other than pensions have not yet been specifically identified, it is not
currently possible to calculate the accumulated benefit obligation relative to
the discontinued operations. However, PG&W does not expect to recognize either
a gain or a loss relative to the transfer of such obligations.
The following items were the components of the net cost of postretirement
benefits other than pensions for the years 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Present value of benefits earned during the year.. $ 269 $ 226
Interest cost on accumulated benefit obligation... 967 967
Return on plan assets............................. (6) --
Net amortization and deferral..................... 654 617
----------- -----------
Net cost of postretirement benefits other than
pensions......................................... 1,884 1,810
Less disbursements for benefits................... (987) (983)
----------- -----------
Increase in liability for postretirement benefits
other than pensions.............................. $ 897 $ 827
=========== ===========
</TABLE>
Reconciliations of the accumulated benefit obligation to the accrued
liability for postretirement benefits other than pensions as of December 31,
1994 and 1993, follow:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Accumulated benefit obligation:
Retirees........................................ $ 9,021 $ 10,149
Fully eligible active employees................. 1,628 1,735
Other active employees.......................... 1,305 1,222
----------- -----------
11,954 13,106
Plan assets at fair value......................... 839 --
----------- -----------
Accumulated benefit obligation in excess of plan
assets........................................... 11,115 13,106
Unrecognized transition obligation being amortized
over 20 years.................................... (11,108) (11,725)
Unrecognized net gain (loss)...................... 885 (554)
----------- -----------
Accrued liability for postretirement benefits
other than pensions.............................. $ 892 $ 827
=========== ===========
</TABLE>
The assumptions used to calculate the costs to be accrued by PG&W under FASB
Statement 106 included discount rates of 8 3/4% and 8% in 1994 and 1993,
respectively, and a 5 1/2% projected annual increase in future compensation
levels. It was also assumed that the per capita cost of covered health care
benefits would increase at an annual rate of 10 1/2% in 1994 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
transition obligation as of January 1, 1994, by approximately $778,000 and the
aggregate of the service and interest cost components of the net cost of
postretirement benefits other than pensions for the year 1994 by approximately
$64,000.
F-55
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Because PG&W has not sought to increase its base gas rates since January 1,
1993, it has not recorded a regulatory asset relative to the costs incurred
pursuant to FASB Statement 106. The $447,000 ($256,000 net of related income
taxes) and $407,000 ($232,000 net of related income taxes) of additional cost
incurred in 1994 and 1993, respectively, as a result of the adoption of the
provisions of FASB Statement 106 were expensed without any adjustment in its
gas rates.
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. PG&W
consistently recorded liabilities for benefits of this nature prior to the
effectiveness of FASB Statement 112 and, as a result, the provisions of FASB
Statement 112, which PG&W adopted effective January 1, 1994, did not have a
material impact on its financial position or results of operations.
(11) CONSTRUCTION EXPENDITURES
PG&W estimates the cost of its 1995 construction program will be $24.8
million. It is anticipated that such expenditures will be financed with
internally generated funds and bank borrowings, pending the periodic issuance
of stock and long-term debt.
(12) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W to survey its gas
distribution system to verify the location and spacing of its gas shut off
valves, to add or repair valves where needed and to establish programs for the
periodic inspection and maintenance of all such valves and the verification of
all gas service line information. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PG&W for complying with the Emergency Order.
PG&W does not believe that compliance with the terms of such Order will have a
material adverse effect on its financial position or results of operations.
Environmental Matters
PG&W, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of
these plants has been in operation since 1960, and several of the plant sites
are no longer owned by PG&W. Pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed
notices with the United States Environmental Protection Agency (the "EPA")
with respect to the former plant sites. None of the sites is or was formerly
on the proposed or final National Priorities List. The EPA has conducted site
inspections and made preliminary assessments of each site and has concluded
that no further remedial action is planned. While this conclusion does not
constitute a legal prohibition against further regulatory action under CERCLA
or other applicable federal or state law, PG&W does not believe that
additional costs, if any, related to these manufactured gas plant sites would
be material to its financial position or results of operations since
environmental remediation costs generally are recoverable through rates over a
period of time.
F-56
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
------------ ------------ -------------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues...... $ 80,233 $ 26,568 $ 14,356 $ 46,835
Operating income........ 10,606 1,916 180 6,426
Income (loss) from con-
tinuing operations..... 6,958 (1,793) (3,505) 3,003
Income from discontinued
operations............. 2,079 2,675 2,985 2,765
Net income (loss)....... 9,037 882 (520) 5,768
Earnings (loss) per
share of common stock:
Continuing operations. 1.43 (.36) (.65) .55
Discontinued opera-
tions................ .43 .53 .55 .51
Net income (loss) be-
fore premium on re-
demption of preferred
stock................ 1.86 .17 (.10) 1.06
Premium on redemption
of preferred stock... -- (.11) -- (.08)
Earnings (loss) per
share of common
stock................ 1.86 .06 (.10) .98
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1993 1993 1993 1993
------------ ------------ -------------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues...... $ 66,931 $ 24,060 $ 13,015 $ 49,319
Operating income (loss). 10,038 1,517 (245) 7,482
Income (loss) from con-
tinuing operations..... 5,815 (2,654) (4,312) 3,081
Income from discontinued
operations............. 1,012 1,617 2,806 2,474
Net income (loss)....... 6,827 (1,037) (1,506) 5,555
Earnings (loss) per
share of common stock:
(a)
Continuing operations. 1.45 (.66) (.33) .67
Discontinued opera-
tions................ .25 .40 .70 .53
Earnings (loss) per
share of common stock
(a).................. 1.70 (.26) .37 1.20
</TABLE>
- --------
(a) The total of the earnings per share for the quarters does not equal the
earnings per share for the year, as shown elsewhere in the financial
statements and supplementary data of this report, as a result of PG&W's
issuance of additional shares of common stock at various dates during the
year.
Because of the seasonal nature of PG&W's gas heating business, there are
substantial variations in operations reported on a quarterly basis.
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
. Long-term debt. The fair value of PG&W's long-term debt has been
estimated based on the quoted market price as of the respective dates for
the portion of such debt which is publicly traded and, with respect to the
portion of such debt which is not publicly traded, on the estimated
borrowing rate as of the respective dates for long-term debt of comparable
credit quality with similar terms and maturities.
. Preferred stock subject to mandatory redemption. The fair value of
PG&W's preferred stock subject to mandatory redemption has been estimated
based on the market value as of the respective dates for preferred stock of
comparable credit quality with similar terms and maturities.
F-57
<PAGE>
The carrying amounts and estimated fair values of PG&W's financial
instruments at December 31, 1994 and 1993, were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-term debt (including current
portion)........................... $174,035 $177,027 $156,590 $167,803
Preferred stock subject to mandatory
redemption (including current
portion)........................... 1,840 1,877 31,920 33,087
</TABLE>
PG&W believes that the regulatory treatment of any excess or deficiency of
fair value relative to the carrying amounts of these items, if such items were
settled at amounts approximating those above, would dictate that these amounts
be used to increase or reduce PG&W's rates over a prescribed amortization
period. Accordingly, any settlement would not result in a material impact on
PG&W's financial position or the results of operations of either PEI or PG&W.
F-58
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1995* 1994*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING REVENUES................................... $ 93,421 $ 106,801
Cost of gas........................................ 54,281 64,814
----------- -----------
OPERATING MARGIN..................................... 39,140 41,987
----------- -----------
OTHER OPERATING EXPENSES:
Operation.......................................... 11,281 11,304
Maintenance........................................ 2,280 2,194
Depreciation....................................... 3,576 3,340
Income taxes....................................... 4,101 5,551
Taxes other than income taxes...................... 6,535 6,999
----------- -----------
Total other operating expenses................... 27,773 29,388
----------- -----------
OPERATING INCOME..................................... 11,367 12,599
OTHER INCOME (DEDUCTIONS), NET....................... 172 81
----------- -----------
INCOME BEFORE INTEREST CHARGES....................... 11,539 12,680
----------- -----------
INTEREST CHARGES:
Interest on long-term debt......................... 4,659 4,300
Other interest..................................... 687 551
Allowance for borrowed funds used during
construction...................................... (22) (10)
----------- -----------
Total interest charges........................... 5,324 4,841
----------- -----------
INCOME FROM CONTINUING OPERATIONS.................... 6,215 7,839
----------- -----------
DISCONTINUED OPERATIONS (Note 2):
Income from discontinued operations................ 2,127 4,724
Estimated loss on disposal of discontinued
operations, net of anticipated income during
phase-out period of $6,855,000 (net of related
income taxes of $5,316,000)....................... (5,831) --
----------- -----------
Income (loss) with respect to discontinued
operations........................................ (3,704) 4,724
----------- -----------
NET INCOME........................................... 2,511 12,563
DIVIDENDS ON PREFERRED STOCK......................... 1,383 2,644
----------- -----------
EARNINGS APPLICABLE TO COMMON STOCK.................. $ 1,128 $ 9,919
=========== ===========
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations............................. $ .87 $ 1.05
Discontinued operations........................... (.67) .95
----------- -----------
Net income before premium on redemption of
preferred stock................................... .20 2.00
Premium on redemption of preferred stock........... -- (.11)
----------- -----------
Total.............................................. $ .20 $ 1.89
=========== ===========
Weighted average shares outstanding................ 5,548,741 4,957,277
=========== ===========
Cash dividends per share........................... $ 1.4125 $ .705
=========== ===========
</TABLE>
- --------
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
F-59
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995* 1994*
----------- ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT:
At original cost, less acquisition adjustments of
$386,000........................................... $ 288,071 $ 284,080
Accumulated depreciation............................ (75,668) (74,408)
--------- ---------
212,403 209,672
--------- ---------
OTHER PROPERTY AND INVESTMENTS........................ 3,289 2,872
--------- ---------
CURRENT ASSETS:
Cash................................................ 234 304
Accounts receivable--
Customers.......................................... 10,787 15,676
Others............................................. 645 1,474
Reserve for uncollectible accounts................. (1,322) (921)
Accrued utility revenues............................ 1,390 9,004
Materials and supplies, at average cost............. 2,713 2,743
Gas held by suppliers, at average cost.............. 12,838 20,025
Natural gas transition costs collectible............ 4,342 4,708
Deferred cost of gas and supplier refunds, net...... -- 3,767
Prepaid expenses and other.......................... 6,232 1,470
--------- ---------
37,859 58,250
--------- ---------
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible......................... 29,942 31,696
Natural gas transition costs collectible........... 1,991 4,099
Other.............................................. 2,825 3,131
Unamortized debt expense............................ 1,669 1,867
Other............................................... 3,218 3,552
--------- ---------
39,645 44,345
--------- ---------
NET ASSETS OF DISCONTINUED OPERATIONS................. 197,713 203,196
--------- ---------
TOTAL ASSETS.......................................... $ 490,909 $ 518,335
========= =========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
F-60
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995* 1994*
----------- ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common shareholder's investment..................... $214,369 $216,032
Preferred stock--
Not subject to mandatory redemption, net........... 33,615 33,615
Subject to mandatory redemption.................... 1,680 1,760
Long-term debt...................................... 108,000 170,825
-------- --------
357,664 422,232
-------- --------
CURRENT LIABILITIES:
Current portion of long-term debt and preferred
stock subject to mandatory redemption.............. 36,670 3,290
Note payable to bank................................ 2,000 --
Accounts payable--
Suppliers.......................................... 14,483 16,762
Affiliates, net.................................... 1,541 788
Deferred cost of gas and supplier refunds, net...... 9,056 --
Accrued general business and realty taxes........... 779 3,381
Accrued income taxes................................ 946 3,185
Accrued interest.................................... 2,974 2,713
Accrued natural gas transition costs................ 2,158 2,356
Other............................................... 2,860 2,395
-------- --------
73,467 34,870
-------- --------
DEFERRED CREDITS:
Deferred income taxes............................... 46,747 46,627
Accrued natural gas transition costs................ 2,170 3,250
Unamortized investment tax credits.................. 5,024 5,110
Operating reserves.................................. 2,191 2,383
Other............................................... 3,646 3,863
-------- --------
59,778 61,233
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL CAPITALIZATION AND LIABILITIES.................. $490,909 $518,335
======== ========
</TABLE>
- --------
* See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1995* 1994*
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations.................. $ 6,215 $ 7,839
Effects of noncash charges to income--
Depreciation..................................... 3,596 3,353
Deferred income taxes, net....................... (127) 744
Provisions for self insurance.................... 526 735
Other, net....................................... 1,219 1,572
Changes in working capital, exclusive of cash and
current portion of long-term debt--Receivables and
accrued utility revenues.......................... 13,733 12,137
Gas held by suppliers............................ 7,187 14,642
Accounts payable................................. (2,691) (4,165)
Deferred cost of gas and supplier refunds, net... 14,019 5,492
Other current assets and liabilities, net........ (8,847) (2,998)
Other operating items, net......................... 438 (827)
----------- -----------
Net cash provided by continuing operations..... 35,268 38,524
Net cash provided (used) by discontinued operations
(Note 2).......................................... 3,764 (3,308)
----------- -----------
Net cash provided by operating activities...... 39,032 35,216
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction)............ (8,304) (7,777)
Other, net......................................... (246) 35
----------- -----------
Net cash used for investing activities......... (8,550) (7,742)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock........................... 5,046 20,390
Redemption of preferred stock...................... (80) (15,080)
Dividends on common and preferred stock............ (9,220) (6,255)
Repayment of long-term debt........................ (210) (1,054)
Repayment of note payable to parent................ -- (3,680)
Net decrease in bank borrowings.................... (26,070) (23,014)
Other, net......................................... (18) (540)
----------- -----------
Net cash used for financing activities......... (30,552) (29,233)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............ (70) (1,759)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 304 2,714
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 234 $ 955
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 11,266 $ 10,031
=========== ===========
Income taxes..................................... $ 8,143 $ 4,314
=========== ===========
</TABLE>
- --------
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements included herein have been prepared by
Pennsylvania Gas and Water Company ("PG&W"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although PG&W
believes that the disclosures are adequate to make the information presented
not misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather. However, in the opinion of management, all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the results for
the interim periods have been reflected in the financial statements. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in PG&W's latest annual
report on Form 10-K.
(2) DISCONTINUED OPERATIONS
On April 26, 1995, Pennsylvania Enterprises, Inc. ("PEI"), the parent
company of PG&W, and PG&W signed a definitive agreement (the "Agreement") with
American Water Works Company, Inc. ("American") and Pennsylvania-American
Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of
American, providing for the sale to Pennsylvania-American of substantially all
of the assets, properties and rights of PG&W's water utility operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the
assumption of $155 million of PG&W's liabilities, including $141 million of
its long-term debt. This price is subject to adjustment for changes in the
assets of PG&W's water utility operations and the liabilities to be assumed by
Pennsylvania-American between December 31, 1994, and the date of closing,
which currently is expected to take place in December, 1995. Until the
closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result
in an estimated after tax loss of $5 to 8 million, net of the expected income
from the water operations during the phase-out period to the date of closing
(which has been assumed to be December 31, 1995). The sale will involve a gain
for income tax purposes, primarily because of the accelerated depreciation
that has been claimed by PG&W with respect to the water utility plant that is
being sold. It is currently estimated that the income taxes payable on the
sale, for which deferred income taxes have previously been provided, will be
approximately $55 million.
The net cash proceeds from the sale of approximately $201 million, after the
payment of income taxes, will be used by PEI and PG&W to retire debt, to
repurchase stock and for working capital for their continuing operations.
After the sale, the principal assets of PG&W will consist of its gas utility
operations and approximately 46,000 acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the Pennsylvania Public Utility Commission ("PPUC"),
approval of the stockholders and certain debt holders of both PEI and PG&W,
termination of the waiting period under federal antitrust laws, and various
other regulatory approvals and certain other conditions.
The accompanying financial statements reflect PG&W's water utility
operations as "discontinued operations" effective March 31, 1995. Interest
charges have been allocated to the discontinued operations based
F-63
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
on the relationship of the gross water utility plant that is being sold to the
total of PG&W's gross gas and water utility plant. This is the same method as
has been utilized by PG&W and the PPUC in establishing the revenue
requirements of both PG&W's gas and water utility operations. None of the
dividends on PG&W's preferred stock has been allocated to the discontinued
operations.
Selected financial information with respect to the discontinued operations
is set forth below:
NET ASSETS OF DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Net utility plant.................................. $364,518 $359,399
Current assets (primarily accounts receivable and
accrued revenues)................................. 13,291 12,141
Deferred charges and other assets.................. 27,111 31,103
-------- --------
Total assets being acquired by Pennsylvania-Ameri-
can............................................... 404,920 402,643
-------- --------
Liabilities being assumed by Pennsylvania-American
Long-term debt................................... 141,295 141,420
Other............................................ 14,280 13,168
-------- --------
155,575 154,588
-------- --------
Net assets being acquired by Pennsylvania-American. 249,345 248,055
Estimated liability for income taxes on sale of
discontinued operations........................... (55,315) (55,542)
Anticipated income from discontinued operations
during balance of phase-out period................ 3,683 --
Other net assets of discontinued operations (writ-
ten off as of March 31, 1995)..................... -- 10,683
-------- --------
Total net assets of discontinued operations........ $197,713 $203,196
======== ========
INCOME FROM DISCONTINUED OPERATIONS (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1995* 1994
----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Operating revenues................................. $ 15,640 $ 32,966
-------- --------
Operating expenses, excluding income taxes
Depreciation..................................... 1,946 3,964
Other operating expenses......................... 6,929 14,685
-------- --------
8,875 18,649
-------- --------
Operating income before income taxes............... 6,765 14,317
Income taxes..................................... 1,403 3,370
-------- --------
Operating income................................... 5,362 10,947
Allocated interest and other charges............. 3,235 6,223
-------- --------
Income from discontinued operations................ $ 2,127 $ 4,724
======== ========
</TABLE>
- --------
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG&W's water utility operations for financial statement
purposes.
F-64
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------
1995* 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Income from discontinued operations............... $ 2,127 $ 4,724
Noncash charges (credits) to income:
Depreciation.................................... 1,946 3,964
Deferred treatment plant costs.................. 145 291
Deferred income taxes........................... 447 2,152
Deferred water utility billings................. -- (2,909)
Changes in working capital, exclusive of cash and
current portion of long-term debt................ 1,648 485
Additions to utility plant........................ (2,276) (8,676)
Utilization of proceeds from issuance of long-term
debt to be assumed by Pennsylvania-American...... 1,137 4,240
Repayment of water facility loans................. (127) (7,279)
Other, net........................................ (1,283) (300)
----------- -----------
Net cash provided (used) by discontinued
operations....................................... $ 3,764 $ (3,308)
=========== ===========
</TABLE>
- --------
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG&W's water utility operations for financial statement
purposes.
(3) RECOVERY OF ORDER 636 TRANSITION COSTS
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that Gas
Transition Costs are subject to recovery through the annual PGC rate filing.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month
period ended January 31, 1995, through an increase in its PGC rate. PG&W will
seek recovery of the remaining $252,000 of Gas Transition Costs in its annual
PGC rate that is effective December 1, 1995.
The PGC Order also indicated that while Non-Gas Transition Costs are not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
such costs are subject to full recovery by local distribution companies
through the filing of a tariff pursuant to either the existing surcharge or
base rate provisions of the Pennsylvania Public Utility Code. By Order of the
PPUC entered August 26, 1994, PG&W began recovering the Non-Gas Transition
Costs that it estimates it will ultimately be billed pursuant to FERC Order
636 through the billing of a surcharge to its customers effective September
12, 1994. It is currently estimated that $9.4 million of Non-Gas Transition
Costs will be billed to PG&W, generally over a four-year period extending
through the fourth quarter of 1997, of which $5.0 million had been billed to
PG&W and $3.0 million had been recovered from its customers as of June 30,
1995. PG&W has recorded the estimated Non-Gas Transition Costs that remain to
be billed to it and the amounts remaining to be recovered from its customers.
(4) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W to survey its gas
distribution system to verify the location and
F-65
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
spacing of its gas shut off valves, to add or repair valves where needed and
to establish programs for the periodic inspection and maintenance of all such
valves and the verification of all gas service line information. On March 31,
1995, the PPUC adopted an Order approving a plan submitted by PG&W for
complying with the Emergency Order. PG&W does not believe that compliance with
the terms of the Order will have a material adverse effect on its financial
position or results of operations.
Environmental Matters
PG&W, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of
these plants has been in operation since 1960, and several of the plant sites
are no longer owned by PG&W. Pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed
notices with the United States Environmental Protection Agency (the "EPA")
with respect to the former plant sites. None of the sites is or was formerly
on the proposed or final National Priorities List. The EPA has conducted site
inspections and made preliminary assessments of each site and has concluded
that no further remedial action is planned. While this conclusion does not
constitute a legal prohibition against further regulatory action under CERCLA
or other applicable federal or state law, PG&W does not believe that
additional costs, if any, related to these manufactured gas plant sites would
be material to its financial position or results of operations since
environmental remediation costs generally are recoverable through rates over a
period of time.
F-66
<PAGE>
ANNEX A
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
AMONG
PENNSYLVANIA ENTERPRISES, INC.,
PENNSYLVANIA GAS AND WATER COMPANY,
AMERICAN WATER WORKS COMPANY, INC.,
AND
PENNSYLVANIA-AMERICAN WATER COMPANY
DATED AS OF
APRIL 26, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1 DEFINITIONS..................................................... A-1
1.1 Certain Definitions................................................ A-1
ARTICLE 2 THE TRANSACTION................................................. A-7
2.1 Sale and Purchase of Assets........................................ A-7
2.2 Excluded Assets.................................................... A-7
2.3 Assumption of Certain Liabilities.................................. A-8
2.4 Consent of Third Parties........................................... A-10
2.5 Closing............................................................ A-10
2.6 Purchase Price..................................................... A-10
2.7 Deliveries and Proceedings at Closing.............................. A-12
2.8 Allocation of Consideration........................................ A-13
2.9 Prorations......................................................... A-13
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER........................ A-14
3.1 Qualification; No Interest in Other Entities....................... A-14
3.2 Authorization and Enforceability................................... A-14
3.3 No Violation of Laws or Agreements................................. A-14
3.4 Financial Statements............................................... A-15
3.5 No Changes......................................................... A-15
3.6 Contracts.......................................................... A-16
3.7 Permits and Compliance With Laws Generally......................... A-16
3.8 Environmental Matters.............................................. A-16
3.9 Consents........................................................... A-18
3.10 Title.............................................................. A-18
3.11 Real Estate........................................................ A-18
3.12 Taxes.............................................................. A-19
3.13 Patents and Intellectual Property Rights........................... A-19
3.14 Accounts Receivable................................................ A-19
3.15 Labor Relations.................................................... A-19
3.16 Employee Benefit Plans............................................. A-19
3.17 Absence of Undisclosed Liabilities................................. A-20
3.18 No Pending Litigation or Proceedings............................... A-21
3.19 Supply of Utilities................................................ A-21
3.20 Insurance.......................................................... A-21
3.21 Relationship with Customers........................................ A-21
3.22 WARN Act........................................................... A-21
3.23 Condition of Assets................................................ A-21
3.24 Brokerage.......................................................... A-22
3.25 All Assets......................................................... A-22
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER......................... A-22
4.1 Organization and Good Standing..................................... A-22
4.2 Authorization and Enforceability................................... A-22
4.3 No Violation of Laws or Agreements................................. A-22
4.4 Consents........................................................... A-23
4.5 Financing.......................................................... A-23
4.6 Brokerage.......................................................... A-23
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 5 ADDITIONAL COVENANTS............................................ A-23
5.1 Conduct of Business................................................ A-23
5.2 Negotiations....................................................... A-24
5.3 Disclosure Schedules............................................... A-24
5.4 Mutual Covenants................................................... A-25
5.5 Filings and Authorizations......................................... A-25
5.6 Public Announcement................................................ A-26
5.7 Further Assurances................................................. A-26
5.8 Cooperation........................................................ A-26
5.9 Employees; Employee Benefits....................................... A-27
5.10 Employee Pension Plan.............................................. A-29
5.11 Employee Savings Plan.............................................. A-30
5.12 Post-Retirement Health Care and Life Insurance..................... A-30
5.13 Taxes.............................................................. A-31
5.14 Survey............................................................. A-31
5.15 PEI Guarantees..................................................... A-31
5.16 Assumption of Seller Debt.......................................... A-32
5.17 Schedule of Permits................................................ A-32
5.18 Title Information.................................................. A-32
5.19 Transaction with Related Parties................................... A-32
5.20 Approval by PEI.................................................... A-32
5.21 Supplemental Information........................................... A-32
5.22 Non-Competition.................................................... A-33
5.23 Insurance.......................................................... A-33
ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION............................... A-33
6.1 Conditions Precedent to Obligations of Buyer and Parent............ A-33
6.2 Conditions Precedent to Obligations of Seller Parties.............. A-34
6.3 Termination........................................................ A-36
6.4 Termination Payments............................................... A-36
ARTICLE 7 CERTAIN ADDITIONAL COVENANTS.................................... A-37
7.1 Certain Taxes and Expenses......................................... A-37
7.2 Maintenance of Books and Records................................... A-37
7.3 Survival........................................................... A-37
7.4 Indemnification.................................................... A-39
7.5 UCC Matters........................................................ A-41
7.6 Financial Statements............................................... A-41
7.7 Collection of Receivables.......................................... A-42
ARTICLE 8 MISCELLANEOUS................................................... A-42
8.1 Construction....................................................... A-42
8.2 Notices............................................................ A-42
8.3 Successors and Assigns............................................. A-43
8.4 Exhibits and Schedules............................................. A-43
8.5 Governing Law...................................................... A-43
8.6 Consent to Jurisdiction............................................ A-43
8.7 Severability....................................................... A-43
8.8 No Third Party Beneficiaries....................................... A-44
8.9 Entire Agreement................................................... A-44
8.10 Amendment and Waiver............................................... A-44
8.11 Counterparts....................................................... A-44
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
8.12 Headings........................................................... A-44
8.13 Definitions........................................................ A-44
8.14 No Implied Representation.......................................... A-44
8.15 Construction of Certain Provisions................................. A-44
8.16 Bulk Sales......................................................... A-45
</TABLE>
iii
<PAGE>
ASSET PURCHASE AGREEMENT
THIS IS AN ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of April 26,
1995, by and among Pennsylvania Enterprises, Inc., a Pennsylvania corporation
("PEI"), Pennsylvania Gas and Water Company, a Pennsylvania corporation
("Seller"), American Water Works Company, Inc., a Delaware corporation
("Parent") and Pennsylvania-American Water Company, a Pennsylvania corporation
("Buyer").
BACKGROUND
A. PEI is a holding company which owns all the outstanding common stock, no
par value, stated value $10.00 per share, of Seller. Seller is a public
utility engaged, among other things, in the business of storing, supplying,
distributing and selling water to the public in certain areas in northeastern
Pennsylvania which business is regulated by the Pennsylvania Public Utility
Commission (the "Business"). Seller and PEI are sometimes hereinafter referred
to as the "Seller Parties."
B. Parent is a holding company which owns all of the outstanding common
stock, par value $5.50 per share, of Buyer. Buyer desires to purchase
substantially all of the assets, properties and rights of the Business, and
Seller desires to sell, and to cause the sale of, such assets, properties and
rights on the terms and subject to the conditions set forth in this Agreement.
TERMS
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE 1
Definitions
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the respective meanings ascribed to them in this Section:
1.1.1 "Acquired Assets" means, subject to Section 2.2, all of Seller's
right, title, and interest in, under and to all of the assets, properties and
rights exclusively used in the Business as a going concern of every kind,
nature and description existing on the Closing Date, wherever such assets,
properties and rights are located and whether such assets, properties and
rights are real, personal or mixed, tangible or intangible, and whether or not
any of such assets, properties and rights have any value for accounting
purposes or are carried or reflected on or specifically referred to in
Seller's books or financial statements, including all of the assets,
properties and rights exclusively relating to the Business enumerated below:
(a) all real property described in Schedule 1.1.1(a), together with all
fixtures, fittings, buildings, structures and other improvements erected
thereon, and easements, rights of way, water lines, rights of use,
licenses, hereditaments, tenements, privileges and other appurtenances
thereto or otherwise exclusively related to the Business (such as
appurtenant rights in and to public streets) (the "Real Estate");
(b) to the extent not included in clause (a) above, all water tanks,
reservoirs, water works, plant and systems, purification and filtration
systems, pumping stations, pumps, wells, mains, water pipes, hydrants,
equipment, machinery, vehicles, tools, dies, spare parts, materials, water
supplies, fixtures and improvements, construction in progress, jigs, molds,
patterns, gauges and production fixtures and other tangible personal
property, in transit or otherwise, used exclusively in the Business (the
"Equipment and Other Tangible Personal Property");
(c) notwithstanding the provisions of Section 2.2 but subject to Section
2.4, all of Seller's water appropriation and flowage rights referenced in
the Order of Confirmation dated May 11, 1949 from the Pennsylvania Water
and Power Resources Board other than the water appropriation and flowage
rights
A-1
<PAGE>
relating to the reservoirs listed on Schedule 2.2; provided, however, that
Buyer shall have the right to the water in the Schedule 2.2 reservoirs in
the event of emergency or drought);
(d) all accounts receivable from customers, accrued utility revenues,
materials and supplies (at average cost net of reserve for obsolescence)
and prepayments attributable in each case exclusively to the Business;
(e) all unamortized debt expense (related to the Assumed Indebtedness),
deferred treatment plant costs and carrying costs, deferred water utility
billings and other deferred charges (excluding deferred taxes collectable)
attributable exclusively to the Business of which recovery in future rates
is probable;
(f) Intellectual Property and goodwill, licenses and sublicenses granted
and obtained with respect thereto;
(g) subject to Section 2.4 hereof, (i) contracts, commitments, agreements
and instruments relating to the sale of any assets, services, properties,
materials or products, including all customer contracts, operating
contracts and distribution contracts relating exclusively to the conduct of
the Business; (ii) orders, contracts, supply agreements and other
agreements relating exclusively to the purchase of any assets, services,
properties, materials, or products for the Business; (iii) all leases of
Real Estate exclusively related to the Business; (iv) all other contracts,
agreements and instruments related exclusively to the Business; and (v) any
such contracts, agreements and other instruments referred to in clauses
(i)-(iv) inclusive, entered into between the date hereof and the Closing
Date which are consistent with the terms of this Agreement and are entered
into in the ordinary course of business consistent with past practice, and
including in the case of clauses (i)-(iv) all such contracts, agreements
and instruments more specifically listed or described in Schedule 3.6, but
specifically excluding the Collective Bargaining Agreements (whether or not
listed on Schedule 3.6) (the "Contracts");
(h) subject to Section 2.4 hereof, franchises, approvals, permits,
authorizations, licenses, orders, registrations, certificates, variances,
and other similar permits or rights obtained from any Authority relating
exclusively to the conduct of the Business and all pending applications
therefor (the "Permits");
(i) books, records, ledgers, files, documents (including originally
executed copies of written Contracts, to the extent available, and copies
to the extent not available), correspondence, Tax returns relating
exclusively to the Business, memoranda, forms, lists, plats, architectural
plans, drawings, and specifications, new product development materials,
creative materials, advertising and promotional materials, studies,
reports, sales and purchase correspondence, books of account and records
relating to the Transferred Employees (to the extent such transfer is not
prohibited by law), photographs, records of plant operations and materials
used, quality control records and procedures, equipment maintenance
records, manuals and warranty information, research and development files,
data and laboratory books, inspection processes, in each case, whether in
hard copy or magnetic format, in each instance, to the extent exclusively
relating to the Business, the Acquired Assets or the Transferred Employees;
(j) all rights or choses in action arising out of occurrences before or
after the Closing Date and exclusively related to any of the Acquired
Assets, including third party warranties and guarantees and all related
claims, credits, rights of recovery and set-off and other similar
contractual rights, as to third parties held by or in favor of Seller or
PEI; provided, however, that (notwithstanding the foregoing provisions of
this Section 1.1.1(j)), to the extent that Seller pays or discharges a
liability related to the Business or any of the Acquired Assets and related
to such right or chose in action (whether by reason of indemnification
under this Agreement or otherwise), Buyer will reassign or reconvey to
Seller such right or chose in action to the extent that such right or chose
in action relates to a recovery of amounts paid to Buyer;
(k) all rights to insurance and condemnation proceeds (i) to the extent
relating to the damage, destruction, taking or other impairment of the
Acquired Assets which damage, destruction, taking or other impairment
occurs on or prior to the Closing but only to the extent that the proceeds
exceed the amount of the write-down of the net book value of such Acquired
Assets on the books and records of Seller as a result of such damage,
destruction, taking or other impairment, and (ii) to the extent they relate
to amounts paid by Buyer for Damages to the extent Buyer does not receive
payment pursuant to Section 7.4.1(a); and
A-2
<PAGE>
(l) the Benefit Plan assets transferred to a trust established under an
employee benefit plan maintained by Buyer in accordance with Sections 5.10,
5.11 and 5.12. Notwithstanding the foregoing, the Acquired Assets shall
also include all of Seller's right, title, and interest in and to the
Common Plant Assets described in Schedule 1.1.1(b).
1.1.2 "Adjusted Net Assets" has the meaning set forth in Section 2.6.4(a)
hereof.
1.1.3 "Affected Participant" has the meaning set forth in Sections 5.10.1
and 5.11.1 hereof.
1.1.4 "Affiliate" of any Person means any Person, directly or indirectly
controlling, controlled by or under common control with such Person.
1.1.5 "Agreement" has the meaning set forth in the introduction hereof.
1.1.6 "American Pension Plan" has the meaning set forth in Section 5.10.1
hereof.
1.1.7 "American Savings Plan" has the meaning set forth in Section 5.11.1
hereof.
1.1.8 "Antitrust Division" has the meaning set forth in Section 5.5 hereof.
1.1.9 "Assumed Benefit Plan" has the meaning set forth in Section 3.16.6
hereof.
1.1.10 "Assumed Indebtedness" means the liabilities and obligations from and
after the Closing Date (except as set forth below) with respect to (i) Luzerne
County Exempt Facilities Revenue Refunding Bonds 1992 Series A including,
without limitation, the Seller's obligations under the Amended and Restated
Project Facilities Agreement dated as of September 1, 1992 between Seller and
the Luzerne County Industrial Development Authority (the "IDA"), (ii) Luzerne
County Exempt Facilities Revenue Bonds 1992 Series B including, without
limitation, the Seller's obligations under the Project Facilities Agreement
dated as of December 1, 1992 between Seller and the IDA, (iii) Luzerne County
Exempt Facilities Revenue Refunding Bonds 1993 Series A including, without
limitation, the Seller's obligations under the Second Amended and Restated
Project Facilities Agreement dated as of December 1, 1993 between Seller and
the IDA, (iv) Luzerne County Exempt Facilities Revenue Refunding Bonds 1994
Series A including, without limitation, the Seller's obligations under the
Amended and Restated Project Facilities Agreement dated as of November 1, 1994
between Seller and the IDA, (v) Loan Agreement dated October 16, 1987 between
Seller and the Pennsylvania Water Facilities Loan Board, (vi) two Loan
Agreements dated March 3, 1989 between Seller and the Pennsylvania
Infrastructure Investment Authority ("PENNVEST"), (vii) three Loan Agreements
dated December 3, 1992 between Seller and PENNVEST. For purposes of clarity,
except as set forth in the next sentence below, "Assumed Indebtedness" shall
not include any liability or obligation to the extent accrued prior to the
Closing Date or to the extent arising out of or relates to an event,
circumstance or occurrence prior to the Closing Date. "Assumed Indebtedness"
shall include the outstanding principal amount and the accrued but unpaid
interest owed by Seller on the debt obligations set forth in the first
sentence of this definition.
1.1.11 "Assumed Liabilities" has the meaning set forth in Section 2.3
hereof.
1.1.12 "Assumption Agreement" has the meaning set forth in Section 2.3.2
hereof.
1.1.13 "Authority" means any federal, state, local or foreign governmental
or regulatory entity (or any department, agency, authority or political
subdivision thereof).
1.1.14 "Base Cash Purchase Price" has the meaning set forth in Section 2.6.1
hereof.
1.1.15 "Beneficiary" means the Person(s) designated by an Employee, by
operation of law or otherwise, as entitled to compensation, benefits,
insurance coverage, payments or any other goods or services under a Benefit
Plan.
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1.1.16 "Benefit Plans" has the meaning set forth in Section 3.16.1 hereof.
1.1.17 "Business" has the meaning set forth in the Background section
hereof.
1.1.18 "Business Day" means any day other than a Saturday, Sunday, or a day
on which banking institutions in the Commonwealth of Pennsylvania are
authorized or obligated by law or executive order to close.
1.1.19 "Buyer" has the meaning set forth in the introduction hereof.
1.1.20 "Buyer's Accountants" means Price Waterhouse LLP or any firm of
independent public accountants hereafter designated by Buyer for purposes of
this Agreement.
1.1.21 "Buyer's Adjusted Amount" has the meaning set forth in Section
2.6.4(a) hereof.
1.1.22 "Ceiling" has the meaning set forth in Section 7.4.2(e) hereof.
1.1.23 "CERCLA" has the meaning set forth in Section 3.8.2 hereof.
1.1.24 "CERCLIS" has the meaning set forth in Section 3.8.7 hereof.
1.1.25 "Closing" has the meaning set forth in Section 2.5 hereof.
1.1.26 "Closing Date" has the meaning set forth in Section 2.5 hereof.
1.1.27 "Closing Statement of Net Assets" has the meaning set forth in
Section 2.6.4(a) hereof.
1.1.28 "Code" means the Internal Revenue Code of 1986, as amended.
1.1.29 "Collective Bargaining Agreements" means the agreements identified as
such on Schedule 3.6 hereto.
1.1.30 "Common Plant Assets" means the assets set forth on Schedule
1.1.1(b).
1.1.31 "Competing Transaction" has the meaning set forth in Section 5.2.
1.1.32 "Contracts" has the meaning set forth in Section 1.1.1(g) hereof.
1.1.33 "Control" with respect to any Person means the ownership, directly or
indirectly, of at least a majority of the voting power of each class of
capital stock of such Person entitled to vote in the election of directors of
such Person generally.
1.1.34 "Damages" has the meaning set forth in Section 7.4.1(c) hereof.
1.1.35 "DER" means the Pennsylvania Department of Environmental Resources.
1.1.36 "Disclosure Schedules" means the Schedules referenced in Articles 3,
4 and 5 of this Agreement, as amended or supplemented pursuant to Section 5.3.
1.1.37 "Employees" has the meaning set forth in Section 5.9.1 hereof.
1.1.38 "Environmental Laws" has the meaning set forth in Section 3.8 hereof.
1.1.39 "Equipment and Other Tangible Personal Property" has the meaning set
forth in Section 1.1.1(b) hereof.
1.1.40 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
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1.1.41 "ERISA Affiliate" means (a) any corporation included with any of the
Seller Parties in a controlled group of corporations within the meaning of
Section 414(b) of the Code; (b) any trade or business (whether or not
incorporated) which is under common control with any of the Seller Parties
within the meaning of Section 414(c) of the Code; (c) any member of an
affiliated service group of which any of the Seller Parties is a member within
the meaning of Section 414(m) of the Code; or (d) any other person or entity
treated as an affiliate of any of the Seller Parties under Section 414(o) of
the Code.
1.1.42 "Excluded Assets" has the meaning set forth in Section 2.2 hereof.
1.1.43 "Excluded Real Estate" means the real property of Seller other than
the real property described on Schedule 1.1.1(a).
1.1.44 "Financial Statements" has the meaning set forth in Section 3.4
hereof.
1.1.45 "FIRPTA Affidavit" has the meaning set forth in Section 2.7.1 hereof.
1.1.46 "Former Employees" means all salaried and hourly employees once
employed by Seller or any of its Affiliates, but who are no longer so employed
on the Closing Date.
1.1.47 "FTC" has the meaning set forth in Section 5.5 hereof.
1.1.48 "GAAP" has the meaning set forth in Section 3.4 hereof.
1.1.49 "Hazardous Substance" has the meaning set forth in Section 3.8
hereof.
1.1.50 "HSR Act" has the meaning set forth in Section 3.9 hereof.
1.1.51 "IDA" shall mean the Luzerne County Industrial Development Authority.
1.1.52 "IDA Financings" shall mean the indebtedness described in clauses (i)
through (iv) of the definition of Assumed Indebtedness.
1.1.53 "Indemnified Party" has the meaning set forth in Section 7.4.2(a)
hereof.
1.1.54 "Indemnifying Party" has the meaning set forth in Section 7.4.2(a)
hereof.
1.1.55 "Intellectual Property" means the trademarks, patents, trade names
and copyrights and applications therefor, inventions, trade secrets, and
confidential business information (including know-how, formulas, water
filtration, purification and pumping processes and techniques, technical data,
designs, drawings, customer and supplier lists, and business and marketing
plans and proposals), all computer software (including data and related
documentation and object and source codes), whether in magnetic format or hard
copy, and tangible embodiments thereof (in whatever form or medium) of Seller,
in each case, utilized exclusively in the Business.
1.1.56 "Interim Statement of Net Assets" means the statement of net assets
for the Business at December 31, 1994.
1.1.57 "Interim Statement of Net Assets Date" means December 31, 1994.
1.1.58 "IRS" has the meaning set forth in Section 3.16.2 hereof.
1.1.59 "Lien" means any lien, charge, claim, pledge, security interest,
conditional sale agreement or other title retention agreement, lease,
mortgage, security agreement, right of first refusal, option, restriction,
tenancy, license, right of way, easement or other encumbrance (including the
filing of, or agreement to give, any financing statement under the Uniform
Commercial Code or statute or law of any jurisdiction).
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1.1.60 "Material Adverse Effect" means a change or effect (or series of
related changes or effects) which has or is reasonably likely to have a
material adverse change in or effect upon the business, assets, condition
(financial or otherwise), or results of operations of the Business or the
Acquired Assets, taken as a whole.
1.1.61 "Mortgage Indenture" has the meaning set forth in Section 6.1.4
hereof.
1.1.62 "On-site Conditions" has the meaning set forth in Section 2.3.1(d).
1.1.63 "Operating Easement" has the meaning set forth in Section 6.1.7(a)
hereof.
1.1.64 "OSHA" has the meaning set forth in Section 3.7.1 hereof.
1.1.65 "PCBs" has the meaning set forth in Section 3.8.6 hereof.
1.1.66 "PEI" has the meaning set forth in the introduction hereof.
1.1.67 "PEI Pension Plan" has the meaning set forth in Section 5.10.1
hereof.
1.1.68 "PEI Savings Plan" has the meaning set forth in Section 5.11.1
hereof.
1.1.69 "Permits" has the meaning set forth in Section 1.1.1(h) hereof.
1.1.70 "Permitted Exceptions" has the meaning set forth in Section 3.10
hereof; provided, however, that from and after the Closing Permitted
Exceptions shall not include any Lien arising under or resulting from the
Mortgage Indenture.
1.1.71 "Person" means an individual, a corporation, a partnership, an
association, an Authority, a trust or other entity or organization.
1.1.72 "PPUC" has the meaning set forth in Section 5.5 hereof.
1.1.73 "Prime Rate" means the rate per annum announced from time to time
during the reference period by Citibank N.A. as its United States prime,
reference or base rate for commercial loans.
1.1.74 "Purchase Price" has the meaning set forth in Section 2.6.1 hereof.
1.1.75 "Real Estate" has the meaning set forth in Section 1.1.1(a) hereof.
1.1.76 "Recovery" has the meaning set forth in Section 7.4.2(l) hereof.
1.1.77 "Release" or "Released" has the meaning set forth in Section 3.8
hereof.
1.1.78 "Remedial Action" has the meaning set forth in Section 3.8 hereof.
1.1.79 "Retained Liabilities" has the meaning set forth in Section 2.3
hereof.
1.1.80 "Review Period" has the meaning set forth in Section 2.6.4(b) hereof.
1.1.81 "SEC" has the meaning set forth in Section 5.8.3.
1.1.82 "Securities Filings" has the meaning set forth in Section 5.8.2
hereof.
1.1.83 "Seller" has the meaning set forth in the introduction hereof.
1.1.84 "Seller's Accountants" means Arthur Andersen LLP or any other firm of
independent public accountants hereafter designated by Seller for purposes of
this Agreement.
1.1.85 "Specified Liabilities" has the meaning set forth in Section 7.4.2(f)
hereof.
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1.1.86 "Survey" has the meaning set forth in Section 5.14.1 hereof.
1.1.87 "Taxes" means any federal, state, local and foreign income, payroll,
withholding, excise, sales, use, personal property, use and occupancy,
business and occupation, mercantile, real estate, gross receipts, license,
employment, severance, stamp, premium, windfall profits, social security (or
similar unemployment), disability, transfer, registration, value added,
alternative, or add-on minimum, estimated, or capital stock and franchise and
other tax of any kind whatsoever, including any interest, penalty or addition
thereto, whether disputed or not.
1.1.88 "Third Accounting Firm" has the meaning set forth in Section 2.6.4(b)
hereof.
1.1.89 "Threshold Amount" has the meaning set forth in Section 7.4.2(e)
hereof.
1.1.90 "Third Party Claim" has the meaning set forth in Section 7.4(b)(i)
hereof.
1.1.91 "Transferred Accounts" has the meaning set forth in Section 5.11.2
hereof.
1.1.92 "Transaction Documents" has the meaning set forth in Section 3.2
hereof.
1.1.93 "Transferred Employees" has the meaning set forth in Section 5.9.2
hereof.
1.1.94 "Union Employees" has the meaning set forth in Section 5.9.1 hereof.
1.1.95 "Utility Code" has the meaning set forth in Section 5.5 hereof.
1.1.96 "VEBAs" has the meaning set forth in Section 5.12 hereof.
1.1.97 "WARN Act" means the Worker Adjustment and Retraining Notification
Act, as codified at 29 U.S.C. (S)(S) 2102-2109, as amended.
ARTICLE 2
The Transaction
2.1 Sale and Purchase of Assets. Subject to the terms and conditions of this
Agreement, at the Closing referred to in Section 2.5 below, PEI shall cause
Seller to sell, assign, transfer, deliver and convey to Buyer and Parent shall
cause Buyer to purchase the Acquired Assets for the Purchase Price specified
in Section 2.6.
2.2 Excluded Assets. The following assets of Seller shall be excluded from
the Acquired Assets (the "Excluded Assets"):
2.2.1 assets of the Seller used in both the Business and in Seller's gas
business other than those described on Schedule 1.1.1(b);
2.2.2 cash and cash equivalents in transit, in hand or in bank accounts;
2.2.3 except as otherwise set forth herein, assets attributable or related
to any Benefit Plan;
2.2.4 subject to Buyer's rights under clause (c) of the definition of
Acquired Assets, the Excluded Real Estate;
2.2.5 the stock record and minute books of Seller;
2.2.6 Acquired Assets disposed of by Seller after the date of this Agreement
to the extent such dispositions are not prohibited by this Agreement;
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2.2.7 except to the extent set forth in Sections 2.9 and 7.1, rights to
refunds of Taxes payable with respect to the business, assets, properties or
operations of any of the Seller Parties or any member of any affiliated group
of which any of them is a member, and which are treated as Retained
Liabilities under Section 2.3.3(b) below;
2.2.8 security and other deposits held in Seller's accounts;
2.2.9 accounts owing by and among Seller and its Affiliates;
2.2.10 notes receivable and other receivables (other than accounts
receivable from customers attributable exclusively to the Business);
2.2.11 all deferred tax assets or collectibles;
2.2.12 subject to Buyer's rights under clause (c) of the definition of
Acquired Assets, the reservoirs listed on Schedule 2.2 hereto; and
2.2.13 duplicate copies of all books and records transferred to Buyer.
2.3 Assumption of Certain Liabilities.
2.3.1 Buyer shall not assume any liabilities of PEI or Seller or any of
their Affiliates, except that Buyer shall assume the following specific
liabilities and obligations:
(a) the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11
and 5.12 hereof;
(b) all liabilities and obligations of Seller in respect of the Contracts
and Permits assigned or transferred to Buyer pursuant to this Agreement in
accordance with the respective terms thereof to the extent the liability or
obligation arises from and after the Closing Date;
(c) the Assumed Indebtedness;
(d) any liability, obligation or responsibility of Seller for conditions
at the Real Estate, whether based on statutory or common law, now or
hereafter in effect, known or unknown, contingent or actual, relating to or
arising from pollution, contamination or protection of the environment,
human health or safety or natural resources or relating to or arising from
the presence or Release or threat of Release of Hazardous Substances into
the environment at the Real Estate or into or from any building, structure,
pipeline or other facility at the Real Estate, including without
limitation, any CERCLA or similar liability under any federal or state law
or regulation, except to the extent Buyer has given written notice of a
claim for indemnification pursuant to Sections 7.3 and 7.4 hereof prior to
the tenth anniversary of the Closing Date (and if Buyer has given written
notice prior to the tenth anniversary of the Closing Date, to the extent
that such claim is not entitled to indemnification under Sections 7.3 and
7.4) (the foregoing, the "On-site Conditions");
(e) advances existing on the Closing Date for construction of facilities
relating to the Business; and
(f) liability for accrued but unused vacation pay for the Transferred
Employees to the extent provided in Section 5.9.2.
2.3.2 Any liabilities or obligations which are assumed by Buyer pursuant to
Section 2.3.1 above are hereinafter referred to as the "Assumed Liabilities."
At the Closing, Parent shall cause Buyer to execute and deliver to Seller an
assumption agreement, in substantially the form of the Assumption Agreement
attached hereto as Exhibit A (the "Assumption Agreement"), pursuant to which
Buyer shall assume the Assumed Liabilities. Each of Parent and Buyer hereby
irrevocably and unconditionally waives and releases the Seller Parties from
all Assumed Liabilities and all liabilities or obligations exclusively
relating to the Business to the extent arising from events or occurrences
after the Closing, including any liabilities created or which arise by statute
or common law, including CERCLA (it being understood that this shall not
constitute a waiver and release of any claims arising out of the contractual
relationships between Buyer and Seller).
2.3.3 Buyer shall not assume any liabilities, commitments or obligations
(contingent or absolute and whether or not determinable as of the Closing) of
any of the Seller Parties or any of their Affiliates except for the
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Assumed Liabilities as specifically and expressly provided for above, whether
such liabilities or obligations relate to payment, performance or otherwise,
and all liabilities, commitments or obligations not expressly transferred to
Buyer hereunder as Assumed Liabilities are being retained by the Seller
Parties, (the "Retained Liabilities"). Each of the Seller Parties hereby
irrevocably and unconditionally waives and releases Buyer from all Retained
Liabilities including any liabilities created or which arise by statute or
common law, including CERCLA (it being understood that this shall not
constitute a waiver and release of any claims arising out of the contractual
relationships between Buyer and Seller).
Without limitation to the foregoing, all of the following shall be
considered Retained Liabilities and not Assumed Liabilities (except as
specified below) for the purposes of this Agreement:
(a) any product liability, toxic tort or similar claim for injury to
person or property, regardless of when made or asserted, to the extent that
it arises out of or is based upon any express or implied representation,
warranty, agreement or guarantee made by any of the Seller Parties or any
of their Affiliates prior to Closing, or alleged to have been made by any
of such Persons, or to the extent that it is imposed or asserted to be
imposed by operation of law, in connection with any service performed or
product distributed or sold by or on behalf of any of the Seller Parties or
any of their Affiliates prior to Closing, including any claim referred to
above in this Section 2.3.3(a) relating to water quality standards, any
claim relating to any product delivered in connection with the performance
of services provided by Seller and any claim seeking recovery for
consequential damages, lost revenue or income;
(b) except to the extent set forth in Sections 2.9 and 7.1 any federal,
state, foreign or local income or other Tax payable with respect to the
business, assets, properties or operations of any of the Seller Parties or
any member of any affiliated group of which any of them is a member;
(c) any liability or obligation associated with or in connection with the
common plant assets (other than the liabilities and obligations exclusively
related to the Common Plant Assets set forth on Schedule 1.1.1(b));
(d) except as provided in Section 2.3.1 above, any liability or
obligation with respect to compensation or employee benefits of any nature
owed to any employees, agents or independent contractors of any of the
Seller Parties or any of their Affiliates, whether or not employed by Buyer
after the Closing, that arises out of or relates to events or conditions to
the extent occurring before the Closing Date;
(e) any liability or obligation of any of the Seller Parties or any of
their Affiliates existing as a result of any act, failure to act or other
state of facts or occurrence which constitutes a breach or violation of any
of Seller's or PEI's representations, warranties, covenants or agreements
contained in this Agreement, except to the extent set forth in Section 7.1;
(f) except to the extent set forth in Section 2.3.1(d), any liability,
obligation or responsibility of any of the Seller Parties, or any of their
Affiliates or predecessors, whether based on statutory or common law, now
or hereafter in effect, known or unknown, contingent or actual, relating to
or arising from pollution, contamination or protection of the environment,
human health or safety or natural resources or relating to or arising from
the presence or Release or threat of Release of Hazardous Substances into
the environment or into or from any building, structure, pipeline or other
facility or relating to or arising from the generation, use, storage,
treatment, disposal, transport or other handling of Hazardous Substances or
sale of product containing Hazardous Substances or from violation of any
law relating to the foregoing, including without limitation, any (A) CERCLA
or similar liability under any federal or state law or regulation or (B)
any such liability associated with businesses or assets of the Seller
Parties other than the Business;
(g) liabilities and obligations relating to the Business to the extent
arising prior to Closing (unless otherwise constituting Assumed
Liabilities) arising by operation of law under any common law or statutory
doctrine (including successor liability or de facto merger);
(h) any obligation or liability arising under any contract, commitment,
instrument or agreement (1) that is not transferred to Buyer as part of the
Acquired Assets, or (2) that relates to any breach or default (or to the
extent that it relates to an event which would, with the passing of time or
the giving of notice, or both,
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constitute a default) under any Contract, instrument or agreement or to any
services to be provided by Seller under any such Contract, instrument or
agreement to the extent that it arises out of or relates to any period
prior to the Closing Date;
(i) any liability or obligation in respect of the Excluded Assets; or
(j) except for the Assumed Liabilities as specifically and expressly set
forth herein, any liability to the extent arising out of or relating to the
ownership or operation of the Acquired Assets or the Business prior to the
Closing Date (including any predecessor operations), any claims,
obligations or litigation to the extent arising out of or relating to
events or conditions occurring before the Closing Date, and any liability
associated with any business other than the Business.
2.4 Consent of Third Parties. On the Closing Date, PEI shall cause Seller to
assign to Buyer, and Parent shall cause Buyer to assume, the Contracts and the
Permits which are to be transferred to Buyer as provided in this Agreement by
means of the Assumption Agreement. To the extent that the assignment of all or
any portion of any Contract or Permit shall require the consent (or result in
a breach or violation thereof) of the other party thereto or any other third
party, and such consent shall not be obtained prior to Closing, this Agreement
shall not constitute an agreement to assign any such Contract or Permit
included in the Acquired Assets. In order, however, to provide Buyer the full
realization and value of every Contract of the character described in the
immediately preceding sentence, Seller agrees that on and after the Closing,
it will, at the request and under the direction of Buyer, in the name of
Seller or otherwise as Buyer shall specify, take all reasonable actions
(including without limitation the appointment of Buyer as attorney-in-fact for
Seller to proceed at Buyer's sole cost and expense) and do or cause to be done
all such things as shall in the reasonable opinion of Buyer be necessary (a)
to assure that the rights of Seller or its Affiliates under such Contracts
shall be preserved for the benefit of Buyer and (b) to facilitate receipt of
the consideration to be received by Seller or its Affiliates in and under
every such Contract. To the extent that Buyer does receive the benefits of any
such Contract pursuant to the preceding sentence, such Contract shall be a
Contract "assigned or transferred to Buyer pursuant to this Agreement" within
the meaning of Section 2.3.1(b) hereof. Nothing in this Section 2.4 shall in
any way diminish the obligations of Seller to obtain consents and approvals
under this Agreement.
2.5 Closing. Subject to the terms and conditions of this Agreement, the
closing of the sale and purchase of the Acquired Assets (the "Closing") shall
take place at 10 a.m., Philadelphia time, on a date mutually satisfactory to
Buyer and Seller which is no later than the fifth Business Day after
satisfaction (or waiver) of the conditions to Closing set forth in Sections
6.1 and 6.2 hereof (other than those conditions which require the delivery of
any documents or the taking of other action, at the Closing) at the offices of
Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street,
Philadelphia, PA 19103, or on such other date and at such other time or place
as may be mutually agreed upon by the parties hereto (the "Closing Date").
2.6 Purchase Price.
2.6.1 Purchase Price. Subject to the terms and conditions of this Agreement,
the aggregate purchase price based on and as of the date of the Interim
Statement of Net Assets would be Four Hundred Nine Million One Hundred Forty-
Three Thousand Dollars ($409,143,000). Subject to the terms and conditions of
this Agreement, the aggregate purchase price to be paid by Buyer for the
purchase of the Acquired Assets (the "Purchase Price") shall be (I) Two
Hundred Fifty-Four Million Five Hundred Fifty-Five Thousand ($254,555,000) in
cash (the "Base Cash Purchase Price", the Base Cash Purchase Price as adjusted
in accordance with Section 2.6.3 is referred to as the "Initial Cash
Payment"), subject to adjustment pursuant to the provisions of this Agreement
(including Section 2.6.3, Section 2.6.4 and Section 2.9 of this Agreement) and
(II) the assumption by Buyer of the Assumed Liabilities.
2.6.2 Payment of Initial Cash Payment. Subject to the terms and conditions
of this Agreement, the Initial Cash Payment shall be paid by Buyer on the
Closing Date by federal or other wire transfer of immediately available funds
to the account designated by Seller in writing at least two (2) Business Days
prior to the Closing Date.
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2.6.3 Estimated Closing Statement. At least five (5) Business Days prior to
the Closing Date, Seller shall deliver to Buyer a statement of net assets (the
"Estimated Statement of Net Assets") reflecting its good faith calculation of
the Adjusted Net Assets of the Business as of the last day of the latest
calendar month for which financial statements of Seller are available (the
"Estimated Adjusted Net Assets"). The Estimated Statement of Net Assets shall
be prepared in the same manner and utilizing the same accounting principles,
policies and methods used in the preparation of the Interim Statement of Net
Assets, except as set forth on Schedule 2.6.4. The Base Cash Purchase Price
shall be increased or decreased on a dollar for dollar basis by the amount, if
any, by which the Estimated Adjusted Net Assets is greater than or less than
Two Hundred Forty-Eight Million, Fifty-Five Thousand Dollars ($248,055,000)
(such increase or decrease, as the case may be, is referred to herein as the
"Estimated Net Asset Adjustment").
2.6.4 Post-Closing Adjustment to Purchase Price.
(a) Within 90 days after the Closing, Buyer shall prepare and deliver to
the Seller Parties a Statement of Net Assets (the "Closing Statement of Net
Assets") which reflects the Adjusted Net Assets of the Business, as of
midnight immediately preceding the Closing Date, based on actual financial
performance and calculated in the same manner, utilizing the same
accounting principles, policies and methods utilized in preparing the
Interim Statement of Net Assets (except as set forth on Schedule 2.6.4),
together with (A) an audit report of Buyer's Accountants stating that the
Closing Statement of Net Assets has been prepared utilizing the same
generally accepted accounting principles, policies and methods used in the
preparation of the Interim Statement of Net Assets (except as set forth on
Schedule 2.6.4) and (B) a calculation of Buyer's determination of the
amount of increase or decrease in the amount of the Adjusted Net Assets of
the Business from the Interim Statement of Net Assets Date to the Closing
Date which is derived from the Closing Statement of Net Assets ("Buyer's
Adjustment Amount"). For purposes of this Agreement, "Adjusted Net Assets "
with respect to the Business means (1) all assets constituting Acquired
Assets minus (2) all Assumed Liabilities (other than liabilities assumed by
Buyer pursuant to Sections 5.9, 5.10, 5.11 and 5.12, but including accrued
interest on the Assumed Indebtedness), minus (3) an amount equal to the
aggregate difference between: (i) the cost of each Transferred Employee's
vacation entitlement for the year in which the Closing occurs multiplied by
a fraction, the numerator of which is the number of days in such year on or
before Closing and the denominator of which is 365, and (ii) the cost of
the vacation days each Transferred Employee has taken on or before Closing,
minus (4) the excess of contributed property related to the Business over
$10,104,000. Buyer shall pay the fees and expenses of Buyer's Accountants
incurred in connection with this Section 2.6.4. The Seller Parties agree to
cooperate, and agree to cause Seller's Accountants to cooperate, with Buyer
and Buyer's Accountants in connection with the preparation of the Closing
Statement of Net Assets and related information, and shall provide to Buyer
and Buyer's Accountants such books, records and information as may be
reasonably requested from time to time, including the work papers of
Seller's Accountants. Buyer will give Seller and its representatives access
during the normal business hours of Buyer to the personnel, books and
records of Buyer and the work papers of Buyer's Accountants to assist
Seller in the review of the Closing Statement of Net Assets and related
matters. Notwithstanding the foregoing, the Closing Statement of Net
Assets, Adjusted Net Assets and the Buyer's Adjustment Amount shall also be
adjusted to reflect the items specified in Section 2.9 to the extent set
forth therein. Buyer agrees that following the Closing through the date on
which the Closing Statement of Net Assets is delivered it will not take any
actions with respect to any accounting books, records, policies or
procedures on which the Closing Statement of Net Assets is to be based that
would make it impossible or impracticable to calculate the Adjusted Net
Assets in the manner and utilizing the methods required hereby. Without
limiting the generality of the foregoing, no changes shall be made in any
reserve or other account existing as of the date of the Interim Statement
of Net Assets except in the ordinary course or as a result of events
occurring after the date of the Interim Statement of Net Assets and, in
such event, only in a manner consistent with past practices of Seller.
(b) Seller may dispute any amounts reflected on the Closing Statement of
Net Assets or in the Buyer's Adjustment Amount, provided, however, that
Seller shall notify Buyer in writing of each disputed amount, and specify
the amount thereof in dispute and the basis of such dispute, within 30 days
of the Seller's receipt
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of the Closing Statement of Net Assets, and the Buyer's Adjustment Amount
(such 30 day period hereinafter referred to as the "Review Period"). In the
event of a dispute with respect to the Closing Statement of Net Assets or
the Buyer's Adjustment Amount, Buyer and Seller shall attempt to reconcile
their differences and any resolution by them as to any disputed amounts
shall be final, binding and conclusive on the parties. If Buyer and Seller
are unable to reach a resolution of such differences within 30 days of
receipt of Seller's written notice of dispute to Buyer, Buyer and Seller
shall submit the amounts remaining in dispute for resolution to an
independent accountant firm of national reputation mutually appointed by
Seller and Buyer (such independent accounting firm being herein referred to
as the "Third Accounting Firm"), which shall be requested to determine and
report to the parties, within 30 days after such submission, upon such
remaining disputed amounts, and such report shall be final, binding and
conclusive on the parties hereto with respect to the amounts disputed. The
fees and disbursements of the Third Accounting Firm shall be allocated
between Buyer and the Seller Parties so that the Seller Parties' share of
such fees and disbursements shall be in the same proportion that the
aggregate amount of such remaining disputed amounts so submitted by the
Seller Parties to the Third Accounting Firm that is unsuccessfully disputed
by the Seller Parties (as finally determined by the Third Accounting Firm)
bears to the total amount of such remaining disputed amounts so submitted
by the Seller Parties to the Third Accounting Firm. The Seller Parties
shall pay the fees and expenses of Seller's Accountants incurred in
connection with this Section 2.6(d). Buyer's Adjustment Amount, if there
are no disputes with respect thereto, or Buyer's Adjustment Amount as
adjusted after the resolution of all disputes with respect thereto in
accordance herewith, shall be referred to as the "Final Net Asset
Adjustment."
(c) If the Base Cash Purchase Price plus (or minus, if negative) the
Final Net Asset Adjustment exceeds the Initial Cash Payment, then within
five (5) Business Days after final determination thereof Buyer shall pay
Seller the amount of such excess together with interest thereon for the
period commencing on the Closing Date through the date of payment
calculated at the Prime Rate in cash by federal or other wire transfer of
immediately available funds, or certified or bank cashier's check. If the
Initial Cash Payment exceeds the sum of the Base Cash Purchase Price plus
(or minus, if negative) the Final Net Asset Adjustment, then within five
(5) Business Days after final determination thereof Seller shall pay Buyer
the amount of such excess together with interest thereon for the period
commencing on the Closing Date through the date of payment calculated at
the Prime Rate in cash by federal or other wire transfer of immediately
available funds, or certified or bank cashier's check.
2.7 Deliveries and Proceedings at Closing. Subject to the terms and
conditions of this Agreement, at the Closing:
2.7.1 Deliveries to Buyer. PEI shall cause Seller to deliver to Buyer:
(a) bills of sale and instruments of assignment to the Acquired Assets,
duly executed by Seller, substantially in the form of Exhibit B hereto and;
(b) the consents to transfer, of all transferable or assignable
Contracts, Intellectual Property, Permits (including Environmental
Permits), to the extent specifically required hereunder;
(c) title certificates to any motor vehicles included in the Acquired
Assets, duly executed by Seller (together with any other transfer forms
necessary to transfer title to such vehicles);
(d) one or more deeds of conveyance to the Real Estate to Buyer, without
covenant or warranty of title, duly executed and acknowledged by Seller and
in recordable form, each substantially in the form of Exhibit C hereto;
(e) the Foreign Investment in Real Property Tax Act Certification and
Affidavit for each parcel of Real Estate, duly executed by the Seller
Parties, substantially in the form of Exhibit D hereto (the "FIRPTA
Affidavit");
(f) the certificates, opinions and other documents required to be
delivered by PEI and Seller pursuant to Section 6.1 hereof and certified
resolutions evidencing the authority of Seller as set forth in Section 3.2
hereof;
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(g) all agreements and other documents required by this Agreement;
(h) a receipt for the payment of the Initial Cash Payment duly executed
by Seller;
(i) all such other instruments of conveyance as shall, in the reasonable
opinion of Buyer and its counsel, be necessary to transfer to Buyer the
Acquired Assets in accordance with this Agreement and where necessary or
desirable, in recordable form;
(j) a lease of that portion of the Common Plant Assets which Buyer and
Seller shall determine is reasonably required for the operation of the
Business, substantially on terms set forth in Exhibit E; and
(k) the Operating Easement duly executed by Seller.
2.7.2 Deliveries By Buyer to the Seller Parties. Buyer will deliver to the
Seller Parties:
(a) wire transfer of immediately available funds in an amount equal to
the Initial Cash Payment;
(b) the Assumption Agreement, duly executed by Buyer;
(c) the Operating Easement duly executed by Buyer;
(d) the certificates, opinions and other documents required to be
delivered by Buyer pursuant to Section 6.2 hereof; and
(e) all such other instruments of assumption as shall, in the reasonable
opinion of Seller and its counsel, be necessary for Buyer to assume the
Assumed Liabilities in accordance with this Agreement.
2.8 Allocation of Consideration. Buyer and Seller shall endeavor in good
faith to agree upon an allocation of the consideration paid by Buyer to Seller
among the Acquired Assets within 90 days after the Closing Date; Buyer and
Seller shall endeavor in good faith to determine the value of the Acquired
Assets subject to real estate transfer taxes within 90 days after the date
hereof. If Buyer and Seller are unable to agree on the allocation, then, if
Buyer so requests, the allocation shall be determined by an appraiser selected
by Buyer and reasonably acceptable to Seller; the Buyer shall pay the fees and
expenses of such appraisal. Buyer and the Seller Parties shall each report the
federal, state and local income and other tax consequences of the transactions
contemplated by this Agreement (which for purposes of this Agreement includes
the Transaction Documents) in a manner consistent with such allocation if
determined in accordance with the preceding two sentences including, but not
limited to, the preparation and filing of Form 8594 under Section 1060 of the
Code (or any successor form or successor provision of any future tax law, or
any comparable provision of state, or local tax law) with their respective
federal, state and local income tax returns for the taxable year that includes
the Closing Date.
2.9 Prorations. The parties hereto agree that the following expenses shall
be calculated and pro rated as of the Closing Date, with Seller responsible
for such expenses for the period up to the Closing Date, and Buyer to be
responsible for the period on and after the Closing Date:
2.9.1 personal and real property taxes (on the basis on which the same were
assessed and paid) and sales, occupation and use taxes, in each case, to the
extent relating to the Business and except as otherwise provided in Section
7.1;
2.9.2 electric, fuel, gas, telephone, sewer and utility charges, in each
case, to the extent relating to the Business;
2.9.3 rentals and other charges under Contracts to be assumed by Buyer
pursuant to Section 2.3 (except to the extent provided in Section 2.3.3(h);
and
2.9.4 charges under maintenance and service contracts and other Contracts
(except to the extent provided in Section 2.3.3(h), and fees under Permits to
be transferred to Buyer as part of the Acquired Assets.
To the extent that any taxing authority shall assess or otherwise calculate
real property taxes on a basis that includes both a portion of the Real Estate
and a portion of the Excluded Real Estate, the parties agree that the
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following allocation principles shall apply. The parties shall each endeavor
to obtain from the taxing authority a statement specifying the applicable
taxes each party is obligated to pay. In the event that such a statement is
not obtained, (a) the party receiving a tax bill shall be responsible for
paying the tax, and the other party shall be required to reimburse the first
party promptly following determination of the allocation, (b) the taxes based
on the value of land shall be allocated based on the square footage of the
property owned by each of them, (c) the taxes based on the value of
improvements shall be allocated based on the assessed value, if known, of the
improvements located on the lands of each party, and (d) all other taxes shall
be allocated by mutual agreement in a manner generally consistent with the
foregoing. The parties each agree to negotiate in good faith regarding these
allocations.
ARTICLE 3
Representations and Warranties of Seller
Each of Seller and PEI jointly and severally represent and warrant to Buyer
as follows:
3.1 Qualification; No Interest in Other Entities.
3.1.1 PEI is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania and has all
requisite corporate power and corporate authority to own and vote the common
stock, no par value, stated value $10.00 per share of Seller.
3.1.2 Seller is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania and has all
requisite corporate power and corporate authority to own, lease and operate
the Acquired Assets and the Business as presently being conducted. Seller is
qualified to do business and is in good standing as a foreign corporation in
all jurisdictions wherein the nature of the business conducted by it or
Seller's ownership or use of assets and properties make such qualification
necessary except such failures to be qualified or to be in good standing, if
any, which when taken together with all such other failures of Seller do not
have a Material Adverse Effect.
3.1.3 No shares of any corporation or any ownership or other investment
interest, either of record, beneficially or equitably, in any Person are
included in the Acquired Assets.
3.2 Authorization and Enforceability. Each of Seller and PEI has full
corporate power and corporate authority to execute, deliver and perform this
Agreement and all other agreements and instruments to be executed by them in
connection herewith (such other agreements and instruments being hereinafter
referred to collectively as the "Transaction Documents"). The execution,
delivery and performance by PEI and Seller of this Agreement and the
Transaction Documents to which PEI and/or Seller is a party have been duly
authorized by all necessary corporate action on the part of each of them,
subject to the approval of each of Seller's and PEI's respective common (and
in the case of Seller, preferred) stockholders. This Agreement has been duly
executed and delivered by Seller and PEI, and as of the Closing Date the other
Transaction Documents will be duly executed and delivered by Seller and PEI.
This Agreement is a legal, valid and binding obligation of Seller and PEI,
enforceable against them in accordance with its terms except as such
enforceability may be limited by applicable laws relating to bankruptcy,
insolvency, fraudulent conveyance, reorganization or affecting creditors'
rights generally and except to the extent that injunctive or other equitable
relief is within the discretion of a court. As of the Closing Date, each of
the other Transaction Documents to which PEI and Seller is a party will be
duly executed and delivered by PEI and Seller and will constitute the legal,
valid and binding obligations of Seller and PEI, enforceable against them in
accordance with its respective terms except as such enforceability may be
limited by applicable laws relating to bankruptcy, insolvency, fraudulent
conveyance, reorganization or affecting creditors' rights generally and except
to the extent that injunctive or other equitable relief is within the
discretion of a court.
3.3 No Violation of Laws or Agreements. The execution, delivery, and
performance of this Agreement and the Transaction Documents by PEI and/or
Seller do not, and the consummation of the transactions
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contemplated by this Agreement and the Transaction Documents by PEI and
Seller, will not (a) contravene any provision of the Restated Articles of
Incorporation or Bylaws of PEI or Seller; or (b) except as set forth on
Schedule 3.3, violate, conflict with, result in a breach of, or constitute a
default (or an event which would, with the passage of time or the giving of
notice or both, constitute a default) under, or result in or permit the
termination, modification, acceleration, or cancellation of, or result in the
creation or imposition of any Lien of any nature whatsoever upon any of the
Acquired Assets or give to others any interests or rights therein under (i)
any indenture, mortgage, loan or credit agreement, license, instrument, lease,
contract, plan, permit or other agreement or commitment, oral or written, to
which PEI or Seller is a party, or by which the Business or any of the
Acquired Assets may be bound or affected, except for such violations,
conflicts, breaches, terminations, modifications, accelerations,
cancellations, Liens, interests or rights which, individually and in the
aggregate, do not have a Material Adverse Effect or will be cured, waived or
terminated prior to the Closing Date, or (ii) any judgment, injunction, writ,
award, decree, restriction, ruling, or order of any court, arbitrator or
Authority or any applicable constitution, law, ordinance, rule or regulation,
to which Seller or PEI is subject other than those violations or conflicts
which individually and in the aggregate would not have a Material Adverse
Effect.
3.4 Financial Statements. Seller has previously delivered to Buyer the
financial statements of Seller contained in Schedule 3.4 (collectively, the
"Financial Statements") and the Interim Statement of Net Assets. The Financial
Statements of Seller fairly present in all material respects the financial
position and the results of operations of Seller in accordance with generally
accepted accounting principles ("GAAP") consistently applied. Except as set
forth on Schedule 3.4, the Interim Statement of Net Assets (a) has in all
material respects been derived from the books and records of Seller and
reflects the separation of the operations associated with the Business from
other operations of Seller; and (b) fairly presents in all material respects
the Acquired Assets and Assumed Liabilities as of the Interim Statement of Net
Assets Date and has been prepared in accordance with GAAP. The Financial
Statements as of and for the period ending December 31, 1994 have been
prepared in the same manner and utilizing the same accounting principles,
policies and methods used in the Financial Statements as of and for the period
ending December 31, 1993 insofar as such Financial Statements relate to
Acquired Assets or Assumed Liabilities. The Interim Statement of Net Assets
has been prepared in the same manner and utilizing the same accounting
principles, policies and methods used in the Financial Statements insofar as
the Financial Statements relate to Acquired Assets or Assumed Liabilities. The
financial statements included in the Annual Report to the PPUC for the year
ended December 31, 1993 were prepared in all material respects in accordance
with the rules and regulations of the PPUC.
3.5 No Changes. Since the Interim Statement of Net Assets Date to the date
hereof, Seller has conducted the Business as presently operated only in the
ordinary course of business consistent with past practice. Since the Interim
Statement of Net Assets Date, except as disclosed in Schedule 3.5, there has
not been:
3.5.1 any Material Adverse Effect;
3.5.2 prior to the date of this Agreement, any change in the salaries or
other compensation payable or to become payable to, or any advance (excluding
advances for ordinary business expenses) or loan to, any Transferred Employee,
or material change or material addition to, or material modification of, other
benefits (including any bonus, profit-sharing, pension or other plan in which
any of the Transferred Employees participate) to which any of the Transferred
Employees may be entitled, or any payments to any pension, retirement, profit-
sharing, bonus or similar plan other than in any such case (i) in the ordinary
course consistent with past practice, (ii) as required by law, or (iii) as
required by the Collective Bargaining Agreements;
3.5.3 any alteration in any material respect of the customary practices with
respect to the collection of accounts receivable of the Business or the
provision of discounts, rebates or allowances;
3.5.4 any disposition of or failure to keep in effect any rights in, to or
for the use of any Permit of the Business which individually or in the
aggregate would have a Material Adverse Effect;
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3.5.5 any damage, destruction or loss affecting the Business which
individually or in the aggregate would have a Material Adverse Effect whether
or not covered by insurance;
3.5.6 prior to the date of this Agreement, any change by Seller in its
method of accounting or keeping its books of account or accounting practices
with respect to the Business except as required by GAAP and is set forth on
Schedule 3.5; or
3.5.7 prior to the date of this Agreement, any sale, transfer or other
disposition of any material assets, properties or rights of the Business,
except in the ordinary course of business consistent with past practice.
3.6 Contracts. As of the date of this Agreement, Schedule 3.6 contains a
list of all Contracts (other than with respect to which the Business' total
annual liability or expense is less than (a) $100,000 per such Contract and
(b) $3,000,000 per all such Contracts). Seller has delivered to Buyer a
correct and complete copy of each written agreement listed in Schedule 3.6.
Except as disclosed on Schedule 3.6, with respect to each Contract, neither
Seller nor, to the Seller Parties' knowledge, any other party thereto, is in
breach or default, and to the Seller Parties' knowledge, no event has occurred
which with notice or lapse of time would constitute a breach or default, or
permit termination, modification, or acceleration, under the Contract, except
in each case where such breaches, terminations, modifications, accelerations
or defaults, individually or in the aggregate, do not have a Material Adverse
Effect. Except as set forth in Schedule 3.6, there are no disputes pending or
to the best of the Seller Parties' knowledge, threatened, under or in respect
of any of the Contracts, other than those that individually and in the
aggregate do not have a Material Adverse Effect.
3.7 Permits and Compliance With Laws Generally.
3.7.1 Except as disclosed on Schedule 3.7, Seller possesses and is in
compliance with all Permits required to operate the Business as presently
operated and to own, lease or otherwise hold the Acquired Assets under all
applicable laws, rules, regulations, ordinances and codes, including
Environmental Laws (as defined below), except to the extent that any failure
to possess, or to comply with, any Permit, laws, rules, regulations or orders
would not, individually or in the aggregate, have a Material Adverse Effect.
Except as disclosed in Schedule 3.7, the Business is conducted by Seller in
compliance with all applicable laws (including the Occupational Safety and
Health Act and the rules and regulations thereunder ("OSHA"), zoning, building
and similar laws and Environmental Laws), rules, regulations, ordinances,
codes, judgments and orders, except for such failures to comply which do not
individually or in the aggregate have a Material Adverse Effect. All Permits
of Seller relating to the operation of the Business are in full force and
effect, other than those the failure of which to be in full force and effect
would not individually or in the aggregate have a Material Adverse Effect.
There are no proceedings pending or, to the Seller Parties' knowledge,
threatened that seek the revocation, cancellation, suspension or any adverse
modification of any such Permits presently possessed by Seller other than
those revocations, cancellations, suspensions or modifications which do not
individually or in the aggregate have a Material Adverse Effect.
3.7.2 Except as set forth on Schedule 3.7, no outstanding notice, citation,
summons or order has been issued, no outstanding complaint has been filed, no
outstanding penalty has been assessed and no investigation or review is
pending or, to the knowledge of the Seller Parties, threatened, by any
Authority or other Person with respect to any alleged (i) violation by Seller
or any Affiliate of Seller relating to the Business of any law, ordinance,
rule, regulation, code or order of any Authority; or (ii) failure by Seller or
any Affiliate to have any Permit required in connection with the conduct of
the Business or otherwise applicable to the Business (including the Acquired
Assets), except, in each case, where such violations or failures, individually
or in the aggregate, would not have a Material Adverse Effect.
3.8 Environmental Matters. Except as set forth on Schedule 3.8 hereto, and
with such exceptions as are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect:
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3.8.1 Seller has not disposed of or arranged for the disposal of or Released
any Hazardous Substances, other than in conformity with applicable laws and
regulations, at any Real Estate, or, in connection with the Business or
Acquired Assets, at any other facility, location, or other site.
3.8.2 Seller has not received any written notice or request for information
with respect to, and to the best of the Seller Parties' knowledge, Seller has
not been designated a potentially liable party for remedial action or response
costs, in connection with any Real Estate, or, as of the date hereof, with
respect to the Business or Acquired Assets, at any other facility, location,
or other site under the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or comparable state statutes.
3.8.3 To the best of the Seller Parties' knowledge, except for such use or
storage of Hazardous Substances as is incidental to the conduct of the
Business, which use and storage is or has been in compliance with applicable
laws and regulations, and which use and storage has not caused any condition
that requires Remedial Action, no Real Estate has been used for the storage,
treatment, generation, processing, production or disposal of any Hazardous
Substances or as a landfill or other waste disposal site in violation of any
law, rule or regulation.
3.8.4 To the best of the Seller Parties' knowledge underground storage tanks
are not, and have not in the past been, located on or under any Real Estate.
3.8.5 There are no pending or unresolved claims against Seller or the
Business for investigatory costs, cleanup, removal, remedial or response
costs, or natural resource damages arising out of any Releases or threat of
Release of any Hazardous Substances at any Real Estate or, as of the date
hereof, with respect to the Business or the Acquired Assets or at any other
facility, location, or other site.
3.8.6 To the best of the Seller Parties' knowledge, no polychlorinated
biphenyls ("PCBs") or asbestos-containing materials are located at or in any
Real Estate in violation of Environmental Laws or which require Remedial
Action.
3.8.7 To the best of the Seller Parties' knowledge, no Hazardous Substance
managed or generated by or on behalf of Seller at the Real Estate or in
connection with the Business or Acquired Assets has come to be located at any
site that is listed or formally proposed for listing under CERCLA, the
Comprehensive Environmental Response, Compensation and Liability Information
System ("CERCLIS"), or any similar state list or that is the subject of
federal, state, or local enforcement actions or investigations.
3.8.8 The Seller Parties know of no facts or circumstances related to
environmental matters (i) in connection with the operation of the Business or
(ii) concerning the Real Estate, that are reasonably likely to result in any
material reduction in the quality or quantity of water available for supply to
the Seller Parties' customers.
3.8.9 The Seller Parties will within thirty (30) days of the date hereof
provide Buyer with copies of all written environmental audits or
investigations of which they are aware (after due inquiry) prepared for the
Real Estate or operations of the Business.
3.8.10 Except as set forth in Schedule 3.8.10-I or the Seller Parties'
Annual Reports on Form 10-K for the year ended December 31, 1994:
(a) The Seller Parties (including for purposes of Section 3.8.10(a) and
(b), Affiliates and predecessors of the Seller Parties) are and have been
for the past three years in full compliance with all federal and state
primary drinking water standards;
(b) The Seller Parties are and have been for the past three years in full
compliance with all federal and state secondary drinking water standards;
and
(c) As to all outstanding violations of state or federal drinking water
standards, as of the date hereof, the Seller Parties have completed or are
in the process of completion in accordance with all applicable
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deadlines, all actions required by Environmental Law or Authorities to
correct or otherwise respond to such violations. The estimated dates of
completion of such actions are listed on Schedule 3.8.10-II.
3.8.11 None of the Seller Parties will be required to place any notice or
restriction relating to the presence of Hazardous Substances in the deed to
any Real Estate, or in any written instrument accompanying this Agreement, and
no Real Estate has such a notice or restriction in its deed or any other
written instrument relating to the purchase, lease or rental of such property.
For the purposes of these Sections 3.7 and 3.8: (A) "Remedial Action" means
all actions to (x) clean up, remove, treat or in any other way respond to any
presence, Release or threat of Release of Hazardous Substances; (y) prevent
the Release or threat of Release, or minimize the further Release of any
Hazardous Substances so it does not endanger or threaten to endanger public or
employee health or welfare or the environment; or (z) perform studies,
investigations or monitoring necessary or required to investigate the
foregoing; (B) "Environmental Laws" means any common law or federal, state or
local law, statutes, rule, regulation, ordinance, code, judgment or order
relating to the protection of the environment or human health and safety and
includes, but is not limited to, CERCLA (42 U.S.C. (S)(S) 9601, et seq.), the
Clean Water Act (33 U.S.C. (S)(S) 1251 et seq.), the Resource Conservation and
Recovery Act (42 U.S.C. (S)(S) 6901 et seq.), the Toxic Substances Control Act
(15 U.S.C. (S)(S) 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. (S)(S)
300f et seq.) and the Oil Pollution Act of 1990 (33 U.S.C. (S)(S) 2701 et
seq.), each as has been or may be amended and the regulations promulgated
pursuant thereto; (C) "Released" means released, spilled, leaked, discharged,
disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or
allowed to escape; and (D) "Hazardous Substances" means hazardous or toxic or
polluting substance or waste or contaminant, including petroleum products,
PCBs and radioactive materials.
3.9 Consents. No consent, approval or authorization of, or registration or
filing with, any Person (governmental or private) is required in connection
with the execution, delivery and performance by Seller or PEI of this
Agreement, the Transaction Documents, or the consummation of the transactions
contemplated hereby or thereby by the Seller Parties, including without
limitation in connection with the assignment of the Contracts and Permits
contemplated hereby, except (i) as required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"), (ii) as specified on Schedule 3.9
and (iii) for such other consents, approvals, authorizations, registrations or
filings the failure of which to obtain or make would not individually or in
the aggregate have a Material Adverse Effect.
3.10 Title. Seller has good and valid title to all of the Acquired Assets
constituting personal property, good and marketable title in fee simple to all
of the owned Acquired Assets constituting Real Estate and good and valid
leasehold title to all of the leased Acquired Assets constituting Real Estate,
in each case, free and clear of Liens subject only to the Permitted
Exceptions. "Permitted Exceptions" as used herein shall mean (a) the Liens set
forth in Schedule 3.10 hereto, (b) Liens securing Taxes, assessments,
governmental charges or levies, or the claims of materialmen, mechanics,
carriers and like persons, all of which are not yet due and payable or which
are being contested in good faith or (c) such other Liens which, individually
or in the aggregate, do not have a Material Adverse Effect (it being
understood that to the extent a Permitted Exception relates to or arises from
a Retained Liability, Seller shall still be liable for such Retained Liability
to the extent set forth herein).
3.11 Real Estate.
3.11.1 As of the date hereof, Seller has not received any written or oral
notice for assessments for public improvements against the Real Estate which
remains unpaid, and to the best knowledge of the Seller Parties, no such
assessment has been proposed. Except as set forth on Schedule 3.11, as of the
date hereof, there is no pending condemnation, expropriation, eminent domain
or similar proceeding affecting all or any portion of any of the Real Estate
and to the best knowledge of the Seller Parties no such proceeding is
threatened.
3.11.2 Except as disclosed on Schedule 3.11, as of the date hereof, Seller
is not a lessee under any Contract relating to the use or occupancy of the
Real Estate involving annual payments in excess of $25,000.
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3.12 Taxes. The Seller Parties have (a) timely filed all material returns
and reports for Taxes, including information returns, that are required to
have been filed in connection with, relating to, or arising out of, the
Business, (b) paid all Taxes that are shown to have come due pursuant to such
returns or reports and (c) paid all other material Taxes not required to be
reported on returns in connection with, relating to, or arising out of, or
imposed on the property of the Business for which a notice of assessment or
demand for payment has been received or which have otherwise become due. To
the best of the Seller Parties' knowledge, all such returns or reports have
been prepared in accordance with all applicable laws and requirements in all
material respects. Except to the extent disclosed on Schedule 3.12, none of
the assets of the Business or constituting any of the Acquired Assets (a) is
property that is required to be treated as owned by another Person pursuant to
the "safe harbor lease" provisions of former Section 168(f)(8) of the Code,
(b) is "tax-exempt use property" within the meaning of Section 168(h) of the
Code or (c) directly or indirectly secures any debt the interest on which is
tax-exempt under Section 103(a) of the Code.
3.13 Patents and Intellectual Property Rights. To the best of Seller's
knowledge, the operations of Seller do not make any unauthorized use of any
Intellectual Property except for any such unauthorized uses which do not have
a Material Adverse Effect. Assuming the consents listed as items 12 through 17
on Schedule 3.3 are obtained, Buyer will not lose any of Seller's rights to,
or be required to pay increased royalties for, any Intellectual Property
included in the Acquired Assets as a result of the Closing and the
consummation of the transactions contemplated by this Agreement, except for
any such rights or such increased royalties the loss or payment of which
would, individually or in the aggregate, not have a Material Adverse Effect.
3.14 Accounts Receivable. The accounts receivable of Seller arising from the
Business as set forth on the Interim Statement of Net Assets or arising since
the date thereof have arisen out of bona fide sales and deliveries of goods,
performance of services and other business transactions in the ordinary course
of business consistent with past practice; the allowance for collection losses
on the Interim Statement of Net Assets has been determined in accordance with
GAAP consistent with past practice.
3.15 Labor Relations. As of the date hereof, except as set forth in Schedule
3.15, to best of the knowledge of the Seller Parties, there has been no union
organizing efforts with respect to the Business conducted within the last
three (3) years and there are none now being conducted with respect to the
Business. Except as set forth in Schedule 3.15, Seller has not at any time
during the three (3) years prior to the date of this Agreement had, nor, to
the best of the Seller Parties' knowledge, is there now threatened, a strike,
work stoppage or work slowdown with respect to or affecting the Business which
had or could reasonably be expected to have a Material Adverse Effect. As of
the date hereof, except as set forth in Schedule 3.15, (i) no Employee is
represented by any union or other labor organization and (ii) there is no
unfair labor practice charge pending or, to the best knowledge of the Seller
Parties, threatened against Seller relating to any of the Employees as related
to the Business which could reasonably be expected to have a Material Adverse
Effect.
3.16 Employee Benefit Plans.
3.16.1 Schedule 3.16.1 contains a true and complete list of each "employee
benefit plan," as defined in Section 3(3) of ERISA (including any
"multiemployer plan" as defined in Section 3(37) of ERISA), bonus, incentive,
deferred compensation, excess benefit, employment contract, stock purchase,
stock ownership, stock option, supplemental unemployment, vacation,
sabbatical, sick-day, severance or other material employee benefit plan,
program or arrangement (other than those required to be maintained by law),
whether written or unwritten, qualified or nonqualified, funded or unfunded,
foreign or domestic, (i) maintained by, or contributed to by Seller or any of
its Affiliates, in respect of any Employee or Former Employee, or (ii) with
respect to which Seller or any of its Affiliates has any liability in respect
of any Employee or Former Employee (the "Benefit Plans"). Except as disclosed
on Schedule 3.16.1, neither Seller nor any of its Affiliates maintains any
bonus, pension or welfare benefit plan, program or arrangement, including any
deferred compensation arrangement, for directors, consultants or independent
contractors of the Business.
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3.16.2 A true and complete copy of each Benefit Plan and related trust
agreements and (to the extent applicable) a copy of each Benefit Plan's
current summary plan description and in the case of an unwritten Benefit Plan,
a written description thereof, has been furnished to Buyer. In addition, to
the extent applicable, Buyer has been provided a copy of the most recent
Internal Revenue Service ("IRS") determination letter issued to each Benefit
Plan and a copy of the most recent IRS Form 5500 together with all schedules
and accountants' statement filed, and actuarial reports prepared, on behalf of
each Benefit Plan.
3.16.3 Each Benefit Plan which is intended to be qualified under Section
401(a) of the Code (as designated on Schedule 3.16.1) is so qualified and any
trust forming a part of such a Benefit Plan is tax exempt under Section 501(a)
of the Code. Each such Benefit Plan has been amended, as and when necessary,
to comply with the Tax Reform Act of 1986 and upon timely filing of an
Application for Determination with the Internal Revenue Service, will be
eligible to make further such amendments under the "remedial amendment
period."
3.16.4 Except as disclosed in Schedule 3.16.4, each Benefit Plan has been
operated and administered in all material respects in accordance with its
terms and all applicable laws, including ERISA and the Code.
3.16.5 None of the Acquired Assets is subject to a Lien or Tax under the
Code or ERISA.
3.16.6 Neither Seller nor any ERISA Affiliate and, to the knowledge of the
Seller Parties, no other Person, has taken any action or failed to take any
action with respect to any Benefit Plan that may subject Buyer or any Benefit
Plan under which liabilities are assumed by Buyer under Section 5.10, 5.11 or
5.12 ("Assumed Benefit Plan") to any material liability or Tax under the Code
or ERISA.
3.16.7 Neither Seller nor any ERISA Affiliate has incurred or expects to
incur any withdrawal liability with respect to any Benefit Plan which is a
"multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA,
including any withdrawal liability arising from the actions of Seller or any
ERISA Affiliate contemplated by this Agreement. All contributions that Seller
or any ERISA Affiliate have been obliged to make to any Benefit Plan,
including any multiemployer plan, have been duly and timely made.
3.16.8 There are no pending or, to the knowledge of the Seller Parties,
threatened claims (other than routine claims for benefits), assessments,
complaints, proceedings or investigations of any kind in any court or
governmental agency with respect to any Benefit Plan which could reasonably be
expected to give rise to a material liability to Buyer.
3.16.9 Except as disclosed on Schedule 3.16.9, no Benefit Plan provides
benefits, including without limitation, death or medical benefits, beyond
termination of service or retirement other than (i) coverage mandated by law,
or (ii) death or retirement benefits under a Benefit Plan qualified under
Section 401(a) of the Code. Except as disclosed in Schedule 3.16.9, Seller has
communicated to retirees that future changes may have to be made to the health
care programs offered to retirees and/or that contributions may be required of
retirees. Except as disclosed in Schedule 3.16.9, neither the Vice President
of Human Resources and Customer Services, the Director of Human Resources, nor
the Vice President of Finance is aware of any representations made on behalf
of the Company which would limit Seller's ability to change post-retirement
benefits.
3.16.10 With respect to each Benefit Plan that is a "group health plan"
within the meaning of Section 607 of ERISA and that is subject to Section
4980B of the Code, Seller and each ERISA Affiliate have complied in all
material respects with the continuation coverage requirements of the Code and
ERISA.
3.16.11 As of January 1, 1995, the assets of the PEI Pension Plan exceeded
the actuarial present value of the accumulated benefit obligation thereunder
for all participants determined as described in Section 5.10.2 hereof.
3.17 Absence of Undisclosed Liabilities. Except as disclosed in Schedule
3.17, Seller has no liabilities with respect to the Business which would
constitute Assumed Liabilities, either direct or indirect, matured or
unmatured or absolute, contingent or otherwise, except:
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3.17.1 those liabilities set forth on the Interim Statement of Net Assets or
referred to in the notes to the Financial Statements and not heretofore paid
or discharged;
3.17.2 liabilities arising in the ordinary course of business under any
Contract; and
3.17.3 those liabilities incurred, consistent with past business practice,
in or as a result of the normal and ordinary course of business since the
Interim Statement of Net Assets Date and reflected in the books and records
related to the Business;
3.17.4 the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11
and 5.12 hereof; and
3.17.5 those other liabilities, which individually and in the aggregate,
would not have a Material Adverse Effect.
3.18 No Pending Litigation or Proceedings. Except as disclosed in Schedule
3.18, there are no actions, suits, investigations or proceedings pending
against or, to the best of the Seller Parties' knowledge, threatened against
or affecting, Seller, the Business or any of the Acquired Assets before any
court or arbitrator or Authority which individually or in the aggregate, would
have a Material Adverse Effect. Except as disclosed in Schedule 3.18, there
are currently no outstanding judgments, decrees or orders of any court or
Authority against Seller or PEI, which relate to or arise out of the conduct
of the Business or the ownership, condition or operation of the Business or
the Acquired Assets which individually or in the aggregate would have a
Material Adverse Effect.
3.19 Supply of Utilities. Except as set forth on Schedule 3.19, the Real
Estate has adequate arrangements for supplies of electricity, gas, oil, coal
and/or sewer for all operations at the 1994 or current operating levels,
whichever is greater. Except as set forth on Schedule 3.19, there are no
actions or proceedings pending or, to the best of the Seller Parties'
knowledge, threatened that would adversely affect the supply of electricity,
gas, coal or sewer to the Real Estate except for those which individually and
in the aggregate would not have a Material Adverse Effect.
3.20 Insurance. Schedule 3.20 lists the Seller Parties' policies and
contracts in effect as of the date hereof for insurance covering the Acquired
Assets or Assumed Liabilities and the operation of the facilities constituting
the Business owned or held by Seller or PEI, together with the risks insured
against, coverage limits and deductible amounts.
3.21 Relationship with Customers. As of the date hereof, Seller does not
have any current customer which accounted for more than 5% of the net sales of
the Business for the immediately preceding 12-month period.
3.22 WARN Act. Except as contemplated by Section 5.9 hereby or as set forth
in Schedule 3.22 hereto, within six months prior to the date hereof, (i)
Seller has not effectuated (a) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating units
within any site of employment or facility of the Business; or (b) a "mass
layoff" (as defined in the WARN Act) affecting any site of employment or one
or more facilities or operating units within any site of employment or
facility of the Business; (ii) Seller has not been affected by any transaction
or engaged in layoffs or employment terminations with respect to the Business
sufficient in number to trigger application of any similar state or local law;
and (iii) none of Seller's employees who are employed in connection with the
Business has suffered an "employment loss" (as defined in the WARN Act) .
3.23 Condition of Assets. Except as set forth on Schedule 3.23, the
buildings, machinery, equipment, tools, furniture, improvements and other
fixed tangible assets of the Business included in the Acquired Assets are in
good operating condition and repair, reasonable wear and tear excepted.
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3.24 Brokerage. None of the Seller Parties or their Affiliates have made any
agreement or taken any other action which might cause any Person to become
entitled to a broker's or finder's fee or commission as a result of the
transactions contemplated hereunder which could result in liability to Buyer
or its Affiliates.
3.25 All Assets. Except as set forth on Schedule 3.25 and for the Excluded
Assets, the Acquired Assets include all assets, rights, properties and
contracts the use of which is necessary to the continued conduct of the
Business by Buyer substantially in the manner as it was conducted prior to the
Closing Date, including the service of all utility customers in substantially
the same manner and at substantially the same service levels as provided by
Seller on the date hereof.
ARTICLE 4
Representations and Warranties of Buyer
Parent and Buyer jointly and severally represent and warrant to Seller as
follows:
4.1 Organization and Good Standing.
4.1.1 Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware.
4.1.2 Buyer is a corporation duly organized validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania and has all
requisite corporate power and authority to own, lease and operate the Acquired
Assets and the Business. Buyer is qualified to do business and is in good
standing in all jurisdictions wherein the nature of the business conducted by
it or Buyer's ownership or use of assets and properties make such
qualification necessary, except such failures to be qualified or to be in good
standing, if any, which when taken together with all such failures of Buyer do
not have a material adverse effect on its ability to perform its obligations
under this Agreement and the Transaction Documents.
4.2 Authorization and Enforceability. Each of Buyer and Parent has full
corporate power and corporate authority to, execute, deliver and perform this
Agreement and the other Transaction Documents to which either of them is a
party. The execution, delivery and performance by Buyer and Parent of this
Agreement and the Transaction Documents to which Buyer and/or Parent is a
party have been duly authorized by all necessary corporate action on the part
of each of them. This Agreement has been duly executed and delivered by Buyer
and Parent, and as of the Closing Date the other Transaction Documents will be
duly executed and delivered by Buyer and Parent. This Agreement is a legal,
valid and binding obligation of Buyer and Parent, enforceable against them in
accordance with its terms, except as such enforceability may be limited by
applicable laws relating to bankruptcy, insolvency, fraudulent conveyance,
reorganization or affecting creditors' rights generally and except to the
extent that injunctive or other equitable relief is within the discretion of a
court. As of the Closing Date, each of the other Transaction Documents to
which Buyer and Parent is a party will be duly executed and delivered by Buyer
and Parent and will constitute the legal, valid and binding obligations of
Buyer and Parent, enforceable against them in accordance with its respective
terms, except as such enforceability may be limited by applicable laws
relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or
affecting creditors' rights generally and except to the extent that injunctive
or other equitable relief is within the discretion of a court.
4.3 No Violation of Laws or Agreements. The execution, delivery and
performance of this Agreement and the Transaction Documents by Buyer and/or
Parent do not, and the consummation of the transactions contemplated hereby
and thereby will not, (a) contravene any provision of the Articles of
Incorporation or Bylaws of Buyer or the Certificate of Incorporation or Bylaws
of Parent; or (b) except as set forth on Schedule 4.3, violate, conflict with,
result in a breach of, or constitute a default (or an event which would with
the passage of time or the giving of notice, or both, constitute a default)
under, or result in or permit the termination, modification, acceleration, or
cancellation of (i) any indenture, mortgage, loan or credit agreement,
license,
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instrument, lease, contract, plan, permit, authorization, proof of dedication
or other agreement or commitment, oral or written, to which Parent or Buyer is
a party, or by which any of their assets or properties may be bound or
affected, except for such violations, conflicts, breaches, terminations,
modifications, accelerations, cancellations, interests or rights which,
individually or in the aggregate do not have a material adverse effect on
their respective ability to perform their obligations under this Agreement and
the Transaction Documents, or (ii) any judgment, injunction, writ, award,
decree, restriction, ruling, or order of any court, arbitrator or Authority or
any applicable constitution, law, ordinance, rule or regulation to which Buyer
or Parent is subject other than those violations and conflicts which
individually or in the aggregate do not have a material adverse effect on
their respective ability to perform their obligations under this Agreement and
the Transaction Documents.
4.4 Consents. No consent, approval or authorization of, or registration or
filing with, any Person (governmental or private) is required in connection
with the execution, delivery and performance by Buyer and Parent of this
Agreement, the other Transaction Documents, or the consummation of the
transactions contemplated hereby or thereby by Buyer or Parent except (i) as
required by the HSR Act, (ii) as specified on Schedule 4.4 and (iii) for such
consents, approvals, authorizations, registrations or filings, the failure to
obtain or make would not individually or in the aggregate have a material
adverse effect on their respective ability to perform their obligations under
this Agreement and the Transaction Documents.
4.5 Financing. Buyer and Parent have, and at the Closing Date, will have
sufficient resources to pay the Purchase Price.
4.6 Brokerage. None of Parent, Buyer or their Affiliates have made any
agreement or taken any other action which might cause any Person to become
entitled to a broker's or finder's fee or commission as a result of the
transactions contemplated hereunder which could result in liability to the
Seller Parties.
ARTICLE 5
Additional Covenants
5.1 Conduct of Business. Except (i) as otherwise specifically permitted by
this Agreement, (ii) as set forth in Schedule 5.1 hereto or (iii) with the
prior written consent of Buyer, from and after the date of this Agreement and
until the Closing Date, each of Seller and PEI agree that:
5.1.1 Seller shall conduct the Business as presently operated and only in
the ordinary course of business consistent with past practice.
5.1.2 They shall promptly inform Buyer in writing of any specific event or
circumstance of which they are aware, or of which they receive notice, that
has or is likely to have, individually or in the aggregate, taken together
with the other events or circumstances, a Material Adverse Effect on the
Acquired Assets or the Assumed Liabilities.
5.1.3 Seller shall not:
(a) change or modify in any material respect existing credit and
collection policies, procedures and practices with respect to accounts
receivable;
(b) enter into any contract or commitment, waive any right or enter into
any other transaction (except in the ordinary course of business) which
would have a Material Adverse Effect;
(c) commit to acquire subsequent to the Closing Date on behalf of the
Business any capital asset or group of capital assets costing in excess of
$1,000,000 which, if so acquired, would be included in the Acquired Assets;
or sell or lease or agree to sell or lease or otherwise dispose of any
assets included in the Acquired Assets except in the ordinary course of the
conduct of the Business, consistent with past practice;
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(d) except in the ordinary course of business, consistent with past
practice or as required under any of Seller's debt instruments or
indentures, mortgage, pledge or subject to any Lien (other than Permitted
Liens) any of the Acquired Assets;
(e) change any compensation or benefits or grant any material new
compensation or benefits payable to or in respect of any Transferred
Employee except (i) as required by law, (ii) in the ordinary course,
consistent with past practice and (iii) as required by the Collective
Bargaining Agreements in existence on the date hereof; provided, however,
no individual Employee shall in any event receive a compensation increase
in excess of seven percent (7%) except as required by the Collective
Bargaining Agreements in existence on the date hereof;
(f) other than in the ordinary course of business consistent with past
practice, sell or otherwise transfer any assets necessary, or otherwise
material to the conduct of, the Business which would constitute Acquired
Assets;
(g) change the Seller's method of accounting or keeping its books of
account or accounting practices with respect to the Business, except as
required by GAAP; or
(h) intentionally and wilfully take or omit to take any action which if
taken or omitted prior to the date hereof would constitute or result in a
breach of any representations or warranties set forth in Sections 3.1, 3.2,
3.3, 3.4, 3.7, 3.8, 3.10, 3.14, 3.16 and 3.25 hereof (it being understood
that the failure to cure a breach shall not, by itself, be an intentional
and willful omission to take action).
5.2 Negotiations. Neither PEI nor Seller nor any Person controlled by PEI or
Seller or under common control with PEI or Seller (each such person being a
"Section 5.2 Affiliate"), nor any officer, director, employee, representative
or agent of PEI or Seller or any of their Section 5.2 Affiliates, shall,
directly or indirectly, solicit or initiate or (subject to the fiduciary
duties of the Board of Directors of PEI to its stockholders under applicable
law as advised by counsel) participate in any way in discussions or
negotiations with, or provide any information or assistance to, or enter into
an agreement with any Person or group of Persons (other than Parent, Buyer or
any Person controlled by Parent or Buyer or under common control with Parent,
Buyer or any Persons providing financing to the parties hereto in connection
with facilitating the consummation of the transactions contemplated by this
Agreement) concerning any acquisition, merger, consolidation, liquidation,
dissolution, disposition or other transaction (or series of such transactions)
that would result in the transfer to any such Person or group of Persons of
ten percent (10%) of the Acquired Assets (as measured by net book value of
such assets on the date of each such transaction) or the acquisition, merger,
consolidation, liquidation, dissolution, disposition or other transaction (or
series of such transactions) involving Seller or PEI, if such acquisition,
merger, consolidation, liquidation, dissolution, disposition or other
transaction (or series of such transactions) would be inconsistent, in any
respect, with the obligations of the Seller Parties hereunder (any of the
foregoing transactions, a "Competing Transaction"). PEI will promptly notify
Buyer of the substance of any inquiry or proposal concerning any such
transaction that may be received by any of the directors or executive officers
of PEI or Seller, their legal counsel or a Vice President or Managing Director
of their financial advisor who is assigned to the Seller Parties account.
5.3 Disclosure Schedules. As promptly as practicable, the Seller Parties
will provide Buyer with a supplement or amendment to the Disclosure Schedules
with respect to any matter, condition or occurrence which is required to be
set forth or described in the Disclosure Schedules. For the avoidance of
doubt, a matter, condition or occurrence shall only be "required" to be set
forth or described in the Disclosure Schedules if the failure to be so
disclosed would result in a breach of the applicable representation or
warranty (qualified by Material Adverse Effect where applicable) on the date
hereof or on the Closing Date. In addition, Seller shall have the right at any
time and from time to time prior to the Closing to supplement or amend the
Disclosure Schedules. Seller may provide Disclosure Schedules with respect to
any representation or warranty of this Agreement whether or not a specific
schedule is referred to therein. In the event that any supplement or amendment
of such Disclosure Schedules shall be provided later than five (5) Business
Days prior to the Closing Date the Buyer shall have the right to delay the
Closing for a period of five (5) Business Days in order for Buyer to review
such supplement or amendment. No such supplement or amendment shall be deemed
to cure any breach of or alter any representation or warranty made in this
Agreement so as to permit the Closing to occur
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unless Buyer specifically agrees thereto in writing. The Seller Parties shall
promptly inform Buyer, and Buyer will promptly inform the Seller Parties of
any fact or event which comes to their attention, the existence of which
constitutes or likely will constitute a breach in any material respects of any
representation or warranty in this Agreement. In addition, Buyer will, within
five (5) days of receipt thereof, forward to Seller (i) any title report Buyer
receives from a title company with respect to the Real Estate and (ii) any
written communication regarding a specific Lien or title defect affecting a
specifically identified parcel of the Real Estate sent to the President,
Treasurer, General Counsel and Secretary of Parent, the Vice President and
Treasurer of American Water Works Service Co., Inc. or the President of Buyer,
and sent by a party other than the Seller Parties, their legal counsel,
financial advisors or representatives.
5.4 Mutual Covenants. The parties mutually covenant from the date of this
Agreement to the Closing Date (and subject to the other terms of this
Agreement, including Section 5.8 hereof):
5.4.1 to cooperate with each other in determining whether filings are
required to be made or consents required to be obtained in any jurisdiction in
connection with the consummation of the transactions contemplated by this
Agreement and in making or causing to be made any such filings promptly and in
seeking to obtain timely any such consents;
5.4.2 to use all reasonable efforts to obtain promptly the satisfaction (but
not waiver) of the conditions to the Closing of the transactions contemplated
herein (each party hereto shall furnish to the other and to the other's
counsel all such information as may be reasonably required in order to
effectuate the foregoing action); and
5.4.3 to advise the other parties promptly if such party determines that any
condition precedent to its obligations hereunder will not be satisfied in a
timely manner.
5.5 Filings and Authorizations. The parties hereto will as promptly as
practicable, make or cause to be made all such filings and submissions under
laws, rules and regulations applicable to it or its Affiliates as may be
required to consummate the terms of this Agreement, including all
notifications and information to be filed or supplied pursuant to the HSR Act
and with the Pennsylvania Public Utility Commission (the "PPUC") pursuant to
the Pennsylvania Public Utility Code (the "Utility Code"). Any such filings
and supplemental information will be in substantial compliance with the
requirements of the applicable law, rule or regulation. Each of Parent and
Buyer, on the one hand, and the Seller Parties, on the other, shall furnish to
the other such necessary information and reasonable assistance as the other
may request in connection with its preparation of any filing or submission to
the PPUC or which is necessary under the HSR Act. The Seller Parties, on the
one hand and Buyer and Parent, on the other, shall keep each other apprised of
the status of any communications with, and inquiries or requests for
additional information from, any Authority, including the PPUC, the United
States Federal Trade Commission ("FTC") and the Antitrust Division of the
United States Department of Justice (the "Antitrust Division"), and shall
comply promptly with any such inquiry or request. Each of PEI, Seller, Parent
and Buyer will use its reasonable efforts to obtain any clearance required
under the HSR Act and from the PPUC for the purchase and sale of the Acquired
Assets in accordance with the terms and conditions hereof. Notwithstanding the
foregoing, nothing contained in this Agreement will require or obligate any
party or their respective Affiliates (i) to initiate, pursue or defend any
litigation (or threatened litigation) to which any Authority (including the
PPUC, the Antitrust Division and the FTC) is a party; (ii) to agree or
otherwise become subject to any material limitations on (A) the right of Buyer
or its Affiliates effectively to control or operate the Business or the right
of Seller or its Affiliates effectively to control or operate Seller's gas
business, (B) the right of Buyer or its Affiliates to acquire or hold the
Business or the right of Seller or its Affiliates to hold the Excluded Assets
or Seller's gas business, or (C) the right of Buyer to exercise full rights of
ownership of the Business or all or any material portion of the Acquired
Assets or the right of Seller to exercise full rights of ownership of Seller's
gas business or all or any material portion of the Excluded Assets; or (iii)
to agree or otherwise be required to sell or otherwise dispose of, hold
separate (through the establishment of a trust or otherwise), or divest itself
of all or any portion of the business, assets or operations of PEI, Seller,
Parent, Buyer, any Affiliate of Buyer or the Business. The parties agree that
no representation, warranty or covenant of Buyer, Parent, PEI or Seller
contained in this
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Agreement shall be breached or deemed breached as a result of the failure by
Parent and Buyer on the one hand or the Seller Parties, on the other, to take
any of the actions specified in the preceding sentence.
5.6 Public Announcement. No party hereto shall make or issue, or cause to be
made or issued, any public announcement or written statement concerning this
Agreement or the transactions contemplated hereby without the prior written
consent of the other party (which will not be unreasonably withheld or
delayed), unless counsel to such party advises that such announcement or
statement is required by law (in which case the parties shall make reasonable
efforts to consult with each other prior to such required announcement).
5.7 Further Assurances. Each of PEI, Parent, Buyer and Seller, from time to
time after the Closing, at Buyer's or Seller's request, will execute,
acknowledge and deliver to the applicable person such other instruments of
conveyance and transfer and will take such other actions and execute such
other documents, certifications, and further assurances as Buyer or Seller, as
the case may be, may reasonably require in order to transfer, in accordance
with the terms and conditions of this Agreement, more effectively in Buyer or
to put Buyer more fully in possession of any of the Acquired Assets or better
to enable Buyer to complete, perform and discharge any of the Assumed
Liabilities. Each party shall cooperate and deliver such instruments and take
such action as may be reasonably requested by the other party in order to
carry out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
5.8 Cooperation.
5.8.1 Parent, Buyer, PEI and Seller shall cooperate and shall cause their
respective Affiliates, officers, employees, agents and representatives to
cooperate to ensure the orderly transition of the Business from Seller to
Buyer and to minimize the disruption to the Business resulting from the
transactions contemplated hereby.
5.8.2 Without limiting the foregoing, neither Parent and Buyer, nor PEI and
Seller (nor any of their respective Affiliates) shall make any filings
pursuant to federal or state securities laws ("Securities Filings") or make
any consent solicitations to holders of Assumed Indebtedness which include any
information about Seller, Buyer (or their respective Affiliates) or the
transactions contemplated hereby without the prior written approval of the
other party, which approval shall not be unreasonably withheld or delayed;
provided, however, that if such consent is withheld or delayed, any party may
so disclose such information in its reasonable judgment to the extent such
party's counsel advises it that such disclosure is required by applicable law.
Each of Parent, Buyer, PEI and Seller shall, and shall cause their respective
Affiliates to, comply with all applicable federal and state securities laws in
connection with this Agreement and the transactions contemplated hereby
(including any solicitation of consents of holders of Assumed Indebtedness),
and all information supplied by any party for inclusion in any Securities
Filing or consent solicitation, including, without limitation, any proxy or
information statement, or any registration statement on Form S-4 shall be true
and correct in all material respects and shall not contain any untrue
statement of a material fact or omit to state any material fact which is
required to be stated therein or which is necessary to make the statements
contained therein not misleading in light of the circumstances in which they
were made.
5.8.3 If required under applicable law, each of PEI and Seller shall prepare
a proxy statement (collectively, the "Proxy Statements") for the PEI common
stock and Seller's preferred stock, file them with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934, and use all
reasonable efforts to have them cleared by the SEC. Parent, Buyer, PEI and
Seller shall cooperate with each other in the preparation of the Proxy
Statements, and the Seller and PEI shall notify Parent and Buyer of the
receipt of any comments of the SEC with respect to the Proxy Statement and of
any requests by the SEC for any amendment or supplement thereto or for
additional information and shall provide to Parent and Buyer promptly copies
of all material correspondence between PEI and the Seller (or either of them)
or any of their representatives and the SEC. Each of PEI, Seller, Parent and
Buyer agrees to use its reasonable efforts, after consultation with the other
parties hereto to respond promptly to all such comments of and requests by the
SEC. As promptly as practicable after the Proxy Statements have been cleared
by the SEC, PEI and Seller shall mail the Proxy Statements to their respective
stockholders.
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5.8.4 Unless this Agreement has been terminated in accordance with Section
6.3 hereof, each of PEI and the Seller, acting through their respective Board
of Directors, shall, in accordance with applicable law and its respective
Articles of Incorporation and By-Laws:
(a) after the Proxy Statements have been cleared by the SEC, promptly and
duly call, give notice of, convene and hold as soon as practicable
thereafter following the execution of this Agreement, a meeting of its
common (in the case of PEI) and preferred (in the case of Seller)
stockholders for the purpose of voting to approve and adopt this Agreement
and the consummation of the transactions contemplated hereby by Seller and
PEI;
(b) subject to the fiduciary duties of the directors of PEI under
Pennsylvania law as advised by counsel and subject to the fiduciary duties
of the directors of Seller to the holders of Seller's preferred stock as
advised by counsel, recommend approval of this Agreement and the
transactions contemplated hereby by its common stockholders (and in the
case of Seller, preferred) and include in the Proxy Statement such
recommendation, and use reasonable efforts to solicit and secure such
approval.
5.8.5 During the first 180 days after the Closing Date, Buyer shall have the
right to use all of the logos, trademarks and trade identification of Seller
as are located at the Real Estate or on the Acquired Assets (collectively, the
"Trademarks"). Buyer's use of the Trademarks shall be in accordance with such
reasonable quality control standards as may be promulgated by Seller and
provided to Buyer. If Seller shall notify Buyer in writing of Buyer's material
failure to comply with such reasonable quality control standards and Buyer
continues to not comply with such reasonable quality control standards for
more than 20 days after receipt of such notice, Seller shall have the right to
terminate Buyer's right under this Section 5.8.5 to use the Trademarks.
5.8.6 Seller shall give Buyer and its representatives (including Buyer's
Accountants, consultants, counsel and employees), upon reasonable notice and
during normal business hours, full access to the properties, contracts,
employees, books, records and affairs of Seller to the extent relating to the
Business and the Acquired Assets, and shall cause its officers, employees,
agents and representatives to furnish to Buyer all documents, records and
information (and copies thereof), to the extent relating to the Business and
the Acquired Assets, as Buyer may reasonably request. Except to the extent
disclosed in the Disclosure Schedules in accordance with Sections 5.3 and 8.4,
no investigation or receipt of information by Buyer pursuant to, or in
connection with, this Agreement, shall diminish or obviate any of the
representations, warranties, covenants or agreements of Seller or PEI under
this Agreement or the conditions to the obligations of Parent or Buyer under
this Agreement. All information provided to Buyer under this Agreement shall
be held subject to the terms and conditions of the Confidentiality Agreement
dated March 23, 1995 between PEI and Parent.
5.9 Employees; Employee Benefits.
5.9.1 Schedule 5.9.1 lists divisions and the number of all salaried and
hourly employees actively employed (as of the date of this Agreement) in each
division by Seller or any of its Affiliates whose primary responsibilities
relate to the Business. Schedule 5.9.1 lists job classifications and number of
employees in each job classification of those employees whose terms and
conditions of employment are subject to a Collective Bargaining Agreement
("Union Employees"). All individuals referred to on Schedule 5.9.1 are herein
referred to as the "Employees." As soon as practical after the execution of
this Agreement, Buyer and Seller shall determine at least 294 of the Employees
to whom Buyer will offer employment and such additional number of Employees,
if any, whom Buyer also wishes to employ. Upon determination of such
Employees, Seller will supplement Schedule 5.9.1 with the name, job title,
unused vacation, current base salary or hourly wage, date of hire and assigned
location of each Transferred Employee (as that term is defined below). At the
Closing, Seller shall provide an updated Schedule 5.9.1 which shall disclose
all the information required under the preceding sentence as of the most
recent practicable date prior to Closing.
5.9.2 Effective as of the Closing, Buyer shall offer employment to at least
294 of those employees included on Schedule 5.9.1. All Employees to whom Buyer
offers employment and who accept such employment are herein referred to as the
"Transferred Employees." In the event any Employees do not accept Buyer's
offer
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of employment, Buyer shall offer employment to such additional employees (the
identity of whom shall be determined by Buyer and Seller) as are necessary to
bring the total number of Transferred Employees to at least 294. Subject to
the provisions of this Section 5.9, Buyer shall provide each Transferred
Employee with compensation and employee benefits which are substantially
comparable to those provided by Buyer to its other similarly situated
employees. Buyer agrees (i) to waive any waiting period or limitations
regarding pre-existing conditions with respect to Transferred Employees and
their Beneficiaries under any group-health or long-term disability plan
maintained by Buyer (and/or any of its Affiliates) for the benefit of any
Transferred Employee, (ii) to credit any covered expenses incurred by a
Transferred Employee or Beneficiary of a Transferred Employee under Seller's
group health plan prior to the Closing towards any deductibles or limits under
any group health plan maintained by Buyer (and/or any of its Affiliates) for
the benefit of any Transferred Employee, (iii) to credit the service of each
Transferred Employee with Seller and its Affiliates before the Closing, for
all purposes under all employee benefit plans and arrangements maintained by
Buyer (and/or any of its Affiliates) for the benefit of any Transferred
Employee, other than for purposes of benefit accrual under any "defined
benefit plan", within the meaning of Section 3(35) of ERISA (iv) to provide
accrued vacation to Transferred Employees in the year in which the Closing
occurs, equal to the excess, if any, of the accrued vacation to which the
Transferred Employee would otherwise be entitled under Seller's vacation plan
during that year over the amount of accrued vacation the Transferred Employee
had taken during that year, and, thereafter, to provide vacation to
Transferred Employees on the same basis as provided to similarly situated
employees of Buyer, with service credit as provided in (iii), hereof, (v) to
provide severance benefits to Transferred Employees terminated by Buyer
without cause within two years of Closing that are substantially comparable to
those benefits provided by Buyer to similarly situated employees and (vi) to
comply with all applicable legal requirements with respect to Union Employees
(including without limitation any applicable duty to bargain with those
employees' bargaining representative). Buyer shall be responsible for
providing to each Transferred Employee vacation in an amount equal to the
Transferred Employee's vacation entitlement for the year of Closing reduced by
the number of vacation days such Transferred Employee has taken on or before
Closing. Nothing in this Section 5.9 shall limit Buyer's authority to
terminate the employment of any Transferred Employee at any time and for
whatever reason. Until the second anniversary of the Closing Date, neither
Seller nor any of its Affiliates shall directly or indirectly solicit or offer
employment to any Transferred Employee then employed by Buyer or its
Affiliates.
5.9.3 Except as specifically provided in Section 5.9.6 and Section 5.12,
Seller shall be solely responsible for any liability, claim or expense
(including reasonable attorneys' fees) related to compensation or employee
benefits incurred by Buyer as the result of any claims against Buyer or its
Affiliates that are made by any Employees or Former Employees (or the
Beneficiary of any Employee or Former Employee) who are not made offers to
become employees of Buyer or its Affiliates including, without limitation,
claims asserted against Buyer as a result of their termination by Seller or
its Affiliates.
5.9.4 Except as otherwise specifically provided in Section 5.9, 5.10, 5.11
or 5.12, Seller shall be solely responsible for any liability, claim or
expense with respect to compensation or employee benefits of any nature
(including, but not limited to, workers compensation claims or the benefits
provided under the Benefit Plans, whether paid before or after the Closing)
owed to any Transferred Employee or the Beneficiary of any Transferred
Employee that arises out of or relates to (i) the employment relationship
between Seller or any of its Affiliates and such Transferred Employee or
Beneficiary, or (ii) any benefit claim or expense (including medical expenses)
incurred before Closing under any Benefit Plan. For purposes of this
Agreement, a medical expense shall be deemed to be incurred when the services
giving rise to a claim are rendered, regardless of when billed or paid.
Without limiting the foregoing, Seller shall be responsible for the payment of
any employee benefits that become due to any Transferred Employees as a result
of their termination by Seller.
5.9.5 Buyer shall be solely responsible for any liability, claim or expense
with respect to compensation or employee benefits of any nature (including,
but not limited to, workers compensation, claims or the benefits provided
under any employee benefit plan or arrangement of Buyer incurred after
Closing) owed to any Transferred Employee or Beneficiary of any Transferred
Employee that arises out of or relates to (i) the employment relationship
between Buyer or any of its Affiliates and any Transferred Employee or (ii)
any benefit
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claim or expense (including medical expense) incurred after Closing under any
employee benefit plan sponsored or contributed to by Buyer or an ERISA
Affiliate after Closing. Notwithstanding the foregoing, Buyer shall not be
responsible for the payment of any employee benefits that become due to any
Transferred Employees under any Benefit Plan (other than the Assumed Benefit
Plans).
5.9.6 Seller currently allocates 420 of the Employees to the Business. Buyer
agrees to reimburse Seller for 50% of the amount paid by Seller as severance
under Seller's severance plan as in effect on the date hereof to any such
Employees provided (i) Buyer does not offer to hire such Employees in
accordance with the provisions of Sections 5.9, 5.10, 5.11 and 5.12 and (ii)
Seller provides notice to those Employees on or shortly after the Closing Date
to the effect that their employment will be terminated on or shortly after the
Closing Date. Buyer will pay such reimbursement to Seller within 5 days after
receipt of a list of the Employees showing which are entitled to severance
pay, the amounts of that severance pay and certifying that those amounts have
been paid.
5.9.7 Until the second anniversary of the Closing Date, Buyer shall not
directly or indirectly solicit or offer employment to any active employee of
Seller or PEI, other than the Transferred Employees.
5.10 Employee Pension Plan.
5.10.1 Effective upon the date of the transfer described in Section 5.10.2,
subject to the terms and conditions of this Agreement, Buyer shall cause the
American Water System Pension Plan (the "American Pension Plan") to assume the
liability of the Employees' Retirement Plan of Pennsylvania Enterprises, Inc.
(the "PEI Pension Plan") for benefits accrued to the Closing Date by those
Transferred Employees participating in the PEI Pension Plan on the Closing
Date (the "Affected Participants"). From and after the Closing Date, the
Affected Participants will accrue additional benefits under the American
Pension Plan, as if they were newly hired on the Closing Date, provided that
they shall be given credit for service with Seller and its Affiliates for
eligibility and vesting, but not benefit accrual purposes, to the same extent
that credit for such service has been given by Seller and its Affiliates.
5.10.2 Buyer shall deliver to Seller as soon as practicable, but in no event
later than ninety (90) days after Closing (i) a certified copy of the American
Pension Plan and any amendment necessary to effectuate the transfer of assets
and the assumption of benefit liabilities in accordance with this Section
5.10, (ii) a certified copy of the trust agreement for the American Pension
Plan; (iii) the most recent favorable determination letter from the IRS with
respect to the American Pension Plan; and (iv) an opinion from Buyer's legal
counsel acceptable to Seller that the American Pension Plan, as so amended,
complies or will comply on a timely basis with the applicable provisions of
the Code relating to the qualification of, and the transfer of assets and
assumption of benefit liabilities by, the American Pension Plan. Seller shall
deliver to Buyer as soon as practicable, but in no event later than ninety
(90) days after Closing, an opinion from Seller's legal counsel acceptable to
Buyer that the PEI Pension Plan complies or will comply on a timely basis with
the applicable provisions of the Code relating to the qualification of the PEI
Pension Plan, and the transfer of assets to and assumption of benefit
limitations by, the American Pension Plan. Promptly (but in any event within
120 days after Closing), PEI shall cause the trustee of the PEI Pension Plan
to transfer in cash and such other property as may be acceptable to Parent to
the trustee of the American Pension Plan an amount equal to the sum of (i) the
actuarial present value of accumulated plan benefits of the Affected
Participants as of the Closing Date using the actuarial methods and
assumptions listed on Schedule 5.10.2, reduced by the amount of any
distributions to Affected Participants, and (ii) an additional amount equal to
interest at the Prime Rate on the amount described in the preceding clause (i)
for the period from the Closing Date to the date of such transfer. Both the
Seller Parties and Parent will file any IRS Form 5310A that is required with
respect to the transfer contemplated by this Section 5.10 at least thirty (30)
days prior to the transfer. Upon the asset transfer described in this Section
5.10, Buyer and the American Pension Plan shall be responsible for all
benefits to which Transferred Employees were entitled under the PEI Pension
Plan as of the Closing Date, and Seller and the PEI Pension Plan shall cease
to have any liability, contingent or otherwise, for such benefits.
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5.11 Employee Savings Plan.
5.11.1 Effective upon the date of the transfer described in Section 5.11.2,
subject to the terms and conditions of this Agreement, Buyer shall cause the
Savings Plan for Employees of American Water Works Company, Inc. (the
"American Savings Plan") to assume the liability of the Pennsylvania
Enterprises, Inc. Employees' Savings Plan (the "PEI Savings Plan") for that
part of account balances of those Transferred Employees participating in the
PEI Savings Plan on the Closing Date (the "Affected Participants") that is
transferred to the American Savings Plan. As of the Closing Date, Affected
Participants shall be 100% vested in their account balances under the PEI
Savings Plan. Transferred Employees shall be given credit under the American
Savings Plan for service with Seller and its Affiliates for eligibility and
vesting, to the same extent that credit for such service has been given by
Seller and its Affiliates.
5.11.2 Buyer shall deliver to Seller as soon as practicable, but in no event
later than ninety (90) days after Closing (i) a certified copy of the American
Savings Plan and any amendment necessary to effectuate the transfer of assets
and the assumption of account balances in accordance with this Section 5.11,
(ii) a certified copy of the trust agreement for the American Savings Plan;
(iii) the most recent favorable determination letter from the IRS with respect
to the American Savings Plan; and (iv) an opinion from Buyer's legal counsel
acceptable to Seller that the American Savings Plan, as so amended, complies
or will comply on a timely basis with the applicable provisions of the Code
relating to the qualification of, and the transfer of assets and assumption of
benefit liabilities by, the American Savings Plan. Seller shall deliver to
Buyer as soon as practicable, but in no event later than ninety (90) days
after Closing, an opinion from Seller's legal counsel acceptable to Buyer that
the PEI Savings Plan complies or will comply on a timely basis with the
applicable provisions of the Code relating to the qualification of the PEI
Savings Plan, and the transfer of assets to, and assumptions of benefit
limitations by, the American Savings Plan. PEI shall (i) allow the Affected
Participants to elect whether to have their entire accounts under the PEI
Savings Plan transferred to the American Savings Plan or to have their
accounts under the PEI Savings Plan other than their PEI stock accounts
transferred to the American Savings Plan and to retain their PEI stock
accounts in the PEI Savings Plan (the portion of the PEI Savings Plan accounts
to be transferred pursuant to the Affected Participant's elections is
hereinafter the "Transferred Accounts") and (ii) as soon as practicable, but
in any event within 120 days after Closing, cause the trustee of the PEI
Savings Plan to transfer in cash, including, for those Affected Participants
who elect to transfer their entire accounts, the cash value of any PEI stock
held in their accounts, and promissory notes representing outstanding loans to
Affected Participants to the trustee of the American Savings Plan an amount
equal to the sum of the account balances of the Transferred Accounts
calculated as of the most recent valuation date under the PEI Savings Plan
(which shall, in any event, be within thirty (30) days of the transfer). Both
the Seller Parties and Buyer will file any IRS Form 5310A that is required
with respect to the transfer contemplated by this Section 5.11 date at least
30 days prior to the transfer. Upon the transfer described in this Section
5.11, Buyer and the American Savings Plan shall be responsible for all
benefits attributable to the Transferred Accounts to which Transferred
Employees were entitled under the PEI Savings Plan as of such date, and Seller
and the PEI Savings Plan shall cease to have any liability, contingent or
otherwise, for such benefits. Sellers and the PEI Savings Plan shall retain
responsibility for all benefits attributable to the portion, if any, of each
Affected Participant's PEI Savings Plan accounts that is not included in the
Transferred Accounts and Buyer and the American Savings Plan shall have no
liability, contingent or otherwise, for such benefits.
5.12 Post-Retirement Health Care and Life Insurance. Within sixty (60) days
of the Closing, Seller agrees to transfer to trusts established by Buyer under
Section 501(c)(9) of the Code ("Buyer's VEBAs") the amount held under any
trust established by Seller under Section 501(c)(9) of the Code ("Seller's
VEBAs") to fund post-retirement health care and life insurance benefits
attributable to the Former Employees identified pursuant to the method set
forth on Schedule 5.12 and any Transferred Employees. Buyer agrees to provide
post-retirement health care and life insurance benefits to the Former
Employees listed on Schedule 5.12 and, as applicable, Transferred Employees
who become eligible for such benefits after Closing and further agrees that
Buyer's VEBAs will apply an amount at least equal to the sum of the assets
(and earnings thereon calculated at the rate of return generated by Buyer's
VEBAs) transferred from Seller's VEBAs to provide post-retirement
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health care and life insurance benefits for such employees. Upon Closing,
Buyer shall be responsible for all obligations of the Seller Parties to
provide post-retirement health care and life insurance benefits "incurred"
(within the meaning of Section 5.9.4) after the Closing and the Seller Parties
shall cease to have any liability, contingent or otherwise, for such benefits.
Notwithstanding the foregoing, Buyer shall not pay and shall not assume any
obligation or responsibility of Seller to provide post-retirement health care
and life insurance benefits attributable to Former Employees to the extent
that the PPUC has not authorized recovery for the expense of such benefits in
Seller's water rates as of the Closing.
5.13 Taxes. The Seller Parties, on the one hand, and Parent and Buyer, on
the other, shall (a) each provide the other with such assistance as may
reasonably be requested by either of them in connection with the preparation
of any Tax return, any audit or other examination by any taxing authority or
any judicial or administrative proceeding with respect to Taxes; (b) each
retain and provide the other with any records or other information which may
be relevant to such return, audit, examination or proceeding, and (c) each
provide the other with any final determination of any such audit or
examination, proceeding or determination that affects any amount required to
be shown on any Tax return of the other for any period (which shall be
maintained confidentially). Without limiting the generality of the foregoing,
Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall
retain, until the applicable statutes of limitations (including all
extensions) have expired, copies of all Tax returns, supporting workpapers,
and other books and records or information which may be relevant to such
returns for all Tax periods or portions thereof ending before or including the
Closing Date, and shall not destroy or dispose of such records or information
without first providing the other party with a reasonable opportunity to
review and copy the same.
5.14 Survey.
5.14.1 Within 180 days after the date hereof Seller shall obtain at its sole
cost and expense and deliver to Buyer a final survey (the "Survey") of the
Real Estate listed on Schedule 1.1.1(a), and a final mapping of those portions
of the Excluded Real Estate as may be required to be mapped in connection with
the Operating Easement. The Survey shall (A) be prepared and sealed by a
Professional Land Surveyor, registered in the Commonwealth of Pennsylvania,
who may be an employee of Seller, (B) be referenced to the Pennsylvania Plane
Coordinate System (North Zone), and where reasonably feasible, to existing
permanent structures such as dams, buildings, roadways and abutments, and (C)
contain a legal description of the Real Estate, including metes and bounds,
sufficient in detail for the preparation of recordable deeds. The mapping of
the Excluded Real Estate shall be sufficient in detail to permit the
recordation of the Operating Easement.
5.14.2 Buyer shall have 60 days after it receives the Survey and make such
adjustments in the Survey as it, in its reasonable, good faith discretion,
determines are necessary to operate the Business. Upon the expiration of such
60 day-period Buyer will notify Seller in writing of such adjustments. In the
event that Seller disputes any such adjustments and Buyer and Seller are
unable to resolve such dispute within 30 days, Seller and Buyer shall each
have the right to terminate this Agreement.
5.14.3 The Seller Parties shall keep Buyer reasonably informed at all times
as to its progress with respect to the subdivision approval for which Seller
makes application (other than proceedings before the PPUC) and shall provide
Buyer with an opportunity to participate in such approval process including
the right to approve any changes in boundary lines or conditions or
restrictions imposed upon the Real Estate as a condition of any such
subdivision approval.
5.15 PEI Guarantees. Each of Parent and Buyer shall use its reasonable
efforts to assist PEI in obtaining full and complete releases on the
guarantees listed on Schedule 5.15 made by PEI of Seller's obligations with
respect to certain of the Assumed Indebtedness. For purposes of this Section
5.15 and Section 5.16, reasonable efforts: (a) shall include Buyer's
assumption of the Assumed Indebtedness on the terms set forth in this
Agreement; (b) shall not be deemed to include any obligation on the part of
Parent to provide a guarantee of Buyer's obligations under each such debt
instrument assumed by Buyer at Closing; (c) shall include the obligation of
Buyer to provide a debt obligation to the IDA satisfactory to the IDA in
replacement of and in
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substitution for Seller's obligations to the IDA under Seller's outstanding
tax-exempt financings; and (d) shall not impose on Buyer or Parent any
obligation to issue any debt obligation under Section 5.16 other than an
obligation (i) on terms substantially similar to Buyer's outstanding general
first mortgage bond indebtedness (other than interest rate, fees and maturity)
and (ii) bearing interest at rates, and with fees and maturities, equal to the
Seller's indebtedness to the IDA.
5.16 Assumption of Seller Debt. Each of Buyer and Parent shall use its
reasonable efforts (as defined in Section 5.15) to assist Seller in obtaining
all consents and taking such other actions as may be required to enable Buyer
to assume at the Closing all of Seller's liabilities and obligations under the
Assumed Indebtedness to the extent provided in Section 2.3.
5.17 Schedule of Permits. Within ninety (90) days following the execution of
this Agreement, PEI and Seller shall deliver to Buyer a schedule, to be
identified as Schedule 5.17, which sets forth all material Permits required
for the use of the Acquired Assets and the operation of the Business by Buyer
substantially in the manner as it was conducted prior to the date hereof. For
purposes of this Section 5.17 material Permits shall include those required
for the service of all utility customers at substantially the same service
levels as provided by Seller on the date of this Agreement. All Permits listed
on Schedule 5.17 that are required to be listed on Schedule 3.3 or Schedule
3.9 shall be so designated. Seller has made or will make prior to the Closing
Date timely applications for renewals of all such Permits listed on Schedule
5.17 which under applicable law must be filed prior to the Closing Date to
maintain the Permits listed on Schedule 5.17 in full force and effect.
5.18 Title Information. Within sixty (60) days following the execution of
this Agreement, Seller shall use its reasonable efforts to deliver to Buyer
true, correct and complete copies of all existing title policies, surveys,
leases, deeds, instruments and agreements relating to title to the Real Estate
in Seller's possession.
5.19 Transaction with Related Parties. Effective as of the Closing Date,
Seller shall have terminated and cancelled all contracts, commitments and
agreements (including employment relationships) relating to the Acquired
Assets or the Business, between Seller, any Affiliate of Seller (including
PEI), any officer or director of Seller or PEI, or any Affiliate of the
foregoing. Seller shall be solely liable for any contractual or other claims,
express or implied arising out of the termination and cancellation of any of
the foregoing raised by any party thereto.
5.20 Approval by PEI. Upon approval of this Agreement and the transactions
contemplated hereby by the common stockholders of PEI as contemplated by
Section 5.8.4 hereof, PEI shall, as the sole owner of common stock of Seller,
vote all of such shares of common stock to approve this Agreement and the
transactions contemplated hereby.
5.21 Supplemental Information.
5.21.1 Seller shall provide Buyer, within five (5) days of the execution or
the date of receipt thereof, a copy of (a) each Contract (other than with
respect to which the Business' total annual liability or expense is less than
$50,000 per such Contract) entered into by Seller after the date hereof and
prior to the Closing Date; (b) a copy of any written notice for assessments
for public improvements against the Real Estate received after the date hereof
and prior to the Closing Date; (c) a copy of the filing of any condemnation,
expropriation, eminent domain or similar proceeding affecting all or any
portion of any of the Real Estate received after the date hereof but prior to
the Closing Date; and (d) a copy of any Contract where Seller is a lessee
relating to the use or occupancy of the Real Estate and where such Contract
involves annual payments in excess of $25,000 entered into by Seller after the
date hereof and prior to the Closing Date.
5.21.2 Within five (5) days of the receipt of notice of violation Seller
shall notify Buyer of any violations of state or federal drinking water
standards which, if such violations existed on the date hereof, would be
required to be disclosed pursuant to Section 3.8.10 hereof, and shall promptly
notify Buyer of the actions proposed to be taken by Seller to correct or
otherwise respond to such violations.
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5.22 Non-Competition. Except as set forth on Schedule 5.22, the Seller
Parties agree that for a period of fifteen (15) years after the Closing Date
neither Seller Party nor any Affiliate of a Seller Party shall directly or
indirectly own, manage, operate, control or participate in the ownership,
management, operation or control of or be otherwise connected in any
substantial manner with any entity engaged in the business of storing,
supplying and distributing water in Pennsylvania, whether or not such business
is subject to regulation by the Pennsylvania Public Utility Commission (it
being understood that the individual directors of Seller and PEI are not
Affiliates of a Seller Party).
5.23 Insurance. Seller or PEI shall arrange, to the reasonable satisfaction
of Buyer, for the first insurance policy listed on Schedule 3.19 (or any
successor or replacement policy thereto) to provide coverage for events or
occurrences occurring prior to Closing but reported within five years of the
Closing Date.
ARTICLE 6
Conditions Precedent; Termination
6.1 Conditions Precedent to Obligations of Buyer and Parent. The obligations
of Buyer and Parent to cause the purchase of the Acquired Assets and the
assumption of the Assumed Liabilities and to consummate the other transactions
contemplated hereby are subject to the satisfaction, on or prior to the
Closing Date, of each of the following conditions (any one or more of which
may be waived in writing in whole or in part by Buyer and Parent in their sole
discretion):
6.1.1 Performance of Agreements; Representations and Warranties. Seller and
PEI shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be performed or
complied with by them at or prior to the Closing; and the representations and
warranties set forth in this Agreement made by Seller and PEI shall be true
and correct on and as of the Closing Date with the same force and effect as
though such representations and warranties had been made on and as of the
Closing Date, except for representations and warranties that speak as of a
specific date or time other than the Closing Date (which need only be true and
correct as of such date or time), other than, in all such cases (except
Section 3.25), such failures to be true and/or correct as would not in the
aggregate reasonably be expected to have a Material Adverse Effect, provided
however, that if any such representation or warranty is already qualified in
any respect by materiality or as to material adverse effect, for purposes of
determining whether this condition has been satisfied, such materiality or
material adverse effect qualification will be in all respects ignored and such
representation or warranty shall be true and correct in all respects without
regard to such qualification (but subject to the overall exception as to
material adverse effect set forth immediately prior to this proviso). Buyer
shall have been furnished with a certificate of the President or Vice
President of Seller and PEI dated the Closing Date, certifying to the
foregoing.
6.1.2 Opinion of Counsel. Buyer shall have received from Moses & Gelso,
counsel to Seller and PEI, an opinion dated the Closing Date, in form and
substance satisfactory to Buyer, to the effect set forth in Exhibit F hereto.
6.1.3 HSR Act. The applicable waiting period under the HSR Act with respect
to the transactions contemplated hereby shall have expired or been terminated.
6.1.4 Required PPUC and Other Consents. The PPUC shall have issued an order
approving the transactions contemplated hereby and affirming that the
regulatory treatment with respect to the Business in existence as of the date
of this Agreement afforded to Seller (including without limitation as to the
recovery of deferred treatment plant costs and recovery of deferred billings)
shall be continued following the transactions contemplated hereby, and such
order shall not contain any restrictions or conditions (other than those in
effect on the date hereof) which would have a Material Adverse Effect on the
Acquired Assets or the Business, and such order shall be final and
unappealable; Seller shall have obtained the statutory and regulatory consents
and approvals listed on Schedule 6.1.4 hereto and all other statutory and
regulatory consents and approvals which are
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required under the laws or regulations of the United States and other
Authorities in order to consummate the transactions contemplated hereby and to
permit Buyer to conduct the Business in the manner contemplated by Section
3.25 hereof other than those the failure of which to obtain would not have a
Material Adverse Effect (it being understood that the failure to obtain
subdivision approval from any Authority other than the PPUC shall not be
considered a required approval unless after the date hereof but prior to the
Closing Date, there is any court decision or any change in, or in the
interpretation by an appropriate Authority of, any law or regulation to the
effect that subdivision approval from an Authority other than the PPUC is
legally required for the subdivision of the Real Estate). Seller shall have
also obtained (i) all consents and legal opinions required to enable Buyer to
assume the IDA Financings (without any change in the tax-exempt status of the
IDA Financings) and all consents required pursuant to the Indenture of
Mortgage of Deed of Trust dated as of March 15, 1946 from Seller to First
Trust of New York, National Association, as successor to Morgan Guaranty Trust
Company of New York, as trustee, as supplemented (the "Mortgage Indenture") to
enable Seller to sell the Acquired Assets and to grant and transfer the rights
under the Operating Easement to Buyer at the Closing, free and clear of all
Liens other than Permitted Exceptions (and specifically free and clear of any
Lien arising under or pursuant to the Mortgage Indenture) and (ii) the
consents listed on Schedule 6.1.4 hereto.
6.1.5 Injunction; Litigation. (i) No statute, rule, regulation or order of
any court or Authority shall be in effect which restrains or prohibits the
transactions contemplated by this Agreement or which would limit or materially
adversely affect Buyer's ownership of all or any material portion of the
Acquired Assets, nor (ii) shall there be pending or threatened any litigation,
suit, action or proceeding by any party which would reasonably be expected to
materially limit or materially adversely affect Buyer's ownership of the
Acquired Assets.
6.1.6 Documents. Seller and PEI shall have delivered the Survey and all of
the certificates, instruments, contracts and other documents specified to be
delivered by it hereunder, including pursuant to Section 2.7 hereof and shall
have made arrangements satisfactory to Buyer to deliver to Buyer as promptly
as practicable after the Closing, such records (including customer and
employee records) necessary to own and operate the Business.
6.1.7 Real Estate.
(a) Seller and Buyer shall have executed and delivered an access and
maintenance easement agreement substantially in the form of Exhibit G
hereto (the "Operating Easement").
(b) The IDA shall have transferred to Seller title to the Project
Facilities as set forth in Exhibit A to the Project Facilities Agreement
dated as of December 1, 1992 between Seller and the IDA.
(c) As of the Closing Date, the Real Estate, as surveyed pursuant to
Section 5.14 hereof, together with the rights granted under the Operating
Easement, as subject to the Permitted Exceptions, will be adequate to
operate the Business consistent with past practice, including the service
of all utility customers in substantially the same manner and at
substantially the same service levels as the Seller has heretofore
provided, and Buyer shall have been furnished with a certificate of the
President or Vice President of Seller and PEI dated the Closing Date,
certifying to the foregoing, which certification shall not survive the
Closing.
6.1.8 Shareholder Approval. This Agreement and the transactions contemplated
hereby shall have been approved by the holders of a majority of the issued and
outstanding shares entitled to vote thereon of (i) common stock of PEI, (ii)
common stock of Seller and (iii) preferred stock of Seller.
6.2 Conditions Precedent to Obligations of Seller Parties. The obligations
of the Seller Parties to cause the sale of the Acquired Assets and to
consummate the other transactions contemplated hereby are subject to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions (any one or more of which may be waived in writing in whole or in
part by the Seller Parties in their sole discretion):
6.2.1 Performance of Agreements; Representations and Warranties. Parent and
Buyer shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to
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be performed or complied with by them at or prior to the Closing; and the
representations and warranties set forth in this Agreement made by Buyer and
Parent shall be true and correct on and as of the Closing Date, with the same
force and effect as though such representations and warranties had been made
on and as of the Closing Date, except for representations and warranties that
speak as of a specific date or time other than the Closing Date (which need
only be true and correct as of such date or time), other than, in all such
cases (except Section 4.2), such failures to be true and/or correct as would
not in the aggregate reasonably be expected to have a material adverse effect
on the respective ability of Buyer and Parent to perform their obligations
under this Agreement and the Transaction Documents, provided, however, that if
any such representation or warranty is already qualified in any respect by
materiality or as to material adverse effect, for purposes of determining
whether this condition has been satisfied, such materiality or material
adverse effect qualification will be in all respects ignored and such
representation or warranty shall be true and correct in all respects without
regard to such qualification (but subject to the overall exception as to
material adverse effect set forth immediately prior to this proviso). Seller
shall have been furnished with a certificate of the President or Vice
President of Parent and Buyer, dated the Closing Date, certifying to the
foregoing.
6.2.2 Opinion of Counsel. Seller shall have received from Dechert Price &
Rhoads, counsel to Buyer, an opinion dated the Closing Date, in form and
substance satisfactory to Seller, to the effect set forth in Exhibit H hereto.
6.2.3 HSR Act. The applicable waiting period under the HSR Act with respect
to the transactions contemplated hereby shall have expired or been terminated.
6.2.4 Required PPUC and Other Consents. The PPUC shall have issued an order
approving the transactions contemplated hereby and such order shall not
contain any restrictions or conditions which would have a material adverse
effect on Seller or PEI, and such order shall be final and unappealable;
Seller shall have obtained the statutory and regulatory consents and approvals
listed on Schedule 6.2.4 hereto and all other statutory and regulatory
consents and approvals which are required under the laws or regulations of the
United States and other Authorities in order to consummate the transactions
contemplated hereby, other than those the failure of which to obtain would not
have a material adverse effect on the Seller or PEI after the Closing. Seller
shall have obtained (i) all consents and legal opinions required to enable
Buyer to assume the IDA Financings and Seller shall have obtained all consents
required pursuant to the Mortgage Indenture to enable Seller to sell the
Acquired Assets to Buyer at the Closing, free and clear of all Liens other
than Permitted Exceptions (and specifically free and clear of any Lien arising
under or pursuant to the Mortgage Indenture), and (ii) the consents listed as
items 1-4, 7, 9 and 17-19 of Schedule 3.3. Seller and Buyer shall each have
obtained all consents required to enable Buyer to grant and transfer the
rights under the Operating Easement to Seller free and clear of all Liens
other than the "Buyer Permitted Exceptions." "Buyer Permitted Exceptions" as
used herein shall mean (a) the Liens set forth in Schedule 3.10 hereto, (b)
Liens securing Taxes, assessments, governmental charges or levies, or the
claims of materialmen, mechanics, carriers and like persons, all of which are
not yet due and payable or which are being contested in good faith or (c) such
other Liens which, individually or in the aggregate, do not have a change or
effect (or series of related changes or effects) which has or is reasonably
likely to have a material adverse change in or effect upon the business,
assets, condition (financial or otherwise), or results of operations of the
business of the Seller Parties taken as a whole.
6.2.5 Injunction; Litigation. (i) No statute, rule, regulation or order of
any court or Authority shall be in effect which restrains or prohibits the
transactions contemplated by this Agreement or which would limit or materially
adversely affect PEI's or Seller's ownership of all or any material portion of
its properties, nor (ii) shall there be pending or threatened any litigation,
suit, action or proceeding by any party which could reasonably be expected to
materially limit or materially adversely affect PEI's or Seller's ownership of
any of its properties.
6.2.6 Operating Easement. Seller and Buyer shall have executed and delivered
the Operating Easement.
6.2.7 Documents. Parent and Buyer shall have delivered all the certificates,
instruments, contracts and other documents specified to be delivered by it
hereunder, including pursuant to Section 2.7 hereof.
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6.2.8 Shareholder Approval. This Agreement and the transactions contemplated
hereby shall have been approved by the holders of a majority of the issued and
outstanding shares entitled to vote thereon of (i) common stock of PEI, (ii)
common stock of Seller and (iii) preferred stock of Seller.
6.3 Termination. This Agreement may be terminated at any time prior to the
Closing Date:
6.3.1 by mutual written consent of the Seller Parties, Buyer and Parent;
6.3.2 by any of the Seller Parties on five (5) business days notice if PEI
or Seller receives a proposal to acquire from PEI or Seller all or most of the
assets of PEI or Seller or the Business or at least a majority of the
outstanding securities of PEI or Seller with general voting rights to elect
directors of PEI or Seller, as the case may be, or any right or option to
acquire any of the foregoing that PEI's Board of Directors determines in good
faith is more favorable to the common stockholders of PEI than the
transactions contemplated hereby;
6.3.3 by any of the Seller Parties, Parent or Buyer if (i) the vote of the
stockholders of PEI or the preferred stockholders of Seller to approve this
Agreement and the transactions contemplated hereby shall not be obtained at
any meeting, and/or any adjournments thereof, called therefor; (ii) any
governmental or regulatory body the consent of which is a condition to the
obligations of the Seller Parties, Parent and Buyer to consummate the
transactions contemplated hereby shall have determined not to grant its
consent and all appeals of such determination shall have been taken and have
been unsuccessful; (iii) any court of competent jurisdiction shall have issued
an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the transactions contemplated
hereby and such order, judgment or decree shall have become final and
nonappealable; or (iv) the Closing shall not have occurred on or before April
26, 1996;
6.3.4 by Buyer or Parent if (i) PEI or Seller fail to perform its
obligations under Section 5.8.3 with respect to preparing, filing and clearing
the Proxy Statements with the SEC, or 5.8.4, and if, after ten (10) days
written notice by Parent or Buyer of any such failure, PEI or Seller fail to
cure (in the determination of Parent and Buyer) such failure, (ii) the
directors of PEI or Seller fail at the time of the mailing of the Proxy
Statements to their respective stockholders pursuant to Section 5.8.3 or at
any time thereafter to recommend approval of this Agreement or withdraw such
recommendation, or modify in a manner adverse to Parent and Buyer its
recommendations or approval or (iii) PEI or Seller enter into any letter of
intent or definitive agreement regarding a Competing Transaction; or
6.3.5 by Seller or Buyer pursuant to Section 5.14.2.
6.3.6 If this Agreement is terminated and the transactions contemplated
hereby are abandoned as described in this Section 6.3, this Agreement shall
become void and of no further force and effect, except for the provisions of
Section 5.6 relating to publicity, Section 6.4 relating to certain payments,
Section 3.24 and 4.6 relating to brokerage, and Section 8.6 relating to
jurisdiction. Nothing in this Section 6.3 shall be deemed to release either
party from any liability for any willful breach by such party of the terms and
provisions of this Agreement.
6.4 Termination Payments.
6.4.1 If (i) PEI or Seller terminates this Agreement in accordance with
Section 6.3.2; (ii) the Seller Parties, Parent or Buyer terminates this
Agreement in accordance with Section 6.3.3(i), and either PEI or Seller enter
into any letter of intent or definitive agreement with respect to or
consummate a Competing Transaction within three months of the date of such
termination; or (iii) Buyer or Parent terminates this Agreement pursuant to
Section 6.3.4 and either PEI or Seller has entered into or enters into any
letter of intent or definitive agreement with respect to or consummates a
Competing Transaction within six months of the date of such termination; then
in any such case within five (5) business days after the date of such
termination (or, if applicable, the date PEI or Seller enters into any letter
of intent or definitive agreement with respect to a Competing Transaction, or
the date of consummation of a Competing Transaction) Seller shall pay to Buyer
the sum of $9,000,000.
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6.4.2 In addition, in any circumstances under which Buyer is entitled to a
payment pursuant to Section 6.4.1, Seller shall pay to Buyer all reasonable
out of pocket expenses incurred by Buyer and Parent in connection with the
transactions contemplated hereby up to a maximum expense reimbursement of
$1,500,000. Seller shall not be required to make any expense reimbursement
contemplated by this Section 6.4.2 unless and until it shall have a list from
Parent or Buyer stating the amount of its Expenses and copies of supporting
invoices.
ARTICLE 7
Certain Additional Covenants
7.1 Certain Taxes and Expenses. The Seller Parties, on the one hand, and
Buyer and Parent, on the other hand shall be equally responsible for all state
and local sales, use, transfer, real property transfer, documentary stamp,
recording and other similar taxes arising from and with respect to the sale
and purchase of the Acquired Assets. Except as otherwise provided in this
Agreement, each of the parties hereto shall each bear its respective
accounting, legal and other expenses incurred in connection with the
transactions contemplated by this Agreement.
7.2 Maintenance of Books and Records. The Seller Parties, on the one hand,
and Buyer and Parent, on the other hand, shall cooperate fully with each other
after the Closing so that (subject to any limitations that are reasonably
required to preserve any applicable attorney-client privilege) each party has
access to the business records, contracts and other information existing at
the Closing Date and relating in any manner to the Acquired Assets or the
Assumed Liabilities or the conduct of the Business (whether in the possession
of the Seller Parties or Buyer or Parent). No files, books or records existing
at the Closing Date and relating in any manner to the Acquired Assets or the
conduct of the Business shall be destroyed by any party for a period of six
years after the Closing Date without giving the other party at least 30 days
prior written notice, during which time such other party shall have the right
(subject to the provisions hereof) to examine and to remove any such files,
books and records prior to their destruction. The access to files, books and
records contemplated by this Section 7.2 shall be during normal business hours
and upon not less than two (2) Business Days prior written request, shall be
subject to such reasonable limitations as the party having custody or control
thereof may impose to preserve the confidentiality of information contained
therein, and shall not extend to material subject to a claim of privilege
unless expressly waived by the party entitled to claim the same.
7.3 Survival.
7.3.1 Subject to this Section 7.3, Section 7.4.2(g) and Section 7.4.2(j),
all representations, warranties, covenants and agreements contained in this
Agreement or the Transaction Documents shall survive (and not be affected in
any respect by) the Closing, any investigation conducted by any party hereto
and any information which any party may receive. Notwithstanding the
foregoing,
(a) the covenants contained in Sections 5.1, 5.3, 5.4, 5.5, 5.8.2 through
5.8.6 and 5.21 and the related indemnity obligations contained in Section
7.4 shall terminate on, and no action or claim with respect thereto may be
brought after, the third anniversary of the Closing Date;
(b) the covenants contained in Section 5.2 and the related indemnity
obligations contained in Section 7.4 shall terminate on, and no action or
claim with respect thereto may be brought after, the Closing Date;
(c) the representations and warranties contained in Sections 3.12 and
3.16 and the related indemnity obligations contained in Section 7.4 shall
terminate on, and no action or claim with respect thereto may be brought
following the expiration of the applicable statute of limitations (or
extensions or waivers thereof);
(d) the representations and warranties contained in Section 3.2 and the
related indemnity obligations contained in Section 7.4 shall survive for an
unlimited period of time;
(e) the representations and warranties contained in Section 3.10 and the
related indemnity obligations contained in Section 7.4 shall terminate on,
and no action or claim with respect thereto may be brought after, the tenth
anniversary of the Closing Date;
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(f) the representations and warranties contained in Section 3.7 and 3.17
and the related indemnity obligations contained in Section 7.4 shall
terminate on, and no action or claim with respect thereto may be brought
after, the fifth anniversary of the Closing Date;
(g) the representations and warranties contained in Sections 3.3, 3.5,
3.6, 3.8, 3.9 and 3.25 and the related indemnity obligations contained in
Section 7.4 shall terminate on, and no action or claim with respect thereto
may be brought after, the third anniversary of the Closing Date;
(h) the representations and warranties contained in Section 3.11 and the
certificate delivered pursuant to Section 6.1.7(c) and the related
indemnity obligations contained in Section 7.4 shall terminate on, and no
action or claim with respect thereto may be brought after, the Closing
Date;
(i) the representations and warranties contained in Section 4.2 and the
related indemnity obligations contained in Section 7.4 shall survive for an
unlimited period of time;
(j) the representations and warranties contained in Sections 4.3 and 4.4
and the related indemnity obligations contained in Section 7.4 shall
terminate on, and no action or claim with respect thereto may be brought
after, the third anniversary of the Closing Date;
(k) the representations and warranties contained in Section 4.5 and the
related indemnity obligations contained in Section 7.4 shall terminate on,
and no action or claim with respect thereto may be brought after, the
Closing Date; and
(l) all other representations and warranties contained in this Agreement
and the related indemnity obligations contained in Section 7.4 shall
terminate on and no further action or claim with respect thereto may be
brought after, the second anniversary of the Closing Date;
(m) such representations and warranties specified in the foregoing
clauses (c) through (k), and the covenants contained in Section 5.1, 5.2,
5.3, 5.4, 5.5, 5.8.2 through 5.8.6 and 5.21 and the liability of any party
with respect thereto, shall not terminate with respect to any claim,
whether or not fixed as to liability or liquidated as to amount, with
respect to which such party has been given written notice setting forth the
facts upon which the claim for indemnification is based and, if possible, a
reasonable estimate of the amount of the claims prior to the relevant
anniversary of the Closing Date or the 30th day after the expiration of the
applicable statute of limitations (or extensions or waivers thereof), as
the case may be.
If any claim for indemnification is asserted or could be asserted with respect
to a breach or asserted breach of Section 3.17 (Undisclosed Liabilities) and
the Buyer or Parent is also entitled to indemnification in respect of that
claim for breach or asserted breach of any other representation or warranty in
this Agreement for which there is a shorter survival period, such shorter
period will apply to such claim except to the extent that such claim is a
product liability, toxic tort or similar claim (as described in Section
2.3.3(a)) brought by a private party litigant.
7.3.2 No claim for indemnity under Section 7.4 shall be brought or made by
Buyer or Parent pursuant to Sections 7.4.1(a)(B) or 7.4.1(a)(C):
(a) after the tenth anniversary of the Closing Date, for any action or
claim with respect to the On-site Conditions;
(b) after the twentieth anniversary of the Closing Date, with respect to
the presence of Hazardous Substances at any locations other than the Real
Estate; and
(c) after the fifth anniversary of the Closing Date, for any action or
claim with respect to any other Retained Liability;
provided, however, that the foregoing time limitations shall not apply to any
such claims which have been the subject of a written notice from Parent and/or
Buyer to the Seller Parties prior to such period setting forth the facts upon
which the claim for indemnification is based and, if possible, a reasonable
estimate of the amount of the claims; and, provided, further, that the
foregoing time limitations shall also not apply to any such claims:
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(u) with respect to Taxes;
(v) with respect to any liability of the types that appear as "Current
Liabilities" (other than "Other") on the Financial Statements of Seller
(other than the Assumed Indebtedness);
(w) not exclusively related to the Acquired Assets or not exclusively
related to the Business; and
(x) with respect to any of the matters discussed in Section 3.16 hereof.
7.4 Indemnification. Seller, PEI, Parent and Buyer agree as follows:
7.4.1 General Indemnification Obligations.
(a) Seller and PEI shall, indemnify Buyer and its directors, officers and
other Affiliates (including Parent) and hold Buyer and such other parties
harmless from and against any and all Damages arising out of or resulting
from (A) any breach of any representation, warranty, covenant or agreement
made by the Seller Parties in this Agreement or in any document or
certificate required to be furnished to Buyer by any of the Seller Parties
pursuant to this Agreement (including the Transaction Documents); (B)
subject to Section 7.3.2, any Excluded Assets or Retained Liabilities; (C)
subject to Section 7.3.2 the ownership, operation or use of any of the
businesses or assets of the Seller Parties or their Affiliates other than
the Business whether before, on or after the Closing Date; and (D) the
failure of Seller to obtain subdivision approvals for the transfer of the
Real Estate from all applicable Authorities.
(b) Buyer and Parent shall indemnify Seller, PEI and their directors,
officers and other Affiliates and hold Seller and such other parties
harmless from and against any and all Damages arising out of or resulting
from (A) any breach of any representation, warranty, covenant or agreement
made by Parent or Buyer in this Agreement or in any document or certificate
required to be furnished to Seller by Parent or Buyer pursuant to this
Agreement (including the Transaction Documents); (B) any Assumed
Liabilities after the Closing Date; (C) the ownership, operation or use of
the Business after the Closing Date (except to the extent resulting from
Retained Liabilities or to the extent resulting from breaches by the Seller
Parties of representations, warranties, covenants or agreements hereunder
or in the other Transaction Documents); and (D) any claim by a Transferred
Employee or a Former Employee referred to on Schedule 5.12 or the
Beneficiary of any such employee or former employee for post-retirement
health care or life insurance benefits "incurred" (within the meaning of
Section 5.9.4) after the Closing.
(c) For purposes of this Agreement, "Damages" shall mean any and all
losses, liabilities, obligations, damages (including any governmental
penalty or punitive damages assessed or asserted against the party seeking
indemnification and including costs of investigation, clean-up and
remediation), deficiencies, interest, costs and expenses and any claims,
actions, demands, causes of action, judgments, costs and reasonable
expenses (including reasonable attorneys' fees and all other reasonable
expenses incurred in investigating, preparing or defending any litigation
or proceeding, commenced or threatened, incident to the successful
enforcement of this Agreement). For purposes of determining any breach of,
and calculating the amount of Damages incurred by the Indemnified Party
arising out of or resulting from, any breach of a representation, covenant
or agreement by any party hereto, the references to a "Material Adverse
Effect" or materiality (or other correlative terms) shall be disregarded.
Notwithstanding the foregoing, Damages shall not include the loss of
profits of the party seeking indemnification, or punitive damages unless
the party seeking indemnification has had punitive damages assessed or
asserted against it.
7.4.2 General Indemnification Procedures.
(a) A party seeking indemnification pursuant to this Section 7.4 (an
"Indemnified Party") shall give prompt written notice to the party from
whom such indemnification is sought (the "Indemnifying Party") of the
assertion of any claim, the incurrence of any Damages, or the commencement
of any action, suit or proceeding, of which it has knowledge and in respect
of which indemnity may be sought hereunder, and will give the Indemnifying
Party such information with respect thereto as the Indemnifying Party may
reasonably request, but failure to give such required notice shall relieve
the Indemnifying Party of any liability hereunder only to the extent that
the Indemnifying Party has suffered actual prejudice thereby. The
Indemnifying Party shall have the right, exercisable by written notice to
the Indemnified Party after receipt
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of notice from the Indemnified Party of the commencement of or assertion of
any claim or action, suit or proceeding by a third party in respect of
which indemnity may be sought hereunder (a "Third Party Claim"), to assume
the defense of such Third Party Claim which involves (and continues to
involve) solely monetary damages; provided, that (A) the Indemnifying Party
expressly agrees in such notice that, as between the Indemnifying Party and
the Indemnified Party, solely the Indemnifying Party shall be obligated to
satisfy and discharge the Third Party Claim, (B) such Third Party Claim
does not include a request or demand for injunctive or other equitable
relief by an Authority and (C) the Indemnifying Party makes reasonably
adequate provision to assure the Indemnified Party of the ability of the
Indemnifying Party to satisfy the full amount of any adverse monetary
judgment that is reasonably likely to result. The Indemnifying Party shall
be deemed to have satisfied the condition set forth in clause (C) of the
proceeding sentence if it is a regulated utility.
(b) Neither the Indemnified Party nor the Indemnifying Party shall settle
any Third Party Claim without the prior written consent of the other, which
consent shall not be unreasonably withheld or delayed.
(c) The Indemnifying Party or the Indemnified Party, as the case may be,
shall have the right to participate in (but not control), at its own
expense, the defense of any Third Party Claim which the other party is
defending as provided in this Agreement.
(d) Amounts paid in respect of indemnification obligations of the parties
shall be treated as an adjustment to the Purchase Price.
(e) Subject to Section 7.4.2(f), neither Parent nor Buyer (and the other
Persons for which they can claim indemnity hereunder) shall be entitled to
indemnification for Damages incurred unless the aggregate amount of Damages
incurred by Parent or Buyer (or the other Persons for which they can claim
indemnification) exceeds $3,000,000 in the aggregate (the "Threshold
Amount"), in which case Seller and PEI shall then be liable for Damages in
excess of the Threshold Amount. Subject to Section 7.4.2(f), the cumulative
aggregate indemnity obligation of PEI and Seller under this Section 7.4
shall not exceed $40,000,000 (the "Ceiling") and the cumulative aggregate
indemnity obligation of PEI and Seller under Section 7.4.1(a)(D) shall not
exceed $1,000,000.
(f) Notwithstanding the foregoing, the parties acknowledge that Parent or
Buyer (and the other Persons for which they can claim indemnity hereunder)
shall be entitled to indemnification for Damages in respect of intentional
and willful breaches of covenants or agreements in this Agreement or any of
the Retained Liabilities other than the Specified Liabilities irrespective
of the Threshold Amount or the Ceiling, and that Parent or Buyer (and the
other Persons for which they can claim indemnity hereunder) shall be
entitled to indemnification for Damages pursuant to Section 7.4.1(a)(D)
irrespective of the Threshold Amount (it being understood that the failure
to cure a breach shall not, by itself, be an intentional and willful
breach). As used herein, the "Specified Liabilities" shall mean the
Retained Liabilities arising from claims made after the Closing Date which
(i) do not relate to matters within the scope of clauses (u), (v), (w) and
(x) of Section 7.3.2; (ii) were unknown, after due inquiry, on or prior to
Closing to any officer, any accounting supervisor or any manager of a water
system of Seller or PEI; (iii) relate exclusively to the Acquired Assets or
the Business prior to the Closing Date; and (iv) are not within the scope
of coverage or policy limits (without giving effect to any deductible or
retention) of the insurance policies of Seller or PEI. Notwithstanding
anything to the contrary in this Section 7.4, Parent or Buyer (or the other
Persons for which they can claim indemnification) shall be entitled to
indemnification for Damages in respect of a breach of Section 3.2, 3.12 or
3.16 irrespective of the Threshold Amount or the Ceiling.
(g) Except to the extent provided in the Operating Easement, the rights
and remedies of PEI, Seller, Parent and Buyer under this Section 7.4 are
exclusive and in lieu of any and all other rights and remedies which PEI,
Seller, Parent and Buyer may have under this Agreement or otherwise for
monetary relief with respect to (x) the inaccuracy of any representation,
warranty, certification or other statement made (or deemed made) by PEI,
Seller, Parent or Buyer in or pursuant to this Agreement or any of the
Transaction Documents or (y) any breach or failure to perform any covenant
or agreements set forth in this Agreement or any of the Transaction
Documents.
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(h) Except to the extent provided in Section 7.4.2(j) below, no right to
indemnification under this Section 7.4 shall be limited by reason of any
investigation or audit conducted before or after the Closing of any party
hereto including, without limitation, the Survey and the adjustment thereof
referred to in Section 5.14 hereof, or the knowledge of such party of any
breach of any representation, warranty, agreement or covenant by the other
party at any time, or the decision by such party to complete the Closing.
(i) No party shall have any liability to another party under this Section
7.4 for Damages to the extent that:
(A) the Indemnified Party recovers insurance proceeds covering the
Damages; or
(B) the Indemnified Party's Tax liability is actually reduced as a
result of a tax benefit to which the Indemnified Party becomes entitled
in respect of the Damages;
(j) Seller and PEI shall have no liability or obligation under this
Section 7.4 for any Damages resulting from the inaccuracy or breach of any
representation or warranty if such inaccuracy or breach is disclosed by
Seller or PEI pursuant to and in accordance with Sections 5.3 and 8.4
hereof;
(k) Buyer agrees that (i) if it receives payment from Seller or PEI for
Damages arising under or pursuant to a breach of the representation and
warranty set forth in Section 3.10, and (ii) if Buyer has obtained title
insurance which may cover the claim or matter giving rise to such Damages,
then (iii) Buyer will make a claim under the title insurance if such claim
can be made in good faith. Buyer shall be under no obligation to obtain
title insurance or prosecute such claim (other than the initial filing of
such claim).
(l) If at any time subsequent to the receipt by an Indemnified Party of
an indemnity payment hereunder, such Indemnified Party (or any Affiliate
thereof) receives any recovery, settlement or other similar payment with
respect to the Damages for which it received such indemnity payment
(including insurance proceeds pursuant to Section 7.4.2(i)(A) and a tax
benefit pursuant to Section 7.4.2(i)(B)) (the "Recovery"), such Indemnified
Party shall promptly pay to the Indemnifying Party an amount equal to the
amount of such Recovery, less any expense incurred by such Indemnified
Party (or its Affiliates) in connection with such Recovery, but in no event
shall any such payment exceed the amount of such indemnity payment;
(m) In the event of any indemnification claim under this Section 7.4
involving the claim of any third party, the Indemnified Party shall
cooperate fully (and shall cause its Affiliates to cooperate fully) with
the Indemnifying Party in the defense of any such claim under this Section
7.4. Without limiting the generality of the foregoing, the Indemnified
Party shall furnish the Indemnifying Party with such documentary or other
evidence as is then in its or any of its Affiliates' possession as may
reasonably be requested by the Indemnifying Party for the purpose of
defending against any such claim. Whether or not the Indemnifying Party
chooses to defend or prosecute any claim involving a third party, all the
parties hereto shall cooperate in the defense or prosecution thereof and
shall furnish such records, information and testimony, and attend such
conferences, discovery proceedings, hearings, trials and appeals, as may be
reasonably requested in connection therewith.
7.5 UCC Matters. From and after the Closing Date, Seller will promptly refer
all inquiries with respect to ownership of the Acquired Assets or the Business
to Buyer. In addition, Seller will execute such documents and financing
statements as Buyer may reasonably request from time to time to evidence
transfer of the Acquired Assets to Buyer in accordance with this Agreement,
including any necessary assignment of financing statements.
7.6 Financial Statements. Seller, at Buyer's expense, shall provide Buyer,
within 90 days after Buyer's written request therefor, with the following
audited financial statements: (i) a statement of net assets of the Business as
of the end of the last fiscal year prior to Closing and (ii) a statement of
income of the Business and a statement of cash flows or its equivalent of the
Business for the last fiscal year prior to Closing including opinions thereon
of independent public accountants and the following unaudited financial
statements (i) a statement of net assets of the Business as of the end of the
last fiscal quarter prior to Closing and (ii) a statement of income of the
Business and a statement of cash flows or its equivalent of the Business, for
the period from the end of the last
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fiscal year through the end of the last fiscal quarter prior to Closing in
connection with the preparation and filing of any registration statement or
periodic report of Buyer or its Affiliates pursuant to such laws.
7.7 Collection of Receivables. Seller agrees that it shall promptly (and in
any event no later than five (5) Business Days following receipt) deliver all
such payments with respect to accounts receivable from customers of the
Business received on and after the Closing Date (including but not limited to
negotiable instruments tendered in payment of accounts receivable assigned to
Buyer hereunder which shall be duly endorsed by Seller to the order of Buyer)
to Buyer. Seller shall cooperate with Buyer in coordinating the transfer of
collection agents and customers of the Business who pay their bills through
the Automated Clearinghouse (ACH) process to Buyer.
ARTICLE 8
Miscellaneous
8.1 Construction. Parent, Buyer and the Seller Parties have participated
jointly in the negotiation and drafting of this Agreement and the Transaction
Documents. In the event any ambiguity or question of intent or interpretation
arises, this Agreement and the Transaction Documents shall be construed as if
drafted jointly by Parent, Buyer and the Seller Parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to any
federal, state, local or foreign statute or law shall be deemed also to refer
to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The word "including" in this Agreement shall mean
including without limitation. Words in the singular shall be held to include
the plural and vice versa and words of one gender shall be held to include the
other genders as the context requires. The terms "hereof," "herein," and
"herewith" and words of similar import shall, unless otherwise stated, be
construed to refer to this Agreement as a whole (including all of the
Schedules and Exhibits hereto) and not to any particular provision of this
Agreement, and Article, Section, paragraph, Exhibit and Schedule references
are to the Articles, Sections, paragraphs, Exhibits and Schedules to this
Agreement unless otherwise specified. The word "or" shall not be exclusive.
Provisions of this Agreement shall apply, when appropriate, to successive
events and transactions. Section references refer to this Agreement unless
otherwise specified.
8.2 Notices. Any notice, request, demand, waiver, consent, approval or other
communication which is required or permitted to be given to any party
hereunder shall be in writing and shall be deemed given only if delivered to
the party personally or sent to the party by telecopy, by registered or
certified mail (return receipt requested) with postage and registration or
certification fees thereon prepaid, or by any nationally recognized overnight
courier addressed to the party at its address set forth below:
If to Buyer:
Pennsylvania-American Water Company
c/o American Water Works Company
1025 Laurel Oak Road
P.O. Box 1770
Voorhees, New Jersey 08043
Fax: (609) 346-8229
Attention: Counsel
with a copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Fax: (215) 994-2222
Attention: George W. Patrick, Esq.
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If to Seller or PEI:
Pennsylvania Enterprises, Inc.
Wilkes-Barre Center
39 Public Square
Wilkes-Barre, PA 18711-0601
Attention: President
Fax:
with a copy to:
Hughes Hubbard & Reed
One Battery Park Plaza
New York, NY 10004
Attention: Garett J. Albert, Esq.
Fax: (212) 422-4726
8.3 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns; provided, however, that no party
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the consent of the other party hereto.
8.4 Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed
hereto or referred to herein are hereby incorporated in and made a part of
this Agreement as if set forth in full herein. Disclosure of any fact or item
in any Schedule referenced by a particular paragraph or Section in this
Agreement shall, should the existence of the fact or item or its contents be
clearly related to any other paragraph or section, be deemed to be disclosed
with respect to that other paragraph or section.
8.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without giving
effect to the conflicts of laws principles thereof.
8.6 Consent to Jurisdiction. Each of the Seller Parties, Parent and Buyer
irrevocably submits to the exclusive jurisdiction of (a) the Court of Common
Pleas situated in any county in the Commonwealth of Pennsylvania, and (b) any
United States District Court situated in the Commonwealth of Pennsylvania, for
purposes of any suit, action or other proceeding arising out of this Agreement
or any transaction contemplated hereby (and agrees not to commence any action,
suit or proceeding relating hereto except in such courts). Each of the Seller
Parties, Parent and Buyer further agrees that service of any process, summons,
notice or document by U.S. registered mail to such party's respective address
set forth in Section 8.2 shall be effective service of process for any action,
suit or proceeding with respect to any matters to which it has submitted to
jurisdiction as set forth in the immediately preceding sentence. Each of the
Seller Parties, Parent and Buyer irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding arising out
of this Agreement or the transactions contemplated hereby in (a) the Court of
Common Pleas situated in any county in the Commonwealth of Pennsylvania, or
(b) any United States District Court situated in the Commonwealth of
Pennsylvania, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient
forum.
8.7 Severability. The parties agree that (a) the provisions of this
Agreement shall be severable in the event that any provision hereof is held by
a court of competent jurisdiction to be invalid, void or otherwise
unenforceable, (b) such invalid, void or otherwise unenforceable provision
shall be automatically replaced by another provision which is as similar as
possible in terms to such invalid, void or otherwise unenforceable provision
but which is valid and enforceable and (c) the remaining provisions shall
remain enforceable to the fullest extent permitted by law.
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8.8 No Third Party Beneficiaries. Nothing herein expressed or implied is
intended or should be construed to confer upon or give to any Person other
than the parties hereto and their successors and permitted assigns any rights
or remedies under or by reason of this Agreement.
8.9 Entire Agreement. This Agreement, together with the Schedules and
Exhibits hereto and the other Transaction Documents, the Confidentiality
Agreement dated March 23, 1995 between PEI and Parent, and the Standstill
Agreement dated the date hereof between PEI and Parent, constitute the entire
understanding of the parties with respect to the subject matter hereof,
supersede any prior agreements or understandings, written or oral, among the
parties with respect to the subject matter hereof and is not intended to
confer upon any Person other than the parties hereto any benefit, right or
remedy.
8.10 Amendment and Waiver. The parties may, by mutual agreement, amend this
Agreement in any respect, and any party, as to such party, may (i) extend the
time for the performance of any of the obligations of the other party; (ii)
waive any inaccuracies in representations and warranties by the other party;
(iii) waive compliance by the other party with any of the covenants or
agreements contained herein and performance of any obligations by the other
party; and (iv) waive the fulfillment of any condition that is precedent to
the performance by such party of any of its obligations under this Agreement.
To be effective, any such amendment or waiver must be in writing and be signed
by the party providing such waiver or extension, as the case may be. The
waiver by any party hereto of any breach of any provision of this Agreement
shall not operate or be construed as a waiver of any subsequent breach,
whether or not similar.
8.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
8.12 Headings. The headings preceding the text of the sections and
subsections hereof are inserted solely for convenience of reference, and shall
not constitute a part of this Agreement nor shall they affect its meaning,
construction or effect.
8.13 Definitions. For purposes of this Agreement, "to the best of the
knowledge of the Seller Parties" shall mean the actual knowledge possessed by
any of the directors of the Seller Parties or the following officers or
employees of Seller: Chairman, President, Vice President--Finance, Vice
President--Human Resources and Customer Services, Vice President--Water
Resources, [Director of Field Operations], Vice President-- Administration and
Secretary, Controller and water treatment plant managers.
8.14 No Implied Representation. NOTWITHSTANDING ANYTHING CONTAINED IN THIS
AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT NEITHER OF THE
SELLER PARTIES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS
OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, ANY SCHEDULE
HERETO, THE TRANSACTION DOCUMENTS, OR ANY DOCUMENT, EXHIBIT, CERTIFICATE,
INSTRUMENT OR STATEMENT TO BE DELIVERED HEREUNDER OR THEREUNDER INCLUDING, BUT
NOT LIMITED TO, ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION,
MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY OF
THE ACQUIRED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS
UNDERSTOOD AND AGREED THAT ANY COST ESTIMATES, PROJECTIONS OR OTHER
PREDICTIONS CONTAINED OR REFERRED TO IN THE SCHEDULES AND ANY COST ESTIMATES,
PROJECTIONS OR PREDICTIONS OR ANY OTHER INFORMATION CONTAINED OR REFERRED TO
IN OTHER MATERIALS THAT HAVE BEEN OR SHALL HEREINAFTER BE PROVIDED TO PARENT,
BUYER OR ANY OF THEIR AFFILIATES, AGENTS OR REPRESENTATIVES ARE NOT AND SHALL
NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF ANY OF THE SELLER
PARTIES.
8.15 Construction of Certain Provisions. It is understood and agreed that
neither the specification of any dollar amount in the representations and
warranties contained in this Agreement nor the inclusion of any specific item
in the Schedules or Exhibits is intended to imply that such amounts or higher
or lower amounts, or the
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items so included or other items, are or are not material, and none of the
parties shall use the fact of the setting of such amounts or the fact of any
inclusion of any such item in the Schedules or Exhibits in any dispute or
controversy between the parties as to whether any obligation, item or matter
is or is not material for purposes hereof.
8.16 Bulk Sales. Buyer agrees that it shall not make any filings under the
Pennsylvania tax bulk sales provisions with respect to the transactions
contemplated by this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first written above.
Pennsylvania Enterprises, Inc.
/s/ Dean T. Casaday
By: _________________________________
Name: Dean T. Casaday
Title: President
Pennsylvania Gas and Water Company
/s/ Dean T. Casaday
By: _________________________________
Name: Dean T. Casaday
Title: President
American Water Works Company, Inc.
/s/ George W. Johnstone
By: _________________________________
Name: George W. Johnstone
Title: President and Chief
Executive Officer
Pennsylvania-American Water Company
/s/ Robert M. Ross
By: _________________________________
Name: Robert M. Ross
Title: President
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ANNEX B
[LOGO OF LEGG MASON CORPORATE FINANCE APPEARS HERE]
April 26, 1995
The Boards of Directors
Pennsylvania Enterprises, Inc.
Pennsylvania Gas and Water Company
Wilkes-Barre Center
39 Public Square
Wilkes-Barre, PA 18711-0601
Dear Sirs:
We are advised that Pennsylvania Enterprises, Inc. ("PEI") and its wholly
owned subsidiary, Pennsylvania Gas and Water Company ("Seller" and, together
with PEI, the "Company"), have entered into a definitive asset purchase
agreement dated April 26, 1995 (the "Agreement") with American Water Works
Company, Inc. ("American Water") and its wholly owned subsidiary,
Pennsylvania-American Water Company ("Buyer"), whereby Buyer will acquire from
Seller assets relating to Seller's business as a water utility (the "Water
Assets") (the "Transaction"). Under the Agreement, Buyer will pay Seller $255
million in cash (subject to adjustment) and assume certain liabilities
associated with the Water Assets for a total purchase price of $409 million
(subject to adjustment). As set forth in the Agreement, the sale of the Water
Assets is subject to among other things: (i) approval by the holders of the
common stock of PEI and Seller; (ii) approval by the holders of the preferred
stock of Seller; (iii) approval by holders of certain outstanding debt
obligations of PEI and Seller; and (iv) various regulatory approvals.
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to holders of the common stock and preferred
stock of Seller and the common stock of PEI of the consideration to be
received by Seller in a sale of the Water Assets pursuant to the Agreement.
For purposes of rendering this opinion, we have:
1. reviewed the terms of the Agreement;
2. reviewed certain publicly available audited and unaudited financial
statements of the Company;
3. reviewed certain operating and financial information, including
forecasts and projections, provided to us by management of the Company with
respect to the operations and prospects of the business conducted with the
Water Assets;
4. met with certain members of management of the Company to discuss the
business and prospects and historical financial statements of the Company
to the extent related to the Water Assets;
5. analyzed publicly available financial data and stock market
performance data of publicly traded companies with water utilities
operations that we deemed comparable to the business conducted with the
Water Assets;
6. reviewed the terms, to the extent available to us, of recent
acquisitions of companies with water utility operations that we considered
relevant to our inquiry; and
7. conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate and feasible.
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In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us by management of the Company or publicly
available. In arriving at our opinion, we have not performed or obtained any
independent appraisal of the Water Assets, nor have we conducted a physical
inspection of the properties included in the Water Assets. With respect to
forecasts and projections related to the business conducted with the Water
Assets, we have assumed without independent verification that they reflect the
best available estimates and judgments of the Company's management as to the
future performance of such business. Our opinion is necessarily based upon
conditions as they exist and can be evaluated on the date hereof.
No limitations were placed on us by the Company's Boards of Directors with
respect to the investigations made or the procedures followed by us in
rendering our opinion, except that, in connection with our engagement, we have
not been requested by the Boards of Directors of the Company, and therefore
were not authorized, to solicit nor have we solicited third party indications
of interest for the acquisition of the Water Assets or any other assets or
securities of the Company, although we have expressed to the Boards of
Directors of the Company our view on the possible interest and ability of
certain third parties to purchase the Water Assets.
It is understood that this letter is for the information of the Company's
Boards of Directors only in their evaluation of the Transaction and may not be
relied upon by any other person, nor does our opinion constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote on the Transaction. This letter is not to be quoted or referred
to, in whole or in part, in any registration statement, prospectus, or in any
other document used in connection with the offering or sale of securities, nor
shall this letter be used for any other purposes, without the prior written
consent of Legg Mason Wood Walker, Incorporated ("Legg Mason").
Legg Mason has, from time to time, provided investment banking services to
the Company, for which it has received customary compensation. As compensation
for its financial services in connection with the Transaction, Legg Mason has
received a fee and will receive an additional fee in the event the Transaction
is consummated.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the consideration to be received by
Seller for the Water Assets is fair from a financial point of view to the
holders of the common stock and preferred stock of Seller and the common stock
of PEI.
Very truly yours,
/s/ Legg Mason Wood Walker, Incorporated
B-2
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ANNEX C
PENNSYLVANIA BUSINESS CORPORATION LAW--DISSENTERS RIGHTS
1571 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.--Except as
otherwise provided in subsection (b), any shareholder of a business
corporation shall have the right to dissent from, and to obtain payment of the
fair value of his shares in the event of, any corporate action, or to
otherwise obtain fair value for his shares, where this part expressly provides
that a shareholder shall have the rights and remedies provided in this
subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--(1) Except as otherwise provided in paragraph (2), the
holders of the shares of any class or series of shares that, at the record
date fixed to determine the shareholders entitled to notice of and to vote at
the meeting at which a plan specified in any of section 1930, 1931(d), 1932(c)
or 1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such
shares under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or
solely into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles,
the plan or the terms of the transaction entitle all shareholders of
the class to vote thereon and require for the adoption of the plan or
the effectuation of the transaction the affirmative vote of a majority
of the votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the
other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter regardless
of the fact, if it be the case, that the acquisition was accomplished by
the issuance of voting shares of the corporation to be outstanding
immediately after the acquisition sufficient to elect a majority or more of
the directors of the corporation.
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(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall
have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholder to dissenters
rights.
(d) Notice of dissenters rights.--Unless otherwise provided by statute, if a
proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) A copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part
that makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
1572 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation for
the purposes of this subchapter. The successor corporation in a division shall
have sole responsibility for payments to dissenters and other liabilities
under this subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects taking into account all
relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors including the average
rate currently paid by the corporation on its principal bank loans.
1573 RECORD AND BENEFICIAL HOLDERS AND OWNERS.--(a) Record holders of
shares.--A record holder of shares of a business corporation may assert
dissenters rights as to fewer than all of the shares registered in his name
only if he dissents with respect to all the shares of the same class or series
beneficially owned by any one person and discloses the name and address of the
person or persons on whose behalf he dissents. In that event, his rights shall
be determined as if the shares as to which he has dissented and his other
shares were registered in the names of different shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a business
corporation who is not the record holder may assert dissenters rights with
respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the
corporation not later than the time of the assertion of dissenters rights a
written consent of the record holder. A beneficial owner may not dissent
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with respect to some but less than all shares of the same class or series
owned by the owner, whether or not the shares so owned by him are registered
in his name.
1574 NOTICE OF INTENTION TO DISSENT.--If the proposed corporate action is
submitted to a vote at a meeting of shareholders of a business corporation,
any person who wishes to dissent and obtain payment of the fair value of his
shares must file with the corporation, prior to the vote, a written notice of
intention to demand that he be paid the fair value for his shares if the
proposed action is effectuated, must effect no change in the beneficial
ownership of his shares from the date of such filing continuously through the
effective date of the proposed action and must refrain from voting his shares
in approval of such action. A dissenter who fails in any respect shall not
acquire any right to payment of the fair value of his shares under this
subchapter. Neither a proxy nor a vote against the proposed corporate action
shall constitute the written notice required by this section.
1575 NOTICE TO DEMAND PAYMENT.--(a) General rule.--If the proposed corporate
action is approved by the required vote at a meeting of shareholders of a
business corporation, the corporation shall mail a further notice to all
dissenters who gave due notice of intention to demand payment of the fair
value of their shares and who refrained from voting in favor of the proposed
action. If the proposed corporate action is to be taken without a vote of
shareholders, the corporation shall send to all shareholders who are entitled
to dissent and demand payment of the fair value of their shares a notice of
the adoption of the plan or other corporate action. In either case, the notice
shall:
(1) State where and when a demand for payment must be sent and certificates
for certificated shares must be deposited in order to obtain payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30
days from the mailing of the notice.
1576 FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC.--(a) Effect of
failure of shareholder to act.--A shareholder who fails to timely demand
payments or fails (in the case of certificated shares) to timely deposit
certificates, as required by a notice pursuant to section 1575 (relating to
notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectutation of the proposed
corporate action or the release of restrictions under the terms of section
1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
1577 RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES.--(a) Failure to
effectuate corporate action.--Within 60 days after the date set for demanding
payment and depositing certificates, if the business corporation has not
effectuated the proposed corporate action, it shall return any certificates
that have been deposited and release uncertificated shares from any transfer
restrictions imposed by reason of the demand for payment.
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(b) Renewal of notice to demand payment.--When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming
to the requirements of section 1575 (relating to notice to demand payment),
with like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are
certificated) have deposited their certificates the amount that the
corporation estimates to be the fair value of the shares or give written
notice that no remittance under this section will be made. The remittance or
notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such
certificate or on the records of the corporation relating to any such
uncertificated shares that such demand has been made. If shares with respect
to which notation has been so made shall be transferred, each new certificate
issued therefor or the records relating to any transferred uncertificated
shares shall bear a similar notation, together with the names of the original
dissenting holder or owner of such shares. A transferee of such shares shall
not acquire by such transfer any rights in the corporation other than those
that the original dissenters had after making demand for payment of their fair
value.
1578 ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES.--(a) General rule.--If
the business corporation gives notice of its estimate of the fair value of the
shares, without remitting such amount, or remits payment of its estimate of
the fair value of a dissenter's shares as permitted by section 1577(c)
(relating to payment of fair value of shares) and the dissenter believes that
the amount stated or remitted is less than the fair value of his shares, he
may send to the corporation his own estimate of the fair value of the shares,
which shall be deemed a demand for payment of the amount or the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amounts stated in the notice or remitted to him by the
corporation.
1579 VALUATION PROCEEDINGS GENERALLY.--(a) General rule.--Within 60 days
after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578 (relating to
estimate by dissenter of fair value of share).
If any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the
shares be determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served
on each such dissenter. If a dissenter is a nonresident, the copy may be
served on him in the
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manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53 (relating to
bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found
to exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the corporation
fails to file an application as provided in subsection (a), any dissenter who
made a demand and who has not already settled his claim against the
corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file
an application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not
previously remitted.
1580 COSTS AND EXPENSES OF VALUATION PROCEEDINGS.--(a) General rule.--The
costs and expenses of any proceeding under section 1579 (relating to valuation
proceedings generally), including the reasonable compensation and expenses of
the appraiser appointed by the court, shall be determined by the court and
assessed against the business corporation except that any part of the costs
and expenses may be apportioned and assessed as the court deems appropriate
against all or some of the dissenters who are parties and whose action in
demanding supplemental payment under section 1578 (relating to estimate by
dissenter of fair value of shares) the court finds to be dilatory, obdurate,
arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective
parties may be assessed as the court deems appropriate against the corporation
and in favor of any of all dissenters if the corporation failed to comply
substantially with the requirements of this subchapter and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner
in respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situation and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of
the amounts awarded to the dissenters who were benefited.
1932 VOLUNTARY TRANSFER OF CORPORATE ASSETS.--(a) Shareholder approval not
required.--The sale, lease, exchange or other disposition of all, or
substantially all, the property and assets of a business corporation, when
made in the usual and regular course of the business of the corporation, or
for the purpose of relocating all, or substantially all, of the business of
the corporation, may be made upon such terms and conditions, and for such
consideration, as shall be authorized by its board of directors. Except as
otherwise restricted by the bylaws, authorization or consent of the
shareholders shall not be required for such a transaction.
(b) Shareholder approval required.--A sale, lease, exchange or other
disposition of all, or substantially all, the property and assets, with or
without the goodwill, of a business corporation, if not made pursuant to
subsection (a) or (d) or to section 1551 (relating to distributions to
shareholders) or Subchapter D (relating to division), may be made only
pursuant to a plan of asset transfer. The property or assets of a direct or
indirect subsidiary corporation that is controlled by a parent corporation
shall also be deemed the property or assets of the parent corporation for the
purposes of this subsection and of subsection (c). The plan of asset transfer
shall set forth the terms and conditions of the sale, lease, exchange or other
disposition or may authorize the board of directors to fix any or all of the
terms and conditions, including the consideration to be received by the
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<PAGE>
corporation therefor. Any of the terms of the plan may be made dependent upon
facts ascertainable outside of the plan if the manner in which the facts will
operate upon the terms of the plan is set forth in the plan. The plan of asset
transfer shall be proposed and adopted, and may be amended after its adoption
and terminated, by a business corporation in the manner provided in this
subchapter for the proposal, adoption, amendment and termination of a plan of
merger, except section 1924(b) (relating to adoption by board of directors).
There shall be included in, or enclosed with, the notice of the meeting of the
shareholders to act on the plan a copy or a summary of the plan and, if
Subchapter D of Chapter 15 (relating to dissenters rights) is applicable, a
copy of the subchapter and of subsection (c). In order to make effective the
plan of asset transfer so adopted, it shall not be necessary to file any
articles or other documents in the Department of State.
(c) Dissenters rights in asset transfers.--(1) If a shareholder of a
corporation that adopts a plan of asset transfer objects to the plan and
complies with Subchapter D of Chapter 15, the shareholder shall be entitled to
the rights and remedies of dissenting shareholders therein provided, if any.
(2) Paragraph (1) shall not apply to a sale pursuant to an order of a
court having jurisdiction in the premises or a sale for money on terms
requiring that all or substantially all of the net proceeds of sale be
distributed to the shareholders in accordance with their respective
interests within one year after the date of sale.
(3) See sections 1906(c) (relating to dissenters rights upon special
treatment) and 2537 (relating to dissenters rights in asset transfers).
(d) Exceptions.--Subsections (b) and (c)(1) shall not apply to a sale,
lease, exchange or other disposition of all, or substantially all of the
property and assets of a business corporation:
(1) That directly or indirectly owns all of the outstanding shares of
another corporation to the other corporation if the voting rights,
preferences, limitations or relative rights, granted to or imposed upon the
shares of any class of the parent corporation are not altered by the sale,
lease, exchange or other disposition;
(2) When made in connection with the dissolution or liquidation of the
corporation, which transaction shall be governed by the provisions of
Subchapter F (relating to voluntary dissolution and winding up) or G
(relating to involuntary liquidation and dissolution), as the case may be;
or
(3) When made in connection with a transaction pursuant to which all the
assets sold, leased, exchanged or otherwise disposed of are simultaneously
leased back to the corporation.
(e) Mortgage.--A mortgage, pledge, grant of a security interest or
dedication of property to the repayment of indebtedness (with or without
recourse) shall not be deemed a sale, lease, exchange or other disposition for
the purposes of this section.
(f) Restrictions.--This section shall not be construed to authorize the
conversion or exchange of property or assets in fraud of corporate creditors
or in violation of law.
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<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
SHAREHOLDER'S PROXY
The undersigned hereby appoints John F. Kell, Jr., Joseph F. Perugino, and
Thomas J. Ward, or any one or more of them, each with full power of
substitution, the proxy or proxies of the undersigned to vote the shares of
Common Stock of Pennsylvania Enterprises, Inc. which the undersigned would be
entitled to vote if personally present at the Special Meeting of Shareholders of
Pennsylvania Enterprises, Inc. to be held on October 11, 1995 at the Woodlands
Inn & Resort, 1073 Highway 315, Wilkes-Barre, Pennsylvania, at 10:00 a.m., and
at any and all adjournments or postponements thereof.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
* FOLD AND DETACH HERE *
PENNSYLVANIA ENTERPRISES, INC.
SPECIAL MEETING OF SHAREHOLDERS
WEDNESDAY, OCTOBER 11, 1995
10:00 A.M.
THE WOODLANDS INN & RESORT
1073 HIGHWAY 315
WILKES-BARRE, PENNSYLVANIA
<PAGE>
THE SHARES REPRESENTED BY THIS PROXY, WHICH REVOKES ALL PRIOR PROXIES, WILL BE
VOTED AS DIRECTED BY THE SHAREHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL
BE VOTED "FOR" ITEM 1.
If you plan to attend the Special Meeting, please check this box in order to
receive an admission ticket.
[ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1.
Item 1- Proposal to approve and adopt the Asset Purchase Agreement, dated as of
April 26, 1995, among Pennsylvania Enterprises, Inc., Pennsylvania Gas and Water
Company, American Water Works Company, Inc., and Pennsylvania-American Water
Company pursuant to which Pennsylvania Gas and Water Company will sell to
Pennsylvania-American Water Company its regulated water operations and certain
related assets, as more fully described in the accompanying Joint Proxy
Statement of Pennsylvania Enterprises, Inc. and Pennsylvania Gas and Water
Company. A conformed copy of the Asset Purchase Agreement is attached as Annex A
to the accompanying Joint Proxy Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 2- In their discretion, the Proxies are authorized to vote upon such other
matters as may come before the meeting or any adjournment or postponement
thereof.
Please mark, date and sign your name exactly as it appears at the
left and return promptly in the enclosed envelope. For joint
accounts, each joint owner should sign. When signing as an
attorney, executor, administrator, trustee, guardian, or other
officer of a corporation, please give your full title as such. If
stock is owned by a partnership or corporation, please indicate
your capacity in signing the proxy.
Date , 1995
--------------------------------------------------------
------------------------------------------------------------------
Signature
------------------------------------------------------------------
Signature
"PLEASE MARK INSIDE BLUE BOXES SO THAT DATA
PROCESSING EQUIPMENT WILL RECORD YOUR VOTES"
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
* FOLD AND DETACH HERE *
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
SHAREHOLDER'S PROXY
The undersigned hereby appoints John F. Kell, Jr., Joseph F. Perugino, and
Thomas J. Ward, or any one or more of them, each with full power of
substitution, the proxy or proxies of the undersigned to vote the shares of
Preferred Stock of Pennsylvania Gas and Water Company which the undersigned
would be entitled to vote if personally present at the Special Meeting of
Preferred Shareholders of Pennsylvania Gas and Water Company to be held on
October 11, 1995 at the Woodlands Inn & Resort, 1073 Highway 315, Wilkes-Barre,
Pennsylvania, at 11:00 a.m., and at any and all adjournments or postponements
thereof.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
* FOLD AND DETACH HERE *
PENNSYLVANIA GAS AND WATER COMPANY
SPECIAL MEETING OF PREFERRED SHAREHOLDERS
WEDNESDAY, OCTOBER 11, 1995
11:00 A.M.
THE WOODLANDS INN & RESORT
1073 HIGHWAY 315
WILKES-BARRE, PENNSYLVANIA
<PAGE>
THE DEPOSITARY PREFERRED SHARES REPRESENTING SHARES OF PG&W'S 9% CUMULATIVE
PREFERRED STOCK REPRESENTED BY THIS INSTRUCTION, WHICH REVOKES ALL PRIOR
INSTRUCTIONS, WILL BE VOTED BY THE DEPOSITARY AS DIRECTED BY THE HOLDER OF
DEPOSITARY PREFERRED SHARES. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED
"FOR" ITEM 1.
If you plan to attend the Special Meeting, please check this box in order to
receive an admission ticket.
[ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1.
Item 1- Proposal to approve and adopt the Asset Purchase Agreement, dated as of
April 26, 1995, among Pennsylvania Enterprises, Inc., ("PEI"), PG&W, American
Water Works Company, Inc., and Pennsylvania-American Water Company ("PAWC")
pursuant to which PG&W will sell to PAWC its regulated water operations and
certain related assets, as more fully described in the accompanying Joint Proxy
Statement of PG&W and PEI. A conformed copy of the Asset Purchase Agreement is
attached as Annex A to the accompanying Joint Proxy Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 2- In its discretion, the Depositary is authorized to vote upon such other
matters as may come before the meeting or any adjournment or postponement
thereof.
Please mark, date and sign your name exactly as it appears at the
left and return promptly in the enclosed envelope. For joint
accounts, each joint owner should sign. When signing as an
attorney, executor, administrator, trustee, guardian, or other
officer of a corporation, please give your full title as such. If
stock is owned by a partnership or corporation, please indicate
your capacity in signing the instructions to the Depositary.
Date , 1995
--------------------------------------------------------
------------------------------------------------------------------
Signature
------------------------------------------------------------------
Signature
"PLEASE MARK INSIDE BLUE BOXES SO THAT DATA
PROCESSING EQUIPMENT WILL RECORD YOUR VOTES"
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
* FOLD AND DETACH HERE *
<PAGE>
FORM OF INSTRUCTION TO THE DEPOSITARY TO VOTE DEPOSITARY PREFERRED SHARES:
The undersigned, as a holder of Pennsylvania Gas and Water Company's
("PG&W")'s Depositary Preferred Shares, each of which represents a 1/4th
interest in a share of PG&W's 9% Cumulative Preferred Stock, hereby instructs
Chemical Bank, as Depositary (the "Depositary") under the Deposit Agreement,
dated as of August 18, 1992 between PG&W and the Depositary with respect to the
Depositary Preferred Shares, to vote the PG&W 9% Cumulative Preferred Stock
underlying such Depositary Preferred Shares at the Special Meeting of the
holders of PG&W Preferred Stock to be held on October 11, 1995, at 11:00 a.m.,
at the Woodlands Inn & Resort, 1073 Highway 315, Wilkes-Barre, Pennsylvania, in
accordance with the following instructions:
THIS INSTRUCTION CARD IS CONTINUED ON THE REVERSE SIDE
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
* FOLD AND DETACH HERE *
PENNSYLVANIA GAS AND WATER COMPANY
SPECIAL MEETING OF PREFERRED SHAREHOLDERS
WEDNESDAY, OCTOBER 11, 1995
11:00 A.M.
THE WOODLANDS INN & RESORT
1073 HIGHWAY 315
WILKES-BARRE, PENNSYLVANIA
