PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine
months ended September 30, 1995 and 1994. . . . . . . . . 2
Consolidated Balance Sheets as of September 30, 1995,
and December 31, 1994. . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1995 and 1994 . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 21
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995* 1994* 1995* 1994*
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 12,119 $ 14,356 $ 105,540 $ 121,157
Cost of gas 4,866 6,552 59,147 71,366
OPERATING MARGIN 7,253 7,804 46,393 49,791
OTHER OPERATING EXPENSES:
Operation 5,062 5,316 16,342 16,620
Maintenance 1,452 1,053 3,732 3,247
Depreciation 1,785 1,670 5,361 5,010
Income taxes (2,845) (2,319) 447 2,643
Taxes other than income taxes 1,399 1,569 7,934 8,568
Total other operating expenses 6,853 7,289 33,816 36,088
OPERATING INCOME 400 515 12,577 13,703
OTHER INCOME, NET 139 18 550 212
INCOME BEFORE INTEREST CHARGES 539 533 13,127 13,915
INTEREST CHARGES:
Interest on long-term debt 3,384 3,244 10,232 9,147
Other interest 643 310 1,485 916
Allowance for borrowed funds used
during construction (19) (8) (40) (18)
Total interest charges 4,008 3,546 11,677 10,045
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,469) (3,013) 1,450 3,870
DISCONTINUED OPERATIONS (Note 2):
Income from discontinued operations - 2,915 2,127 7,639
Estimated loss on disposal of discontinued
operations, net of anticipated income
during the phase-out period of $6,855,000
(net of related income taxes of $5,316,000) - - (5,831) -
Income (loss) with respect to discontinued
operations - 2,915 (3,704) 7,639
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (3,469) (98) (2,254) 11,509
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 690 1,025 2,073 3,669
NET INCOME (LOSS) $ (4,159) $ (1,123) $ (4,327) $ 7,840
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations $ (.72) $ (.74) $ (.11) $ .03
Discontinued operations - .53 (.65) 1.41
Net income (loss) before premium on
redemption of subsidiary's preferred stock (.72) (.21) (.76) 1.44
Premium on redemption of subsidiary's
preferred stock - - - (.10)
Earnings (loss) per share of common stock $ (.72) $ (.21) $ (.76) $ 1.34
Weighted average shares outstanding 5,754,607 5,445,740 5,715,294 5,428,865
Cash dividends per share $ .55 $ .55 $ 1.65 $ 1.65
*See Note 2 regarding discontinued operations and restatement of prior period consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1995* 1994*
(Thousands of Dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT:
At original cost, less acquisition
adjustments of $386,000 $ 293,279 $ 284,080
Accumulated depreciation (76,680) (74,408)
216,599 209,672
OTHER PROPERTY AND INVESTMENTS 4,393 3,481
CURRENT ASSETS:
Cash 762 330
Restricted cash - common stock subscribed
(Note 4) - 2,532
Accounts receivable -
Customers 8,118 16,883
Others 513 1,474
Reserve for uncollectible accounts (1,086) (937)
Accrued utility revenues 1,573 9,004
Materials and supplies, at average cost 2,955 2,797
Gas held by suppliers, at average cost 20,155 20,025
Natural gas transition costs collectible 4,350 4,708
Deferred cost of gas and supplier refunds, net - 3,767
Prepaid expenses and other 5,308 1,483
42,648 62,066
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible 30,174 31,696
Natural gas transition costs collectible 1,668 4,099
Other 3,062 3,131
Unamortized debt expense 2,950 3,539
Other 3,218 3,552
41,072 46,017
NET ASSETS OF DISCONTINUED OPERATIONS 195,595 203,196
TOTAL ASSETS $ 500,307 $ 524,432
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1995* 1994*
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common shareholders' investment (Notes 4 and 5) $ 161,632 $ 172,012
Preferred stock -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,680 1,760
Long-term debt 154,900 220,705
351,827 428,092
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption 57,491 3,290
Note payable to bank 5,000 -
Accounts payable 14,049 17,781
Deferred cost of gas and supplier refunds, net 2,468 -
Accrued general business and realty taxes 703 3,315
Accrued income taxes 531 3,136
Accrued interest 2,382 2,850
Accrued natural gas transition costs 2,158 2,356
Other 2,225 2,398
87,007 35,126
DEFERRED CREDITS:
Deferred income taxes 47,861 46,600
Accrued natural gas transition costs 1,631 3,250
Unamortized investment tax credits 4,982 5,110
Operating reserves 2,236 2,383
Other 4,763 3,871
61,473 61,214
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $ 500,307 $ 524,432
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995* 1994*
(Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations, net of
subsidiary's preferred stock dividends $ (623) $ 201
Effects of noncash charges to income -
Depreciation 5,395 5,030
Deferred income taxes, net 205 1,314
Provisions for self insurance 889 1,064
Other, net 1,945 2,435
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 19,838 16,743
Gas held by suppliers (130) 4,657
Accounts payable (3,696) (7,773)
Deferred cost of gas and supplier refunds, net 7,207 147
Other current assets and liabilities, net (10,243) (4,618)
Other operating items, net 1,027 (3,055)
Net cash provided by continuing operations 21,814 16,145
Net cash provided by discontinued operations (Note 2) 3,764 1,621
Net cash provided by operating activities 25,578 17,766
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (14,907) (13,294)
Other, net 2,560 88
Net cash used for investing activities (12,347) (13,206)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 3,376 1,214
Common stock subscribed - 1,678
Redemption of preferred stock of PG&W (80) (15,080)
Dividends on common stock (9,430) (8,955)
Issuance of long-term debt - 20,000
Repayment of long-term debt (3,535) (1,054)
Net decrease in bank borrowings (3,125) (3,463)
Other, net (5) (1,259)
Net cash used for financing activities (12,799) (6,919)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 432 (2,359)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 330 2,749
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 762 $ 390
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 19,634 $ 17,186
Income taxes $ 10,018 $ 5,828
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The interim consolidated financial statements included herein for
Pennsylvania Enterprises, Inc. (the "Company") and its subsidiaries:
Pennsylvania Gas and Water Company, Pennsylvania Energy Marketing Company,
Pennsylvania Energy Resources, Inc. and Theta Land Corporation, have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather on the Company's operating utility, Pennsylvania Gas and Water Company
("PG&W"). However, in the opinion of management, all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the results for the
interim periods have been reflected in the consolidated financial statements.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K.
(2) DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PG&W signed a definitive agreement (the
"Agreement") with American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, providing for the sale to Pennsylvania-American of
substantially all of the assets, properties and rights of PG&W's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which currently is
expected to take place in late December, 1995, or early January, 1996. Until
the closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period to the date of closing (which
has been assumed to be December 31, 1995). The sale will involve a gain for
income tax purposes, primarily because of the accelerated depreciation that has
been claimed by PG&W with respect to the water utility plant that is being sold.
It is currently estimated that the income taxes payable on the sale, for which
deferred income taxes have previously been provided, will be approximately $55
million.
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The net cash proceeds from the sale of approximately $201 million, after the
payment of income taxes, will be used by the Company and PG&W to retire debt, to
repurchase stock and for working capital for their continuing operations. After
the sale, the principal assets of the Company and PG&W will consist of PG&W's
gas utility operations and approximately 46,000 acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American was
approved by the shareholders of both the Company and PG&W on October 11, 1995.
Completion of the sale remains subject to approval by the Pennsylvania Public
Utility Commission ("PPUC"), approval of certain debt holders of both the
Company and PG&W, and various other regulatory approvals and certain other
conditions.
The accompanying consolidated financial statements reflect PG&W's water
utility operations as "discontinued operations" effective March 31, 1995.
Interest charges of PG&W have been allocated to the discontinued operations
based on the relationship of the gross water utility plant that is being sold to
the total of PG&W's gross gas and water utility plant. This is the same method
as has been utilized by PG&W and the PPUC in establishing the revenue
requirements of both PG&W's gas and water utility operations. None of the
dividends on PG&W's preferred stock nor any of the Company's interest expense
has been allocated to the discontinued operations.
Selected financial information with respect to the discontinued operations
is set forth below:
Net Assets of Discontinued Operations
[CAPTION]
As of As of
September 30, December 31,
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Net utility plant $ 366,313 $ 359,399
Current assets (primarily accounts
receivable and accrued revenues) 13,609 12,141
Deferred charges and other assets 26,498 31,103
Total assets being acquired by
Pennsylvania-American 406,420 402,643
Liabilities being assumed by
Pennsylvania-American
Long-term debt 141,132 141,420
Other 15,497 13,168
156,629 154,588
Net assets being acquired by
Pennsylvania-American 249,791 248,055
Estimated liability for income taxes on
sale of discontinued operations (55,050) (55,542)
Anticipated income from discontinued
operations during the balance of the
phase-out period 854 -
Other net assets of discontinued operations
(written off as of March 31, 1995) - 10,683
Total net assets of discontinued operations $ 195,595 $ 203,196
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Income from Discontinued Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995* 1994
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues $ - $17,507 $15,640 $50,473
Operating expenses, excluding income
taxes
Depreciation - 1,983 1,946 5,947
Other operating expenses - 7,286 6,929 21,971
- 9,269 8,875 27,918
Operating income before income taxes - 8,238 6,765 22,555
Income taxes - 2,148 1,403 5,518
Operating income - 6,090 5,362 17,037
Allocated interest and other charges - 3,175 3,235 9,398
Income from discontinued operations $ - $ 2,915 $ 2,127 $ 7,639
</TABLE>
Net Cash Provided (Used) by Discontinued Operations
[CAPTION]
Nine Months Ended
September 30,
1995* 1994
(Thousands of Dollars)
[S] [C] [C]
Income from discontinued operations $ 2,127 $ 7,639
Noncash charges (credits) to income:
Depreciation 1,946 5,947
Deferred treatment plant costs 145 436
Deferred income taxes 447 3,080
Deferred water utility billings - (4,329)
Changes in working capital, exclusive of cash
and current portion of long-term debt 1,648 (350)
Additions to utility plant (2,276) (13,590)
Utilization of proceeds from issuance of
long-term debt to be assumed by
Pennsylvania-American 1,137 7,203
Repayment of water facility loans (127) (6,708)
Other, net (1,283) 2,293
Net cash provided by discontinued operations $ 3,764 $ 1,621
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG&W's water utility operations for financial statement
purposes.
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(3) RECOVERY OF ORDER 636 TRANSITION COSTS
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that Gas
Transition Costs are subject to recovery through the annual PGC rate filing.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. The remaining
$252,000 of Gas Transition Costs will be recovered by PG&W in its annual PGC
rate that the PPUC has approved effective December 1, 1995.
The PGC Order also indicated that while Non-Gas Transition Costs are not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
such costs are subject to full recovery by local distribution companies through
the filing of a tariff pursuant to either the existing surcharge or base rate
provisions of the Pennsylvania Public Utility Code. By Order of the PPUC
entered August 26, 1994, PG&W began recovering the Non-Gas Transition Costs that
it estimates it will ultimately be billed pursuant to FERC Order 636 through the
billing of a surcharge to its customers effective September 12, 1994. It is
currently estimated that $9.5 million of Non-Gas Transition Costs will be billed
to PG&W, generally over a four-year period extending through the fourth quarter
of 1997, of which $5.6 million had been billed to PG&W and $3.4 million had been
recovered from its customers as of September 30, 1995. PG&W has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
(4) RESTRICTED CASH - COMMON STOCK SUBSCRIBED
On July 28, 1994, the Company implemented a Customer Stock Purchase Plan
(the "Customer Plan") which provides the residential customers of PG&W with a
method of purchasing newly-issued shares of the Company's common stock at a 5%
discount from the market price. On January 3, 1995, the Company issued 45,360
shares of its common stock for an aggregate consideration of $1.2 million with
respect to payments received pursuant to the Customer Plan during the December,
1994, subscription period. The payments so received during December, 1994, are
reflected under captions "Restricted cash - common stock subscribed" and "Common
shareholders' investment" in these consolidated financial statements as of
December 31, 1994. Effective May 9, 1995, the Company suspended the Customer
Plan because of the significant reduction in its capital requirements that will
result from the currently pending sale of PG&W's water utility operations to
Pennsylvania-American.
Through the Company's Dividend Reinvestment and Stock Purchase Plan (the
"DRP"), holders of shares of the Company's common stock may reinvest cash
dividends and/or make cash investments in the common stock of the Company. On
January 3, 1995, the Company issued 51,565 shares of its common stock for an
aggregate consideration of $1.3 million with respect to cash investments made
pursuant to the DRP during the fourth quarter of 1994. The investments so
received during December, 1994, are reflected under the captions "Restricted
cash - common stock subscribed" and "Common shareholders' investment" in these
consolidated financial statements as of December 31, 1994. Effective May 9,
1995, the Company suspended the cash investment feature of the DRP because of
the significant reduction in capital requirements that will result from the
currently pending sale of PG&W's water utility operations to Pennsylvania-
American.
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(5) COMMON STOCK
On April 26, 1995, the Company adopted a Shareholder Rights Plan under the
terms of which each shareholder of record at the close of business on May 16,
1995, received a dividend distribution of one right ("Right" or "Rights") for
each share of common stock held.
Each Right entitles shareholders to purchase from the Company one-half of a
share of common stock. No less than two Rights, and only integral multiples of
two Rights, may be exercised by holders of Rights at an exercise price of $100
per share of common stock (equivalent to $50 for each one-half share of common
stock), subject to certain adjustments. The Rights will become exercisable only
if a person or group acquires 15% or more of the Company's common stock, or
commences a tender or exchange offer which, if consummated, would result in that
person or group owning at least 15% of the common stock. Prior to that time,
the Rights will not trade separately from the common stock.
If a person or group acquires 15% or more of the Company's common stock, all
other holders of Rights will then be entitled to purchase, by payment of the
$100 exercise price upon the exercise of two Rights, the Company's common stock
(or a common stock equivalent) with a value of twice the exercise price. In
addition, at any time after a 15% position is acquired and prior to the
acquisition by any person or group of 50% or more of the outstanding common
stock, the Company's Board of Directors may, at its option, require each
outstanding Right (other than Rights held by the acquiring person or group) to
be exchanged for one share of common stock (or one common stock equivalent).
If, following an acquisition of 15% or more of the Company's common stock,
the Company is acquired by any person in a merger or other business combination
transaction or sells more than 50% of its assets or earning power to any person
(other than the currently pending sale of PG&W's water utility operations to
Pennsylvania-American or, if such sale is not consummated, any other sale of
PG&W's water utility operations, if and as approved by the Company's Board of
Directors), all other holders of Rights will then be entitled to purchase, by
payment of the $100 exercise price upon the exercise of two Rights, common stock
of the acquiring company with a value of twice the exercise price.
The Company may redeem the Rights at $.005 per Right at any time prior to
the time that a person or group has acquired 15% or more of its common stock.
The Rights, which expire on May 16, 2005, do not have voting or dividend rights
and, until they become exercisable, have no dilutive effect on the earnings per
share of the Company.
(6) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W to survey its gas
distribution system to verify the location and spacing of its gas shut off
valves, to add or repair valves where needed and to establish programs for the
periodic inspection and maintenance of all such valves and the verification of
all gas service line information. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PG&W for complying with the Emergency Order. PG&W
does not believe that compliance with the terms of such Order will have a
material adverse effect on its financial position or results of operations.
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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.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PG&W signed a definitive agreement (the
"Agreement") with American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, providing for the sale to Pennsylvania-American of
substantially all of the assets, properties and rights of PG&W's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which currently is
expected to take place in late December, 1995, or early January, 1996. Until
the closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period (which for financial reporting
purposes commenced April 1, 1995) to the date of closing (which has been assumed
to be December 31, 1995).
The net cash proceeds from the sale of approximately $201 million, after the
payment of an estimated $55 million of income taxes, will be used by the Company
and PG&W to retire debt, to repurchase stock and for working capital for their
continuing operations. After the sale, the principal assets of the Company and
PG&W will consist of PG&W's gas utility operations and approximately 46,000
acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American was
approved by the shareholders of both the Company and PG&W on October 11, 1995.
Completion of the sale remains subject to approval by the Pennsylvania Public
Utility Commission ("PPUC"), approval of certain debt holders of both the
Company and PG&W, and various other regulatory approvals and certain other
conditions. Until the closing, PG&W intends to utilize its existing bank lines
of credit for the external financing requirements of the water utility
operations, which the Company believes will be adequate for such purposes.
Operating revenues from PG&W's water utility operations increased by
$645,000 (3.7%) from $17.5 million for the three-month period ended September
30, 1994, to $18.2 million for the three-month period ended September 30, 1995.
This increase in revenues was principally the result of a 3.5% increase in
customer consumption, which the Company believes was attributable to the lower
than normal rainfall experienced in 1995. Operating expenses related to the
water utility operations, excluding income taxes, increased $967,000 (10.4%)
from $9.3 million for the three-month period ended September 30, 1994, to $10.2
million for the three-month period ended September 30, 1995. This increase was
primarily attributable to higher expenses as a result of operational changes and
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increased maintenance necessitated by the lower than normal rainfall during the
quarter. Income taxes with respect to the water utility operations decreased by
$261,000 (12.1%) from $2.1 million in the third quarter of 1994 to $1.9 million
in the third quarter of 1995 due to a lower level of income before income taxes
(for this purpose, operating income net of interest charges) and a decrease in
the Pennsylvania Corporate Net Income Tax rate. As a result of the foregoing,
operating income of the water utility operations decreased $61,000 (1.0%) from
$6.1 million for the three-month period ended September 30, 1994, to $6.0
million for the three-month period ended September 30, 1995. After allocated
interest and other charges, the income from the water utility operations
decreased $86,000 (3.0%) from $2.9 million for the three-month period ended
September 30, 1994, to $2.8 million for the three-month period ended September
30, 1995.
Operating revenues from PG&W's water utility operations remained relatively
unchanged, increasing $129,000 (0.3%) from $50.5 million for the nine-month
period ended September 30, 1994, to $50.6 million for the nine-month period
ended September 30, 1995. Operating expenses related to the water utility
operations, excluding income taxes, increased $462,000 (1.7%) from $27.9 million
for the nine-month period ended September 30, 1994, to $28.4 million for the
nine-month period ended September 30, 1995. This increase was primarily the
result of increased maintenance expense as a result of a higher level of leak
repairs in 1995 compared to 1994. Income taxes with respect to the water
utility operations decreased by $395,000 (7.2%) from $5.5 million in the first
nine months of 1994 to $5.1 million in the first nine months of 1995 due to a
lower level of income before income taxes (for this purpose, operating income
net of interest charges) and a decrease in the Pennsylvania Corporate Net Income
Tax rate. As a result of the foregoing, operating income of the water utility
operations increased $62,000 (0.4%) from $17.0 million for the nine-month period
ended September 30, 1994, to $17.1 million for the nine-month period ended
September 30, 1995. After allocated interest and other charges, the income from
the water utility operations for the nine-month periods ended September 30, 1994
and 1995, remained relatively unchanged, decreasing by $25,000 (0.3%).
In accordance with generally accepted accounting principles, the Company's
consolidated financial statements have been restated to reflect PG&W's water
utility operations as "discontinued operations" effective March 31, 1995, and
the following sections of Management's Discussion and Analysis generally relate
only to the Company's continuing operations, which consist primarily of PG&W's
gas utility operations. For additional information regarding the discontinued
operations, see Note 2 of the accompanying Notes to Consolidated Financial
Statements.
-13-
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the Company's consolidated
statements of income as percentages of operating revenues for each of the three
and nine-month periods ended September 30, 1995, and September 30, 1994:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0%
Cost of gas................................ 40.2 45.6 56.0 58.9
OPERATING MARGIN............................. 59.8 54.4 44.0 41.1
OTHER OPERATING EXPENSES:
Operation.................................. 41.8 37.0 15.5 13.7
Maintenance................................ 12.0 7.4 3.5 2.7
Depreciation............................... 14.7 11.6 5.1 4.1
Income taxes............................... (23.5) (16.1) 0.4 2.2
Taxes other than income taxes.............. 11.5 10.9 7.5 7.1
Total other operating expenses........... 56.5 50.8 32.0 29.8
OPERATING INCOME............................. 3.3 3.6 12.0 11.3
OTHER INCOME, NET............................ 1.2 0.1 0.5 0.2
INTEREST CHARGES(1).......................... 33.1 24.7 11.1 8.3
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (28.6) (21.0) 1.4 3.2
INCOME (LOSS) WITH RESPECT TO DISCONTINUED
OPERATIONS................................. - 20.3 (3.5) 6.3
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS............................ (28.6) (0.7) (2.1) 9.5
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... 5.7 7.1 2.0 3.0
NET INCOME (LOSS)............................ (34.3) (7.8) (4.1) 6.5
</TABLE>
(1) None of the Company's interest expense nor any of the subsidiary's
preferred stock dividends has been allocated to the discontinued operations.
Three Months Ended September 30, 1995, Compared
With Three Months Ended September 30, 1994
Operating Revenues. Operating revenues decreased $2.2 million (15.6%) from
$14.4 million for the three-month period ended September 30, 1994, to $12.1
million for the three-month period ended September 30, 1995. This decrease was
primarily the result of a reduction in the purchased gas cost component of
PG&W's tariffs (the "gas cost rate") effective May 16, 1995. See "-Rate
Matters." Also contributing to the decrease was a 106,000 cubic feet (8.4%)
decrease in consumption by residential and commercial heating customers as a
result of 48 (27.6%) fewer heating degree days during the quarter.
Cost of Gas. The cost of gas decreased $1.7 million (25.7%) from $6.6
million for the three-month period ended September 30, 1994, to $4.9 million for
the three-month period ended September 30, 1995, primarily because of the
aforementioned reduction in the gas cost rate effective May 16, 1995 (see "-Rate
Matters") and the switching to transportation service by certain commercial and
industrial customers.
-14-
<PAGE>
Operating Margin. The operating margin decreased $551,000 (7.1%) from $7.8
million in the third quarter of 1994 to $7.3 million in the third quarter of
1995, primarily because of the 106,000 cubic feet (8.4%) decrease in consumption
by residential and commercial heating customers. However, as a percentage of
operating revenues, the margin increased from 54.4% for the quarter ended
September 30, 1994, to 59.8% for the quarter ended September 30, 1995, largely
as a result of a higher average charge per cubic feet to residential and
commercial heating customers because of their lower consumption due to the
warmer weather.
Other Operating Expenses. Other operating expenses decreased $436,000
(6.0%) for the three-month period ended September 30, 1995, compared to the
three-month period ended September 30, 1994. This decrease was attributable to
a number of factors, the most significant of which was a $526,000 (22.7%)
decrease in income taxes. Income taxes decreased from a credit of $2.3 million
in the third quarter of 1994 to a credit of $2.8 million in the third quarter of
1995 because of a decrease in income before income taxes (for this purpose,
operating income net of interest charges) and a reduction in the Pennsylvania
corporate net income tax rate. Also contributing to the decrease in other
operating expenses was a slightly lower level of operation expenses, which
declined $254,000 (4.8%), and a $170,000 (10.8%) decrease in taxes other than
income taxes, primarily as a result of decreased gross receipts tax attributable
to the lower operating revenues. The effects of these decreases were partially
offset by a $399,000 (37.9%) increase in maintenance expenses, principally as a
result of charges relative to the maintenance of gas valves, and increased
depreciation expense of $115,000 (6.9%) as a result of additions to utility
plant. Even though other operating expenses decreased, they increased as a
percentage of operating revenues from 50.8% during the third quarter of 1994 to
56.5% during the third quarter of 1995 because of the relatively greater
decrease in revenues.
Operating Income. As a result of the above, total operating income
decreased by $115,000 (22.3%) from $515,000 for the three-month period ended
September 30, 1994, to $400,000 for the three-month period ended September 30,
1995, and decreased as a percentage of total operating revenues for such periods
from 3.6% in 1994 to 3.3% in 1995, primarily because of the decrease in
operating revenues resulting from the reduction in the gas cost rate and lower
consumption by residential and commercial heating customers.
Interest Charges. Interest charges increased by $462,000 (13.0%) from $3.5
million for the three-month period ended September 30, 1994, to $4.0 million for
the three-month period ended September 30, 1995. This increase was largely
attributable to interest on overcollections of purchased gas costs and higher
levels of bank borrowings. None of the interest expense on borrowings under the
Company's term loan agreement or the Company's senior notes has been allocated
to the discontinued operations.
Income (Loss) From Continuing Operations. The loss from continuing
operations increased $456,000 (15.1%) from $3.0 million for the quarter ended
September 30, 1994, to $3.5 million for the quarter ended September 30, 1995.
This increase in the seasonal loss was largely the result of the matters
discussed above, principally the decrease in operating margin and increase in
interest charges.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $335,000 (32.7%) from $1.0 million for the three-month period ended
September 30, 1994, to $690,000 for the three-month period ended September 30,
1995, as a result of the redemption by PG&W on December 16, 1994, of 150,000
-15-
<PAGE>
shares ($15.0 million) of its 8.90% cumulative preferred stock, $100 par value.
No dividends on preferred stock have been allocated to the discontinued
operations.
Net Income (Loss). The decrease in net income of $3.0 million from a loss
of $1.1 million for the three-month period ended September 30, 1994, to a loss
of $4.2 million for the three-month period ended September 30, 1995, as well as
the decrease in earnings per share of common stock of $.51 from a loss of $.21
per share for the quarter ended September 30, 1994, to a loss of $.72 per share
for the quarter ended September 30, 1995, were largely the result of the
elimination from earnings of the income from discontinued operations during the
phase-out period for those operations. The anticipated income from the
discontinued operations during the quarter ended September 30, 1995, was
recorded as an offset to the estimated loss on the disposal of the discontinued
operations which was recorded as of March 31, 1995. Also contributing to the
decreases in net income and earnings per share for the quarter ended September
30, 1995, was the lower income from continuing operations. The effects of these
factors were partially offset by the reduced dividends on subsidiary's preferred
stock.
Nine Months Ended September 30, 1995, Compared
With Nine Months Ended September 30, 1994
Operating Revenues. Operating revenues decreased $15.6 million (12.9%) from
$121.2 million for the nine-month period ended September 30, 1994, to $105.5
million for the nine-month period ended September 30, 1995. This decrease was
primarily the result of a reduction in the gas cost rate effective May 16, 1995.
See "-Rate Matters." Also contributing to the decrease in revenues was a 1.7
billion cubic feet (10.6%) decrease in sales to residential and commercial
heating customers, caused by a 638 (14.7%) decrease in heating degree days.
There were 3,696 heating degree days (90.7% of normal) during the first nine
months of 1995 compared to 4,334 (106.4% of normal) during the first nine months
of 1994.
Cost of Gas. The cost of gas decreased $12.2 million (17.1%) from $71.4
million for the nine-month period ended September 30, 1994, to $59.1 million for
the nine-month period ended September 30, 1995, primarily because of the
aforementioned reduction in the gas cost rate effective May 16, 1995. See "-
Rate Matters." Also contributing to the decrease was the reduced consumption by
residential and commercial heating customers.
Operating Margin. The operating margin decreased $3.4 million (6.8%) from
$49.8 million in the nine-month period ended September 30, 1994, to $46.4
million in the nine-month period ended September 30, 1995. However, as a
percentage of operating revenues, the margin increased from 41.1% in the first
nine months of 1994 to 44.0% in the first nine months of 1995 primarily as a
result of the higher average charge per cubic foot to residential and commercial
heating customers because of their lower consumption due to the warmer weather.
Other Operating Expenses. Other operating expenses decreased $2.3 million
(6.3%) from $36.1 million for the nine-month period ended September 30, 1994, to
$33.8 million for the nine-month period ended September 30, 1995. This decrease
was primarily the result of a $2.2 million (83.1%) decrease in income taxes from
$2.6 million in the first nine months of 1994 to $447,000 in the first nine
months of 1995 due to a decrease in income before income taxes (for this
purpose, operating income net of interest charges) and a reduction in the
Pennsylvania corporate net income tax rate. Also contributing to the decrease
in other operating expenses was a slightly lower level of operation expenses,
-16-
<PAGE>
which declined $278,000 (1.7%), and a $634,000 (7.4%) decrease in taxes other
than income taxes, primarily because of a decrease in gross receipts tax as a
result of the lower level of operating revenues. The effect of the decreases in
taxes was partially offset by a $485,000 (14.9%) increase in maintenance
expenses, principally as a result of charges relative to the maintenance of gas
valves, and a $351,000 (7.0%) increase in depreciation expense as a result of
additions to utility plant. Notwithstanding the decrease in other operating
expenses, such expenses increased as a percentage of operating revenues from
29.8% during the first nine months of 1994 to 32.0% during the first nine months
of 1995 because of the relatively greater decrease in revenues.
Operating Income. As a result of the above, total operating income
decreased by $1.1 million (8.2%) from $13.7 million for the nine-month period
ended September 30, 1994, to $12.6 million for the nine-month period ended
September 30, 1995. Nonetheless, operating income increased as a percentage of
total operating revenues for such periods from 11.3% in 1994 to 12.0% in 1995,
primarily because of the decrease in the cost of gas as a percentage of
operating revenues, the effect of which was partially offset by the lower levels
of taxes.
Interest Charges. Interest charges increased by $1.6 million (16.2%) from
$10.0 million for the nine-month period ended September 30, 1994, to $11.7
million for the nine-month period ended September 30, 1995. This increase was
largely attributable to interest on overcollections of purchased gas costs and
increased borrowings primarily as a result of the Company's May 31, 1994, term
loan agreement. None of the interest expense on borrowings under the Company's
term loan agreement or the Company's senior notes has been allocated to the
discontinued operations.
Income (Loss) From Continuing Operations. Income from continuing operations
decreased $2.4 million (62.5%) from $3.9 million for the nine months ended
September 30, 1994, to $1.5 million for the nine months ended September 30,
1995. This decrease was largely the result of the matters discussed above,
principally the decrease in operating margin resulting from the lower level of
sales to residential and commercial heating customers. The effect of the
decreased operating margin was partially offset by the lower levels of taxes.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $1.6 million (43.5%) from $3.7 million for the nine-month period ended
September 30, 1994, to $2.1 million for the nine-month period ended September
30, 1995, as a result of the redemption by PG&W on May 31, 1994, of 150,000
shares ($15.0 million) of its 9.50% cumulative preferred stock, $100 par value,
and on December 16, 1994, of 150,000 shares ($15.0 million) of its 8.90%
cumulative preferred stock, $100 par value. No dividends on preferred stock
have been allocated to the discontinued operations.
Net Income (Loss). The decrease in net income (loss) of $12.2 million from
income of $7.8 million for the nine-month period ended September 30, 1994, to a
loss of $4.3 million for the nine-month period ended September 30, 1995, as well
as the decrease in earnings per share of common stock of $2.10 from earnings of
$1.34 per share for the nine months ended September 30, 1994 (after a $.10 per
share charge for the premium on redemption of subsidiary's preferred stock), to
a loss of $.76 per share for the nine months ended September 30, 1995, were
largely the result of the estimated loss (equivalent to $1.02 per share) on the
disposal of discontinued operations, as discussed above. Also contributing to
the decreases in net income and earnings per share for the nine months ended
September 30, 1995, was the lower income from continuing operations. The
effects of these factors were partially offset by the reduced dividends on
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<PAGE>
subsidiary's preferred stock and, in the case of earnings per share, the absence
of any premium on the redemption of subsidiary's preferred stock.
RATE MATTERS
Pursuant to the provisions of the Pennsylvania Public Utility Code (the
"Code") which require that the tariffs of larger gas distribution companies,
such as PG&W, be adjusted on an annual basis to reflect changes in their
purchased gas costs, the PPUC, by Order adopted November 10, 1994, authorized
PG&W to decrease the gas costs contained in its tariffs from $3.74 to $3.68 per
thousand cubic feet effective December 1, 1994. This change in gas rates on
account of purchased gas costs was designed to produce a decrease in annual
revenue of $1.8 million. In accordance with the same provisions of the Code, by
Order adopted May 11, 1995, the PPUC authorized PG&W to decrease the gas costs
contained in its gas tariffs to $2.42 per thousand cubic feet effective May 15,
1995, in order to refund overcollections from customers caused by lower than
anticipated purchased gas costs and the receipt of supplier refunds during 1995.
This change in gas rates on account of purchased gas costs was designed to
produce a decrease in revenue of $8.2 million from its effective date through
December 1, 1995. Additionally, by Order adopted November 9, 1995, the PPUC
authorized PG&W to increase its gas cost rate to $2.75 per thousand cubic feet
effective December 1, 1995. This change in gas rates on account of purchased
gas costs is designed to produce a $9.6 million increase in annual revenue. The
changes in gas rates on account of purchased gas costs have no effect on the
Company's earnings since the changes in revenue are offset by corresponding
changes in the cost of gas.
Effective September 14, 1995, the PPUC adopted regulations that provide for
the quarterly adjustment of the annual 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, these regulations will not have any
material effect on PG&W's financial position or results of operations, and PG&W
will still be required to file an annual purchased gas cost rate. The initial
date that PG&W's purchased gas cost rate is subject to adjustment in accordance
with such regulations is March 1, 1996.
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
Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to
recovery through the annual PGC rate filings made with the PPUC by PG&W and
other larger local gas distribution companies. The PGC Order also indicated
that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition
Costs") are not natural gas costs eligible for recovery under the PGC rate
filing mechanism, such costs are subject to full recovery by local distribution
companies through the filing of a tariff pursuant to either the existing
surcharge or base rate provisions of the Code. The PGC Order further stated
that all such filings would be evaluated on a case-by-case basis.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. The remaining
$252,000 of Gas Transition Costs will be recovered by PG&W in its annual PGC
rate that the PPUC has approved effective December 1, 1995.
By Order of the PPUC entered August 26, 1994, PG&W began recovering the Non-
Gas Transition Costs that it estimates it will ultimately be billed pursuant to
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<PAGE>
FERC Order 636 through the billing of a surcharge to its customers effective
September 12, 1994. It is currently estimated that $9.5 million of Non-Gas
Transition Costs will be billed to PG&W, generally over a four-year period
extending through the fourth quarter of 1997, of which $5.6 million had been
billed to PG&W and $3.4 million had been recovered from its customers as of
September 30, 1995. PG&W has recorded the estimated Non-Gas Transition Costs
that remain to be billed to it and the amounts remaining to be recovered from
its customers.
LIQUIDITY AND CAPITAL RESOURCES
The primary capital needs of the Company are the funding of PG&W's
construction program and the seasonal funding of PG&W's gas purchases and
increases in its customer accounts receivable. PG&W's revenues are highly
seasonal and weather-sensitive, with approximately 75% of its revenues normally
being realized in the first and fourth quarters of the calendar year when the
temperatures in its service area are the coldest.
The cash flow from PG&W's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG&W to use bank borrowings to fund
such expenditures, pending the periodic issuance of stock and long-term debt.
Bank borrowings are also used by PG&W for the seasonal funding of its gas
purchases and increases in customer accounts receivable.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, and also to provide funding required for its
discontinued operations, PG&W has made arrangements for a total of $80.5 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 November 10,
1995, $60.0 million of borrowings were outstanding under the Credit Agreement.
PG&W currently has five additional bank lines of credit with an aggregate
borrowing capacity of $20.5 million which provide for borrowings at interest
rates generally less than prime. Borrowings outstanding under these bank lines
of credit are due and payable at various dates during 1996, the earliest of
which is March 31, 1996. As of November 10, 1995, PG&W had $9.0 million of
borrowings outstanding under these additional bank lines of credit.
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. No long-term debt or capital stock financings were consummated by
either the Company or PG&W during the nine-month period ended September 30,
1995. However, on October 12, 1995, PG&W borrowed $50.0 million (the "Bridge
Loan") pursuant to a term loan agreement (the "Bridge Loan Agreement"), which
matures on November 1, 1996. The interest rate on borrowings under the Bridge
Loan Agreement is generally less than prime. Proceeds from the Bridge Loan,
along with other funds provided by PG&W, were utilized on October 13, 1995, to
redeem the $50 million principal amount of PG&W's 9.57% Series First Mortgage
Bonds due September 1, 1996.
-19-
<PAGE>
The Company also obtains external funds from the sale of its common stock
through its Dividend Reinvestment and Stock Purchase Plan (the "DRP"), Customer
Stock Purchase Plan (the "Customer Plan") and Employees' Savings Plan. During
the nine-month period ended September 30, 1995, the Company realized $3.0
million, $2.4 million and $476,000 from the issuance of common stock under the
DRP, Customer Plan and Employees' Savings Plan, respectively. However, because
of the significant reduction in its capital requirements that will result from
the currently pending sale of PG&W's water utility operations to Pennsylvania-
American, effective May 9, 1995, the Company suspended both the investment
feature of the DRP, from which $2.0 million was realized in 1995 prior to such
action, and the Customer Plan.
Expenditures for the construction of utility plant totaled $15.3 million
during the first nine months of 1995 and are currently estimated to be $4.8
million during the remainder of the year. PG&W's construction expenditures are
being financed with internally-generated funds and bank borrowings, pending the
periodic issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of September 30, 1995, $57.5 million of PG&W preferred stock and long-
term debt was required to be repaid within twelve months, exclusive of PG&W's
9.57% Series First Mortgage Bonds due September 1, 1996. Such amount included
borrowings of $49.0 million under the Credit Agreement and $8.4 million under
three additional bank lines of credit, which expire during the second and third
quarters of 1996. Prior to their respective expirations, PG&W intends to renew
the Credit Agreement and its other bank lines of credit to the extent the
related borrowing capacity is required. The $50 million of PG&W's 9.57% Series
First Mortgage Bonds were redeemed on October 13, 1995, largely with proceeds
from the Bridge Loan and were thus classified as long-term debt as of September
30, 1995.
Long Lived Assets
In March 1995, Financial Accounting Standards Board ("FASB") Statement 121,
"Accounting for the Impairment of Long-Lived Assets", was issued. The
provisions of this statement, which are effective for fiscal years beginning
after September 15, 1995, require that long-lived assets, identifiable
intangibles, capital leases and goodwill be reviewed for impairment whenever
events occur or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. In addition, FASB Statement 121 requires
that regulatory assets meet the recovery criteria of FASB Statement 71,
"Accounting for Effects of Certain Types of Regulation", on an ongoing basis in
order to avoid a writedown. The implementation of FASB Statement 121 in 1996 is
not expected to have any significant impact on the Company or PG&W since the
carrying amount of all assets, including regulatory assets, is considered
recoverable.
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting held on October 11, 1995, the common shareholders of
the Company approved the Asset Purchase Agreement providing for the sale by
the Company and Pennsylvania Gas and Water Company ("PG&W") of PG&W's
regulated water operations and certain related assets to
Pennsylvania-American Water Company, a wholly-owned subsidiary of American
Water Works Company, Inc. for approximately $409 million (including debt
assumed), subject to adjustment. Shareholders cast 3,669,946 votes for the
proposal, 126,204 votes against it, and 36,297 abstained from voting on the
proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Service Agreement for storage service dated October 13, 1995, by and
between PG&W and Avoca Natural Gas Storage -- filed as Exhibit 10-1
to PG&W's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-3490.
10-2 Employment Agreement effective September 1, 1995, between the Company
and Dean T. Casaday -- filed herewith.
11-1 Statement Re Computation of Per Share Earnings -- filed herewith.
27-1 Financial Data Schedule -- filed herewith.
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements 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.
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
Date: November 13, 1995 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: November 13, 1995 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements 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.
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
Date: November 13, 1995 By:
Thomas J. Ward
Secretary
Date: November 13, 1995 By:
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
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<COMMON-STOCK-DIVIDENDS> 9,430,000
<TOTAL-INTEREST-ON-BONDS> 18,609,000
<CASH-FLOW-OPERATIONS> 25,578,000
<EPS-PRIMARY> (.76)
<EPS-DILUTED> (.76)
</TABLE>
EMPLOYMENT AGREEMENT
This Agreement made this 1st day of September, 1995, between
Pennsylvania Enterprises, Inc. (PEI), a Pennsylvania Corporation, with
offices at 39 Public Square, Wilkes-Barre, Pennsylvania 18711-0601, and
Dean T. Casaday, of 5 Italian Road, Dallas, Pennsylvania 18612, hereinafter
referred to as "Casaday."
Background
The background of this Agreement is that PEI is a utility holding
company with its principal office in Wilkes-Barre, Pennsylvania. Casaday
is currently serving as President and CEO of the corporation. Casaday's
initial three year employment agreement expired on September 1, 1994, but
he wishes to continue his employment with the Company and PEI wishes to
continue his employment as President and CEO for an additional one year
period.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein and other good and valuable considerations, the parties
hereto do hereby agree as follows:
1. Employment; Acceptance of Employment. PEI hereby employes Casaday
as President and CEO and Casaday hereby accepts employment with PEI subject
to the terms and conditions hereafter set forth.
2. Term. The term of the Agreement and the employment of Casaday
hereunder to be effective September 1, 1995, and run for a period of 12
<PAGE>
months, ending September 1, 1996. This Agreement shall terminate in the
event of the death of Casaday during the term thereof. This Agreement
shall not affect any rights or obligations of either party under any other
benefit or program Casaday may have as an executive officer of the Company.
The supplemental retirement plan agreement dated December 23, 1991, is
unaffected by this Employment Agreement and continues in full force and
effect, except that as a result of recent amendments to the Internal
Revenue Code which limit the amount of includible compensation which may be
taken into account under a tax-qualified retirement plan, the supplemental
retirement agreement dated December 23, 1991, will be amended to guarantee
Casaday the difference, if any, between the benefit Casaday would be
entitled to under the Company's qualified pension plan, if such benefits
were calculated without regard to restrictions on compensation imposed
under Internal Revenue Code Section 401(a) (17) and the amount of pension
benefit actually payable under the Company's qualified pension plan.
3. Compensation. Casaday will be compensated at the rate of $212,880
per annum payable in accordance with normal pay practices of the Company.
In addition, Casaday shall be entitled to have his salary reviewed in June
1996 and will receive all normal benefits provided by PEI to officers of
the Company in a similar executive management category.
4. Time Commitment. Casaday shall devote his entire time and
attention to the business of PEI and its subsidiary companies during the
term of this Agreement. During the term of the Agreement, Casaday shall
<PAGE>
not be engaged in any other business activity which interferes with his
ability to perform for PEI hereunder, whether or not such business activity
is pursued for pecuniary advantage.
5. Duties. Casaday shall be responsible for the general management
of the Company and is responsible for providing the vision, philosophy and
culture of PEI and its subsidiary companies. During the term of this
contract, it is understood that the following goals and objectives should
be pursued vigorously and reported periodically to the Board.
A. Develop, attract, retain and motivate a top management team
capable of achieving the strategic objectives of the Company. This will
include periodic consultation with the Board on management succession.
B. Achieve the one year financial objectives provided for in the
1995-96 budget goals. These would be defined as the earnings per share
budgeted for 1995 and 1996 approved by the Board of Directors, and subject
to unforeseen circumstances and unusual weather conditions.
C. Develop and plan a strategic long-term strategy for the Company
working closely with the Planning Committee of the Board of Directors. It
is understood that the initiatives and responsibility for the long-term
plan must come from the CEO with an oversight role by the Board's Planning
Committee.
D. Continue a close working relationship with the Board of Directors,
keeping them fully informed on all important aspects of the Company and its
<PAGE>
various operations. This will include implementing Board policies and
recommendations.
E. Develop a marketing plan for the Company which sets forth
acceptable new business objectives in both the gas and water part of the
business. The objectives established for the growth of the gas business
should be comparable or exceed the percent increase of new customers being
achieved by peer companies operating in like service areas.
F. Develop and carry out an external relations program with the
shareholders, customers, communities and other constituents served by the
Company throughout its service area.
G. Provide the leadership to lead the Company and establish a
philosophy that is well understood, and consistently applied and
effectively implemented. In other words, set the tone for the Company and
make sure the tone is incorporated into the culture of the organization.
6. Status of Employee. In performing services under this Agreement,
Casaday shall be acting as an officer of PEI and subject to its control and
direction.
7. Non-Competition. The parties agree that during the term of this
Agreement and employment hereunder, Casaday will not be employed by or
provide services in any capacity whatsoever for any entity which is in any
way competitive with PEI in the utilities services business.
8. Annual Physical and Confidential Report to Human Resources
Department. To provide proper management succession and to be aware of the
<PAGE>
status of senior officers, the Board requests that Mr. Casaday have annual
examinations, a summary report of which will be filed with the Human
Resources Department. It is understood that the head of Human Resources
would call to the attention of the Chairman of the Board any life
threatening situations that are discovered during the course of physical
examination.
IN WITNESS WHEREOF, and with intent to legally bind their heirs,
successors and assigns, the parties have hereto set forth hands and seals
to this Agreement the day and date above written.
ATTEST: PENNSYLVANIA ENTERPRISES, INC.
/s/ Thomas J. Ward By: /s/ Dean T. Casaday
Thomas J. Ward Dean T. Casaday
/s/ Kenneth L. Pollock
Kenneth L. Pollock, Chairman
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11-1
PENNSYLVANIA ENTERPRISES, INC.
Statement Re Computation of Per Share Earnings for the
Three and Nine Month Periods Ended September 30, 1995 and 1994
Three Months Ended Nine Months Ended
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Income (loss) before subsidiary's
preferred stock dividends $ (3,469,000) $ (98,000) $ (2,254,000) $ 11,509,000
Subsidiary's preferred stock
dividends 690,000 1,025,000 2,073,000 3,669,000
Net income (loss) $ (4,159,000) $ (1,123,000) $ (4,327,000) $ 7,840,000
Earnings (loss) per share of
common stock* $ (.72) $ (.21) $ (.76) $ (1.34)
Computations of additional common
shares outstanding
Average shares of common stock 5,754,607 5,445,740 5,715,294 5,428,865
Incremental common shares
applicable to options, based on
the daily average market price 3,418 1,229 1,194 1,041
Average common shares as adjusted 5,758,025 5,446,969 5,716,488 5,429,906
Average shares of common stock 5,754,607 5,445,740 5,715,294 5,428,865
Incremental common shares
applicable to options, based on
the more dilutive of daily
average or ending market price 5,963 - 3,121 -
Average common shares fully
diluted 5,760,570 5,445,740 5,718,415 5,428,865
Earnings (loss) per share of
common stock
Average common shares as adjusted $ (.72) $ (.21) $ (.76) $ 1.34
Average common shares fully
diluted $ (.72) $ (.21) $ (.76) $ 1.34
* Earnings (loss) per share of common stock reflect the effect of premiums totaling
$534,375 on the redemption of subsidiary's preferred stock in May, 1994, that were
charged to retained earnings and not included in the determination of net income.
</TABLE>
<PAGE>
