PART I
ITEM l. BUSINESS
GENERAL
Pennsylvania Enterprises, Inc. (the "Company") is a holding company formed
in 1974 whose principal subsidiary, Pennsylvania Gas and Water Company ("PG&W"),
is engaged in the distribution of natural gas and water. The Company's other
subsidiaries, which include Pennsylvania Energy Resources, Inc. ("PERI"),
Pennsylvania Energy Marketing Company ("PEM") and Theta Land Corporation
("THETA"), do not constitute a significant portion of either the Company's
assets or operations.
PG&W, incorporated in Pennsylvania in 1867 as Dunmore Gas & Water Company,
is an operating public utility whose gas and water businesses are regulated by
the Pennsylvania Public Utility Commission ("PPUC"). As of December 31, 1994,
PG&W had approximately 139,300 gas customers and 132,500 water customers.
PG&W's gas operating revenues are highly seasonal and depend on certain
factors that are beyond its control, such as the price of natural gas and the
availability of markets for natural gas. Other factors include the weather, the
effect of federal and state regulation, the effect of competition from other
forms of energy, including electricity and oil, and the switching of customers
from sales to transportation service. See "GAS BUSINESS-Transportation and
Storage Service."
Since 1986, PG&W has incurred significant expenditures for water treatment
facilities and improvements to its water distribution system. While the PPUC
has approved rate increases since January 1, 1991, designed to produce an
aggregate of $35.8 million in additional annual water operating revenues, PG&W
will require additional rate increases in order to fully recover the capital
investment associated with its water utility operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Rate
Matters - Water Rate Filings" and "Industry Segments" on pages 27 to 29 and page
53, respectively, of the Company's Annual Report to Shareholders which is
incorporated herein by reference.
As of December 31, 1994, the Company and its subsidiaries employed
approximately 965 persons.
INDUSTRY SEGMENTS
Financial information with respect to the Company's industry segments for
the years ended December 31, 1994, 1993 and 1992 appears on page 53 of the
Company's 1994 Annual Report to Shareholders which is incorporated herein by
reference.
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GAS BUSINESS
PG&W distributes natural gas to an area in northeastern Pennsylvania lying
within the Counties of Lackawanna, Luzerne, Wyoming, Susquehanna, Columbia,
Montour, Northumberland, Lycoming, Union and Snyder, a territory that includes
116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and
Williamsport. The total estimated population of PG&W's natural gas service
area, based on the 1990 U.S. Census, is 561,000.
Number and Type of Customers. At December 31, 1994, PG&W had approximately
139,300 natural gas customers, from which it derived total natural gas revenues
of $168.0 million during 1994. The following chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1994:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.6% 63.8%
Commercial 8.1 23.8*
Industrial 0.2 10.8*
Other Users 0.1 1.6
Total 100.0% 100.0%
* Includes the 4.0% of total gas revenues derived from interruptible
customers.
During 1994, PG&W delivered an estimated total of 44,400,000 thousand cubic
feet ("MCF") of natural gas to its customers, of which 56.3% was sold at normal
tariff rates, 40.9% represented gas transported for customers and 2.8% was sold
under the Alternate Fuel Rate (as described below).
PG&W sells gas to "firm" customers with the understanding that it will not
interrupt their supply except during periods of supply deficiency or emergency
conditions. "Interruptible" gas customers are required to have equipment
installed capable of using an alternate energy form. Interruptible customers,
therefore, do not require a continuous supply of gas and their supply can be
interrupted by PG&W at any time under the conditions set forth in their
contracts for gas service. In 1994, a total of 1,157,000 MCF of natural gas was
sold by PG&W to interruptible customers and 3,712,000 MCF was transported for
such customers, which together represented 11.0% of the total deliveries of
natural gas by PG&W to its customers during 1994.
No individual customer accounted for as much as 2.0% of PG&W's operating
revenues in 1994.
Transportation and Storage Service. PG&W provides transportation service to
natural gas customers who consume at least 5,000 MCF of natural gas per year,
meet certain other conditions and execute a transportation agreement. In
addition, groups of up to ten customers, with a combined consumption of at least
5,000 MCF per year, are eligible for transportation service. Prior to March 25,
1993, transportation service was only provided to individual customers, or
groups of not more than three customers, who consumed at least 50,000 MCF of
natural gas per year. Transportation service is provided on both a firm and an
interruptible basis and includes provisions regarding over and under deliveries
of gas on behalf of the respective customer. In addition, PG&W offers firm
transportation customers a "storage service" pursuant to which such customers
may have gas delivered to PG&W during the period from April through October for
storage and redelivery during the winter period. PG&W also offers firm
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transportation customers a "standby service" under the terms of which PG&W will
supply the customer with gas in the event the customer's transportation service
is interrupted or curtailed by its broker, supplier or other third party.
Commencing in April, 1995, PG&W will begin offering a Market Sensitive Sales
Service ("MSSS") in conjunction with its transportation service. The MSSS,
which was approved by Order of the PPUC entered January 11, 1995, provides for
the sale of natural gas at contracted rates based on market prices and other
specified terms and conditions. The MSSS is expected to result in additional
sales of natural gas by PG&W and less transportation of natural gas by it on
behalf of third parties.
Set forth below is a summary of the gas transported by PG&W and the number
of its customers using transportation service from 1992 to 1994:
[CAPTION]
Number Volume of Gas Transported (MCF)
of Interstate Pennsylvania
Year Customers Gas Gas Total
[S] [C] [C] [C] [C]
1994 574 13,411,000 4,744,000 18,155,000
1993 569 10,078,000 4,627,000 14,705,000
1992 457 9,084,000 3,843,000 12,927,000
During 1995, PG&W expects to transport approximately 16,672,000 MCF of
natural gas, of which it anticipates approximately 5,203,000 MCF will be
Pennsylvania gas.
The rates charged by PG&W for the transportation of interstate gas are
essentially equal to its tariff rates for the sale of gas with all gas costs
removed. As a result, the transportation of interstate gas has had no
significant adverse effect on earnings. However, the rate charged for the
transportation of gas produced in Pennsylvania yields considerably less revenue
than the gross margin (gas operating revenues less the cost of gas) that would
be realized from sales under normal tariff rates. This lower rate for the
transportation of Pennsylvania gas is the result of regulations adopted by the
PPUC to encourage the production of natural gas within the state.
Alternate Fuel Sales. In order to be more competitive in terms of price
with certain alternate fuels, PG&W offers an Alternate Fuel Rate for eligible
customers. This rate applies to large commercial and industrial accounts that
have the capability of using No. 2, 4 or 6 fuel oil or propane as an alternate
source of energy. Whenever the cost of such alternate fuel drops below the cost
of natural gas at PG&W's normal tariff rates, PG&W is permitted by the PPUC to
lower its price to these customers so that PG&W can remain competitive with the
alternate fuel. However, in no instance may PG&W sell gas under this special
arrangement for less than its average commodity cost of gas purchased during the
month. PG&W's revenues under the Alternate Fuel Rate amounted to $3.7 million
in 1994, $4.6 million in 1993 and $3.4 million in 1992. These revenues
reflected the sale of 1,223,000 MCF, 1,541,000 MCF and 1,149,000 MCF in 1994,
1993, and 1992, respectively. It is anticipated that approximately 1,410,000
MCF will be sold under the Alternate Fuel Rate in 1995. The change in volumes
sold under the Alternate Fuel Rate reflects the switching by certain customers
between alternate fuel service and transportation service as a result of
periodic changes in the relative cost of natural gas and alternate fuels.
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FERC Order 636. On April 8, 1992, the Federal Energy Regulatory Commission
("FERC") issued Order No. 636 ("Order 636"), requiring interstate pipeline
suppliers to restructure their services and operations in an attempt to enhance
competition and maximize the benefits of wellhead price decontrol. The
objectives of Order 636 were to be accomplished primarily by unbundling the
services (i.e., the sale, transportation and storage of gas) provided by the
interstate pipeline suppliers and by making those services available to end
users on the same terms as local gas distribution companies, such as PG&W.
Pursuant to Order 636, the interstate pipelines have been required to: (1)
unbundle transportation service from sales service; (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services; (3) provide a no-notice transportation service; (4) provide open
access storage service; (5) reallocate upstream pipeline capacity and upstream
storage for the benefit of downstream interstate pipeline suppliers; and (6)
implement a straight fixed-variable rate design to replace all modified fixed-
variable rate designs. The interstate pipelines have been granted a blanket
sales certificate to make unbundled sales in competition with non-pipeline
merchants and are being permitted recovery of all reasonable and prudent
transition costs incurred in order to comply with Order 636. Such transition
costs include: (1) the cost of renegotiating existing gas supply contracts with
producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included
in the interstate pipelines' purchased gas adjustment accounts at the time they
adopted market-based pricing for gas sales ("Account 191 Costs"); (3)
unrecovered costs of assets that cannot be assigned to customers of unbundled
services ("Stranded Costs"); and (4) costs of new facilities to physically
implement Order 636 ("New Facility Costs"). Additionally, the interstate
pipelines have been allowed pre-granted abandonment of sales and transportation
services to customers upon expiration of applicable contracts, subject to
customers' rights of first refusal.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding the recovery of 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 filing
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 Pennsylvania
Public Utility Code (the "Code"). The PGC Order further stated that all such
filings would be evaluated on a case-by-case basis. As of February 1, 1994,
PG&W began to recover the Gas Transition Costs that are being billed to PG&W by
its interstate pipelines through an increase in its PGC rate. It is currently
estimated that these costs, which will be billed to PG&W over a nineteen-month
period extending through March 31, 1995, will aggregate $1.2 million, of which
$1.1 million had been billed to PG&W and $659,000 had been recovered from its
customers as of December 31, 1994. 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 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 $3.8 million had been billed to PG&W and $1.1 million had been
recovered from its customers as of December 31, 1994. As of December 31, 1994,
PG&W had recorded a liability of $5.6 million for the estimated transition costs
that remained to be billed to it as of such date, and both a current asset and a
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deferred asset (which together totaled $8.8 million) representing the transition
costs remaining to be recovered from its customers.
Sources of Supply. PG&W purchases natural gas from marketers, producers,
and integrated energy companies, generally under the terms of supply
arrangements that extend for the heating season (i.e., November through March)
or for periods of one year or longer. These contracts typically provide for an
adjustment each month in the cost of gas purchased pursuant thereto based on the
then current market prices for natural gas. The largest individual supplier, an
integrated energy company, accounted for 24.5% of PG&W's total purchases of
natural gas in 1994. No other supplier accounted for more than 15% of PG&W's
total purchases of natural gas in 1994.
The purchases of natural gas by PG&W during each of the years 1994, 1993 and
1992 are summarized below:
[CAPTION]
Volume Average
Year Purchased (MCF) Cost per MCF
[S] [C] [C]
1994 28,364,000 $2.82
1993 26,200,000 $2.98
1992 21,323,000 $2.61
During 1995, PG&W expects to purchase a total of approximately 30,157,000
MCF of natural gas under seasonal or longer-term contracts at a currently
projected average cost of $2.79 per MCF. It is expected that a portion of these
purchases will be made through a company that is being formed by a group of
eight Northeastern and Mid-Atlantic local gas distribution companies including
PG&W, the primary purposes of which will be to increase the reliability of
natural gas supplies and reduce the cost of natural gas for the eight companies.
PG&W presently has adequate supplies of natural gas to meet the demands of
existing customers through October, 1995, and the Company believes that PG&W
will be able to obtain sufficient supplies to meet the demands of its existing
customers and to serve new customers (of which approximately 3,500 are expected
to be added in 1995) beyond October, 1995.
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Pipeline Transportation and Storage Entitlements. Pursuant to the terms of
Order 636, PG&W has entered into agreements with its former interstate pipeline
suppliers providing for the firm transportation by those pipelines of the
following quantities of gas:
[CAPTION]
Daily Percentage of Total
Expiration Transportation Transportation
Pipeline Date (a) Entitlement (MCF) Entitlement
[S] [C] [C] [C]
Transco Various through 2015 74,100 (b) 55.5%
Tennessee 1999 and 2000 48,252 36.2
Columbia 2004 11,016 8.3
133,368 100.0%
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PG&W agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Includes 3,300 MCF per day that PG&W can transport during the period
December through February pursuant to an agreement with Transco that
extends through 2011.
PG&W has also contracted with its former interstate pipeline suppliers for
the following volumes of gas storage and storage withdrawals:
[CAPTION]
Maximum
Expiration Total Storage Daily Withdrawal
Pipeline Date (a) (MCF) (b) From Storage (MCF)
[S] [C] [C] [C]
Transco Various through 2013 6,500,000 131,044
Tennessee November 1, 2000 3,500,000 23,031
Columbia October 31, 2004 1,100,000 16,036
11,100,000 170,111
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PG&W agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Storage is utilized in order to meet peak day and seasonal demands.
Based on its present pipeline transportation and storage entitlements, PG&W
is entitled to a maximum daily delivery of the following quantities of gas:
[CAPTION]
Firm Pipeline Withdrawals
Transportation From Storage Percentage
Pipeline (MCF) (MCF) Total (MCF) of Total
[S] [C] [C] [C] [C]
Transco 74,100 (a) 131,044 205,144 67.6%
Tennessee 48,252 23,031 71,283 23.5
Columbia 11,016 16,036 27,052 8.9
133,368 170,111 303,479 100.0%
(a) Includes 3,300 MCF that may be transported during the period
December through February.
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In accordance with the provisions of Order 636, PG&W may release to its
customers and other parties the portions of its firm pipeline transportation and
storage entitlements which are in excess of its requirements. Such releases may
be made upon notice in accordance with the provisions of Order 636 and for a
consideration not in excess of PG&W's cost of the respective entitlement.
Releases may be made for periods ranging from one day to the remaining term of
the entitlement.
Since September 1, 1993, PG&W has released portions of its firm pipeline
transportation capacity to certain of its customers and third parties for
varying periods extending up to three years. The maximum capacity so released
on any one day in 1994 was 38,985 MCF. Through March 10, 1995, PG&W had not,
however, released any of its storage capacity.
The Company believes that PG&W has sufficient firm pipeline transportation
and storage entitlements to meet the demands of its existing customers and to
supply new customers.
Peak Day Requirements. PG&W plans for peak day demand on the basis of a
daily mean temperature of 0 degrees Fahrenheit. Requirements for such a design
peak day, assuming the curtailment of service to interruptible customers, are
currently estimated to be 302,906 MCF. Based upon present pipeline
transportation and storage contracts, and assuming no curtailments by its
suppliers, PG&W could meet a peak day requirement of 303,479 MCF. PG&W's
historic maximum daily sendout is 293,683 MCF, which occurred on January 19,
1994, when service to interruptible customers was curtailed. The mean
temperature in its gas service area on that day was -8 degrees Fahrenheit.
Construction Expenditures. PG&W's construction expenditures for gas utility
plant in 1994 totaled $17.5 million and are estimated to be $21.9 million for
1995. The higher level of expenditures estimated for 1995 reflects certain
long-term pipeline improvement programs, as well as an increased emphasis on new
business development.
Regulation. PG&W's natural gas utility operations are regulated by the
PPUC, particularly as 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.
In addition to those regulations promulgated by the PPUC, PG&W must also
comply with federal, state and local regulations relating generally to the
discharge of materials into the environment or otherwise relating to the
protection of the environment. Compliance with such regulations has not had any
material effect upon the capital expenditures, earnings or competitive position
of PG&W's gas business. Although it cannot predict the future impact of these
regulations, the Company believes that any additional expenditures and costs
made necessary by them would be fully recoverable by PG&W through rates.
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 have 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
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
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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
laws, PG&W does not believe that additional costs, if any, related to these
manufactured gas plant sites will be material to its financial position or
results of operations.
The Company is a "holding company" within the meaning of the Public Utility
Holding Company Act of 1935, as amended ("PUHCA"), but it is exempt, pursuant to
Section 3(a) of the PUHCA, from all the provisions of the PUHCA (except Section
9(a)(2) thereof) and the rules and regulations promulgated thereunder. The
Company files an annual exemption statement on Form U-3A-2 pursuant to Rule U-2
promulgated under the PUHCA. Pursuant to the PUHCA, certain acquisitions by the
Company or its subsidiaries of the stock or assets of gas or electric public
utilities are subject to prior approval by the Securities and Exchange
Commission.
PG&W's gas distribution and transportation activities are not subject to the
Natural Gas Act, as amended.
Valve Maintenance. On November 16, 1993, the PPUC staff issued an Emergency
Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring PG&W
by January 31, 1994, 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. The
Emergency Order was issued following the occurrence of two gas incidents (one
concerning an explosion and the other a fire) in PG&W's service area in June and
October, 1993, respectively, involving nearby gas shut off valves that had been
paved over by third parties and that could not be readily located due to alleged
inaccurate service line records. The Emergency Order also cited four additional
incidents occurring since January 31, 1991, in which shut off valves had been
paved over or records were inaccurate. In connection with these incidents, the
PPUC has alleged that PG&W has violated certain federal and state regulations
related to gas pipeline valves. The PPUC has the authority to assess fines for
such violations. The PPUC ordered PG&W to develop a plan, including a
timetable, by December 30, 1993, for compliance with the terms of the Emergency
Order. PG&W met the December 30, 1993, deadline for submission of this plan.
However, PG&W included in such plan, a timetable, which, in effect, requested an
extension of the January 31, 1994, deadline contained in the Emergency Order,
which PG&W viewed as unrealistic. On February 2, 1994, the PPUC staff notified
PG&W that it considered the plan submitted by PG&W "only a general plan of
action to address the problem with valving in [PG&W's] system" and that the plan
"is lacking in detail and more information is needed." By letter dated February
2, 1994, the PPUC staff indicated that it would initiate an informal
investigation of the matter, including PG&W's responsibility for the incidents
referred to in the Emergency Order. Following discussions between the PPUC
staff and PG&W regarding the development of a mutually acceptable plan, PG&W
submitted a detailed plan of action for complying with the Emergency Order to
the PPUC on April 11, 1994, which was subsequently revised. The PPUC staff
agreed that the revised plan (the "Plan") satisfies the concerns of the PPUC
expressed in the Emergency Order, and on November 30, 1994, the PPUC staff and
PG&W entered into a Settlement Agreement, subject to approval by the PPUC, (i)
terminating the informal investigation initiated by the PPUC staff, (ii)
memorializing the acceptance by the PPUC staff of the Plan and (iii) evidencing
PG&W's commitment to satisfy the requirements of the Plan. The PPUC must
approve the Settlement Agreement. PG&W does not believe that compliance with
the terms of the Settlement Agreement or any liability that might result from
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violations of law or the Emergency Order will have a material adverse effect on
its financial position or results of operations.
Rates. As required by the Code, PG&W files an annual purchased gas cost
rate with the PPUC. This rate is designed to recover purchased gas costs for
the period it will be in effect. The procedure includes a process for the
reconciliation of actual gas costs incurred and actual revenues received and
also provides for the refund of any overcollections, plus interest thereon, or
the recoupment of any undercollections of gas costs. The procedure is limited
to purchased gas costs, to the exclusion of other rate matters, and requires a
formal evidentiary proceeding conducted by the PPUC, the submission of specific
information regarding gas procurement practices and specific findings of fact by
the PPUC regarding the "least cost fuel procurement" policies of the utility.
In accordance with this procedure, PG&W placed a purchased gas cost rate of
$3.68 per MCF in effect on December 1, 1994, and is required to file a proposed
purchased gas cost rate on or before June 1, 1995, to be effective December 1,
1995. It is not presently possible to estimate how this proposed rate will
compare to the current purchased gas cost rate of $3.68 per MCF, which is
scheduled to remain in effect through November 30, 1995. The annual changes in
gas rates on account of purchased gas costs have no effect on PG&W's earnings
since the change in revenues is offset by a corresponding change in the cost of
gas.
The PPUC has issued proposed regulations that would provide for the
quarterly adjustment of the purchased gas cost rate of larger gas distribution
companies, including PG&W. Except for reducing the amount of any over or
undercollections of gas costs, the adoption of these proposed regulations would
not have any material effect on either the Company's or PG&W's financial
position or results of operations.
FERC Order 636, among other matters, requires that PG&W contract for
sufficient gas supplies, pipeline capacity and storage for its annual needs.
These added responsibilities may result in increased scrutiny by the PPUC as to
the prudence of PG&W's gas procurement and supply activities. Depending upon
how the PPUC views the cost effectiveness of such activities, PG&W may not be
permitted to recover all of its gas supply costs in the rates charged to
customers. However, although it cannot be certain, the Company believes that
PG&W will be able to demonstrate to the PPUC the prudence of its gas supply
costs and, therefore, will be allowed to recover all such costs in its purchased
gas cost rate.
Tax Surcharge Adjustments. The PPUC allows PG&W to apply a state tax
adjustment surcharge tariff to its bills for gas service to recoup any increased
taxes resulting from changes in the law with respect to the Pennsylvania Capital
Stock Tax, Corporate Net Income Tax, Gross Receipts Tax or Public Utility Realty
Tax. In accordance with such procedure, PG&W filed a revised state tax
adjustment surcharge tariff with the PPUC which became effective August 1, 1994,
to reflect the effect of tax legislation enacted by the Commonwealth of
Pennsylvania on June 16, 1994, decreasing the Corporate Net Income Tax rate.
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WATER BUSINESS
PG&W distributes water to an area lying within the Counties of Lackawanna,
Luzerne, Susquehanna and Wayne, which includes the Cities of Scranton and
Wilkes-Barre and 62 other municipalities. The total estimated population of
PG&W's water service area, based on the 1990 U.S. Census, is 398,000.
Number and Type of Customers. At December 31, 1994, PG&W had approximately
132,500 water customers from which it derived total water revenues of $66.7
million during 1994. The following chart shows a breakdown of the types of
customers and the percentages of water revenues they generated in 1994:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.6% 63.2%
Commercial 7.1 18.3
Industrial 0.3 8.6
Municipal and Other Users 1.0 9.9
Total 100.0% 100.0%
Sources of Supply and Safe Yield. The water that PG&W distributes is
furnished by a PG&W-owned water supply system, which includes 36 active and
standby reservoirs located on extensive watershed lands and five wells. The
water supply can be augmented, on a short-term basis, by two pump stations that
can pump water from streams outside the watershed into the reservoir storage
system. The combined "safe yield" of PG&W's active and standby sources of
supply is approximately 88 million gallons per day, and the combined storage
capacity of the reservoir system is estimated by PG&W to be approximately 20
billion gallons. ("Safe yield" is the quantity of water, generally expressed in
million gallons per day, that a source of supply can deliver in extreme drought
conditions.) The average daily delivery into PG&W's water distribution system
during 1994 was approximately 66.5 million gallons. As of December 31, 1994,
the quantity of water held in PG&W's reservoirs was approximately 19.0 billion
gallons or 96.3% of their maximum storage capacity.
PG&W has always been able to provide adequate water supplies to meet the
requirements of its service area and has never issued a mandatory water
conservation directive. PG&W believes it can continue to meet fully the water
supply requirements of its service area in the absence of any extended periods
of severe drought.
The Susquehanna River, one of the major rivers in the Commonwealth of
Pennsylvania, flows through PG&W's service area and has always been considered a
possible source of supply for its service area. Although PG&W is not presently
taking any water from the Susquehanna River and does not have facilities
installed that would permit it to do so, it is currently authorized to withdraw,
on an emergency basis, 15 million gallons per day from the river.
Filtration of Water Supplies. All of PG&W's water customers are supplied
with filtered water (except for several hundred who are supplied with ground
water from wells) which meets all federal and state drinking water regulations.
The filtration of PG&W's water supplies is performed at ten water treatment
plants, located throughout PG&W's water service area, which have an aggregate
daily capacity of 101.1 million gallons. The goal of providing all of PG&W's
customers who are served from surface supplies with filtered water was achieved
on September 30, 1993, when the Watres Water Treatment Plant was placed into
operation. The Watres Water Treatment Plant was the last of eight water
treatment plants to be constructed and placed into operation by PG&W during the
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period 1988 through 1993. Until the construction of these plants, most of
PG&W's water customers were supplied with treated, but nonfiltered water,
obtained from various reservoirs and stream intakes, although a relatively small
percentage of its customers received filtered water from two previously existing
water treatment plants or ground water pumped from wells.
Main Replacement and Rehabilitation Program and Other Distribution System
Improvements. PG&W distributes water to its customers through approximately
1,689 miles of pipe ranging in size from over 48" in diameter to less than 1" in
diameter. The majority of the water mains in PG&W's distribution system
consists of cast iron or ductile iron pipe. The majority of cast iron pipe is
unlined. Approximately 54% (based on linear feet of pipe of all diameters) of
PG&W's water mains were installed prior to 1920 and approximately 30% were
installed prior to 1900.
In 1987, PG&W completed a review of its distribution system designed to
ascertain the general nature and the approximate cost of improvements that would
be required for a complete distribution system main rehabilitation. In
performing the study, PG&W made certain assumptions as to the general structural
condition of its system. It did not request outside engineering assessments of
the entire system. Using the criteria developed in the distribution system
assessment as a guide, PG&W preliminarily estimated the cost of complete
distribution system main replacement and/or rehabilitation to be approximately
$248 million at 1987 price levels.
Based upon this assessment, PG&W determined that embarking on a program to
accomplish total distribution system rehabilitation in a relatively short span
of time would not be a cost effective means of improving water quality. PG&W
determined that the most substantial opportunities for improvement of water
quality lay in the filtration of PG&W's sources of water supply. In view of the
large commitment of capital needed to construct water treatment plants, rapid
implementation of a distribution system rehabilitation program would divert
financial resources from, and cause delays in, the construction of those
facilities. Consequently, PG&W developed a program of rehabilitation to be
implemented on a more modest scale, which PG&W believes will address the
conditions that are most likely to cause degradation of water quality in the
distribution system. This program, which includes the selective replacement and
rehabilitation of water mains and services and the elimination of dead-end
lines, involved the expenditure of $55.0 million during the period 1988 through
1994.
In connection with its distribution system rehabilitation program, PG&W
intends to expend an average of $9.8 million per year during the period 1995
through 1997 for water distribution system improvements, primarily the replacing
or cleaning and lining of mains. Such replacement and cleaning and lining of
mains will focus on the areas of highest priority and will be based on the
criteria set forth in the 1987 distribution system assessment, which will be
updated in accordance with the PPUC's June 23, 1993, Order allowing PG&W a
conditional rate increase for the Scranton Water Rate Area. As part of the
settlement resolving certain disputed issues relating to such Order, PG&W agreed
to spend a total of $4.9 million annually beginning June 23, 1993 (an additional
$2.5 million over its actual average annual expenditure of $2.4 million during
the three-year period ended June 30, 1993), for distribution system improvements
in the Scranton Water Rate Area until the PPUC is satisfied that PG&W is
providing adequate service. PG&W was in compliance with this provision of the
Order as of December 31, 1994, and the additional expenditures it is so required
to make are included in the amounts that it is planning to spend annually on
distribution system improvements during the years 1995 through 1997.
-11-
<PAGE>
PG&W estimates that approximately 30% of the water introduced to its
distribution system is lost through leakage or otherwise cannot be accounted for
through identifiable uses. However, PG&W believes that its rate of unaccounted
for water is not uncharacteristic of water systems of similar age, size and
demographics. Unaccounted for water requires PG&W to incur expenses to process
water that is not furnished to customers. While such costs are typically
recoverable in the rates charged to customers, the PPUC has disallowed their
recovery when unaccounted for water reached a level the PPUC determined to be
unreasonable. The PPUC, in a 1989 Policy Statement on water conservation for
water utilities, stated that levels of unaccounted for water should be kept
within reasonable levels. Although the PPUC has considered levels above 20% to
be excessive in certain circumstances, there is no industry standard for
unaccounted for water levels. In a 1990 decision involving another Pennsylvania
water utility, the PPUC recognized that historic unaccounted for water problems
could not be resolved immediately and that a utility would not be penalized if
it were making substantial progress toward achieving the 20% unaccounted for
goal. PG&W believes that it has made substantial progress in identifying
sources of water loss in its system through the implementation of an aggressive
leak detection program in conjunction with an ongoing main replacement program
and it is continuing its efforts to identify additional sources utilizing the
services of consultants.
Regulation. PG&W's water utility operations are regulated by the PPUC,
particularly as to utility rates, service and facilities, accounts, issuance of
certain securities, the encumbering or disposition of public utility properties
and various other matters associated with broad regulatory authority.
PG&W, in common with most industrial enterprises, is subject to regulation
with respect to the environmental effects of its operations. In addition to the
PPUC, the principal agency having regulatory authority over PG&W's water
operations is the DER, which has jurisdiction, among other matters, concerning
water rights, sources of supply, the design and construction of waterworks, the
quality of drinking water and the safety of dams.
In addition to those regulations promulgated by the PPUC, PG&W must also
comply with federal, interstate compact, state and local regulations relating
generally to the discharge of materials into the environment, or otherwise
relating to the protection of the environment. Compliance with such regulations
has not had any material effect upon the capital expenditures, earnings or
competitive position of PG&W's water business. Although it cannot predict the
future impact of these regulations, the Company believes that any additional
expenditures and costs made necessary by them will be fully recoverable by PG&W
through rates.
Federal and State Water Quality Standards. The Federal Safe Drinking Water
Act of 1974 (the "Act") regulates the quality of drinking water provided to the
public. Pursuant to the Act, the EPA has issued regulations relating to, among
other things, water quality standards, maximum contaminant levels and monitoring
requirements and prohibitions against the use of lead in distribution systems.
As permitted by the Act, the Pennsylvania Department of Environmental Resources
(the "DER") has assumed primacy for enforcement of drinking water standards in
Pennsylvania. PG&W has taken action to comply with these regulations and does
not anticipate any impact on its water operations as a result thereof.
Treatment and Testing of Water. All water entering PG&W's distribution
system is filtered (except for the small quantity of ground water pumped from
wells), disinfected, and treated with chemicals to minimize corrosion of the
distribution system and customers' piping. Water samples are taken at each of
-12-
<PAGE>
the intake stations and at selected locations in PG&W's service area, and
turbidity is monitored at each location at which the water enters the
distribution system. PG&W operates a laboratory which is certified by the DER
to perform microbiological, inorganic and organic chemical analyses of the water
in both its reservoirs and distribution system, utilizing a scheduled sampling
program. Such analyses include those tests required by the DER, and the results
of such tests are reported to the DER as required by law.
Construction Expenditures. PG&W's construction expenditures for water
utility plant in 1994 totaled $19.3 million, and are estimated to be $23.0
million for 1995. The higher level of capital expenditures estimated for 1995
is primarily attributable to the construction of storage tanks at the Hillside
Water Treatment Plant and increased expenditures for distribution system
improvements.
Rates. The following table summarizes PG&W's requests for water rate
increases and the action taken by the PPUC on those requests from January 1,
1991, to March 10, 1995:
<TABLE>
<CAPTION>
Amount Increase
Date of Requested Effective Granted
Service Area Request (in millions) Date (in millions)
<S> <C> <C> <C> <C>
Scranton (filtered water
customers) June, 1990 $ 25.5 March, 1991 $ 15.0 (1)
(subject to
phase-in)
Spring Brook (customers
served water exclusively
from the Nesbitt Water
Treatment Plant) April, 1991 2.6 January, 1992 1.9
Spring Brook (customers
served water exclusively
from the Crystal Lake
Water Treatment Plant) June, 1992 4.4 March, 1993 2.0 (1)
(subject to
phase-in)
Scranton (filtered water
customers) September, 1992 9.9 June, 1993 5.0 (1)
Spring Brook (customers
served water exclusively
from the Ceasetown and
Watres Water Treatment
Plants) April, 1993 19.5 December, 1993 11.9 (1)
(subject to
phase-in)
</TABLE>
(1) See -Management's Discussion and Analysis of Financial Condition and
Results of Operations-Rate Matters-Water Rate Filings beginning on page 27
of the Company's 1994 Annual Report to Shareholders which is incorporated
herein by reference.
The rate relief granted in the past to PG&W by the PPUC has been less than
the full amounts requested. Generally, the amounts granted have been determined
through negotiated settlements with certain parties to the proceedings in order
to obtain rate relief earlier than expected and to avoid the substantial
expenses associated with further administrative and possible appellate
-13-
<PAGE>
proceedings. The Company believes that PG&W will be able to obtain adequate
future rate relief as it makes further improvements to its distribution system
-14-
<PAGE>
and is able to demonstrate it is providing water that is suitable for all
"household purposes", i.e., meeting federal and state primary (health-related)
and secondary (aesthetics-related, particularly taste, odor and color) drinking
water standards, and that meets all applicable water quality standards.
The magnitude of the projected rate increases that will be required to
enable PG&W to fully recover its capital expenditures associated with the
construction of the water treatment plants will be significant. Prior to the
construction of the plants, the average annual cost of water to PG&W's customers
receiving nonfiltered water was approximately $143. The average annual cost of
water to PG&W's residential customers, all of whom are now receiving filtered
water (except for several hundred who are supplied ground water from wells) was
approximately $340 as of March, 1995. PG&W anticipates that this cost will
increase to approximately $460 in the latter part of this decade, at which time
PG&W expects to have been allowed by the PPUC to fully reflect in rates its
costs associated with the filtration of its water supplies. PG&W believes that
these levels of increases, in terms of percentages, will not be inconsistent
with those that have been or will be experienced by other water utilities
required to make a similar transition to filtered water; however, the level of
rates that PG&W expects to seek in future rate increases will be such that the
PPUC may question the "affordability" of such rates and may require that any
such rate increases be phased-in over a period of time in order to reduce
consumer "rate shock." While the Company expects that the PPUC will grant PG&W
adequate rate relief in a timely manner, there can be no assurance that the PPUC
will take such action.
Tax Surcharge Adjustments. The PPUC allows PG&W to apply a state tax
adjustment surcharge tariff to its bills for water service to recoup any
increased taxes resulting from changes in the law with respect to the
Pennsylvania Capital Stock Tax, Corporate Net Income Tax or Public Utility
Realty Tax. In accordance with such procedure, PG&W filed a revised state tax
adjustment surcharge tariff with the PPUC which became effective August 1, 1994,
to reflect the effect of tax legislation enacted by the Commonwealth of
Pennsylvania on June 16, 1994, decreasing the Corporate Net Income Tax rate.
NONREGULATED SUBSIDIARIES
Certain of the Company's operations are also conducted by Pennsylvania
Energy Resources, Inc. ("PERI"), Pennsylvania Energy Marketing Company ("PEM")
and Theta Land Corporation ("THETA"). Operating revenues and operating income
(after taxes on income) attributable to PERI, PEM and THETA have not been
significant relative to the Company's regulated operations.
PERI. PERI sells materials and supplies used in the distribution of water
and natural gas and engages in service activities, primarily the maintenance of
gas heating appliances for PG&W customers.
PEM. PEM is engaged in the marketing and brokering of natural gas directly
to large industrial and commercial users.
THETA. Theta owns a small amount of real estate which is being held for
sale or future development. Theta also periodically engages in the sale of
forest products.
-15-
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Positions and
Officer Offices with the
Name Age Since Company
<S> <C> <C> <C>
Kenneth L. Pollock 74 1987 Chairman of the Board of
Directors
William D. Davis 63 1991 Vice Chairman of the
Board of Directors
Dean T. Casaday 63 1991 President and Chief
Executive Officer
Harry E. Dowling 45 1984 Vice President, Human
Resources and Customer
Services
David R. Kaufman 41 1991 Vice President, Water
Resources
John F. Kell, Jr. 57 1978 Vice President, Finance
Joseph F. Perugino 56 1988 Vice President,
Marketing and Gas Supply
Thomas J. Ward 44 1988 Vice President,
Administration and
Secretary
Richard N. Marshall 37 1993 Treasurer
Thomas J. Koval 42 1992 Controller and Assistant
Treasurer
</TABLE>
Each of the Executive Officers has been elected to serve until the first
meeting of the Board of Directors of the Company following the 1995 Annual
Meeting and until his successor has been duly elected. Also, each of these
Officers holds the same position with PG&W. Other than with respect to Mr.
Casaday, who has an employment agreement with the Company as President and Chief
Executive Officer for a one-year period ending August 31, 1995, there are no
arrangements or understandings between any officer and any other person pursuant
to which he was selected as an officer.
Other than for Kenneth M. Pollock, a Director, who is the son of Kenneth L.
Pollock, the Chairman of the Board of Directors, there are no existing family
relationships between any directors or executive officers of the Company.
-16-
<PAGE>
ITEM 2. PROPERTIES
Gas. PG&W's gas system consists of approximately 2,191 miles of
distribution lines, nine city gate and 67 major regulating stations and
miscellaneous related and additional property. PG&W believes that its gas
utility properties are adequately maintained and in good operating condition in
all material respects. Continued expenditures will, however, be required with
regard to PG&W's on-going valve maintenance program. See "Business-Gas
Business-Valve Maintenance."
Most of PG&W's gas utility properties are subject to a first mortgage lien
pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15,
1946, as supplemented by twenty-nine supplemental indentures (collectively, the
"Indenture") from PG&W to First Trust of New York, National Association, as
Trustee.
Water. PG&W's water system consists principally of 36 active and standby
reservoirs and stream intakes, ten water treatment plants, five wells, various
distribution system storage tanks, approximately 1,689 miles of aqueducts and
pipelines, and miscellaneous related and additional property. In addition, PG&W
owns approximately 53,000 acres of land situated in northeastern Pennsylvania.
In PG&W's opinion, its water utility properties are adequately maintained
and in good operating condition in all material respects. Continued capital
expenditures will, nonetheless, be required for PG&W's on-going program of water
main replacement and rehabilitation and other improvements to ensure the
integrity of PG&W's distribution system. See "Business-Water Business-Main
Replacement and Rehabilitation Program and Other Distribution System
Improvements."
Most of PG&W's water utility properties are subject to a first mortgage lien
pursuant to the Indenture. Additionally, certain of these properties are
subject to a second mortgage lien (the "PENNVEST Mortgage") pursuant to a loan
agreement, dated October 16, 1987, between PG&W and the Pennsylvania Water
Facilities Loan Board and pursuant to loan agreements, dated March 3, 1989, and
December 3, 1992, between PG&W and the Pennsylvania Infrastructure Investment
Authority ("PENNVEST"), under the terms of which funds were provided to finance
the construction of certain water facilities. The PENNVEST Mortgage also
secures PG&W's obligations under assumption agreements dated April 5, 1993, with
PENNVEST which relate to loans which were assumed by PG&W in connection with its
acquisition of two small water companies.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to the business of the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1994, there were no matters submitted to a vote
of security holders of the registrant through the solicitation of proxies or
otherwise.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information captioned "Common Stock and Dividend Information" and
presented on page 56 of the Company's 1994 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C>
Page 54 of the Company's 1994 Annual Report to Shareholders is incorporated
herein by reference.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 22 through 32 of the Company's 1994 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 33 through 51 of the Company's 1994 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-18-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information required by this item concerning directors of the Company
has been omitted from this Form 10-K since the Company expects to file its
definitive proxy statement not later than 120 days after the close of its fiscal
year covered by this Form 10-K.
(b) Identification of Executive Officers
Information concerning the Company's executive officers is set forth in Part
I of this Form 10-K under the heading "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
-19-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements, notes to
consolidated financial statements and report of independent public
accountants for the Company and its subsidiaries contained in the
Company's 1994 Annual Report to Shareholders filed as Exhibit 13 hereto
are incorporated herein by reference.
[CAPTION]
1994
Annual
Report
Pages
[S] [C]
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1994. . . . . . . . . . . . 33
Consolidated Balance Sheets as of December 31, 1994 and 1993 . 34
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1994. . . . . . . . . 36
Consolidated Statements of Capitalization as of December 31,
1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Common Shareholders' Investment
for each of the three years in the period ended December
31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Notes to Consolidated Financial Statements . . . . . . . . . . 39
Report of Independent Public Accountants . . . . . . . . . . . 51
2. Financial Statement Schedules
The following consolidated financial statement schedule for the
Company and its subsidiaries is filed as a part of this Form 10-K.
Schedules not included have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Schedule Number Page
II Valuation and Qualifying Accounts for the three-year
period ended December 31, 1994 . . . . . . . . . . . . 22
3. Exhibits
See "Index to Exhibits" located on page 24 for a listing of all
exhibits filed as part of this report on Form 10-K.
-20-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1994.
(c) Executive Compensation Plans and Arrangements
The following listing includes the Company's executive compensation plans
and arrangements in effect as of December 31, 1994.
Exhibit
10-33 Form of Change in Control Agreement between the Company and certain
of its Officers -- filed as Exhibit 10-38 to the Company's Annual
Report on Form 10-K for 1989, File No. 0-7812.
10-34 Agreement by and between the Company, PG&W and Robert L. Jones dated
as of March 15, 1991 -- filed as Exhibit No. 10-44 to the Company's
Annual Report on Form 10-K for 1990, File No. 0-7812.
10-35 Employment Agreement effective September 1, 1994, between the
Company and Dean T. Casaday -- filed as Exhibit 10-1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, File No. 0-7812.
10-36 Supplemental Retirement Agreement, dated as of December 23, 1991,
between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
the Company's Common Stock Form S-2, Registration No. 33-43382.
10-37 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between the Company and Dean T. Casaday --
filed herewith.
10-38 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to the Company's 1993 definitive
Proxy Statement, File No. 0-7812.
(d) Statements Excluded from Annual Report to Shareholders
Not applicable.
-21-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
To Pennsylvania Enterprises, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Pennsylvania Enterprises,
Inc.'s 1994 Annual Report to Shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated February 17, 1995. Our audit was
made for the purpose of forming an opinion on those consolidated financial
statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying
Accounts for the three-year period ended December 31, 1994 (see index of
financial statements) is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic consolidated
financial statements. This schedule has been subject to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 17, 1995
-22-
<PAGE>
SCHEDULE II
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
[CAPTION]
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
[S] [C]
Date: March 27, 1995 By: /s/ Dean T. Casaday
Dean T. Casaday
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 27, 1995 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
[CAPTION]
Signature Capacity Date
[S] [C] [C]
/s/ Kenneth L. Pollock Chairman of the Board of March 27, 1995
Kenneth L. Pollock Directors
/s/ William D. Davis Vice Chairman of the Board March 27, 1995
William D. Davis of Directors
/s/ Dean T. Casaday Director, President and March 27, 1995
Dean T. Casaday Chief Executive Officer
/s/ Robert J. Keating Director March 27, 1995
Robert J. Keating
/s/ John D. McCarthy Director March 27, 1995
John D. McCarthy
/s/ Kenneth M. Pollock Director March 27, 1995
Kenneth M. Pollock
/s/ James A. Ross Director March 27, 1995
James A. Ross
/s/ Ronald W. Simms Director March 27, 1995
Ronald W. Simms
-24-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
[CAPTION]
(3) Articles of Incorporation and By Laws:
[S] [C]
3-1 Restated Articles of Incorporation of the Company, as amended --
filed as Exhibit 3-1 to the Company's Senior Note Form S-2,
Registration No. 33-47581.
3-2 By-Laws of the Company, as amended and restated on January 18, 1995
-- filed herewith.
(4) Instruments Defining the Rights of Security Holders, Including Debentures:
4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946,
between Scranton-Spring Brook Water Service Company (now PG&W) and
Guaranty Trust Company, as Trustee (now Morgan Guaranty Trust
Company of New York) -- filed as Exhibit 2(c) to PG&W's Bond Form
S-7, Registration No. 2-55419.
4-2 Fourth Supplemental Indenture, dated as of March 15, 1952 -- filed
as Exhibit 2(d) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as
Exhibit 2(e) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-4 Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed
as Exhibit 2(f) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960 -- filed
as Exhibit 2(g) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-6 Fourteenth Supplemental Indenture, dated as of December 15, 1961 --
filed as Exhibit 2(h) to PG&W's Bond Form S-7, Registration No.
2-55419.
4-7 Fifteenth Supplemental Indenture, dated as of December 15, 1963 --
filed as Exhibit 2(i) to PG&W's Bond Form S-7, Registration No.
2-55419.
4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed
as Exhibit 2(j) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-9 Seventeenth Supplemental Indenture, dated as of October 15, 1967 --
filed as Exhibit 2(k) to PG&W's Bond Form S-7, Registration No.
2-55419.
4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970 -- filed
as Exhibit 2(1) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed
as Exhibit 2(m) to PG&W's Bond Form S-7, Registration No. 2-55419.
-25-
<PAGE>
Exhibit
Number
4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed
as Exhibit 2(n) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-13 Twenty-first Supplemental Indenture, dated as of December 1, 1976 --
filed as Exhibit 4-16 to PG&W's Annual Report on Form 10-K for 1982,
File No. 1-3490.
4-14 Twenty-second Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-22 to the Company's Annual Report on Form 10-K
for 1989, File No. 0-7812.
4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-23 to the Company's Annual Report on Form 10-K
for 1989, File No. 0-7812.
4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-3 to the Company's Common Stock Form S-2,
Registration No. 33-43382.
4-17 Twenty-fifth Supplemental Indenture, dated as of September 1, 1992,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-17 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-18 Twenty-sixth Supplemental Indenture, dated as of December 1, 1992,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-18 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-19 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-20 Twenty-eighth Supplemental Indenture, dated as of December 1, 1993,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-20 to PG&W's Annual Report on Form 10-K for
1993, File No. 1-3490.
4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994,
from PG&W to First Trust of New York, National Association, as
Successor Trustee to Morgan Guaranty Trust Company of New York --
filed as Exhibit 4-21 to PG&W's Annual Report on Form 10-K for 1994,
File No. 1-3490.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth,
Eleventh and Thirteenth Supplemental Indentures merely convey
additional properties to the Trustee.
4-22 Indenture dated as of June 15, 1992, between the Company and
Chemical Bank, as Trustee, with respect to the Company's 10.125%
Senior Notes due June 15, 1999 -- filed as Exhibit 4-20 to the
Company's Annual Report on Form 10-K for 1992, File No. 0-7812.
-26-
<PAGE>
Exhibit
Number
(10) Material Contracts:
10-1 Service Agreement for storage service under Rate Schedule LGA, dated
August 6, 1974, between PG&W and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-3 to PG&W's Annual Report on Form
10-K for 1984, File No. 1-3490.
10-2 Service Agreement for transportation service under Rate Schedule FT,
dated February 1, 1992, by and between PG&W and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-4 to PG&W's Annual
Report on Form 10-K for 1991, File No. 1-3490.
10-3 Service Agreement for storage service under Rate Schedule SS-2,
dated April 1, 1990, between PG&W and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-8 to the Company's Common Stock
Form S-2, Registration No. 33-43382.
10-4 Service Agreement for sales service under Rate Schedule FS, dated
August 1, 1991, between PG&W and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-6 to the Company's Annual Report
on Form 10-K for 1991, File No. 0-7812.
10-5 Service Agreement for transportation service under Rate Schedule FT,
dated August 1, 1991, between PG&W and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-10 to the Company's Common
Stock Form S-2, Registration No. 33-43382.
10-6 Service Agreement for transportation service under Rate Schedule IT,
dated January 31, 1992, between PG&W and Transcontinental Gas
Pipeline Corporation -- filed as Exhibit 10-8 to the Company's
Annual Report on Form 10-K for 1991, File No. 0-7812.
10-7 Service Agreement for storage service under Rate Schedule LSS, dated
October 1, 1993, by and between PG&W and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-7 to PG&W's Annual Report on
Form 10-K for 1993, File No. 1-3490.
10-8 Service Agreement for storage service under Rate Schedule GSS, dated
October 1, 1993, by and between PG&W and Transcontinental Gas
Pipeline Corporation Company -- filed as Exhibit 10-8 to PG&W's
Annual Report on Form 10-K for 1993, File No. 1-3490.
10-9 Service Agreement for transportation service under Rate Schedule
FTS, dated November 1, 1993, by and between PG&W and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-9 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-10 Service Agreement for transportation service under Rate Schedule
SST, dated November 1, 1993, by and between PG&W and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-10 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
-27-
<PAGE>
Exhibit
Number
10-11 Service Agreement for storage service under Rate Schedule FSS, dated
November 1, 1993, by and between PG&W and Columbia Gas Transmission
Corporation -- filed as Exhibit 10-11 to PG&W's Annual Report on
Form 10-K for 1993, File No. 1-3490.
10-12 Service Agreement for transportation service under Rate Schedule
FTS-1, dated November 1, 1993, by and between PG&W and Columbia Gulf
Transmission Company -- filed as Exhibit 10-12 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-13 Service Agreement for transportation service under Rate Schedule
ITS-1, dated November 1, 1993, by and between PG&W and Columbia Gulf
Transmission Company -- filed as Exhibit 10-13 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-14 Service Agreement for transportation service under Rate Schedule
ITS, dated November 1, 1993, by and between PG&W and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-14 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-15 Service Agreement (Contract No. 946) for transportation service
under Rate Schedule FT-A, dated September 1, 1993, by and between
PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1 to
PG&W's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
10-16 Service Agreement (Service Package No. 171) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit
10-2 to PG&W's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-17 Service Agreement (Service Package No. 187) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit
10-3 to PG&W's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-18 Service Agreement (Service Package No. 190) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG&W and Tennessee Gas Pipeline -- filed as Exhibit 10-4 to
PG&W's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
10-19 Service Agreement (Contract No. 2289) for storage service under Rate
Schedule FS, dated September 1, 1993, by and between PG&W and
Tennessee Gas Pipeline -- filed as Exhibit 10-5 to PG&W's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993, File
No. 1-3490.
10-20 Bond Purchase Agreement, dated September 1, 1989, relating to PG&W's
First Mortgage Bonds 9.23% Series due 1999 and First Mortgage Bonds
9.34% Series due 2019 among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York and PG&W -- filed as
Exhibit 10-34 to the Company's Annual Report on Form 10-K for 1989,
File No. 0-7812.
-28-
<PAGE>
Exhibit
Number
10-21 Form of Bond Purchase Agreement, dated as of September 1, 1991, re:
$50.0 million of 9.57% First Mortgage Bonds, due September 1, 1996,
entered into between PG&W and each of the following parties: Pacific
Mutual Life Insurance Company, Principal Mutual Life Insurance
Company, Great West Life & Annuity Insurance Company, The Life
Insurance Company of Virginia, Lutheran Brotherhood, Transamerica
Life Insurance and Annuity Company and The Franklin Life Insurance
Company -- filed as Exhibit 10-7 to the Company's Common Stock Form
S-2, Registration No. 33-43382.
10-22 Amended and Restated Project Facilities Agreement dated as of
September 1, 1992, between PG&W and the Luzerne County Industrial
Development Authority -- filed as Exhibit 10-27 to the Company's
Annual Report on Form 10-K for 1992, File No. 0-7812.
10-23 7.20% Bond Purchase Agreement, dated September 2, 1992, among the
Luzerne County Industrial Development Authority, PG&W and Butcher &
Singer, a division of Wheat First Securities Inc., as representative
on behalf of itself and Legg Mason Wood Walker Incorporated -- filed
as Exhibit 10-28 to the Company's Annual Report on Form 10-K for
1992, File No. 0-7812.
10-24 Project Facilities Agreement, dated December 1, 1992, between
Luzerne County Industrial Development Authority and PG&W -- filed as
Exhibit 10-29 to the Company's Annual Report on Form 10-K for 1992,
File No. 0-7812.
10-25 7.125% Bond Purchase Agreement, dated December 10, 1992, among the
Luzerne County Industrial Development Authority, PG&W and Butcher &
Singer, a division of Wheat First Securities Inc., as representative
on behalf of itself and Legg Mason Wood Walker Incorporated -- filed
as Exhibit 10-30 to the Company's Annual Report on Form 10-K for
1992, File No. 0-7812.
10-26 Second Amended and Restated Project Facilities Agreement dated as of
December 1, 1993, between PG&W and the Luzerne County Industrial
Development Authority -- filed as Exhibit 10-30 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-27 6.05% Bond Purchase Agreement, dated December 2, 1993, among the
Luzerne County Industrial Development Authority, PG&W and Butcher &
Singer, a division of Wheat First Securities, Inc., as
representative on behalf of itself and Legg Mason Wood Walker
Incorporated -- filed as Exhibit 10-31 to PG&W's Annual Report on
Form 10-K for 1993, File No. 1-3490.
10-28 7% Bond Purchase Agreement, dated November 1, 1994, among the
Luzerne County Industrial Development Authority, PG&W and Wheat
First Butcher Singer, as representative on behalf of itself and Legg
Mason Wood Walker Incorporated -- filed as Exhibit 10-28 to PG&W's
Annual Report on Form 10-K for 1994, File No. 1-3490.
-29-
<PAGE>
Exhibit
Number
10-29 Amended and Restated Project Facilities Agreement dated as of
November 1, 1994, between PG&W and the Luzerne County Industrial
Development Authority -- filed as Exhibit 10-29 to PG&W's Annual
Report on Form 10-K for 1994, File No. 1-3490.
10-30 Term Loan Agreement, dated as of May 31, 1994, by and among
Pennsylvania Enterprises, Inc. and the Banks parties thereto and PNC
Bank, National Association, as Agent -- filed as Exhibit 10-1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1994, File No. 0-7812.
10-31 Credit Agreement, dated as of April 19, 1993, by and among PG&W, the
Banks parties thereto and PNC Bank, Northeast PA, as Agent, and
CoreStates Bank, N.A. and NBD Bank, N.A. as Co-Agents -- filed as
Exhibit 10-1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993, File No. 0-7812.
10-32 First Amendment to Credit Agreement and Notes, dated as of December
16, 1994, by and among PG&W, the Banks parties thereto and PNC Bank,
Northeast PA, as Agent, and CoreStates Bank, N.A. and NBD Bank, N.A.
as Co-Agents -- filed as Exhibit 10-31 to PG&W's Annual Report on
Form 10-K for 1994, File No. 1-3490.
10-33 Form of Change in Control Agreement between the Company and certain
of its Officers -- filed as Exhibit 10-38 to the Company's Annual
Report on Form 10-K for 1989, File No. 0-7812.
10-34 Agreement, dated as of March 15, 1991, by and between the Company,
PG&W and Robert L. Jones -- filed as Exhibit 10-38 to the Company's
Annual Report on Form 10-K for 1990, File No. 0-7812.
10-35 Employment Agreement effective September 1, 1994, between the
Company and Dean T. Casaday -- filed as Exhibit 10-1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, File No. 0-7812.
10-36 Supplemental Retirement Agreement, dated as of December 23, 1991,
between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
the Company's Common Stock Form S-2, Registration No. 33-43382.
10-37 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between the Company and Dean T. Casaday --
filed herewith.
10-38 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 - filed as Exhibit A to the Company's 1993 definitive
Proxy Statement, File No. 0-7812.
-30-
<PAGE>
Exhibit
Number
(11) Statement Re Computation of Per Share Earnings:
11-1 Statement Re Computation of Per Share Earnings -- filed herewith.
(13) Annual Report to Security Holders:
13-1 1994 Annual Report to Shareholders (except for the information
presented on the front and rear covers and pages 1 through 21, which
are not deemed to be filed with the Securities and Exchange
Commission for the purposes of the Securities Exchange Act of 1934)
-- filed herewith.
(21) Subsidiaries of the Registrant:
21-1 Subsidiaries of the Registrant -- filed herewith.
(23) Consents of Experts and Counsel:
23-1 Consent of Independent Public Accountants -- filed herewith.
-31-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 16
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 17
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 17
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 17
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . 18
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 18
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . 18
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 18
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 19*
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 23
________________________
* The "Index to Exhibits" is located on page 24.
</TABLE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994
Balance at Charged Charged Balance
beginning to to other at end
Description of year income accounts Deductions of year
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Deducted from the asset to which it applies:
Reserve for uncollectible accounts-
Year ended December 31, 1994 $ 1,229 $ 2,345 $ - $ 2,259(a) $ 1,315
Year ended December 31, 1993 $ 1,480 $ 1,595 $ - $ 1,846(a) $ 1,229
Year ended December 31, 1992 $ 1,612 $ 1,806 $ - $ 1,938(a) $ 1,480
Shown as operating reserves on the consolidated
balance sheets:
Insurance -
Year ended December 31, 1994 $ 1,863 $ 1,695 $ - $ 1,175(b) $ 2,383
Year ended December 31, 1993 $ 1,565 $ 1,823 $ 75 $ 1,600(b) $ 1,863
Year ended December 31, 1992 $ 1,847 $ 1,216 $ - $ 1,498(b) $ 1,565
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table expresses certain items in the Company's Consolidated
Statements of Income as percentages of total operating revenues for each of the
calendar years ended December 31, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Operating Revenues:
Gas 71.6% 74.2% 74.6%
Water 28.4 25.8 25.4
Total operating revenues 100.0 100.0 100.0
Operating Expenses:
Cost of gas 42.0 41.9 40.5
Other operation expenses 17.1 18.8 19.8
Maintenance and depreciation 10.4 10.5 10.2
Deferred treatment plant costs, net 0.3 (0.7) (0.1)
Income and other taxes 11.6 11.5 11.4
Total operating expenses 81.4 82.0 81.8
Operating Income 18.6 18.0 18.2
Other Income, Net 0.1 0.3 -
Interest Charges 11.2 11.3 12.2
Subsidiary's Preferred Stock Dividends 2.0 3.1 2.6
Net Income 5.5% 3.9% 3.4%
</TABLE>
o Year ended December 31, 1994, compared with year ended December 31, 1993
Operating Revenues. Operating revenues of the Company increased $28.0
million (13.6%) from $206.7 million for 1993 to $234.7 million for 1994.
Gas 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-
Gas Rate Filings." Also contributing to the increase in gas 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-Gas Rate Filings") acted to increase gas operating revenues by $1.8
million in 1994. The effects of the price increase and the surcharges on gas
operating revenues were partially offset by the switching of certain commercial
and industrial customers from sales to transportation service and a price
* 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 650
Fahrenheit. Actual degree days represent the sum of the degree days for the
period.
F-1
<PAGE>
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-Gas Rate Filings").
Water operating revenues increased by $13.4 million (25.0%) from $53.4
million for 1993 to $66.7 million for 1994. This increase in revenues was
primarily the result of rate increases which the Pennsylvania Public Utility
Commission (the "PPUC") allowed PG&W, including a $2.0 million annual rate
increase effective March 9, 1993, for customers in the Spring Brook Water Rate
Area served exclusively by the Crystal Lake Water Treatment Plant, a $5.0
million annual rate increase effective June 23, 1993, for customers in the
Scranton Water Rate Area, and an $11.9 million annual rate increase effective
December 16, 1993, for customers in the Spring Brook Water Rate Area served by
the Ceasetown and Watres Water Treatment Plants, as more fully explained below
under "-Rate Matters-Water Rate Filings."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $21.6 million (12.8%) from $169.4 million for 1993 to $191.0
million for 1994. As a percentage of operating revenues, total operating
expenses decreased from 82.0% during 1993 to 81.4% during 1994. Operating
expenses related to gas utility operations increased by $14.2 million (10.6%)
from $133.7 million in 1993 to $147.9 million in 1994, primarily as a result of
a $12.1 million increase in the cost of gas, a higher level of other operations
and maintenance expense and increased gross receipts tax as a result of the
higher level of gas revenues. Operating expenses related to water utility
operations increased by $7.4 million (20.7%) from $35.7 million in 1993 to $43.1
million in 1994, primarily as a result of increases in other operation expense,
depreciation, net deferred treatment plant costs and income taxes.
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-Gas 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. The gross margin on gas operations (gas operating
revenues less the cost of gas) increased $2.6 million or 3.9% in 1994, primarily
as a result of the increased sales to residential and commercial heating
customers.
Other than the cost of gas and income taxes, operating expenses increased by
$6.3 million (8.3%) from $75.0 million for 1993 to $81.2 million for 1994. This
increase was largely attributable to a $1.2 million increase in other operation
and maintenance expenses (principally as a result of a $668,000 increase in
payroll costs, a $507,000 increase in other postretirement benefits and
increased provisions for uncollectible accounts of $728,000) and a $2.1 million
increase in net deferred treatment plant costs during 1994 (see "-Deferred
Treatment Plant Costs, Net and Carrying Charges"), as well as a $2.0 million
increase in depreciation (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 water plant in the Ceasetown and Watres Service
Areas). The effects of these increases were partially offset by a $613,000
increase in costs charged to construction (which acts to reduce expense) as a
result of a higher level of construction activity.
F-2
<PAGE>
Income taxes increased by $3.3 million from $7.9 million in 1993 to $11.1
million in 1994 due to a higher level of income before income taxes (for this
purpose, operating income net of interest charges).
Deferred Treatment Plant Costs, Net and Carrying Charges. Pursuant to an
Order of the PPUC entered September 5, 1990, PG&W deferred all operating
expenses, including depreciation and property taxes, and the carrying charges
(equivalent to the allowance for funds used during construction ("AFUDC"))
relative to the four new Scranton Area water treatment plants and related
facilities from the dates of commercial operation of the plants until March 23,
1991, the effective date of the Scranton Area water rate increase approved by
the PPUC on March 22, 1991. By its Order entered June 23, 1993, relative to the
Scranton Water Rate Area, the PPUC granted PG&W's request to recover $5.8
million of costs deferred with respect to the Scranton Area water treatment
plants and related facilities over a ten-year period beginning June 23, 1993, of
which $885,000 had been recovered as of December 31, 1994.
Similarly, as permitted by an Order of the PPUC entered September 24, 1992,
PG&W deferred all operating expenses, including depreciation and property taxes,
and the carrying charges relative to the Crystal Lake Water Treatment Plant and
related facilities from August 3, 1992 (the date of commercial operation of that
plant), until March 9, 1993, the effective date of the water rate increase
approved by the PPUC on February 25, 1993, for customers in PG&W's Spring Brook
Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant.
Additionally, in accordance with an Order of the PPUC entered July 28, 1993,
PG&W deferred all expenses and the carrying charges relative to the Ceasetown
and Watres Water Treatment Plants and related facilities incurred prior to
December 16, 1993, the effective date of the water rate increase approved by the
PPUC on December 15, 1993, for customers served by the Ceasetown and Watres
Water Treatment Plants.
As of December 31, 1994, a total of $4.6 million of costs relative to the
Crystal Lake, Ceasetown and Watres Water Treatment Plants and related facilities
had been deferred pursuant to the PPUC's Orders of September 24, 1992, and July
28, 1993. PG&W will seek recovery of the costs that have been so deferred in
its next rate increase request relating to the Spring Brook Water Rate Area.
Although it cannot be certain, the Company believes that the recovery of such
costs by PG&W will be allowed by the PPUC in future rate increases, particularly
in view of the PPUC's action allowing the recovery of the costs deferred with
respect to the Scranton Area water treatment plants and related facilities.
Operating Income. As a result of the above, total operating income
increased by $6.4 million (17.3%) from $37.3 million for 1993 to $43.7 million
for 1994, and increased as a percentage of total operating revenues for such
periods from 18.0% in 1993 to 18.6% in 1994. Operating income from gas utility
operations increased $459,000 (2.3%) from $19.6 million in 1993 to $20.1 million
in 1994, primarily as a result of a $2.6 million increase in the gross margin,
the effect of which was partially offset by a higher level of maintenance
expense because of colder than normal weather in January and February, 1994, and
increased gross receipts tax as a result of the higher level of gas revenues.
Operating income from water utility operations increased $6.0 million (33.8%)
from $17.7 million in 1993 to $23.6 million in 1994. This increase was
primarily the result of rate increases effective March 9, 1993, June 23, 1993,
and December 16, 1993, and a decrease in other taxes, the effects of which were
partially offset by increases in other operations expense, depreciation, net
deferred treatment plant costs and income taxes, as discussed above.
F-3
<PAGE>
Other Income, Net. Other income, net decreased $471,000 from $673,000 for
1993 to $202,000 for 1994. This decrease was primarily attributable to a $1.5
million (97.4%) decrease in the allowance for equity funds used during
construction because of a lower level of construction in progress, largely as a
result of the completion of the Crystal Lake, Watres and Ceasetown Water
Treatment Plants in 1993, and the discontinuance of the deferral of carrying
charges relative to those plants. The effect of such items was partially offset
by a $254,000 increase ($145,000 net of related income taxes) in gains on the
sale of non-watershed land, a $469,000 gain ($268,000 net of related income
taxes) on the sale of PG&W's interest in an oil and gas joint venture and a
decrease in net interest expense associated with the unutilized portion of the
proceeds from the issuance on December 22, 1992, of the Luzerne County
Industrial Development Authority (the "Authority") Exempt Facilities Revenue
Bonds, 1992 Series B (Pennsylvania Gas and Water Company Project) (the "1992
Series B Bonds.") See "-Liquidity and Capital Resources-Long-Term Debt and
Capital Stock Financings." The proceeds from the issuance of the 1992 Series B
Bonds were deposited in a construction fund held by PNC Bank (formerly
Northeastern Bank of Pennsylvania) as trustee for the 1992 Series B Bonds (the
"IDA Trustee"), pending their utilization to finance the construction of various
additions and improvements to PG&W's water facilities for which construction
commenced subsequent to September 23, 1992. Interest expense relative to the
funds so utilized for the benefit of PG&W is reflected as interest on long-term
debt. The interest expense relating to the portion of the funds held by the IDA
Trustee, net of the income earned on the temporary investment of such funds, is
reflected in other income, net.
Interest Charges. Interest charges increased by $2.9 million (12.6%) from
$23.5 million for 1993 to $26.4 million for 1994. This increase was primarily
attributable to a $1.2 million decrease in AFUDC, largely because of the
completion of the Crystal Lake, Ceasetown and Watres Water Treatment Plants, and
the discontinuance of the deferral, which totaled $1.2 million during 1993, of
the carrying charges associated with those plants.
Interest on long-term debt increased by $1.4 million (5.8%) from $23.5
million during 1993 to $24.9 million during 1994. The increase was principally
the result of an additional $868,000 of interest expense relative to the 1992
Series B Bonds being reflected as interest on long-term debt (see "-Other
Income, Net") and an $11.3 million (3.6%) increase from $318.2 million during
1993 to $329.5 million during 1994 in the weighted average indebtedness
outstanding, primarily as a result of the redemption of preferred stock by PG&W
and the construction of various additions and improvements to PG&W's water
utility plant. Largely offsetting the effect of these items was a decrease in
the weighted average interest rate on indebtedness from 8.14% during 1993 to
7.87% during 1994.
Subsidiary's Preferred Stock Dividends. Dividends on 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.
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 the matters discussed above, principally the increases in water operating
revenues resulting from the rate increases which the PPUC allowed PG&W effective
March 9, 1993, June 23, 1993, and December 16, 1993, and the increase in the
gross margin on gas operations resulting primarily from the higher level of
F-4
<PAGE>
sales to residential and commercial heating customers. The effects of these
factors were partially offset by increased operating expenses and interest
charges.
<TABLE>
<CAPTION>
<S> <C>
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 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 the Company's 1,250,000 share common stock
offering in October, 1993. While premiums on the redemption of 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 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 the Company's earnings per
share for 1994 by $.18 per share, resulting in earnings of $2.17 per share of
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.
</TABLE>
o Year ended December 31, 1993, compared with year ended December 31, 1992
Operating Revenues. Operating revenues of the Company increased $14.8
million (7.7%) from $191.9 million for 1992 to $206.7 million for 1993.
Gas 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 gas 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 gas operating revenues were partially offset by
the switching of certain commercial and industrial customers from sales to
transportation service.
Water operating revenues increased by $4.7 million (9.7%) from $48.7 million
for 1992 to $53.4 million for 1993. This increase in revenues was largely the
result of rate increases which the PPUC allowed PG&W, including a $2.0 million
annual rate increase effective March 9, 1993, for customers in the Spring Brook
Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, a
$5.0 million annual rate increase effective June 23, 1993, for customers in the
Scranton Water Rate Area, and an $11.9 million annual rate increase effective
December 16, 1993, for customers in the Spring Brook Water Rate Area served by
the Ceasetown and Watres Water Treatment Plants, as more fully explained below
under "-Rate Matters-Water Rate Filings."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $12.4 million (7.9%) from $157.0 million for 1992 to $169.4
million for 1993. As a percentage of operating revenues, total operating
expenses increased from 81.8% during 1992 to 82.0% during 1993. Operating
expenses related to PG&W's gas utility operations increased by $10.1 million
(8.2%) from $123.6 million in 1992 to $133.7 million in 1993, primarily as a
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result of an $8.8 million increase in the cost of gas. Operating expenses
related to PG&W's water utility operations increased by $2.2 million (6.7%) from
$33.5 million in 1992 to $35.7 million in 1993, primarily as a result of
increased operation and maintenance costs, depreciation and taxes, the effects
of which were partially offset by a $1.2 million increase in the deferral of
treatment plant costs (which acted to reduce expenses).
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 decreased volume was largely attributable to the aforementioned switching
of customers from sales to transportation service. The gross margin on gas
operations increased $1.3 million or 2.0% in 1993, primarily as a result of the
increased sales to residential and commercial heating customers due to the
colder weather experienced in 1993.
Other than the cost of gas and income taxes, operating expenses increased by
$3.0 million (4.2%) from $71.9 million for 1992 to $75.0 million for 1993. This
increase was largely attributable to a $1.3 million increase in other taxes,
principally as a result of increased gross receipts tax (resulting from the
higher level of gas revenues) and increased property taxes (resulting from the
construction of the Ceasetown and Watres Water Treatment Plants). Also
contributing to this increase was a $1.6 million increase in other operations
and maintenance expenses, primarily as a result of a $1.5 million increase in
payroll costs, as well as a $1.4 million increase in depreciation (primarily as
a result of capital additions and the change in March, 1993, from a 4% compound
interest to a straight-line method of depreciation with respect to water plant
in the Crystal Lake Service Area). The effects of such increases were partially
offset by a $1.2 million increase in the deferral of treatment plant costs
during 1993. See "-Deferred Treatment Plant Costs, Net and Carrying Charges."
Income taxes increased by $510,000 (6.9%) from $7.4 million in 1992 to $7.9
million in 1993 due to a higher level of income before income taxes (for this
purpose, operating income net of interest charges) and the change, from 34% to
35%, in the federal corporate income tax rate on taxable income in excess of
$10.0 million. This increase was the result of the enactment of the Omnibus
Budget Reconciliation Act of 1993 (the "1993 Tax Act") on August 10, 1993. The
provisions of the 1993 Tax Act, which were retroactive to January 1, 1993,
increased the Company's income tax expense by approximately $124,000 for the
year 1993. The effects of the increased income before income taxes and the
higher federal income tax rate were partially offset by the impact
(approximately $668,000) of the nontaxable equity portions of the AFUDC and of
the deferred treatment plant carrying charges that were recorded during 1993.
See "-Other Income, Net", as discussed above.
Deferred Treatment Plant Costs, Net and Carrying Charges. As more fully
discussed above, pursuant to an Order of the PPUC entered September 24, 1992,
PG&W deferred all operating expenses, including depreciation and property taxes,
and the carrying charges (equivalent to the AFUDC) relative to the Crystal Lake
Water Treatment Plant and related facilities from August 3, 1992 (the date of
commercial operation of that plant), until March 9, 1993, the effective date of
the water rate increase approved by the PPUC on February 25, 1993, for customers
in PG&W's Spring Brook Water Rate Area served exclusively by the Crystal Lake
Water Treatment Plant. Similarly, in accordance with an Order of the PPUC
entered July 28, 1993, PG&W deferred all expenses and the carrying charges
relative to the Ceasetown and Watres Water Treatment Plants and related
facilities incurred prior to December 16, 1993, the effective date of the water
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rate increase approved by the PPUC on December 15, 1993, for customers served by
the Ceasetown and Watres Water Treatment Plants. As contemplated by the PPUC's
Orders, PG&W will seek recovery of the $4.6 million of costs that have been so
deferred in its next rate increase request relating to the Spring Brook Water
Rate Area.
Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred
all operating expenses and the carrying charges relative to the four new
Scranton Area water treatment plants and related facilities from the dates of
commercial operation of the plants until March 23, 1991, the effective date of
the Scranton Area water rate increase approved by the PPUC on March 22, 1991.
By its Order entered June 23, 1993, relative to the Scranton Water Rate Area,
the PPUC granted PG&W's request to recover $5.8 million of costs deferred with
respect to the Scranton Area water treatment plants and related facilities over
a ten-year period beginning June 23, 1993, of which $304,000 had been recovered
as of December 31, 1993.
Operating Income. As a result of the above, total operating income
increased by $2.4 million (6.9%) from $34.8 million for 1992 to $37.3 million
for 1993, but decreased as a percentage of total operating revenues for such
periods from 18.2% in 1992 to 18.0% in 1993. Operating income from gas utility
operations decreased $48,000 (0.2%) from $19.7 million in 1992 to $19.6 million
in 1993, primarily as a result of increases in other operations and maintenance
expenses, depreciation, and income and gross receipts taxes, the effects of
which were partially offset by a $1.3 million increase in the gross margin.
Operating income from water utility operations increased $2.5 million (16.2%)
from $15.2 million in 1992 to $17.7 million in 1993. This increase was
primarily the result of rate increases effective March 9, 1993, June 23, 1993,
and December 16, 1993, as well as the deferral of costs relative to the Crystal
Lake, Ceasetown and Watres Water Treatment Plants and related facilities, the
effects of which were partially offset by increases in other operations and
maintenance expenses, depreciation, and income and property taxes, as discussed
above.
Other Income, Net. Other income, net increased from $26,000 in 1992, to
$673,000 in 1993, primarily as a result of the recording of $1.6 million of
deferred treatment plant carrying charges and allowance for equity funds used
during construction. This amount was partially offset by the net interest
expense associated with the unutilized portion of the proceeds from the issuance
on December 22, 1992, of the Authority's 1992 Series B Bonds. See "-Liquidity
and Capital Resources-Long-Term Debt and Capital Stock Financings." The
proceeds from the issuance of the 1992 Series B Bonds were deposited in a
construction fund held by the IDA Trustee, pending their utilization to finance
the construction of various additions and improvements to PG&W's water
facilities for which construction commenced subsequent to September 23, 1992.
Interest expense relative to the funds so utilized for the benefit of PG&W is
reflected as interest on long-term debt. The interest expense relating to the
portion of the funds held by the IDA Trustee, net of the income earned on the
temporary investment of such funds, is reflected in other income, net.
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Interest Charges. Interest charges increased by $145,000 (0.6%) from $23.3
million for 1992 to $23.5 million for 1993. This increase was largely
attributable to increased interest on long-term debt and decreased AFUDC, the
effects of which were largely offset by an increase in deferred treatment plant
carrying charges associated with the Crystal Lake, Ceasetown and Watres Water
Treatment Plants and a decrease in other interest charges.
Although the weighted average interest rate on indebtedness decreased from
8.91% during 1992 to 8.14% during 1993, interest on long-term debt increased by
$2.3 million (10.7%) from $21.3 million during 1992 to $23.5 million during
1993. This increase was largely attributable to increased indebtedness to
finance the construction of various additions and improvements to PG&W's water
utility plant. The weighted average indebtedness outstanding during 1993 was
$318.2 million as compared to $255.0 million during 1992. Largely offsetting
the effect of this increase was a lower level of interest expense incurred
during 1993 in connection with overcollections from PG&W's gas customers.
Subsidiary's Preferred Stock Dividends. Dividends on 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, $100 par value, on August 18, 1992.
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 the matters discussed above, primarily the increases in water
operating revenues resulting from the rate increases which the PPUC allowed PG&W
effective March 9, 1993, June 23, 1993, and December 16, 1993, and the increase
in the gross margin on gas operations resulting from higher levels of sales to
residential and commercial heating customers. The effects of these factors were
partially offset by increases in operating expenses and dividends on PG&W's
preferred stock.
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 the Company's common stock
offering in October, 1993.
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RATE MATTERS
In accordance with the Pennsylvania Public Utility Code (the "Code"), PG&W
files an annual purchased gas cost rate with the PPUC. From time to time, PG&W
also files for adjustments to its gas and water rates to, among other reasons,
recover interest charges and depreciation expenses relating to capital
expenditures, recover increased operating expenses and make adjustments to
existing surcharge rates approved by the PPUC.
The following is a summary of such filings (exclusive of those solely
involving state tax adjustment surcharges) with respect to which the PPUC has
issued an order since the beginning of 1992, or which are currently pending.
Gas Rate Filings. Pursuant to the provisions of 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:
[CAPTION]
Change in Calculated
Effective Rate per MCF 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
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 will be offset by a
corresponding change in the cost of gas.
The PPUC has issued proposed regulations that would provide for the
quarterly adjustment of the purchased gas cost rate of larger gas distribution
companies, including PG&W. Except for reducing the amount of any over or
undercollections of gas costs, the adoption of these proposed regulations would
not have any material effect on PG&W's financial position or results of
operations.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding the 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 filing
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. As of February 1, 1994, PG&W began to recover the Gas Transition Costs
that are being billed to PG&W by its interstate pipelines through an increase in
its PGC rate. It is currently estimated that these costs, which will be billed
to PG&W over a nineteen-month period extending through March 31, 1995, will
aggregate $1.2 million, of which $1.1 million had been billed to PG&W and
$659,000 had been recovered from its customers as of December 31, 1994. 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 by its
interstate pipelines pursuant to FERC Order 636 through the billing of a
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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 $3.8 million had been billed to PG&W and $1.1 million had been
recovered from its customers as of December 31, 1994. As of December 31, 1994,
PG&W had recorded a liability of $5.6 million for the estimated transition costs
that remained to be billed to it as of such date and both a current asset and a
deferred asset (which together totaled $8.8 million) representing the transition
costs remaining to be recovered from PG&W's customers.
Water Rate Filings. As a general rule, public utilities are entitled to
recover their reasonable operating expenses and earn a fair rate of return on
their investment, or rate base. However, a regulated utility's ability to
generate earnings is influenced significantly by the timing and amount of rate
relief that it is granted. As part of the ratemaking process, the PPUC may
reject, in whole or in part, a public utility's request to increase its rates
where the PPUC concludes, after a hearing, that the service rendered by the
public utility is inadequate in that it fails to meet quantity or quality
standards for the type of service provided. Based upon previous rate filings
(referred to below), PG&W expects that the quality of its water service will be
scrutinized by the PPUC in any future water rate filings. In its Order of June
23, 1993, relating to the most recent Scranton Water Rate Area rate case, the
PPUC granted PG&W rate relief despite its finding that PG&W's water quality did
not always meet secondary drinking water standards. Notwithstanding this
decision, PG&W believes that it is providing its customers with water service
meeting or exceeding the PPUC's standards for quantity and quality, based on
testing performed by PG&W and an independent laboratory of water at certain
customers' premises which indicates that the water meets federal and state
primary (health-related) drinking water standards all of the time and secondary
(aesthetics-related, particularly taste, odor and color) drinking water
standards nearly all of the time. PG&W also believes that in the future as it
makes further improvements to its distribution system, it will be able to
demonstrate to the PPUC's satisfaction that it is providing adequate service to
its customers.
As discussed below, the rate relief granted in the past to PG&W by the PPUC
has been less than the full amounts requested. Generally, the amounts granted
have been determined through negotiated settlements with certain parties to the
proceedings in order to obtain rate relief earlier than expected and to avoid
the substantial expenses associated with further administrative and possible
appellate proceedings. The Company believes that PG&W will be able to obtain
adequate future rate relief as it makes further improvements to its distribution
system and is able to demonstrate it is providing water that is suitable for all
"household purposes" and that meets all applicable water quality standards. See
"-Liquidity and Capital Resources-Failure to Obtain Adequate Rate Relief" for a
discussion of the adverse effects on the Company if adequate rate relief were
denied.
The magnitude of the projected rate increases that will be required to
enable PG&W to fully recover its capital expenditures associated with the
construction of the water treatment plants will be significant. Prior to the
construction of the plants, the average annual cost of water to PG&W's customers
receiving nonfiltered water was approximately $143. The average annual cost of
water to PG&W's residential customers, all of whom are now receiving filtered
water (except for several hundred who are supplied with ground water from
wells), was approximately $340 as of March, 1995. PG&W anticipates that this
cost will increase to approximately $460 in the latter part of this decade, at
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which time PG&W expects to have been allowed by the PPUC to fully reflect in
rates its costs associated with the filtration of its water supplies. PG&W
believes that these levels of increases, in terms of percentages, will not be
inconsistent with those that will be experienced by other water utilities
required to make a similar transition to filtered water; however, the level of
rates that PG&W expects to seek in future rate increases will be such that the
PPUC may question the "affordability" of such rates and may also require that
any rate increases be phased-in over a period of time in order to reduce
consumer "rate shock." While the Company expects that the PPUC will grant PG&W
adequate rate relief in a timely manner, there can be no assurance that the PPUC
will take such action.
Scranton Area. By Order adopted March 22, 1991, the PPUC granted PG&W an
approximate 110% rate increase effective March 23, 1991, for the Scranton Water
Rate Area that was designed to produce $15.0 million of additional annual
revenue to be phased-in over a two-year period under the terms of a qualified
phase-in plan, pursuant to Financial Accounting Standards Board ("FASB")
Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in Plans." In
accordance with said Order, PG&W deferred the billing of $4.7 million of the
increased revenue recorded during the period March 23, 1991, through March 22,
1992. Effective March 23, 1992, PG&W began to bill such $4.7 million by means
of a surcharge that will be in effect during the period through March 22, 2001,
and as of December 31, 1994, $1.4 million had been so billed to its Scranton
Water Rate Area customers.
Crystal Lake Service Area. On June 30, 1992, PG&W filed an application with
the PPUC seeking a water rate increase, designed to produce $4.4 million in
additional annual revenue. This rate increase request involved the
approximately 5,000 customers in the Spring Brook Water Rate Area served
exclusively by the Crystal Lake Water Treatment Plant, which became fully
operational in August, 1992. On December 15, 1992, PG&W and certain parties
filing objections to the rate increase request reached a settlement providing
for an approximate 130% rate increase designed to produce $2.0 million of
additional annual revenue to be phased-in over a two-year period under the terms
of FASB Statement 92. The settlement provided that $1.1 million of the
increased revenue (an approximate 72% increase in rates) was to be realized
through an immediate rate increase and that the remaining $900,000 in increased
revenue (an additional 58% increase in rates) was to be realized through another
rate increase one year later (i.e., at the beginning of year two of the phase-in
period). The settlement also specified that the $900,000 in revenue that would
be deferred during the first year of the phase-in period, as well as an
approximate $243,000 in related carrying charges, was to be collected from
customers in the form of a surcharge in years three through five of the phase-in
period. By Order adopted February 25, 1993, the PPUC approved the settlement
effective March 9, 1993.
In accordance with the provisions of FASB Statement 92, PG&W commenced
recording the entire $2.0 million increase in annual revenue allowed by the PPUC
as additional revenue beginning March 9, 1993, along with the related carrying
charges on revenue deferred in accordance with the phase-in plan. However,
pursuant to the terms of the settlement, PG&W deferred the billing of
approximately $900,000 of the increased revenue recorded during the first year
of the phase-in period (i.e., the period March 9, 1993, through March 8, 1994).
Effective March 9, 1995, PG&W began to bill, by means of the surcharge that will
be in effect in years three through five of the phase-in period, the approximate
$900,000 that has been so deferred, as well as the related carrying charges.
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Scranton Area. On September 25, 1992, PG&W filed an application with the
PPUC seeking a water rate increase, designed to produce $9.9 million in
additional annual revenue. This rate increase request involved the
approximately 56,000 customers in PG&W's Scranton Water Rate Area at such date.
By Order entered June 23, 1993, the PPUC rejected the proposed rate increase in
its entirety "due to inadequate service" (i.e., water quality). However, by the
same Order, the PPUC granted PG&W the alternative of a rate increase designed to
produce an additional $5.0 million in annual revenue, provided that PG&W
dedicate the entire increase to augment the improvements to its water
distribution system until "the demonstration by [PG&W] to [the PPUC] that it is
providing adequate service." PG&W accepted this alternative and placed such
$5.0 million rate increase into effect as of June 23, 1993.
On August 19, 1993, the PPUC approved a settlement agreement (the
"Settlement Agreement") resolving certain disputed issues relating to its June
23, 1993, Order. The Settlement Agreement provided, among other things, for (i)
modification by the PPUC of its June 23, 1993, Order to reduce the amount of the
revenue increase that it ordered be dedicated to distribution system
improvements by the related income taxes and other expenses and the $319,000
additional expense for retiree health care and life insurance benefits that the
PPUC allowed PG&W in its revenues (which resulted in the requirement for an
additional annual expenditure for distribution system improvements by PG&W of
$2.5 million), (ii) the agreement by PG&W (with which it was in compliance as of
December 31, 1994) to spend a total of $4.9 million annually (an additional $2.5
million over its actual average annual expenditure of $2.4 million during the
three-year period ended June 30, 1993) for distribution system improvements in
the Scranton Water Rate Area until the PPUC is satisfied that PG&W is providing
adequate service, (iii) the modification by the PPUC of its June 23, 1993, Order
to restore the Hollister Reservoir to PG&W's rate base, and (iv) the withdrawal
by PG&W and the Office of Consumer Advocate (the "OCA") of their appeals to the
Commonwealth Court of Pennsylvania regarding the PPUC's June 23, 1993, Order.
Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$19.5 million in additional annual revenue. This rate increase request involved
approximately 59,300 customers in PG&W's Spring Brook Water Rate Area,
principally those customers (i) served by the Ceasetown Water Treatment Plant
which was placed in service on March 31, 1993, (ii) served by the Watres Water
Treatment Plant which was placed in service on September 30, 1993, (iii) served
jointly by the Ceasetown and Watres Water Treatment Plants, and (iv) who are
served exclusively by the Nesbitt Water Treatment Plant. On September 23, 1993,
PG&W, the PPUC Office of Trial Staff, the OCA and the Office of Small Business
Advocate filed a settlement petition (the "Settlement Petition") with the
Administrative Law Judge ("ALJ") assigned to conduct the investigation of the
rate increase request. This Settlement Petition provided for an overall 119%
rate increase involving approximately 44,900 customers, principally those served
either exclusively or jointly by the Ceasetown and Watres Water Treatment
Plants, that was designed to produce $11.9 million of additional annual revenue
to be phased-in over a two-year period under the terms of a qualified phase-in
plan, pursuant to FASB Statement 92. Under the terms of the Settlement
Petition, except for approximately 200 customers who were previously served
jointly by the Hillside and Nesbitt Water Treatment Plants, none of the
approximately 14,600 customers served exclusively by the Nesbitt Water Treatment
Plant would receive an increase. The Settlement Petition further provided that
$6.4 million of the increased revenue (an approximate 65% increase in rates) was
to be realized through an immediate rate increase and that the remaining $5.5
million of the increased revenue (an additional 54% increase in rates) was to be
realized through a further rate increase one year later (i.e., at the beginning
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of year two of the phase-in period). The Settlement Petition also specified
that the $5.5 million in revenue that was to be deferred during the first year
of the phase-in period, as well as an approximate $1.3 million in related
carrying charges, was to be collected from customers in the form of a surcharge
in years three through five of the phase-in period. By Order adopted December
15, 1993, the PPUC approved the Settlement Petition effective December 16, 1993.
In accordance with the provisions of FASB Statement 92, PG&W commenced
recording the entire $11.9 million increase in annual revenue allowed by the
PPUC as additional revenue beginning December 16, 1993, along with the related
carrying charges on revenue deferred in accordance with the phase-in plan.
However, pursuant to the terms of the settlement, PG&W deferred the billing of
$5.3 million of the increased revenue recorded during the first year of the
phase-in period (i.e., the period December 16, 1993, through December 15, 1994).
The amount so deferred was $200,000 less than the $5.5 million originally
estimated because of slightly lower than anticipated consumption. Effective
December 16, 1995, PG&W will begin to bill the $5.3 million that had been so
deferred, as well as the related carrying charges, by means of the surcharge
that will be effective in years three through five of the phase-in period.
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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity of the Company is influenced significantly by the capital
intensive nature of PG&W's operations and the ratemaking practices of the PPUC,
which together effectively require external financing of a substantial portion
of PG&W's construction expenditures. Additionally, because of the seasonal
nature of its gas utility operations and the ratemaking practices of the PPUC
regarding the recovery of purchased gas costs (see "-Rate Matters-Gas Rate
Filings"), it is necessary for PG&W to finance its gas purchases and increases
in its customer accounts receivable with bank borrowings during certain periods
of the year.
PG&W's ability to generate sufficient internal funds and to obtain the
external funds that are required for its operations and construction
expenditures is influenced significantly by the timing and amount of rate relief
it is granted. Nonetheless, the Company believes that PG&W will be granted
sufficient rate relief to enable it to meet its future anticipated capital
requirements, particularly in view of the increases in annual water revenue
aggregating $35.8 million which PG&W has been granted by the PPUC since 1991
with respect to customers being supplied with filtered water. The Company also
believes that PG&W will be allowed additional rate increases by the PPUC for its
approximately 132,500 water customers, all of whom are now receiving filtered
water (except for several hundred who are supplied with ground water from
wells), because of the relatively low level of earnings that PG&W is realizing
from its water utility operations and its expectation that with filtration and
further distribution system improvements, water quality should be less of a
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concern in its requests for water rate increases. See "-Construction
Expenditures and Related Financing" and "-Failure to Obtain Adequate Rate
Relief."
The Company relies on a number of sources, primarily cash dividends from
PG&W, to provide the funds necessary to pay dividends on its 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 the Company 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 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.
In addition, PG&W is prohibited from paying any dividends to the Company in
the event of a default under certain of its debt instruments or failure to make
any required dividend payments due holders of PG&W's preferred stock.
Furthermore, any failure by PG&W to pay preferred stock dividends for four
consecutive quarters would permit the holders of the PG&W preferred stock to
elect a majority of the directors of PG&W.
The Company 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
It is the practice of PG&W to use bank borrowings to finance certain of its
construction expenditures pending the periodic issuance of stock and long-term
debt. Additionally, because of the seasonal nature of its gas utility
operations and the ratemaking practices of the PPUC regarding the recovery of
purchased gas costs (see "-Rate Matters-Gas Rate Filings"), it is necessary for
PG&W to finance its gas purchases and increases in its customer accounts
receivable with bank borrowings during certain periods of the year.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, PG&W has made arrangements for a total of $67.5 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 March 10,
1995, $35.0 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
F-14
<PAGE>
mature on May 31, 1996. As of March 10, 1995, PG&W had $3.9 million
of borrowings outstanding under these additional bank lines of credit.
Prior to their respective maturities, PG&W intends to renew the $7.5
million of these bank lines of credit.
Current Maturities of Long-Term Debt and Preferred Stock
As of December 31, 1994, $3.8 million of PG&W preferred stock and long-term
debt was required to be repaid within twelve months. Such amount included $3.0
million of borrowings that were outstanding under PG&W's bank lines of credit as
of such date.
The Company believes that PG&W will have sufficient cash flow and borrowing
capacity to repay current maturities of its preferred stock and long-term debt
and to meet its other obligations based on its present earnings and financing
capabilities, capitalization and banking arrangements and relationships.
Likewise, the Company believes it has sufficient cash flow and borrowing
capacity, based on its equity ownership of PG&W and its other subsidiaries and
the earnings power of those companies, to meet its obligations. However, since
most of the Company's cash flow is derived from dividends from PG&W, any
inability of PG&W to pay sufficient dividends to the Company would have a
material adverse effect on the Company's liquidity.
Long-Term Debt and Capital Stock Financings
Both the Company 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, consummated by the Company and PG&W since the beginning of
1993.
During 1993 and 1994, PG&W utilized $15.9 million and $9.8 million,
respectively, of the proceeds from the issuance by the Luzerne County Industrial
Development Authority (the "Authority") on December 22, 1992, of $30.0 million
of its 1992 Series B Bonds and with respect to which PG&W issued $30.0 million
of its 7.125% First Mortgage Bonds to the PNC Bank (formerly Northeastern Bank
of Pennsylvania) as trustee (the "IDA Trustee") for the 1992 Series B Bonds, as
security for the 1992 Series B Bonds. The proceeds from the issuance of the
1992 Series B Bonds were deposited in a construction fund held by the IDA
Trustee for the Authority's 1992 Series B Bonds, pending their utilization to
finance the construction of various additions and improvements to PG&W's water
facilities for which construction commenced subsequent to September 23, 1992.
As of December 31, 1994, $3.4 million of the proceeds (including investment
income) was held by the IDA Trustee and was available to finance the future
construction of qualified water facilities for PG&W.
In addition, during 1993, PG&W assumed $812,000 of indebtedness to the
Pennsylvania Infrastructure Investment Authority (an agency of the Commonwealth
of Pennsylvania known as "PENNVEST") in connection with its acquisition of the
assets and operations of two small water companies. Also, during 1993 and 1994,
PG&W borrowed $1.6 million and $695,000 respectively, under the terms of a water
facility loan agreement with PENNVEST dated December 3, 1992, relative to such
acquisition. A total of $2.6 million is being made available to PG&W pursuant
to the PENNVEST loan agreement, of which $270,000 remained available as of
December 31, 1994, for borrowing by PG&W.
F-15
<PAGE>
On October 20, 1993, the Company issued 1,250,000 shares of its common stock
for aggregate net proceeds of $31.9 million. The net proceeds from the issuance
of these shares of common stock were used by the Company to purchase common
stock of PG&W. PG&W utilized the $31.9 million so received from the Company to
repay bank borrowings. These borrowings had been incurred primarily to finance
construction expenditures.
On December 21, 1993, the Authority issued $19.0 million of its Exempt
Facilities Revenue Refunding Bonds, 1993 Series A (Pennsylvania Gas and Water
Company Project) (the "1993 Series A Bonds") and, in connection therewith, PG&W
issued $19.0 million of its 6.05% Series First Mortgage Bonds to the IDA Trustee
for the 1993 Series A Bonds, as security for the 1993 Series A Bonds. PG&W will
make payments to the IDA Trustee pursuant to the 6.05% Series First Mortgage
Bonds in amounts sufficient and at the times necessary to pay the debt service
requirements on the 1993 Series A Bonds. The proceeds from the issuance of the
1993 Series A Bonds, along with additional funds provided by PG&W, were
deposited with the IDA Trustee for the Authority's $19.0 million Exempt
Facilities Revenue Bonds, 1989 Series A (Pennsylvania Gas and Water Company
Project) (the "1989 Series A Bonds") on December 21, 1993, for use in redeeming
the 1989 Series A Bonds on January 1, 1994. The deposit of such funds acted to
discharge all of PG&W's obligations with respect to its 7%, 1989 Series A Note
in the principal amount of $19.0 million which had been issued to the IDA
Trustee in connection with the 1989 Series A Bonds and which was subject to
repayment on January 1, 1994.
On May 31, 1994, the Company borrowed $20.0 million pursuant to a five-year
term loan agreement (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 March 10,
1995). Under the provisions 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.
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 proceeds from the issuance of shares
through the Customer Plan are used by the Company to purchase common stock of
PG&W.
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
F-16
<PAGE>
investments made pursuant to the DRP during the fourth quarter of 1994. The
Company uses the proceeds from the DRP to purchase common stock of PG&W. 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.
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.
On November 15, 1994, the Authority issued $30.0 million of its Exempt
Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water
Company Project) (the "1994 Series A Bonds") and in connection therewith, PG&W
issued $30.0 million of its 7% Series First Mortgage Bonds. PG&W will make
payments to the IDA Trustee pursuant to the 7% Series First Mortgage Bonds in
amounts sufficient and at the times necessary to pay the debt service
requirements on the 1994 Series A Bonds. The proceeds from the issuance of the
1994 Series A Bonds, along with additional funds provided by PG&W, were
deposited with the IDA Trustee for the Authority's Exempt Facilities Revenue
Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) (the "1987
Series B Bonds") on November 15, 1994, for use in redeeming the 1987 Series B
Bonds on December 1, 1994. The deposit of such funds acted to discharge all of
PG&W's obligations with respect to its 8%, 1987 Series B Note in the principal
amount of $30.0 million which had been issued to the IDA Trustee in connection
with the 1987 Series B Bonds and which was subject to repayment on December 1,
1994.
PG&W's rated first mortgage bonds are currently rated BBB- (investment
grade) by Standard & Poor's Corporation ("S&P"), Baa3 (investment grade) by
Moody's Investors Services ("Moody's") and Class 2 by the National Association
of Insurance Commissioners ("NAIC"). On July 25, 1994, S&P said PG&W's outlook
was "stable" and that "continued, though slow financial improvement is expected
with the phase-in of water rate relief." However, S&P noted that "significant
capital expenditures and an excessive dividend payout...will continue to
challenge management over the intermediate term."
If PG&W's rated first mortgage bonds are downgraded below Class 2 (i.e.,
below investment grade) by the NAIC, this downgrade would cause the stated
interest rate on PG&W's $50.0 million of 9.57% Series First Mortgage Bonds due
1996 to increase to 11.17% per annum (which increase would cost PG&W $800,000
per year in additional interest expense, exclusive of tax benefits). Also, any
downgrading of PG&W's rated first mortgage bonds below investment grade by both
S&P and Moody's would result in the interest rate charged on borrowings under
the Credit Agreement being increased by one quarter percent per annum (which
increase could cost PG&W as much as $150,000 per year in additional interest
expense, exclusive of tax benefits, depending on the amount of borrowings
outstanding under the Credit Agreement). Additionally, any downgrading of
PG&W's rated first mortgage bonds by S&P, Moody's or the NAIC could have a
material adverse effect on the cost and difficulty of issuing additional debt,
which in turn could significantly impair the Company's and PG&W's ability to
refinance debt and fund future capital expenditures. See "-Failure to Obtain
Adequate Rate Relief."
F-17
<PAGE>
Construction Expenditures and Related Financing
Expenditures for the construction of utility plant during the period 1992
through 1994 were as follows:
[CAPTION]
Water Gas
Year Facilities Facilities Total
(Thousands of Dollars)
[S] [C] [C] [C]
1992 $ 44,352 $ 12,669 $ 57,021
1993 32,575 13,325 45,900
1994 19,321 17,455 36,776
$ 96,248 * $ 43,449 $139,697
* Includes $30.5 million, $20.7 million and $2.1 million, expended in
1992, 1993 and 1994, respectively, for various water supply and
treatment facilities and associated distribution system improvements
constituting part of the program that PG&W adopted in 1986 for
filtering all of its regularly used water supplies.
Approximately $13.2 million of PG&W's expenditures for the construction of
water facilities during 1994 were financed with proceeds from the issuance of
the Authority's 1992 Series B Bonds being held by the IDA Trustee for the
benefit of PG&W and with revenues from the water rate increase for Scranton
Water Rate Area which was effective June 23, 1993 (the "Scranton Area Water Rate
Increase") (see "-Rate Matters-Water Rate Filings-Scranton Area"). The balance
($6.1 million) of PG&W's expenditures for the construction of water facilities
during 1994, as well as its expenditures for the construction of gas facilities
during 1994, were financed with internally-generated funds and bank borrowings,
pending the periodic issuance of stock and long-term debt.
The Company estimates that PG&W's capital expenditures for 1995 through 1997
will total $147.7 million, of which $74.5 million will involve the construction
of water facilities and $73.2 million will involve the construction of gas
facilities. The Company anticipates that a portion of such water facilities
will be financed with the $3.4 million of proceeds from the issuance of the
Authority's 1992 Series B Bonds held by the IDA Trustee as of December 31, 1994,
for the benefit of PG&W and with $7.5 million of revenues from the Scranton Area
Water Rate Increase, while the balance of its expenditures for water facilities
($63.6 million), as well as its expenditures for gas facilities, will be
financed with approximately $25.0 million from the issuance of a term loan in
1995, $29.5 million in 1996 from purchase by the Company of PG&W's common stock
(such purchase to be funded by the Company from the proceeds of $29.5 million of
common stock which it expects to issue in 1996), $50.0 million from the issuance
of another series of first mortgage bonds in 1997, proceeds from the Customer
Plan and DRP, and internally generated funds.
Neither the Company nor PG&W has made any formal arrangements for such
proposed future debt or stock financings and there can be no assurance that any
commitments for such proposed future debt or stock financings will be available
on terms acceptable to the Company or PG&W or that such proposed financings will
be consummated. The failure to consummate such proposed financings could have a
material adverse effect on the Company and PG&W.
Failure to Obtain Adequate Rate Relief
If PG&W is unable to obtain adequate rate relief in future rate increase
applications filed with the PPUC, the Company would be forced to restrict its
F-18
<PAGE>
cash expenditures by, among other actions, possibly reducing dividends on its
common stock, and PG&W would be forced to restrict its cash expenditures by,
among other actions, curtailing or deferring work on various capital projects,
all of which could negatively impact the quality and reliability of services
rendered to the public by PG&W.
Notwithstanding the PPUC's decision in its June 23, 1993, Order (see "-Rate
Matters-Water Rate Filings"), the Company believes PG&W will be able to obtain
adequate future rate relief, although there can be no assurance that such rate
relief will be obtained. However, if PG&W were unable to obtain adequate rate
relief from the PPUC under circumstances where PG&W believed that it is entitled
as a matter of law to such rate relief, PG&W would file appropriate appeals with
the Commonwealth Court of Pennsylvania, claiming that, contrary to law, the PPUC
by its actions had denied PG&W an opportunity to earn a fair rate of return on
its prudent investment in property which is used and useful in providing public
utility service.
F-19
<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 9, 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.
February 17, 1995
F-20
<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:
Gas $ 167,992 $ 153,325 $ 143,227
Water 66,731 53,363 48,651
Total operating revenues 234,723 206,688 191,878
OPERATING EXPENSES:
Cost of gas 98,653 86,557 77,720
Other operation expenses 40,153 38,859 37,971
Maintenance 10,093 9,341 8,677
Depreciation 14,339 12,299 10,856
Deferred treatment plant costs, net 581 (1,532) (294)
Income taxes 11,140 7,883 7,373
Other taxes 16,073 16,019 14,730
Total operating expenses 191,032 169,426 157,033
OPERATING INCOME 43,691 37,262 34,845
OTHER INCOME, NET (Note 3) 202 673 26
INCOME BEFORE INTEREST CHARGES 43,893 37,935 34,871
INTEREST CHARGES:
Interest on long-term debt 24,899 23,536 21,270
Other interest 1,793 2,641 4,307
Allowance for borrowed funds used
during construction (255) (1,482) (1,773)
Deferred treatment plant carrying
charges - (1,207) (461)
Total interest charges 26,437 23,488 23,343
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 4):
Before premium on redemption of subsidiary's
preferred stock $ 2.35 $ 1.82 $ 1.61
Premium on redemption of subsidiary's
preferred stock (.18) - -
Earnings per share of common stock $ 2.17 $ 1.82 $ 1.61
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,456,568 4,394,953 4,011,098
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-21
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1994 1993
(Thousands of Dollars)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Gas plant, at original cost less
acquisition adjustments of $386,000 $260,679 $245,969
Water plant, at original cost plus
acquisition adjustments of $14,572,000, and
$14,577,000, respectively 376,735 360,996
Common plant, at original cost 26,118 26,212
663,532 633,177
Accumulated depreciation (94,461) (86,287)
569,071 546,890
OTHER PROPERTY AND INVESTMENTS:
Restricted funds held by trustee (Note 6) 3,401 12,853
Other 3,481 3,841
6,882 16,694
CURRENT ASSETS:
Cash and cash equivalents 330 2,749
Restricted cash - common stock subscribed (Note 4) 2,532 -
Accounts receivable -
Customers 23,504 21,552
Others 1,474 1,325
Reserve for uncollectible accounts (1,315) (1,229)
Accrued utility revenues 13,299 16,123
Materials and supplies, at average cost 4,132 3,593
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 2,544 2,038
75,000 85,553
DEFERRED CHARGES:
Deferred taxes collectible 55,410 51,382
Natural gas transition costs collectible (Note 2) 4,099 -
Unamortized debt expense 8,849 7,009
Deferred treatment plant costs
and carrying charges 9,548 10,129
Deferred water utility billings (Note 2) 8,908 3,885
Other 7,610 7,754
94,424 80,159
TOTAL ASSETS $745,377 $729,296
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-22
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1994 1993
(Thousands of Dollars)
<S> <S> <S>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements):
Common shareholders' investment (Notes 4 and 7) $172,012 $165,775
Preferred stock of PG&W (Note 5) -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,760 31,840
Long-term debt (Note 6) 361,605 296,112
568,992 527,342
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption (Notes 5, 6 and 8) 3,810 38,664
Notes payable to bank (Note 8) - 2,000
Accounts payable 17,781 23,286
Accrued general business and realty taxes 3,815 3,599
Accrued income taxes 3,136 4,954
Accrued interest 4,853 4,164
Accrued natural gas transition costs (Note 2) 2,356 -
Other 3,458 2,442
39,209 79,109
DEFERRED CREDITS:
Deferred income taxes 96,912 86,951
Accrued natural gas transition costs (Note 2) 3,250 -
Unamortized investment tax credits 8,943 9,183
Advances for construction 11,349 10,985
Contributions in aid of construction 10,207 9,810
Operating reserves 2,383 1,863
Other 4,132 4,053
137,176 122,845
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
TOTAL CAPITALIZATION AND LIABILITIES $745,377 $729,296
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-23
<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:
Net income $ 12,817 $ 7,985 $ 6,463
Effects of noncash charges (credits) to income -
Depreciation 14,365 12,324 10,875
Deferred income taxes, net 5,898 1,698 2,068
Provisions for self insurance 1,695 1,800 1,196
Deferred treatment plant costs and carrying
charges, net 581 (3,560) (756)
Allowance for equity funds used during
construction (40) (734) -
Deferred water utility billings (5,574) (582) (969)
Other, net 3,841 4,773 3,047
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Accounts receivable and accrued utility
revenues 1,338 (2,763) (2,664)
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 (664) 648 2,558
Other operating items, net (6,390) (3,277) (2,162)
Net cash provided by (used for) operating
activities 35,901 (1,266) 9,328
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (37,940) (46,526) (58,324)
Other, net 2,226 1,493 2,030
Net cash used for investing activities (35,714) (45,033) (56,294)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 3,887 32,807 29,284
Common stock subscribed, net (Note 4) 2,515 - -
Issuance of preferred stock of PG&W - - 23,615
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 50,723 20,661 139,826
Repayment of long-term debt (38,584) (31,485) (57,371)
Restricted funds held by trustee for
benefit of PG&W (Note 6) 9,753 15,868 (27,994)
Net increase (decrease) in bank borrowings 15,370 32,247 (45,167)
Other, net (4,188) (2,228) (5,748)
Net cash provided by (used for) financing
activities (2,606) 47,985 47,302
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:
F-24
<PAGE>
Interest (net of amount capitalized) $ 24,622 $ 23,992 $ 19,180
Income taxes $ 7,460 $ 6,931 $ 3,815
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-25
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
December 31,
1994 1993
(Thousands of Dollars)
<S> <C> <C>
COMMON SHAREHOLDERS' INVESTMENT (Notes 4 and 7):
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 30.2% 165,775 31.4%
PREFERRED STOCK of PG&W, par value $100 per share
Authorized - 997,500 shares (Note 5):
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 5.9% 33,615 6.4%
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 0.3% 31,840 6.0%
LONG-TERM DEBT (Note 6):
First mortgage bonds 237,535 207,745
Notes 115,380 107,698
Other 12,420 19,253
Less current maturities and sinking
fund requirements (3,730) (38,584)
Total long-term debt 361,605 63.6% 296,112 56.2%
TOTAL CAPITALIZATION $568,992 100.0% $527,342 100.0%
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-26
<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
preferred 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 4) - 2,515 - - 2,515
Premium on redemption of
preferred 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
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-27
<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., Pennsylvania Energy Marketing
Company 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. PG&W has one wholly-owned subsidiary, Penn Gas Development
Co. (PGD), which has not been consolidated since it is insignificant. Prior to
October 1, 1994, PG&W had four other wholly-owned subsidiaries, each a small
water company, which were not consolidated since they also were insignificant.
As of September 30, 1994, these four small water companies were merged into
PG&W. The equity method is used to account for PG&W's investment in PGD and was
used to account for its investment in the four small water companies prior to
their merger into PG&W.
<TABLE>
<CAPTION>
<S> <C>
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, and are primarily
attributable to land, water rights and goodwill. Except for approximately
$340,000 recorded in 1993 with respect to water plant, which is being amortized
over a ten-year period, the plant acquisition adjustments relate to acquisitions
made prior to October 31, 1970, and thus are not required to be amortized for
financial reporting purposes since the Company believes there has been no
diminution in their value. Also, such treatment is consistent with PPUC Orders.
</TABLE>
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 either other income, net (with respect to the cost
of equity funds) or 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 for gas plant and
all common plant. As of December 31, 1994, depreciation was provided on a
straight-line basis for approximately 96% of the water plant and on a 4%
compound interest method for the remainder of the water plant. Exclusive of
transportation and work equipment, the annual provision for depreciation, as
F-28
<PAGE>
related to the average depreciable original cost of utility plant, resulted in
the following percentages:
[CAPTION]
1994 1993 1992
[S] [C] [C] [C]
Gas 2.48% 2.49% 2.51%
Water 2.02 1.71 1.57
Common 7.62 8.06 6.76
The increase in the annual rate of depreciation relative to water plant in
both 1994 and 1993 reflects a change from the 4% compound interest method to the
straight-line method of depreciation with respect to certain of that plant, as
ordered by the PPUC. Such change in method of depreciation has generally been
made as PG&W was allowed to initially increase its rates for customers receiving
filtered water service.
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 based on estimated or
actual meter readings on a cycle basis. Gas customers and certain water
customers, primarily large users, are billed monthly on a cycle that extends
throughout the month. Other water customers are billed bi-monthly on cycles
that extend over the bi-monthly period. The estimated unbilled amounts from the
most recent meter reading dates through the end of the period being reported on
are recorded as accrued revenues.
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. Such deferred charges include, among other amounts,
deferred treatment plant costs and carrying charges as more fully discussed in
the following paragraphs, certain pre-operating costs relative to PG&W's water
treatment plants, costs associated with an early retirement plan and certain
preliminary survey and investigation costs. These amounts either relate to
previously-issued orders of the PPUC or are of a nature which, in the opinion of
the Company, will be recoverable in future rates, based on past actions of the
PPUC or other relevant factors.
Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred
all operating expenses, including depreciation and property taxes, and the
carrying charges (equivalent to the AFUDC) relative to the four new Scranton
Area water treatment plants and related facilities from the dates of commercial
operation of the plants until March 23, 1991, the effective date of the Scranton
Area water rate increase approved by the PPUC on March 22, 1991. By its Order
entered June 23, 1993, relative to the Scranton Water Rate Area, the PPUC
granted PG&W's request to recover the $5.8 million of costs deferred relative to
the Scranton Area water treatment plants and related facilities over a ten-year
period beginning June 23, 1993, of which $885,000 had been recovered as of
December 31, 1994.
F-29
<PAGE>
Similarly, as permitted by an Order of the PPUC entered September 24, 1992,
PG&W has deferred all operating expenses, including depreciation and property
taxes, and the carrying charges relative to the Crystal Lake Water Treatment
Plant and related facilities from August 3, 1992 (the date of commercial
operation of that plant), until March 9, 1993, the effective date of the water
rate increase approved by the PPUC on February 25, 1993, for customers in PG&W's
Spring Brook Water Rate Area served exclusively by the Crystal Lake Water
Treatment Plant. Additionally, in accordance with an Order of the PPUC entered
July 28, 1993, PG&W deferred all expenses and the carrying charges relative to
the Ceasetown and Watres Water Treatment Plants and related facilities, until
December 16, 1993, the effective date of the water rate increase for customers
served by the Ceasetown and Watres Water Treatment Plants approved by the PPUC
on December 15, 1993. A total of $4.6 million of costs relative to these plants
and related facilities had been so deferred pursuant to the respective PPUC
Orders permitting the deferral of such costs.
As contemplated by the PPUC's Orders of September 24, 1992, and July 28,
1993, PG&W will seek recovery of these costs, which total $4.6 million, in its
next rate increase request relative to the Spring Brook Water Rate Area.
Although it cannot be certain, the Company believes that the recovery of such
costs by PG&W will be allowed by the PPUC in future rate increases, particularly
in view of the PPUC's action allowing the recovery of the costs deferred with
respect to the Scranton Area water treatment plants and related facilities.
The 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 Financial Accounting Standards Board ("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:
[CAPTION]
1994 1993
(Thousands of Dollars)
[S] [C] [C]
Utility plant basis differences $94,430 $86,924
Deferred treatment plant costs, net 4,194 4,460
Deferred water utility billings 4,151 1,892
FERC Order 636 transition costs 1,371 -
Contributions and advances for construction (3,544) (3,284)
Alternative minimum tax (2,213) (2,176)
Operating reserves (1,020) (816)
Other (457) (49)
Net deferred income tax liability $96,912 $86,951
F-30
<PAGE>
The provision for income taxes consists of the following components:
[CAPTION]
1994 1993 1992
(Thousands of Dollars)
[S] [C] [C] [C]
Included in operating expenses:
Currently payable -
Federal $ 3,627 $ 4,538 $ 3,732
State 1,893 1,917 1,888
Total currently payable 5,520 6,455 5,620
Deferred, net -
Federal 5,486 2,535 2,512
State 390 (851) (503)
Total deferred, net 5,876 1,684 2,009
Amortization of investment tax credits (256) (256) (256)
Total included in operating expenses 11,140 7,883 7,373
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 $11,677 $ 8,024 $ 7,684
The components of deferred income taxes, which are recorded consistent with
the treatment allowed by the PPUC for ratemaking purposes, are as follows:
[CAPTION]
1994 1993 1992
(Thousands of Dollars)
[S] [C] [C] [C]
Excess of tax depreciation over
depreciation for accounting purposes $ 3,449 $ 3,214 $ 2,502
Deferred treatment plant costs, net (266) 1,458 585
Deferred water utility billings 2,259 75 258
FERC Order 636 transition costs 1,371 - -
Take-or-pay costs, net (652) (1,126) (446)
Other, net (263) (1,924) (831)
Total deferred taxes, net $ 5,898 $ 1,697 $ 2,068
Included in:
Operating expenses $ 5,876 $ 1,684 $ 2,009
Other income, net 22 13 59
Total deferred taxes, net $ 5,898 $ 1,697 $ 2,068
F-31
<PAGE>
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:
[CAPTION]
1994 1993 1992
(Thousands of Dollars)
[S] [C] [C] [C]
Income before income taxes $29,124 $22,471 $19,212
Tax expense at statutory federal
income tax rate $10,193 $ 7,865 $ 6,532
Increases (reductions) in taxes
resulting from -
State income taxes, net of
federal income tax benefit 1,814 980 1,247
Deferred treatment plant carrying
charges and allowance for equity
funds used during construction (14) (545) -
Amortization of investment tax
credits (256) (256) (256)
Other, net (60) (20) 161
Total provision for income taxes $11,677 $ 8,024 $ 7,684
(2) RATE MATTERS
Gas Utility Operations
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:
[CAPTION]
Change in Calculated
Effective Rate per MCF 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
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 made with the PPUC by PG&W and other larger
local gas distribution companies. The PGC Order also indicated that while Non-
Gas Transition Costs were not natural gas costs eligible for recovery under the
PGC rate filing mechanism, such costs were 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. As of
F-32
<PAGE>
February 1, 1994, PG&W began to recover the Gas Transition Costs that are being
billed to PG&W by its interstate pipelines through an increase in its PGC rate.
It is currently estimated that these costs, which will be billed to PG&W over a
nineteen-month period extending through March 31, 1995, will aggregate $1.2
million, of which $1.1 million had been billed to PG&W and $659,000 had been
recovered from its customers as of December 31, 1994. 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 $3.8 million had been billed to PG&W and $1.1 million had been
recovered from its customers as of December 31, 1994. PG&W has recorded a
liability for the $5.6 million of such estimated transition costs that remain to
be billed to it as of December 31, 1994, and both a current asset and a deferred
asset (which together totaled $8.8 million as of December 31, 1994) representing
the transition costs remaining to be recovered from its customers.
Water Rate Filings
Scranton Area Water Rate Increase. On September 25, 1992, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$9.9 million in additional annual revenue, to be effective November 24, 1992.
This rate increase request involved the approximately 56,000 customers in PG&W's
Scranton Water Rate Area at such date. By Order entered June 23, 1993, the PPUC
rejected the proposed rate increase in its entirety "due to inadequate service"
(i.e., water quality). However, by the same Order, the PPUC granted PG&W the
alternative of a rate increase designed to produce an additional $5.0 million in
annual revenue, provided that PG&W dedicate the entire increase to augment the
improvements to its water distribution system until "...the demonstration by
[PG&W] to [the PPUC] that it is providing adequate service." PG&W accepted this
alternative and placed such $5.0 million rate increase into effect as of June
23, 1993.
On August 19, 1993, the PPUC approved a settlement agreement resolving
certain disputed issues relating to its June 23, 1993, Order. This settlement
agreement provided, among other things, for (i) modification by the PPUC of its
June 23, 1993, Order to reduce the amount of the revenue increase that it
ordered be dedicated to distribution system improvements by the related income
taxes and other expenses and the $319,000 additional expense for retiree health
care and life insurance benefits that the PPUC allowed PG&W in its revenues
(which resulted in the requirement for an additional annual expenditure for
distribution system improvements by PG&W of $2.5 million), (ii) the agreement by
PG&W (with which it was in compliance as of December 31, 1994) to spend a total
of $4.9 million annually (an additional $2.5 million over its actual average
annual expenditure of $2.4 million during the three-year period ended June 30,
1993) for distribution system improvements in the Scranton Water Rate Area until
the PPUC is satisfied that PG&W is providing adequate service, (iii) the
modification by the PPUC of its June 23, 1993, Order to restore the Hollister
Reservoir to PG&W's rate base, and (iv) the withdrawal by PG&W and the Office of
Consumer Advocate (the "OCA") of their appeals to the Commonwealth Court of
Pennsylvania regarding the PPUC's June 23, 1993, Order.
Spring Brook Water Rate Increases. Crystal Lake Service Area. On June 30,
1992, PG&W filed an application with the PPUC seeking a water rate increase,
designed to produce $4.4 million in additional annual revenue. This rate
increase request involved the approximately 5,000 customers in the Spring Brook
Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant,
F-33
<PAGE>
which became fully operational in August, 1992. On December 15, 1992, PG&W and
certain parties filing objections to the rate increase request reached a
settlement providing for an approximate 130% rate increase designed to produce
$2.0 million of additional annual revenue to be phased-in over a two-year period
under the terms of a qualified phase-in plan pursuant to FASB Statement 92. The
settlement provided that $1.1 million of the increased revenue (an approximate
72% increase in rates) was to be realized through an immediate rate increase and
that the remaining $900,000 in increased revenue (an additional 58% increase in
rates) was to be realized through another rate increase one year later (i.e., at
the beginning of year two of the phase-in period). The settlement also
specified that the $900,000 in revenue that would be deferred during the first
year of the phase-in period, as well as an approximate $243,000 in related
carrying charges, was to be collected from customers in the form of a surcharge
in years three through five of the phase-in period. By Order adopted February
25, 1993, the PPUC approved the settlement effective March 9, 1993. In
accordance with the provisions of FASB Statement 92, PG&W commenced recording
the entire $2.0 million increase in annual revenue allowed by the PPUC as
additional revenue beginning March 9, 1993, along with the related carrying
charges on revenue deferred in accordance with the phase-in plan.
Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$19.5 million in additional annual revenue, to be effective June 28, 1993. This
rate increase request involved approximately 59,300 customers in PG&W's Spring
Brook Water Rate Area, principally those customers (i) served by the Ceasetown
Water Treatment Plant which was placed in service on March 31, 1993, (ii) served
by the Watres Water Treatment Plant which was placed in service on September 30,
1993, (iii) served jointly by the Ceasetown and Watres Water Treatment Plants,
and (iv) who are served exclusively by the Nesbitt Water Treatment Plant. On
September 23, 1993, PG&W and certain parties filing objections to the rate
increase request reached a settlement providing for an overall 119% rate
increase involving approximately 44,900 customers, principally those served
either exclusively or jointly by the Ceasetown and Watres Water Treatment
Plants, designed to produce $11.9 million of additional annual revenue to be
phased-in over a two-year period under the terms of a qualified phase-in plan,
pursuant to FASB Statement 92. Under the terms of the settlement, except for
approximately 200 customers who were previously served jointly by the Hillside
and Nesbitt Water Treatment Plants, none of the approximately 14,600 customers
now served exclusively by the Nesbitt Water Treatment Plant would receive an
increase. The settlement further provided that $6.4 million of the increased
revenue (an approximate 65% increase in rates) was to be realized through an
immediate rate increase and that the remaining $5.5 million of the increased
revenue (an additional 54% increase in rates) was to be realized through a
further rate increase one year later (i.e., at the beginning of year two of the
phase-in period). The settlement also specified that the $5.5 million in
revenue to be deferred during the first year of the phase-in period, as well as
an approximate $1.3 million in related carrying charges, is to be collected from
customers in the form of a surcharge in years three through five of the phase-in
period. By Order adopted December 15, 1993, the PPUC approved the settlement
effective December 16, 1993. In accordance with the provisions of FASB
Statement 92, PG&W commenced recording the entire $11.9 million increase in
annual revenue allowed by the PPUC as additional revenue beginning December 16,
1993, along with the related carrying charges on revenue deferred in accordance
with the phase-in plan.
F-34
<PAGE>
(3) OTHER INCOME, NET
Other income, net was comprised of the following elements:
[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 non-watershed land and
other property, net of related income
taxes 165 20 102
Deferred treatment plant carrying
charges and allowance for equity funds
used during construction 40 1,555 -
Amortization of preferred stock issuance
costs, net of related income tax
benefits (227) (126) (66)
Net interest expense on proceeds
remaining in construction fund (217) (785) (23)
Holding company expenses, net of related
income tax benefits (209) (203) (469)
Premium on retirement/defeasance of debt (40) (81) (127)
Other 27 (23) 11
Total $ 202 $ 673 $ 26
Summary financial data for non-regulated
subsidiaries:
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
(4) COMMON STOCK
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.
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
F-35
<PAGE>
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.
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.
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.
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.
(5) PREFERRED STOCK
Preferred Stock of PG&W Subject to Mandatory Redemption
On December 23, 1993, PG&W redeemed 100,000 shares of the 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).
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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.
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:
[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
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.
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(6) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1994
and 1993:
[CAPTION]
1994 1993
(Thousands of Dollars)
[S] [C] [S]
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 -
6.05 % Series, due 2019 19,000 19,000
7 % Series, due 2017 30,000 -
7.125% Series, due 2022 30,000 30,000
7.20 % Series, due 2017 50,000 50,000
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
237,535 207,745
Notes -
1%, due 1994 (Small Business Administration) - 845
8%, 1987 Series B, defeased on November 15, 1994 - 30,000
Bank borrowings, at weighted average interest
rates of 5.28% and 4.31%, respectively (Note 8) 65,500 47,000
65,500 77,845
Water facility loans from agencies of the
Commonwealth of Pennsylvania, at interest rates
ranging from 1.76% to 9.36%, repayable in
installments through 2012 12,420 19,253
Less current maturities and sinking
fund requirements (3,730) (38,584)
Total long-term debt of PG&W 311,725 266,259
Total consolidated long-term debt $361,605 $296,112
7.125% Series First Mortgage Bonds. On December 22, 1992, the Luzerne
County Industrial Development Authority (the "Authority") issued $30.0 million
of its 7.125% Exempt Facilities Revenue Bonds, 1992 Series B (Pennsylvania Gas
and Water Company Project) (the "1992 Series B Bonds") and, in connection
therewith, PG&W issued $30.0 million of its 7.125% Series First Mortgage Bonds
to PNC Bank (formerly Northeastern Bank of Pennsylvania), as trustee (the "IDA
Trustee") for the 1992 Series B Bonds, as security for the 1992 Series B Bonds.
The proceeds from the issuance of the 1992 Series B Bonds were deposited in a
construction fund held by the IDA Trustee for the 1992 Series B Bonds, pending
their utilization to finance the construction of various additions and
improvements to PG&W's water facilities for which construction commenced
subsequent to September 23, 1992. As of December 31, 1994, $3.4 million
(including investment income) was so held by the IDA Trustee and was available
to finance the future construction of qualified water facilities for PG&W.
Under the terms of the 7.125% Series First Mortgage Bonds, PG&W will make
payments to the IDA Trustee in amounts sufficient and at the times necessary to
pay the debt service requirements on the 1992 Series B Bonds.
6.05% Series First Mortgage Bonds. On December 21, 1993, the Authority
issued $19.0 million of its Exempt Facilities Revenue Refunding Bonds, 1993
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Series A (Pennsylvania Gas and Water Company Project) (the "1993 Series A
Bonds") and, in connection therewith, PG&W issued $19.0 million of its 6.05%
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Series First Mortgage Bonds to the IDA Trustee for the 1993 Series A Bonds, as
security for the 1993 Series A Bonds. PG&W will make payments to the IDA
Trustee pursuant to the 6.05% Series First Mortgage Bonds in amounts sufficient
and at the times necessary to pay the debt service requirements on the 1993
Series A Bonds. The proceeds from the issuance of the 1993 Series A Bonds,
along with additional funds provided by PG&W, were deposited with the IDA
Trustee for the Authority's $19.0 million of 7% Exempt Facilities Revenue Bonds,
1989 Series A (Pennsylvania Gas and Water Company Project) (the "1989 Series A
Bonds") on December 21, 1993, for use in redeeming the 1989 Series A Bonds on
January 1, 1994. The deposit of such funds acted to discharge all of PG&W's
obligations with respect to its 7%, 1989 Series A Note in the principal amount
of $19.0 million which had been issued to the IDA Trustee in connection with the
1989 Series A Bonds and which was subject to repayment on January 1, 1994.
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 March 10, 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.
7% Series First Mortgage Bonds. On November 15, 1994, the Authority issued
$30.0 million of its Exempt Facilities Revenue Refunding Bonds, 1994 Series A
(Pennsylvania Gas and Water Company Project) due 2017 (the "1994 Series A
Bonds") and, in connection therewith, PG&W issued $30.0 million of its 7% Series
First Mortgage Bonds, as security for the 1994 Series A Bonds. PG&W will make
payments to the IDA Trustee pursuant to the 7% Series First Mortgage Bonds in
amounts sufficient and at the times necessary to pay the debt service
requirements on the 1994 Series A Bonds. The proceeds from the issuance of the
1994 Series A Bonds, along with additional funds provided by PG&W, were
deposited with the IDA Trustee for the Authority's $30.0 million of 8% Exempt
Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company
project) (the "1987 Series B Bonds") on November 15, 1994, for use in redeeming
the 1987 Series B Bonds on December 1, 1994. The deposit of such funds acted to
discharge all of PG&W's obligations with respect to its 8%, 1987 Series B Note
in the principal amount of $30.0 million which had been issued to the IDA
Trustee in connection with the 1987 Series B Bonds and which was subject to
repayment on December 1, 1994.
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<PAGE>
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:
[CAPTION]
Year Amount
[S] [C]
1995 $ 3,730,000
1996 $113,258,000 (a)
1997 $ 3,694,000
1998 $ 611,000
1999 $ 60,644,000 (b)
(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.
Liens Securing Indebtedness. Most of PG&W's properties are subject to
mortgage liens securing certain funded debt. Additionally, PG&W's gross
revenues and receipts, accounts receivable and certain of its other rights and
interests are subject to liens securing various water facility loans from
agencies established by the Commonwealth of Pennsylvania for the purpose of
providing financial assistance to public water supply and sewage systems in the
state. These liens are limited to the amount of the related loans outstanding,
which aggregated $12.4 million as of December 31, 1994.
(7) 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.
(8) 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 March 10, 1995, $35.0 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
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<PAGE>
borrowing capacity of $2.5 million mature on May 31, 1996. As of March 10,
1995, PG&W had $3.9 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.
Information relating to PG&W's bank lines of credit and borrowings under
those lines of credit is set forth below:
[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% -
(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.
(9) 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
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is fully covered by assets in the trust, a contribution may not be made for a
particular year. Net pension costs, including amounts capitalized, were
$562,000, $443,000 and $333,000 in 1994, 1993 and 1992, respectively.
The following items were the components of the net pension cost for the
years 1994, 1993 and 1992:
[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
The funded status of the plan as of December 31, 1994 and 1993, was as
follows:
[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)
The discount rate used to determine the actuarial present value of the
projected benefit obligations was 8-3/4% in 1994 and 8% in 1993. 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
both 1994 and 1993.
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 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.
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<PAGE>
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.
The following items were the components of the net cost of postretirement
benefits other than pensions for the years 1994 and 1993:
[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
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.
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<PAGE>
The additional costs accrued pursuant to FASB Statement 106 are allocated
between PG&W's gas utility and water utility operations. By Orders entered in
1993 relative to PG&W's water utility operations, the PPUC approved the
inclusion of the costs required to be accrued pursuant to FASB Statement 106 in
PG&W's water rates. Since PG&W has not sought to increase its base gas rates,
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, with regard to PG&W's gas utility operations as a result of the
adoption of the provisions of FASB Statement 106 were expensed without any
adjustment being made to 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.
(10) CONSTRUCTION EXPENDITURES
PG&W estimates the cost of its 1995 construction program will be $44.9
million, which includes $23.0 million for the construction of water facilities
and $21.9 million for the construction of gas facilities.
(11) 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 by January 31,
1994, 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. PG&W submitted
a detailed plan of action for complying with the Emergency Order to the PPUC on
April 11, 1994, which was subsequently revised. The PPUC staff agreed that the
revised plan (the "Plan") satisfies the concerns of the PPUC expressed in the
Emergency Order, and on November 30, 1994, the PPUC staff and PG&W entered into
a Settlement Agreement, subject to approval by the PPUC, (i) terminating the
informal investigation of the matter initiated by the PPUC staff, (ii)
memorializing the acceptance by the PPUC staff of the Plan and (iii) evidencing
PG&W's commitment to satisfy the requirements of the Plan. The PPUC must
approve the Settlement Agreement. PG&W does not believe that compliance with
the terms of the Settlement Agreement or any liability that might result from
violations of law or the Emergency Order will have a material adverse effect on
its financial position or results of operations.
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<PAGE>
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.
(12) INDUSTRY SEGMENTS
Financial information with respect to the Company's industry segments for
the years ended December 31, 1994, 1993 and 1992 appears on page 53. Such
industry segment information is incorporated herein as part of these
Consolidated Financial Statements.
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<PAGE>
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[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 $ 96,285 $ 43,483 $ 31,862 $ 63,093
Operating income 16,170 7,965 6,606 12,950
Net income (loss) 8,548 415 (1,123) 4,977
Earnings (loss) per share
of common stock:
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
QUARTER ENDED
March 31, June 30, September 30, December 31,
1993 1993 1993 1993
(Thousands of Dollars, Except Per Share Amounts)
Operating revenues $ 78,318 $ 37,251 $ 27,959 $ 63,160
Operating income 13,587 5,951 5,039 12,685
Net income (loss) 6,318 (1,451) (1,955) 5,073
Earnings (loss) per share
of common stock (a) 1.53 (.35) (.47) .99
(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.
(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:
o Restricted funds held by trustee. The fair value of the restricted funds
held by the trustee has been based on the market value as of the respective
dates of the financial instruments in which such funds have been invested.
o 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.
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<PAGE>
o 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:
[CAPTION]
1994 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Restricted funds held by trustee $ 3,401 $ 3,401 $ 12,853 $ 12,857
Long-term debt (including current
portion):
Company 49,880 50,000 29,853 30,300
PG&W 315,455 317,867 306,843 327,436
Preferred stock of PG&W subject to
mandatory redemption (including
current portion) 1,840 1,877 31,920 33,087
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.
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<PAGE>
SELECTED FINANCIAL AND STATISTICAL DATA
[CAPTION]
Year Ended December 31,
1994 1993 1992 1991 1990
(Thousands of Dollars, Except Per Share Amounts)
[S] [C] [C] [C] [C] [C]
OPERATING REVENUES:
Gas $167,992 $153,325 $143,227 $138,465 $135,185
Water 66,731 53,363 48,651 44,285 31,452
Total operating revenues 234,723 206,688 191,878 182,750 166,637
OPERATING EXPENSES:
Cost of gas 98,653 86,557 77,720 77,801 75,711
Other operation expenses 40,153 38,859 37,971 36,334 35,755
Maintenance 10,093 9,341 8,677 9,634 10,401
Depreciation 14,339 12,299 10,856 9,779 7,860
Deferred treatment
plant costs, net 581 (1,532) (294) (664) (1,682)
Income taxes 11,140 7,883 7,373 4,141 2,136
Other taxes 16,073 16,019 14,730 12,814 11,892
Total operating expenses 191,032 169,426 157,033 149,839 142,073
OPERATING INCOME 43,691 37,262 34,845 32,911 24,564
OTHER INCOME
(DEDUCTIONS), NET 202 673 26 656 (1,502)
INTEREST CHARGES (26,437) (23,488) (23,343) (25,158) (18,070)
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (4,639) (6,462) (5,065) (4,236) (4,323)
NET INCOME $ 12,817 $ 7,985 $ 6,463 $ 4,173 $ 669
COMMON STOCK INFORMATION:
Weighted average number
of shares outstanding in
thousands 5,457 4,395 4,011 2,734 2,719
Earnings per share -
Before premium on
redemption of
subsidiary's preferred
stock $ 2.35 $ 1.82 $ 1.61 $ 1.53 $ .25
Premium on redemption
of subsidiary's
preferred stock (.18) - - - -
Earnings per share $ 2.17 $ 1.82 $ 1.61 $ 1.53 $ .25
Cash dividends $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20
F-49
<PAGE>
[CAPTION]
Year Ended December 31,
1994 1993 1992 1991 1990
(Thousands of Dollars, Except Per Share Amounts)
[S] [C] [C] [C] [C] [C]
CAPITALIZATION AT YEAR END:
Amounts -
Common shareholders'
investment $172,012 $165,775 $135,144 $109,965 $111,360
Preferred stock of PG&W -
Not subject to mandatory
redemption, net 33,615 33,615 33,615 9,916 9,916
Subject to mandatory
redemption 1,760 31,840 41,920 42,000 42,080
Long-term debt 361,605 296,112 275,703 194,853 178,168
Total capitalization $568,992 $527,342 $486,382 $356,734 $341,524
Ratios -
Common shareholders'
investment 30.2% 31.4% 27.8% 30.8% 32.6%
Preferred stock of PG&W -
Not subject to mandatory
redemption, net 5.9 6.4 6.9 2.8 2.9
Subject to mandatory
redemption 0.3 6.0 8.6 11.8 12.3
Long-term debt 63.6 56.2 56.7 54.6 52.2
Total 100.0% 100.0% 100.0% 100.0% 100.0%
ADDITIONS TO UTILITY PLANT:
Gas $ 17,455 $ 13,325 $ 12,669 $ 9,359 $ 14,127
Water 19,321 32,575 44,352 19,155 22,255
Total additions to
utility plant $ 36,776 $ 45,900 $ 57,021 $ 28,514 $ 36,382
UTILITY PLANT AT YEAR END:
Total utility plant $663,532 $633,177 $589,042 $538,486 $513,087
Accumulated depreciation 94,461 86,287 76,743 71,044 63,858
Net utility plant $569,071 $546,890 $512,299 $467,442 $449,229
TOTAL ASSETS AT YEAR END $745,377 $729,296 $632,905 $551,101 $525,801
F-50
<PAGE>
[CAPTION]
1994 1993 1992 1991 1990
[S] [C] [C] [C] [C] [C]
OPERATING STATISTICS-GAS
Revenues (thousands of dollars):
Residential nonheating $ 2,680 $ 2,576 $ 2,589 $ 2,810 $ 2,987
Residential heating 104,495 89,729 79,853 80,786 74,296
Industrial 19,255 25,785 28,484 20,863 23,914
Commercial 38,872 32,819 29,758 31,068 31,187
Other 2,690 2,416 2,543 2,938 2,801
Total $167,992 $153,325 $143,227 $138,465 $135,185
Million cubic feet of gas sold and
transported:
Residential nonheating 302 326 343 338 373
Residential heating 16,674 16,585 15,971 14,312 13,426
Industrial 18,466 18,024 18,087 17,728 17,460
Commercial 8,082 7,727 7,299 6,645 6,853
Other 577 559 539 467 434
Total 44,101 43,221 42,239 39,490 38,546
Number of customers:
Residential nonheating 14,704 15,547 16,279 16,936 17,746
Residential heating 112,877 110,232 107,300 104,167 101,161
Industrial 241 237 237 234 224
Commercial 11,233 10,880 10,417 10,116 9,662
Other 272 272 281 292 289
Total 139,327 137,168 134,514 131,745 129,082
Average cost of gas sold per
thousand cubic feet $ 3.560 $ 3.450 $ 3.099 $ 2.721 $ 3.197
Degree day information:
Actual 6,162 6,179 6,136 5,543 5,339
Percentage of actual to normal 97.9% 98.2% 96.9% 87.6% 84.3%
OPERATING STATISTICS-WATER
Revenues (thousands of dollars):
Residential $ 42,185 $ 33,795 $ 31,321 $ 28,772 $ 20,800
Industrial 5,771 4,906 3,956 3,662 2,761
Commercial 12,190 9,029 8,379 7,565 5,049
Other 6,585 5,633 4,995 4,286 2,842
Total $ 66,731 $ 53,363 $ 48,651 $ 44,285 $ 31,452
Water output (estimated million
gallons) 24,273 24,054 24,000 23,522 26,203
Number of customers:
Residential 121,337 120,414 119,577 119,271 119,373
Industrial 365 369 378 396 430
Commercial 9,420 9,308 9,159 9,052 8,425
Other 1,360 1,335 1,311 1,255 1,178
Total 132,482 131,426 130,425 129,974 129,406
EMPLOYEES AT YEAR END 967 975 997 990 1,044
TOTAL WAGES AND SALARIES
(thousands of dollars) $ 29,892 $ 28,586 $ 27,299 $ 26,751 $ 26,241
F-51
<PAGE>
INDUSTRY SEGMENTS
The following tables set forth certain financial information with respect to
the Company's industry segments for the years ended December 31, 1994, 1993 and
1992. The revenues and expenses of the Company's nonregulated operations, which
are not significant relative to its regulated operations, are reflected in the
consolidated financial statements in "Other income, net."
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
(Thousands of Dollars)
<S> <C> <C> <C>
GAS UTILITY OPERATIONS
Operating revenues $167,992 $153,325 $143,227
Operating expenses excluding income taxes:
Cost of gas 98,653 86,557 77,720
Depreciation 6,667 6,388 6,087
Other operating expenses 37,247 34,927 34,031
Total 142,567 127,872 117,838
Operating income before income taxes 25,425 25,453 25,389
Income taxes 5,355 5,842 5,730
Operating income $ 20,070 $ 19,611 $ 19,659
Additions to utility plant $ 17,455 $ 13,325 $ 12,669
Identifiable assets at December 31 (a) $290,253 $285,596 $238,017
WATER UTILITY OPERATIONS
Operating revenues $ 66,731 $ 53,363 $ 48,651
Operating expenses excluding income taxes:
Depreciation 7,672 5,911 4,769
Other operating expenses 29,072 29,292 27,347
Deferred treatment plant costs, net 581 (1,532) (294)
Total 37,325 33,671 31,822
Operating income before income taxes 29,406 19,692 16,829
Income taxes 5,785 2,041 1,643
Operating income $ 23,621 $ 17,651 $ 15,186
Additions to utility plant $ 19,321 $ 32,575 $ 44,352
Identifiable assets at December 31 (a) $440,202 $426,389 $379,989
TOTAL OPERATIONS
Operating revenues $234,723 $206,688 $191,878
Operating expenses excluding income taxes:
Cost of gas 98,653 86,557 77,720
Depreciation 14,339 12,299 10,856
Other operating expenses 66,319 64,219 61,378
Deferred treatment plant costs, net 581 (1,532) (294)
Total 179,892 161,543 149,660
Operating income before income taxes 54,831 45,145 42,218
Income taxes 11,140 7,883 7,373
Operating income $ 43,691 $ 37,262 $ 34,845
Additions to utility plant $ 36,776 $ 45,900 $ 57,021
Identifiable assets at December 31 (a) $730,455 $711,985 $618,006
Other assets at December 31 (b) 14,922 17,311 14,899
Total assets $745,377 $729,296 $632,905
(a) Includes allocated common plant and is net of the respective accumulated
depreciation.
(b) Composed primarily of investments, cash and special deposits, prepayments
F-52
</TABLE>
<PAGE>
and unallocated deferred charges.
F-53
<PAGE>
COMMON STOCK AND DIVIDEND INFORMATION
The Company's Common Stock is traded on the New York Stock Exchange, under
the symbol "PNT." Quotations are shown in The Wall Street Journal as "PennEntr"
and in The New York Times as "PennEn." The report price range per share of PEI
Common Stock and quarterly cash dividends paid for years 1994 and 1993 were as
follows:
[CAPTION]
Price Range Cash
High Low Dividend
[S] [C] [C] [C]
1994
4th Quarter $30-1/8 $26-7/8 $ .55
3rd Quarter 31-7/8 29-3/8 .55
2nd Quarter 30-7/8 29 .55
1st Quarter 33 29-1/4 .55
1993
4th Quarter $30-1/2 $27 $ .55
3rd Quarter 30 27-1/2 .55
2nd Quarter 31-1/4 29 .55
1st Quarter 32-1/4 26 .55
F-54
<PAGE>
EXHIBIT 11-1
PENNSYLVANIA ENTERPRISES, INC.
Statement Re Computation of Per Share Earnings
for the Twelve Month Period Ended December 31, 1994
[CAPTION]
Twelve Months
Ended
[S] [C]
Income before subsidiary's
preferred stock dividends $ 17,456,000
Subsidiary's preferred stock dividends 4,639,000
Net income $ 12,817,000
Earnings per share of common stock* $ 2.17
Computations of additional common shares
outstanding
Average shares of common stock 5,456,568
Incremental common shares applicable to
options, based on the daily average
market price 1,152
Average common shares as adjusted 5,457,720
Average shares of common stock 5,456,568
Incremental common shares applicable to
options, based on the more dilutive of
daily average or ending market price -
Average common shares fully diluted 5,456,568
Earnings per share of common stock*
Average common shares as adjusted $ 2.17
Average common shares fully diluted $ 2.17
* Earnings per share of common stock reflect the effect of premiums totaling
$979,875 on the redemption of subsidiary's preferred stock in May and
December, 1994, that were charged to retained earnings and not included in
the determination of net income.
<PAGE>
EXHIBIT 21-1
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
The following are subsidiaries of the Registrant. Their voting securities
are owned 100% by the Registrant. All of the subsidiaries are incorporated in
Pennsylvania.
Pennsylvania Gas and Water Company
Pennsylvania Energy Resources, Inc.
Theta Land Corporation
Pennsylvania Energy Marketing Company
Penn Gas Development Co.*
* A subsidiary of PG&W accounted for on the equity method which has not been
consolidated since it is insignificant.
<PAGE>
Exhibit 23-1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included or incorporated by reference in this Form 10-K,
into the Company's previously filed Registration Statements (File No. 33-
53501, File No. 33-43838, File No. 33-53435 and File No. 33-62892).
ARTHUR ANDERSEN LLP
New York, N.Y.
March 27, 1995
<PAGE>
FIRST AMENDMENT
TO THE
SUPPLEMENTAL RETIREMENT AGREEMENT
This Amendment, effective as of September 1, 1994, is intended to
effectuate the benefit obligations of Pennsylvania Enterprises, Inc. (the
"Company") pursuant to paragraph 2 of the Employment Agreement between the
Company and Dean T. Casaday dated as of September 1, 1994. Accordingly,
the Supplemental Retirement Agreement (the "Agreement"), dated December 23,
1991, is hereby amended in the following respects:
1. The first sentence of Paragraph 2.1 of the Agreement is
hereby amended to read in its entirety as follows:
"2.1 The Company agrees to pay Executive a Supplemental
Retirement Benefit equal to the difference, if any, between:
(a) the amount of his Retirement Plan Benefit; and (b) a
retirement benefit calculated under the terms of the Plan (i) as
if Executive had completed twenty (20) years of Credited Service
and based upon Executive's Highest Average Annual Earnings, as
such term is defined herein, and (ii) without regard to the
limitations imposed by Code Section 401(a)(17) on compensation
which may be taken into account under the Plan."
2. The first sentence of Section 3 of the Supplemental
Retirement Agreement is amended to read in its entirety as follows:
"3. If Executive dies while an employee and prior to
commencement of his Retirement Plan Benefits, his Spouse shall be entitled
to receive a Supplemental Pre-Retirement Death Benefit equal to the
difference, if any, between:
(a) the Pre-Retirement Death Benefit payable pursuant to the
Plan; and
<PAGE>
(b) the Pre-Retirement Death Benefit which would have been
payable under the terms of the Plan (i) based upon twenty (20) Years of
Credited Service and Highest Average Annual Earnings, as defined in this
Agreement, and (ii) without regard to the limitations imposed by Code
Section 401(a)(17) on compensation which may be taken into account under
the Plan."
IN WITNESS WHEREOF, the Company and the Executive have cause this
agreement to be executed effective as of the 8th day of
March , 1995.
PENNSYLVANIA ENTERPRISES, INC.
By: _________________________
ATTEST:
______________________________
Secretary
______________________________
Dean T. Casaday
<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
B Y L A W S
ARTICLE I
STOCKHOLDERS
Section 1. Place of Holding Meetings. Meetings of stockholders
shall be held within the State of Pennsylvania, and, unless otherwise
determined by the Board of Directors, all meetings of the stockholders
shall be held at the office of the Company.
Section 2. Voting.
(a) Voting Rights of Stockholders. - Unless otherwise provided in
the articles, every stockholder of the Company shall be
entitled to one vote for every share standing in the name of
the stockholder on the books of the Company.
(b) Voting and Other Action by Proxy.
(1) Every stockholder entitled to vote at a meeting of
stockholders may authorize another person to act for the
stockholder by proxy.
(2) The presence of, or vote or other action at a meeting of
stockholders by a proxy of a stockholder shall
constitute the presence of, or vote or action by the
stockholder.
(3) Where two or more proxies of a stockholder are present,
the Company shall, unless otherwise expressly provided
in the proxy, accept, as the vote of all shares
represented thereby the vote cast by a majority of them
and, if a majority of the proxies cannot agree whether
the shares represented shall be voted or upon the manner
of voting the shares, the voting of the shares shall be
divided equally among those persons.
(c) Execution and Filing. - Every proxy shall be executed in
writing by the stockholder or by the duly authorized
attorney-in-fact of stockholder and filed with the Secretary
of the Company. A telegram, telex, cablegram, datagram or
similar transmission from a stockholder or attorney-in-fact,
or a photographic, facsimile or similar reproduction of a
writing executed by a stockholder or attorney-in-fact:
(1) may be treated as properly executed for purposes of this
subsection; and
(2) shall be so treated if it sets forth a confidential and
unique identification number or other mark furnished by
the Company to the stockholder for the purposes of a
particular meeting or transaction.
(d) Revocation. A proxy, unless coupled with an interest, shall
be revocable at will, notwithstanding any other agreement or
any provision in the proxy to the contrary, but the
revocation of a proxy shall not be effective until written
notice thereof has been given to the Secretary of the
- 1 -
<PAGE>
Company. An unrevoked proxy shall not be valid after three
years from the date of its execution unless a longer time is
expressly provided therein.
A proxy shall not be revoked by the death or incapacity of
the maker unless, before the vote is counted or the authority
is exercised, written notice of the death or incapacity is
given to the Secretary of the Company.
(e) Expenses. The Company shall pay the reasonable expenses of
solicitation of votes, proxies or consents of stockholders by
or on behalf of the Board of Directors or its nominees for
election to the Board, including solicitation by professional
proxy solicitors and otherwise.
(f) Voting by Fiduciaries and Pledgees. Shares of the Company
standing in the name of a trustee or other fiduciary and
shares held by an assignee for the benefit of creditors or by
a receiver may be voted by the trustee, fiduciary, assignee
or receiver. A stockholder whose shares are pledged shall be
entitled to vote the shares until the shares have been
transferred into the name of the pledgee, or a nominee of the
pledgee, but nothing in this section shall affect the
validity of a proxy given to a pledgee or nominee.
(g) Voting by Joint Holders of Shares. Where shares of the
Company are held jointly or as tenants in common by two or
more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in person
or by proxy, all of the shares standing in the names of
such persons shall be deemed to be represented for the
purpose of determining a quorum and the Company shall
accept as the vote of all the shares the vote cast by a
joint owner or a majority of them; and
(2) if the persons are equally divided upon whether the
shares held by them shall be voted or upon the manner of
voting the shares, the voting of the shares shall be
divided equally among the persons without prejudice to
the rights of the joint owners or the beneficial owners
thereof among themselves.
(3) However, if there has been filed with the Secretary of
the Company a copy, certified by an attorney at law to
be correct, of the relevant portions of the agreement
under which the shares are held or the instrument by
which the trust or estate was created or the order of
court appointing them or of an order of court directing
the voting of the shares, the persons specified as
having such voting power in the document latest in date
of operative effect so filed, and only those persons,
shall be entitled to vote the shares but only in
accordance therewith.
(h) Voting by Corporations. Any corporation that is a
stockholder of the Company may vote at meetings of
stockholders of this Company by any of its officers or
agents, or by proxy appointed by any officer or agent, unless
some other person, by resolution of the Board of Directors of
the other corporation or a provision of its articles or
- 2 -
<PAGE>
bylaws, a copy of which resolution or provision certified to
be correct by one of its officers has been filed with the
Secretary of this Company, is appointed its general or
special proxy in which case that person shall be entitled to
vote the shares.
Section 3. Quorum. Any number of stockholders together holding
at least a majority of the stock issued and outstanding of the class or
classes entitled to vote, who shall be present in person or represented by
proxy at any meeting (other than an adjourned meeting as specified in
Article I, Section 8, herein) duly called, shall constitute a quorum for
the transaction of business, except as may be otherwise provided by law.
The stockholders present at a duly organized meeting can continue to do
business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 4. Adjournment of Meetings. If less than a quorum shall
be in attendance at the time for which the meeting shall have been called,
the meeting may be adjourned from time to time by a majority vote of the
stockholders present or represented, without any notice other than an
announcement at the meeting, until a quorum shall attend. Any meeting at
which a quorum is present may also be adjourned, in like manner, for such
time, or upon such call, as may be determined by vote.
Section 5. Annual Election of Directors. The Board of Directors
may fix and designate the date and time of the Annual Meeting of
Stockholders for the election of directors and the transaction of other
business. If no such date and time is fixed and designated by the Board,
the meeting for any calendar year shall be held on the second Wednesday in
May at an hour to be named in the notice. At each Annual Meeting, the
stockholders entitled to vote shall, as provided in Section 2 of this
Article, by ballot, elect a Board of Directors, and they may transact such
other corporate business as shall come before the meeting. The candidates
receiving the highest number of votes from each class or group of classes,
if any, entitled to elect directors separately up to the number of
directors to be elected by the class or group of classes shall be elected.
If at any meeting of stockholders, directors of more than one class are to
be elected, each class of directors shall be elected in a separate
election.
Section 6: Special Meetings. How Called. Special meetings of
the stockholders for any purpose or purposes, may be called at any time by
the Board, upon written request delivered to the Secretary of the Company.
In addition, an "interested stockholder" (as defined in section 2553 of the
Pennsylvania Business Corporation Law as it may from time to time be
amended) may, upon written request delivered to the Secretary of the
Company, call a special meeting for the purpose of approving a business
combination under either subsection (3) or (4) of section 2555. Any
request for a special meeting of stockholders shall state the purpose or
purposes of the proposed meeting. Upon receipt of any such request, it
shall be the duty of the Secretary to give notice, in a manner consistent
with these Bylaws, of a special meeting of the stockholders to be held at
such time as the Secretary may fix, which time may not be, if the meeting
is called pursuant to a statutory right, more than sixty (60) days after
receipt of the request. If the Secretary shall neglect or refuse to fix
the date of the meeting and give notice thereof, the person or persons
calling the meeting may do so. Business transacted at any special meeting
shall be confined to the business stated in the notice.
Section 7. Manner of Voting at Stockholders' Meetings. At all
meetings of stockholders, all questions, except the question of an
- 3 -
<PAGE>
amendment to the Bylaws, and the election of directors, and all such other
questions, the manner of deciding which is especially regulated by statute,
shall be determined by a majority vote of the stockholders entitled to vote
present in person or represented by proxy; provided, however, that any
qualified voter may demand a stock vote, and in that case, such stock vote
shall immediately be taken.
Section 8. Notice of Stockholders' Meetings. Written notice of
every meeting of the stockholders stating the place, the date and hour
thereof and the matters to be acted on at such meeting, shall be given in a
manner consistent with the applicable provisions of section 14 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder, or any successor act or regulation (the "Exchange Act"), by, or
at the direction of, the Secretary of the Company or, in the absence of the
Secretary of the Company any Assistant Secretary of the Company, at least
twenty (20) days prior to the day named for a meeting, to each stockholder
entitled to vote thereat on the date fixed as a record date in accordance
with these Bylaws or, if no record date be fixed, then of record at the
close of business on the 50th day next preceding the day of the meeting, at
such address as appears on the transfer books of the Company. Any notice
of any meeting of stockholders shall state that, for purposes of any
meeting that has been previously adjourned for one or more periods
aggregating at least fifteen (15) days because of an absence of a quorum,
the stockholders entitled to vote who attend such a meeting, although less
than a quorum pursuant to Article 1, Section 3 of these Bylaws, shall
nevertheless constitute a quorum for the purpose of acting upon any matter
set forth in the original notice of the meeting that was so adjourned.
Notice or other communications need not be sent to any stockholder with
whom the Company has been unable to communicate for more than twenty-four
(24) consecutive months because communications to the stockholder are
returned unclaimed or the stockholder has otherwise failed to provide the
Company with a current address. Whenever the stockholder provides the
Company with a current address, the Company shall commence sending notices
and other communications to the stockholder in the same manner as to the
other stockholders.
Section 9. Nominations of Directors. (Effective immediately
after the 1995 Annual Meeting) Nominees for election to the Board shall be
selected by the Board or a committee of the Board to which the Board has
delegated the authority to make such selections pursuant to these Bylaws.
The Board or such committee, as the case may be, will consider written
recommendations from stockholders for nominees for election to the Board
provided any such recommendation, together with (i) such information
regarding each nominee as would be required to be included in a proxy
statement filed pursuant to the Exchange Act, (ii) a description of any
arrangements or understandings among the recommending stockholder and each
nominee and any other person with respect to such nomination, and (iii) the
consent of each nominee to serve as a director of the Company if so
elected, is received by the Secretary of the Company, in the case of an
annual meeting of stockholders, not later than the date specified in the
most recent proxy statement of the Company as the date by which stockholder
proposals for consideration at the next annual meeting of stockholders must
be received, and, in the case of a special meeting of stockholders, not
later than the tenth day after the giving of notice of such meeting. Only
persons duly nominated for election to the Board in accordance with this
Section 9 and persons with respect to whose nominations proxies have been
solicited pursuant to a proxy statement filed pursuant to the Exchange Act
shall be eligible for election to the Board.
ARTICLE II
DIRECTORS
- 4 -
<PAGE>
Section 1. First Meeting. The newly elected directors may hold
their first meeting for the purpose of organization and the transaction of
business, if a quorum be present, immediately after the Annual Meeting of
Stockholders, or the time and place of such meeting may be fixed by consent
in writing of all the directors.
Section 2. Election of Officers. At such meeting the directors
shall elect a President, one or more Vice Presidents, a Treasurer and a
Secretary, who need not be directors. The directors may also elect such
other officers as provided in Article III, Section 1. of these Bylaws.
Such officers shall hold office until the next annual election of officers
and until their successors are elected and qualify, unless removed by the
Board of Directors as provided in Section 8 of Article III of these Bylaws.
Section 3. Regular Meetings. Regular meetings of the directors
may be held without notice at such places and times as shall be determined
from time to time by resolution of the directors.
Section 4. Special Meetings. How called. Notice. Special
meetings of the Board may be called by either the President, the Secretary,
the Chairman of the Executive Committee or by the Secretary pursuant to the
written request of any two directors, upon forty-eight (48) hours' notice
afforded by either telephone, telegraph, facsimile or personal notice, or
upon three (3) days' notice afforded by mail.
Section 5. Number and Quorum. The number of directors shall be
not less than three (3) nor more than fifteen (15). Within such limits,
the number of directors may be increased or decreased by the Board of
Directors from time to time without a vote of the stockholders. The
directors shall be elected by the stockholders, at the Annual Meeting of
stockholders, in each year, to hold office for the term of one year and
until their successors are chosen. A majority of the directors in office
shall constitute a quorum for the transaction of business. Directors need
not be stockholders.
Section 6. Place of Meeting. The directors may hold their
meetings and have one or more offices, and keep the books of the Company,
outside the State of Pennsylvania, at any office or offices of the Company,
or at any other place, as they may from time to time by resolution
determine.
Section 7. Powers of Directors. The Board of Directors shall
have all the necessary powers for the management of the business of the
Company, and subject to the restrictions imposed by law, or by these
Bylaws, may exercise all the powers of the Corporation.
Section 8. Vacancies. Vacancies occurring in the membership of
the Board of Directors, from whatever cause arising, shall be filled by a
majority vote of the remaining directors, and in case of any increase in
the number of directors, the additional directors authorized by such
increase shall be elected by a majority vote of the directors in office,
although less than a quorum.
Section 9. Removal of Directors. Any one or more of the
directors may be removed, either with or without cause, at any time, by a
majority vote of the stockholders entitled to vote at any regular or
special meeting. The successor or successors of any director or directors
so removed shall be elected by the remaining directors.
- 5 -
<PAGE>
Section 10. Compensation of Directors. Directors and members of
any committee of the Board of Directors, except full-time officers and
employees of the Company, shall be entitled to such reasonable compensation
for their services as directors and members of any such committee as shall
be fixed from time to time by resolution of the Board of Directors, and
shall also be entitled to reimbursement for any reasonable expenses
incurred in attending such meetings. The compensation of directors may be
paid on such basis as is determined in the resolution of the Board of
Directors.
Section 11. Executive Committee and Other Committees. How
Appointed. The directors may by a resolution adopted by a majority of the
directors in office appoint from their number an Executive Committee of
three or more members and other Committees of one or more members. The
Committees may make their own rules of procedure and shall meet where and
as provided by such rules, or by a resolution of the directors. A majority
shall constitute a quorum, but in every case the affirmative vote of a
majority of all the members of the committee shall be necessary to the
adoption of any resolution.
Section 12. Executive Committee. Powers. During the intervals
between the meetings of the directors, the Executive Committee shall have
and may exercise all the powers of the directors in the management of the
business and affairs of the Company, including power to authorize the seal
of the Company to be affixed to all papers which may require it, in such
manner as such committee shall deem best for the interests of the Company,
in all cases in which specific directions shall not have been given by the
directors. Neither the Executive Committee or any other committee of the
Board of Directors created by these Bylaws nor the Board of Directors shall
have any power or authority as to the following:
(i) the submission to stockholders of any action requiring
approval of stockholders under the Pennsylvania Business Corporation Law.
(ii) the creation or filling of vacancies in the Board of
Directors.
(iii) the adoption, amendment or repeal of the Bylaws.
(iv) the amendment or repeal of any resolution of the Board that
by its terms is amendable or repealable only by the Board.
(v) action on matters committed by the Bylaws or resolution of
the Board of Directors to another committee of the Board.
Section 13. Meeting by Telephonic Conference. Any meeting of the
Board of Directors or of a committee thereof, including the Executive
Committee, may be held in which any one or more or all of the directors or
participants may participate as if present in person, by means of
conference telephone or similar communication equipment in a manner by
which all persons participating in the meeting can hear each other.
Section 14. Substitute Committee Members. The Board may
designate one or more directors as alternate members of any committee who
may replace any absent or disqualified member at any meeting of the
committee or for the purposes of any written action by the committee. In
the absence or disqualification of a member and alternate member or members
of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another director to act at the meeting in
the place of the absent or disqualified member.
Section 15. Personal Liability of Directors. To the fullest
extent that the laws of the Commonwealth of Pennsylvania, as now in effect
or as hereafter amended, permit elimination or limitation of the liability
of directors, no director of the Company shall be personally liable for
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<PAGE>
monetary damages as such for any action taken, or any failure to take any
action, as a director. Further, any amendment or repeal of this Section 15
which has the effect of increasing director liability shall operate
prospectively only, and shall not affect any action taken, or any failure
to act, prior to its adoption.
Section 16. Action by Consent of Directors. Any action required
or permitted to be taken at a meeting of the Board or of a committee of the
Board may be taken without a meeting if, prior or subsequent to the action,
a consent or consents in writing setting forth the action so taken shall be
signed by all of the directors in office or the members of the committee,
as the case may be, and filed with the Secretary of the Company.
ARTICLE III
OFFICERS
Section 1. Required Officers of the Company. The officers of the
Company shall be a Chairman of the Board of Directors, a President, one or
more Vice Presidents, a Secretary and a Treasurer, one or more Assistant
Secretaries, and one or more Assistant Treasurers. One person may hold any
two offices except the office of President and Vice President. The Board
of Directors may appoint such other officers as from time to time they may
determine. All officers of the Company, as between themselves and the
Company, shall have such authority and perform such duties in the
management of the Company as may be provided by or pursuant to the Board of
Directors, or as may be determined by or pursuant to these Bylaws.
Section 1A. Chairman of the Board of Directors. The Chairman of
the Board of Directors shall be a member of the Board of Directors. He
shall preside as Chairman at all meetings of the stockholders and of the
Board of Directors, and shall perform such other duties as are specified in
these Bylaws or as are usually performed by a Chairman of the Board of
Directors, or as from time to time shall be assigned to him by the Board of
Directors. In the absence of, or at the request of, the Chairman of the
Board of Directors, the Board of Directors is authorized to designate a
Chairman for the Annual Meeting or special meetings.
Section 2. President. The President shall be the Chief Executive
Officer of the Company and shall have general management and control of the
business and affairs of the Company, subject to the direction of the Board
of Directors, and he shall generally do and perform all acts incident to
the office of the President, or which are authorized or required by law.
The President shall have power to call special meetings of the stockholders
or directors for any purpose or purposes, and when authorized by the Board
of Directors or these Bylaws shall make and sign contracts and agreements
in the name of and on behalf of the Company.
Section 3. Vice Presidents. Each Vice President shall have such
powers and shall perform such duties as may be assigned to him by the
President or the Board of Directors. In case of the absence or disability
of the President, the duties of the office of the President shall be
performed by the Vice Presidents in the order of priority established by
the Board, and unless and until the Board of Directors shall otherwise
direct.
Section 4. Secretary. The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and directors, and all other
notices required by law or by these Bylaws, and in case of his absence or
refusal or neglect so to do, any such notice may be given by any person
thereunto directed by the President, or by the directors or stockholders
upon whose request the meeting is called, as provided in these Bylaws. He
- 7 -
<PAGE>
shall record all the proceedings of the meetings of the stockholders and of
the directors in a book to be kept for that purpose, and shall perform such
other duties as may be assigned to him by the directors or the President.
He shall have custody of the seal of the Company and shall affix the same
to all instruments requiring it, when authorized by the directors or the
President, and attest the same.
Section 5. Assistant Secretary. The Board of Directors may
appoint an Assistant Secretary or more than one Assistant Secretary. Each
Assistant Secretary shall have such powers and shall perform such duties as
may be assigned to him by the Board of Directors or the President.
Section 6. Treasurer. The Treasurer shall have the custody of
all funds, securities, evidences of indebtedness and other valuable
documents of the Company; he shall receive and give or cause to be given
receipts and acquittances for moneys paid in on account of the Company and
shall pay out of the fund on hand all just debts of the Company, of
whatever nature upon maturity of the same; he shall enter or cause to be
entered in books of the Company to be kept for that purpose full and
accurate accounts of all moneys received and paid out on account of the
Company, and he shall perform all the other duties incident to the office
of the Treasurer. If the Board of Directors so determine, he shall give
the Company a bond for the faithful discharge of his duties in such amount
and with such security as the Board shall prescribe.
Section 7. Assistant Treasurer. The Board of Directors may
appoint an Assistant Treasurer or more than one Assistant Treasurer. Each
Assistant Treasurer shall have such powers and shall perform such duties as
may be assigned to him by the Board of Directors or the President.
Section 8. Removal of Officers and Agents. Any officer or agent
of the Company may be removed by the Board of Directors with or without
cause. The removal shall be without prejudice to the contract rights, if
any, of any person so removed. Election or appointment of an officer or
agent shall not of itself create contract rights.
ARTICLE IV
CAPITAL STOCK
Section 1. Issue of Certificates of Stock. Certificates of the
shares of the capital stock of the Company shall be in such form as shall
be approved by the Board of Directors. Each stockholder shall be entitled
to a certificate of his stock under the seal of the Company, executed, by
facsimile or otherwise, by or on behalf of the Company, by the President or
a Vice President, and also by the Treasurer or an Assistant Treasurer. In
case any officer who has signed or whose facsimile signature has been
placed upon any share certificate shall have ceased to be such officer,
because of death, resignation or otherwise, before the certificate is
issued, it may be issued by the Company with the same effect as if the
officer had not ceased to be such at the time of issue. No stock
certificate shall be valid unless countersigned and registered in such
manner, if any, as the directors shall by resolution prescribe.
Section 2. Transfer of Shares. The shares of stock of the
Company shall be transferable upon its books by the holders thereof in
person or by their duly authorized attorneys or legal representatives, and
upon such transfer the old certificates shall be surrendered to the Company
by the delivery thereof to the person in charge of the stock and transfer
books and ledgers, or to such other person as the directors may designate,
by whom they shall be cancelled, and new certificates shall thereupon be
- 8 -
<PAGE>
issued. A record shall be made of each transfer, and a duplicate thereof
mailed to the Pennsylvania office of the Company.
Section 3. Dividends. The directors may declare dividends from
the surplus or net profits arising from the business of the Company as and
when they deem expedient. Before declaring any dividend, there may be
reserved out of the accumulated profits such sum or sums as the directors
from time to time, in their discretion, think proper for working capital or
as a reserve fund to meet contingencies or for equalizing dividends, or for
such other purposes as the directors shall think conducive to the interest
of the Company.
Section 4. Lost Certificates. If the owner of a share
certificate claims that it has been lost, destroyed, or wrongfully taken,
the Company shall issue a new certificate in place of the original
certificate if the owner so requests before the Company has notice that the
certificate has been acquired by a bona fide purchaser and if the owner has
filed with the Company an indemnity bond and an affidavit of facts
satisfactory to the Board or its designated agent, and has complied with
such other reasonable requirements, if any, as the Board may deem
appropriate.
Section 5. Rules as to Issue of Certificates. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates of stock of
the Company.
Each and every person accepting from the Company certificates of
stock therein shall furnish the Corporation a written statement of his or
her residence or post office address.
Section 6. Holder of Record to be deemed Holder in Fact. The
Company shall be entitled to treat the holder of record of any share or
shares of stock as the holder in fact thereof, and accordingly shall not be
bound to recognize any equitable or other claim to, or interest in, such
share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by law or
by Section 7 of this Article.
Section 7. Shares of Stock Held for Account of Another. The
Board of Directors is authorized to adopt a procedure whereby a stockholder
of the Corporation may certify in writing that all or part of the shares of
stock registered in the name of the stockholder are held for account of a
specified person or persons. The resolution of the Board of Directors that
adopts this certification procedure may include the following:
(1) The class of stockholder who may qualify.
(2) The purpose or purposes for which the certification may be
made.
(3) The form of certification and the information that it should
contain.
(4) The time after the record date within which the certification
must be received by the Corporation, if the certification
concerns a record date.
(5) Any other provisions regarding the certification procedure
that the Board of Directors deems necessary or desirable.
- 9 -
<PAGE>
On receipt by the Corporation of a certification that complies
with the procedure adopted by the Board of Directors, the person specified
in the certification is deemed, for the purpose set forth in the
certification, to be the holder of record of the shares of stock indicated
in the certification in place of the stockholder making the certification.
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Company shall end
on the 31st day of December of each year.
Section 2. Checks, etc. All checks, drafts or orders for the
payment of money shall be signed by such officer(s) or agent(s) as the
directors may designate.
Section 3. Notice and Waiver of Notice. Except as provided in
Article 1 Section 8 of these Bylaws, whenever, under the provisions of the
Pennsylvania Business Corporation Law or of the Articles or of these Bylaws
or otherwise, written notice is required to be given to any person, it may
be given to such person either personally or by sending a copy thereof by
first class or express mail, postage prepaid, telegram (with messenger
service specified), telex, TWX (with answerback received), courier service
(with charges prepaid) or facsimile transmission to his or her address (or
to his or her telex, TWX, or facsimile number) appearing on the books of
the Company or, in the case of directors, supplied by the director to the
Company for the purpose of notice. If the notice is sent by mail,
telegraph or courier service, it shall be deemed to have been given to the
person entitled thereto when deposited in the United States mail or with a
telegraph office or courier service for delivery to that person. A notice
given by telex or TWX shall be deemed to have been given when dispatched.
If mailed at least twenty (20) days prior to the meeting or corporate
action to be taken, notice may be sent by any class of postpaid mail
(including bulk mail). Whenever any notice is required to be given by the
Pennsylvania Business Corporation Law or by the Articles or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to the
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be
transacted nor the purpose of a meeting need be specified in the waiver of
notice of the meeting. Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting, except where any person
attends a meeting for the express purpose of objecting to the transaction
of any business because the meeting was not lawfully called or convened,
and the person so objects at the beginning of the meeting.
Section 4. Inspection of Books. Every stockholder shall, upon
written verified demand stating the purpose thereof, have a right to
examine, in person or by agent or attorney, during the usual hours for
business for any proper purpose, the share register books and records of
account, and records of the proceedings of the incorporators, stockholders
and directors and to make copies or extracts therefrom. A proper purpose
shall mean a purpose reasonably related to the interest of the person as a
stockholder. In every instance where an attorney or other agent is the
person who seeks the right of inspection, the demand shall be accompanied
by a verified power of attorney or other writing that authorizes the
attorney or other agent to so act on behalf of the stockholder. The demand
shall be directed to the Company at its registered office in the
Commonwealth of Pennsylvania or at its principal place of business wherever
situated.
- 10 -
<PAGE>
Section 5. Record date. The Board of Directors may fix a time
prior to the date of any meeting of stockholders as a record date for the
determination of the stockholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be
not more than 90 days prior to the date of the meeting of stockholders.
Only stockholders of record on the date fixed shall be so entitled
notwithstanding any transfer of shares on the books of the Company after
any record date fixed as provided in this subsection. The Board of
Directors may similarly fix a record date for the determination of
stockholders of record for any other purpose. When a determination of
stockholders for a record date has been made as provided in this Section
for the purpose of a meeting, such determination shall apply to any
adjournments thereof unless the Board fixes a new record date for the
adjourned meeting.
- 11 -
<PAGE>
ARTICLE VI
AMENDMENT AND REPEAL
Section 1. Amendment and Repeal of Bylaws. The stockholders by
the affirmative vote of the holders of a majority of the stock issued and
outstanding of the class or classes entitled to vote, may at any meeting,
provided the substance of the proposed amendment shall have been stated in
the notice of the meeting, amend, alter or repeal any of these Bylaws.
Section 2. Amendments By Directors. Except as prohibited by law,
the directors, by the affirmative vote of a majority of the Board, may at
any meeting amend, alter or repeal these Bylaws, in whole or in part.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Except as prohibited by
law, every director and officer of the Company shall be entitled as of
right to be indemnified by the Company against reasonable expense and any
liability paid or incurred by such person in connection with any actual or
threatened claim, action, suit or proceeding, civil, criminal,
administrative, investigative or other, whether brought by or in the right
of the Company or otherwise, in which he or she may be involved, as a party
or otherwise, by reason of such person being or having been a director or
officer of the Company or by reason of the fact that such person is or was
serving at the request of the Company as a director, officer, employee,
fiduciary or other representative of another corporation, partnership,
joint venture, trust, employee benefit plan or other entity (such claim,
action, suit or proceeding hereinafter being referred to as "Action").
Such indemnification shall include the right to have expenses incurred by
such person in connection with an Action paid in advance by the Company
prior to final disposition of such Action, subject to such conditions as
may be prescribed by law. Persons who are not directors or officers of the
Company may be similarly indemnified in respect of service to the Company
or to another such entity at the request of the Company to the extent the
Board of Directors at any time designates such person as entitled to the
benefits of this Section. As used herein, "expense" shall include fees and
expenses of counsel selected by such person; and "liability" shall include
amounts of judgments, excise taxes, fines and penalties, and amounts paid
in settlement.
Section 2. Right of Claimant to Bring Suit. If a claim for
indemnification by any person eligible to be indemnified under Section 1 is
not paid in full by the Company within 30 days after a written claim has
been received by the Company, the claimant may at any time thereafter bring
suit against the Company to recover the unpaid amount of the claim, and, if
successful in whole or in part, the claimant shall also be entitled to be
paid the expense of prosecuting such claim. It shall be a defense to any
such suit that the conduct of the claimant was such that under Pennsylvania
law the Company would be prohibited from indemnifying the claimant for the
amount claimed, but the burden of proving such defense shall be on the
Company. Neither the failure of the Company (including its Board of
Directors, independent legal counsel and its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the claimant is proper in the circumstances because the conduct of the
claimant was not such that indemnification would be prohibited by law, nor
an actual determination by the Company (including its Board of Directors,
independent legal counsel or its stockholders) that the conduct of the
claimant was such that indemnification would be prohibited by law, shall be
a defense to the suit or create a presumption that the conduct of the
claimant was such that indemnification would be prohibited by law.
- 12 -
<PAGE>
Section 3. Insurance and Funding. The Company may purchase and
maintain insurance to protect itself and any person eligible to be
indemnified hereunder against any liability or expense asserted or incurred
by such person in connection with any Action, whether or not the Company
would have the power to indemnify such persons against such liability or
expense by law or under the provisions of this Article VII. The Company
may create a trust fund, grant a security interest, cause a letter of
credit to be issued or use other means (whether or not similar to the
foregoing) to ensure the payment of such sums as may become necessary to
effect indemnification as provided herein.
Section 4. Non-exclusivity; Nature and Extent of Rights. The
right of indemnification provided for herein (1) shall not be deemed
exclusive of any other rights, whether now existing or hereafter created,
to which those seeking indemnification hereunder may be entitled under any
agreement, by-law or charter provision, vote of stockholders or directors
or otherwise, (2) shall be deemed to create contractual rights in favor of
persons entitled to indemnification hereunder, (3) shall continue as to
persons who have ceased to have the status pursuant to which they were
entitled or were designated as entitled to indemnification hereunder and
shall inure to the benefit of the heirs and legal representatives of
persons entitled to indemnification hereunder and (4) shall be applicable
to Actions commenced after the adoption hereof, whether arising from acts
or omissions occurring before or after the adoption hereof. The right of
indemnification provided for herein may not be amended, modified or
repealed so as to limit in any way the indemnification provided for herein
with respect to any acts or omissions occurring prior to the effective date
of any such amendment, modification or repeal.
ARTICLE VIII
EXCEPTIONS TO PENNSYLVANIA BUSINESS CORPORATION LAW
Section 1. Control Share. Pursuant to Section 2561(b)(2), the
provisions of Subchapter G - Control Share Acquisitions of Chapter 25 of
the Pennsylvania Business Corporation Law shall not be applicable to PEI.
Section 2. Disgorgement of Profits. Pursuant to Section
2571(b)(2), the provisions of Subchapter H - Disgorgement by Certain
Controlling Shareholders Following Attempts to Acquire Control of Chapter
25 of the Business Corporation Law shall not be applicable to PEI.
- 13 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENTS OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000077231
<NAME> PENNSYLVANIA ENTERPRISES INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 569,071,000
<OTHER-PROPERTY-AND-INVEST> 6,882,000
<TOTAL-CURRENT-ASSETS> 75,000,000
<TOTAL-DEFERRED-CHARGES> 94,424,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 745,377,000
<COMMON> 55,539,000
<CAPITAL-SURPLUS-PAID-IN> 48,008,000
<RETAINED-EARNINGS> 68,465,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 568,992,000
33,615,000
1,760,000
<LONG-TERM-DEBT-NET> 361,605,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,730,000
80,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 172,575,000
<TOT-CAPITALIZATION-AND-LIAB> 745,377,000
<GROSS-OPERATING-REVENUE> 234,723,000
<INCOME-TAX-EXPENSE> 11,140,000
<OTHER-OPERATING-EXPENSES> 179,892,000
<TOTAL-OPERATING-EXPENSES> 191,032,000
<OPERATING-INCOME-LOSS> 43,691,000
<OTHER-INCOME-NET> 202,000
<INCOME-BEFORE-INTEREST-EXPEN> 43,893,000
<TOTAL-INTEREST-EXPENSE> 26,437,000
<NET-INCOME> 17,456,000
4,639,000
<EARNINGS-AVAILABLE-FOR-COMM> 12,817,000
<COMMON-STOCK-DIVIDENDS> 12,002,000
<TOTAL-INTEREST-ON-BONDS> 18,891,000
<CASH-FLOW-OPERATIONS> 35,901,000
<EPS-PRIMARY> 2.17
<EPS-DILUTED> 2.17
</TABLE>
