PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three
months ended March 31, 1996 and 1995. . . . . . . . . . . 2
Consolidated Balance Sheets as of March 31, 1996,
and December 31, 1995 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and 1995. . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 17
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995*
(Thousands of Dollars)
<S> <C> <C>
OPERATING REVENUES:
Gas sales and service $ 72,151 $ 70,800
Construction activities 1,898 10
Other 38 72
Total operating revenues 74,087 70,882
OPERATING EXPENSES:
Cost of gas 41,921 43,840
Other operation expenses 8,990 5,979
Maintenance 1,214 968
Depreciation 2,018 1,794
Income taxes 5,905 4,497
Taxes other than income taxes 3,816 3,894
Total operating expenses 63,864 60,972
OPERATING INCOME 10,223 9,910
OTHER INCOME, NET 791 249
INCOME BEFORE INTEREST CHARGES 11,014 10,159
INTEREST CHARGES:
Interest on long-term debt 2,868 3,486
Other interest 218 322
Allowance for borrowed funds used
during construction (46) (9)
Total interest charges 3,040 3,799
INCOME FROM CONTINUING OPERATIONS 7,974 6,360
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS
(Note 2) (365) (3,704)
INCOME BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS 7,609 2,656
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 637 691
NET INCOME $ 6,972 $ 1,965
COMMON STOCK
Earnings per share of common stock:
Continuing operations $ 1.26 $ 1.00
Discontinued operations (.06) (.65)
Net income $ 1.20 $ .35
Weighted average shares outstanding 5,790,812 5,653,003
Cash dividend per share $ .55 $ .55
*Reclassified to conform with 1996 consolidated financial statement presentation.
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>
March 31, December 31,
1996 1995*
(Thousands of Dollars)
<S> <C> <C>
ASSETS
UTILITY PLANT:
At original cost $ 298,675 $ 295,895
Accumulated depreciation (78,594) (76,882)
220,081 219,013
OTHER PROPERTY AND INVESTMENTS:
Nonutility property and equipment 11,380 11,553
Accumulated depreciation (5,409) (5,394)
Other 1,001 983
6,972 7,142
CURRENT ASSETS:
Cash and cash equivalents 149,087 629
Accounts receivable -
Customers 28,855 21,066
Others 1,170 815
Reserve for uncollectible accounts (1,001) (788)
Accrued utility revenues 8,217 10,319
Materials and supplies, at average cost 3,135 2,876
Gas held by suppliers, at average cost 1,726 15,140
Natural gas transition costs collectible 3,514 4,612
Deferred cost of gas and supplier refunds, net 3,529 -
Prepaid expenses and other 4,753 3,486
202,985 58,155
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 29,893 30,015
Natural gas transition costs collectible - 497
Other 3,027 2,516
Unamortized debt expense 2,478 2,630
35,398 35,658
NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250
TOTAL ASSETS $ 465,436 $ 524,218
*Reclassified to conform with 1996 consolidated financial statement presentation.
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>
March 31, December 31,
1996 1995*
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (Note 3):
Common shareholders' investment $ 167,293 $ 162,739
Preferred stock of PGE -
Not subject to mandatory redemption, net 18,944 33,615
Subject to mandatory redemption 1,680 1,680
Long-term debt 106,638 106,706
294,555 304,740
CURRENT LIABILITIES:
Current portion of long-term debt 225 116,001
Preferred stock subject to mandatory
redemption or repurchase 14,751 80
Notes payable 115 10,180
Accounts payable 16,919 18,531
Deferred cost of gas and supplier refunds, net - 434
Accrued general business and realty taxes 2,297 1,493
Accrued income taxes 64,219 526
Accrued interest 1,205 2,307
Accrued natural gas transition costs 2,247 2,278
Other 5,790 3,534
107,768 155,364
DEFERRED CREDITS:
Deferred income taxes 45,914 48,835
Accrued natural gas transition costs 588 1,144
Unamortized investment tax credits 4,895 4,938
Operating reserves 3,359 3,709
Other 8,357 5,488
63,113 64,114
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES $ 465,436 $ 524,218
*Reclassified to conform with 1996 consolidated financial statement presentation.
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>
Three Months Ended
March 31,
1996 1995
(Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends $ 7,337 $ 5,669
Effects of noncash charges to income -
Depreciation 2,031 1,799
Deferred income taxes, net 96 1,109
Provisions for self insurance 241 163
Other, net 625 1,012
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues (5,829) (3,364)
Gas held by suppliers 13,414 10,719
Accounts payable (970) (5,648)
Deferred cost of gas and supplier refunds, net (2,955) 15,397
Other current assets and liabilities, net 5,449 (892)
Other operating items, net (2,912) 168
Net cash provided by continuing operations 16,527 26,132
Net cash provided by discontinued operations 2,133 3,764
Net cash provided by operating activities 18,660 29,896
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (2,973) (3,770)
Net proceeds from sale of discontinued operations 261,752 -
Other net 68 158
Net cash provided (used) by investing activities 258,847 (3,612)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 768 496
Common stock subscribed - 1,851
Dividends on common stock (3,186) (3,109)
Repayment of long-term debt (50,050) -
Net decrease in bank borrowings (76,508) (24,925)
Other, net (73) (4)
Net cash used for financing activities (129,049) (25,691)
NET INCREASE IN CASH AND CASH EQUIVALENTS 148,458 593
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 629 330
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 149,087 $ 923
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 1,510 $ 6,204
Income taxes $ 470 $ 453
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
Nature of the Business. Pennsylvania Enterprises, Inc. ("the Company") is a
holding company whose principal subsidiary, PG Energy Inc. ("PGE"), a regulated
public utility formerly known as Pennsylvania Gas and Water Company, distributes
natural gas to a ten-county area in northeastern Pennsylvania, a territory that
includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre
and Williamsport. The Company, through its other subsidiaries, Pennsylvania
Energy Resources, Inc. ("PERI"), Pennsylvania Energy Marketing Company ("PEM")
and Theta Land Corporation, is also engaged in various non-regulated activities,
including energy-related services and the construction, maintenance and
rehabilitation of natural gas distribution pipelines, which prior to 1996 were
not significant to the operations of the Company as a whole.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, PGE, PERI, PEM
and Theta. The consolidated financial statements also include the accounts of
Keystone Pipeline Services, Inc. ("Keystone"), a wholly-owned subsidiary of
PERI, beginning December 4, 1995, the date Keystone was acquired by PERI. All
material intercompany accounts have been eliminated in consolidation.
PGE is a regulated public utility subject to the jurisdiction of the
Pennsylvania Public Utility Commission ("PPUC") for rate and accounting
purposes. The financial statements of PGE that are incorporated in these
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, including the provisions of Financial
Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of
Certain Types of Regulation," which give recognition to the rate and accounting
practices of regulatory agencies such as the PPUC.
Interim Financial Statements. The interim consolidated financial statements
included herein 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 PGE, the Company's operating utility. 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.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
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the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors which are difficult to
predict and are beyond the control of the Company. Therefore, actual amounts
could differ from these estimates.
(2) DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995 (the
"Agreement") among the Company, PGE, American Water Works Company, Inc.
("American") and Pennsylvania-American Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, the Company and PGE sold substantially
all of the assets, properties and rights of PGE's water utility operations to
Pennsylvania-American on February 16, 1996.
Under the terms of the Agreement, Pennsylvania-American paid PGE
approximately $413.5 million consisting of $266.4 million in cash and the
assumption of $147.1 million of PGE's liabilities, including $141.1 million of
its long-term debt. This price was subsequently reduced to $409.5 million as a
result of certain post-closing adjustments and is subject to further post-
closing adjustments, which currently are not expected to exceed $100-200,000.
PGE continued to operate the water utility business until February 16, 1996.
The sale price reflected a $6.5 million premium over the book value of the
assets sold. However, after transaction costs and the net effect of other
items, principally the write-off of certain deferred regulatory assets and
deferred credits and the impact of pension and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.0 million, net of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15, 1996). The sale involved a gain for income tax
purposes, primarily because of the accelerated depreciation that had been
claimed by PGE with respect to the water utility plant that was sold. It is
estimated that the income taxes payable on the sale, for which deferred income
taxes had previously been provided, will be approximately $58.7 million.
The net cash proceeds from the sale of approximately $203.1 million, net of
the estimated $58.7 million payable for income taxes, are being used by the
Company and PGE to retire debt, to repurchase stock (see Note 3 of these Notes
to Consolidated Financial Statements), and for working capital for their
continuing operations. With the sale of PGE's water utility operations, the
principal assets of the Company and PGE now consist of PGE's gas utility
operations and approximately 46,000 acres of land.
The accompanying consolidated financial statements reflect PGE's water
utility operations as "discontinued operations" effective March 31, 1995.
Interest charges relating to indebtedness of PGE were allocated to the
discontinued operations based on the relationship of the gross water utility
plant that was sold to the total of PGE's gross gas and water utility plant.
This is the same method as was utilized by PGE and the PPUC in establishing the
revenue requirements of both PGE's gas and water utility operations. None of
the dividends on PGE's preferred stock nor any of the Company's interest expense
were allocated to the discontinued operations.
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Selected financial information for the discontinued operations is set forth
below:
Net Assets of Discontinued Operations
As of December 31, 1995
(Thousands of Dollars)
[CAPTION]
[S] [C]
Net utility plant $ 368,742
Current assets (primarily accounts
receivable and accrued revenues) 12,756
Deferred charges and other assets 25,752
Total assets acquired by
Pennsylvania-American 407,250
Liabilities assumed by
Pennsylvania-American -
Long-term debt 141,097
Other 5,983
147,080
Net assets acquired by
Pennsylvania-American 260,170
Estimated liability for income taxes on
sale of discontinued operations (56,710)
Estimated net income of discontinued operations
during the remainder of the phase-out period 790
Total net assets of discontinued operations $ 204,250
Loss With Respect to Discontinued Operations
[CAPTION]
Three Months Ended March 31,
1996 1995
(Thousands of Dollars)
[S] [C] [C]
Income from discontinued operations,
net of related income taxes of $1,403,000* $ - $ 2,127
Estimated loss on disposal of discontinued
operations, net of income during the
phase-out period (365) (5,831)
Loss with respect to discontinued operations $ (365) $ (3,704)
* Reflects income only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
(3) REPURCHASES OF STOCK
During April, 1996, the Company repurchased 890,602 shares of its common
stock for an aggregate consideration of $34.7 million, and PGE repurchased
128,359 shares of its 9% Cumulative Preferred Stock for an aggregate
consideration of $13.9 million and 18,354 shares of its 4.10% Cumulative
Preferred Stock for an aggregate consideration of $918,000, in each case
pursuant to a self tender offer dated March 11, 1996.
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(4) ACCOUNTING CHANGES
Long Lived Assets. In March 1995, FASB Statement 121, "Accounting for the
Impairment of Long-Lived Assets", was issued. The provisions of this statement,
which are effective for fiscal years beginning after September 15, 1995, require
that long-lived assets, identifiable intangibles, capital leases and goodwill be
reviewed for impairment whenever events occur or changes in circumstances
indicate that the carrying amount of the assets may 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 provisions
of FASB Statement 121, which the Company and PGE adopted effective January 1,
1996, did not have a material impact on the financial position or results of
operations of either the Company or PGE since the carrying amount of all assets,
including regulatory assets, are considered recoverable.
(5) 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 PGE 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 PGE for complying with the Emergency Order. The
Company does not believe that PGE's compliance with the terms of such Order will
have a material adverse effect on its financial position or results of
operations.
Environmental Matters
PGE, 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 PGE. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PGE 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
Pursuant to an Asset Purchase Agreement dated April 26, 1995 (the
"Agreement") among the Company, PG Energy Inc. ("PGE"), American Water Works
Company, Inc. ("American") and Pennsylvania-American Water Company
("Pennsylvania-American"), a wholly-owned subsidiary of American, the Company
and PGE sold substantially all of the assets, properties and rights of PGE's
water utility operations to Pennsylvania-American on February 16, 1996.
Under the terms of the Agreement, Pennsylvania-American paid PGE
approximately $413.5 million consisting of $266.4 million in cash and the
assumption of $147.1 million of PGE's liabilities, including $141.1 million of
its long-term debt. This price was subsequently reduced to $409.5 million as a
result of certain post-closing adjustments and is subject to further post-
closing adjustments, which currently are not expected to exceed $100-200,000.
PGE continued to operate the water utility business until February 16, 1996.
The sale price reflected a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the net effect of other
items, principally the write-off of certain deferred regulatory assets and
deferred credits and the impact of pension and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.0 million, net of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15, 1996.)
The net cash proceeds from the sale of approximately $203.1 million, net of
an estimated $58.7 million payable for income taxes, are being used by the
Company and PGE to retire debt, to repurchase stock (see Note 3 of the
accompanying Notes to Consolidated Financial Statements) and for working capital
for their continuing operations. With the sale of PGE's water utility
operations, the principal assets of the Company and PGE now consist of PGE's gas
utility operations and approximately 46,000 acres of land.
In accordance with generally accepted accounting principles, the Company's
consolidated financial statements reflect PGE'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. For additional information regarding the discontinued
operations, see Note 2 of the accompanying Notes to Consolidated Financial
Statements.
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RESULTS OF CONTINUING 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
three-month periods ended March 31, 1996, and March 31, 1995:
[CAPTION]
Percentage of
Operating Revenues
Three Months Ended
March 31,
1996 1995
[S] [C] [C]
OPERATING REVENUES:
Gas sales and service...................... 97.4% 99.9%
Construction activities.................... 2.6 -
Other...................................... - 0.1
Total operating revenues................. 100.0 100.0
OPERATING EXPENSES:
Cost of gas................................ 56.6 61.9
Other operation expenses................... 12.1 8.4
Maintenance................................ 1.6 1.4
Depreciation............................... 2.7 2.5
Income taxes............................... 8.0 6.3
Taxes other than income taxes.............. 5.2 5.5
Total other operating expenses........... 86.2 86.0
OPERATING INCOME............................. 13.8 14.0
OTHER INCOME, NET............................ 1.1 0.4
INTEREST CHARGES (1)......................... 4.1 5.4
INCOME FROM CONTINUING OPERATIONS............ 10.8 9.0
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. (0.5) (5.2)
INCOME BEFORE SUBSIDIARY'S PREFERRED STOCK
DIVIDENDS.................................. 10.3 3.8
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... 0.9 1.0
NET INCOME................................... 9.4% 2.8%
(1) None of the Company's interest expense nor any of the subsidiary's
preferred stock dividends was allocated to the discontinued operations.
Three Months Ended March 31, 1996, Compared
With Three Months Ended March 31, 1995
Operating Revenues. Operating revenues increased $3.2 million (4.5%) from
$70.9 million for the three-month period ended March 31, 1995, to $74.1 million
for the three-month period ended March 31, 1996. Of this increase, $1.3 million
was attributable to higher revenues from gas sales and service as a result of a
1.6 billion cubic feet (16.1%) increase in consumption by PGE's residential and
commercial heating customers. Heating degree days during the first quarter of
1996 were 509 (18.1%) higher compared to the first quarter in 1995 and 4.1%
above normal. The effects of the increased sales to heating customers were
partially offset by a reduction in the purchased gas cost component of PGE's
tariffs (the "gas cost rate"). See "-Rate Matters." Also contributing to the
increased operating revenues were the construction activities of Keystone
Pipeline Services, Inc. ("Keystone"), which was acquired in December, 1995. The
revenues from these activities totaled $1.9 million in the first quarter of
1996.
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Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $2.9 million (4.7%) from $61.0 million for the three-month
period ended March 31, 1995, to $63.9 million for the three-month period ended
March 31, 1996. As a percentage of operating revenues, total operating expenses
increased only slightly, from 86.0% during the first quarter of 1995 to 86.2%
during the first quarter of 1996.
The cost of gas decreased $1.9 million (4.4%) from $43.8 million for the
three-month period ended March 31, 1995, to $41.9 million for the three-month
period ended March 31, 1996, primarily because of the aforementioned reduction
in PGE's gas cost rate (see "-Rate Matters"), the effects of which were
partially offset by the increased sales to PGE's residential and commercial
heating customers.
Other than the cost of gas and income taxes, operating expenses increased by
$3.4 million (26.9%) from $12.6 million for the three-month period ended March
31, 1995, to $16.0 million for the three-month period ended March 31, 1996.
This increase was largely attributable to a $3.0 million (50.4%) increase in
other operation expenses, primarily as a result of $2.0 million of expenses
relative to Keystone's construction activities and a $733,000 (12.6%) increase
in expenses relative to PGE's operations, principally payroll and payroll-
related costs. Also contributing to the increase in operating expenses were a
$246,000 (25.4%) increase in PGE's maintenance expenses, principally as a result
of charges relative to the maintenance of gas valves, and increased depreciation
expense of $224,000 (12.5%), primarily as a result of $117,000 of depreciation
relative to Keystone and $107,000 relative to additions to PGE's utility plant.
Income taxes for the three-month period ended March 31, 1996, increased by
$1.4 million (31.3%) from $4.5 million in 1995 to $5.9 million in 1996 due to a
higher level of income before income taxes (for this purpose, operating income
net of interest charges).
Operating Income. As a result of the above, total operating income
increased by $313,000 (3.2%) from $9.9 million for the three-month period ended
March 31, 1995, to $10.2 million for the three-month period ended March 31,
1996, but decreased slightly as a percentage of total operating revenues for
such periods from 14.0% in 1995 to 13.8% in 1996.
Other Income, Net. Other income, net increased $542,000 from $249,000 for
the three-month period ended March 31, 1995, to $791,000 for the three-month
period ended March 31, 1996, primarily as a result of investment income totaling
$628,000 relative to the temporary investment of a portion of the proceeds from
the sale of PGE's regulated water utility operations.
Interest Charges. Interest charges decreased by $759,000 (20.0%) from $3.8
million for the three-month period ended March 31, 1995, to $3.0 million for the
three-month period ended March 31, 1996. This decrease was largely attributable
to the repayment of PGE's $50.0 million term loan and all of its outstanding
bank borrowings on February 16, 1996, with proceeds from the sale of its
regulated water utility operations on such date.
Income From Continuing Operations. Income from continuing operations
increased $1.6 million (25.4%) from $6.4 million for the quarter ended March 31,
1995, to $8.0 million for the quarter ended March 31, 1996. This increase was
largely the result of the matters discussed above, principally the increase in
operating revenues and other income, net and the decrease in interest charges,
the effects of which were partially offset by the increased operating expenses.
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Net Income. The increase in net income of $5.0 million from $2.0 million
for the three-month period ended March 31, 1995, to $7.0 million for the three-
month period ended March 31, 1996, as well as the increase in earnings per share
of common stock of $.85 from $.35 per share for the quarter ended March 31,
1995, to $1.20 per share for the quarter ended March 31, 1996, were largely the
result of increased income from continuing operations and the reduced loss with
respect to discontinued operations.
RATE MATTERS
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code (the "Code") relating to the annual purchased gas cost rate
of larger gas distribution companies, such as PGE, the PPUC, by Order adopted
May 11, 1995, authorized PGE to decrease the gas costs contained in its gas
tariffs from $3.68 per thousand cubic feet 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. In accordance with the same provisions of the
Code, the PPUC, by Order adopted November 9, 1995, authorized PGE 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.
Quarterly Gas Cost Adjustment. 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 PGE.
Such adjustments are allowed when the actual purchased gas costs vary from the
estimated costs reflected in the respective company's tariffs by 2% or more.
Except for reducing the amount of any over or undercollections of gas costs,
these regulations will not have any material effect on PGE's financial position
or results of operations, and PGE will still be required to file an annual
purchased gas cost rate. As of May 10, 1996, no such quarterly gas cost
adjustments had been made to PGE's tariffs.
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 Account 191 and New Facility Costs ("Gas
Transition Costs") are subject to recovery through the annual PGC rate filings
made with the PPUC by PGE and other larger local gas distribution companies.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs ("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.
PGE was billed a total of $1.3 million of Gas Transition Costs by its
interstate pipelines. Of this amount, $858,000 was recovered by PGE over a
twelve-month period ended January 31, 1995, through an increase in its PGC rate,
$252,000 are being recovered by PGE in its annual PGC rate that the PPUC has
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<PAGE>
approved effective December 1, 1995, and the recovery of the remaining $213,000
will be sought by PGE in its PGC rate that will be effective December 1, 1996.
By Order of the PPUC entered August 26, 1994, PGE 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 PGE, generally over a four-year period
extending through the fourth quarter of 1997, of which $6.6 million had been
billed to PGE and $5.9 million had been recovered from its customers as of March
31, 1996. PGE 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
Sale of Water Utility Operations
On February 16, 1996, PGE sold its regulated water operations and certain
related assets to Pennsylvania-American for approximately $413.5 million,
consisting of $266.4 million in cash and the assumption of $147.1 million of
PGE's liabilities, including $141.1 million of its long-term debt. This price
was subsequently reduced to $409.5 million as a result of certain post-closing
adjustments and is subject to further post-closing adjustments, which currently
are not expected to exceed $100-200,000.
The Company and PGE are using the $203.1 million of cash proceeds from the
sale, after the payment of an estimated $58.7 million of federal and state
income taxes, to retire debt, to repurchase stock and for working capital
purposes. In this regard, PGE repaid its $50.0 million term loan due 1996 and
all of its outstanding bank borrowings on February 16, 1996, and the Company and
PGE temporarily invested the balance of the proceeds. Additionally, in April,
1996, the Company repurchased 890,627 shares of its common stock at a price of
$39 per share (for an aggregate consideration of $34.7 million), and PGE
repurchased 128,359 shares of its 9% cumulative preferred stock at a price of
$108 per share (for an aggregate consideration of $13.9 million) and 18,354
shares of its 4.10% cumulative preferred stock at a price of $50 per share (for
an aggregate consideration of $918,000). As of May 10, 1996, the Company and
PGE had temporary cash investments totaling approximately $95.0 million, which
are expected to be utilized during the balance of the year for additional
repurchases of stock and working capital purposes.
With the repayment of its term loan and all its bank borrowings on February
16, 1996, and the availability of cash proceeds from the sale of its regulated
water operations that have been temporarily invested, PGE terminated its $60.0
million bank credit agreement and one additional bank line of credit under which
$3.0 million was available for borrowing by PGE. PGE has retained and currently
has three bank lines of credit with an aggregate borrowing capacity of $14.5
million (See "-Liquidity"), which is deemed adequate for its immediate needs
through June 30, 1996, when the last $5.0 million of these lines will expire.
PGE plans to arrange new and replacement bank lines of credit as the proceeds
from the sale of its water utility operations are fully utilized and as it
requires bank borrowings for working capital and other purposes.
Liquidity
The primary capital needs of the Company are the funding of PGE's
construction program and the seasonal funding of PGE's gas purchases and
increases in its customer accounts receivable. PGE's revenues are highly
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<PAGE>
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 PGE'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 PGE to use bank borrowings to fund
such expenditures, pending the periodic issuance of stock and long-term debt.
Bank borrowings are also used by PGE 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, PGE has made arrangements for a total of $14.5 million
of unsecured revolving bank credit and plans to arrange other bank lines of
credit as its needs require (See "-Sale of Water Utility Operations").
Specifically, PGE currently has three bank lines of credit with an aggregate
borrowing capacity of $14.5 million which provide for borrowings at interest
rates generally less than prime. Two of these bank lines providing for an
aggregate borrowing capacity of $9.5 million expire on May 31, 1996, and the
third line, which provides for borrowings up to $5.0 million, expires June 30,
1996. However, PGE currently has no borrowings outstanding under these bank
lines of credit, and it intends to arrange new and replacement bank lines of
credit when it again has a need for bank borrowings. Additionally, PGE intends
to borrow funds from the Company during 1996 for its construction expenditures
and other working capital requirements to the extent that the Company has excess
funds pending the use of those funds by the Company. Any such interim
borrowings by PGE from the Company will be repaid with proceeds from bank
borrowings by PGE.
The Company believes that PGE 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.
Long-Term Debt and Capital Stock Financings
Both the Company and PGE 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 PGE during the three-month period ended March 31, 1996.
The Company also obtains external funds from the sale of its common stock
through its Dividend Reinvestment and Stock Purchase Plan (the "DRP"), its 1992
Stock Option Plan and its Employees' Savings Plan. During the three-month
period ended March 31, 1996, the Company realized $340,000, $234,000 and
$194,000 from the issuance of common stock under the DRP, 1992 Stock Option Plan
and Employees' Savings Plan, respectively.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $2.8 million
during the first three months of 1996 and are currently estimated to be $26.8
million during the remainder of the year. Such expenditures are being financed
with proceeds from the sale of PGE's regulated water operations, internally-
generated funds and bank borrowings, pending the periodic issuance of stock and
long-term debt.
-15-
<PAGE>
Current Maturities of Long-Term Debt and Preferred Stock
As of March 31, 1996, $80,000 of PGE's preferred stock and $225,000 of
PERI's long-term debt was required to be repaid within twelve months. An
additional $14.7 million of PGE's preferred stock, which was repurchased in
April, 1996, pursuant to self tender offers, was also reflected as a current
liability as of March 31, 1996.
Forward-Looking Statements
Certain statements made above relating to plans, conditions, objectives and
economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, and each is subject to factors that could cause actual results to differ
from those in the forward-looking statement.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4-1 First Supplemental Indenture, dated as of February 15, 1996, between
the Company and Chemical Bank, as Trustee, with respect to the
Company's 10.125% Senior Notes due June 15, 1999 -- filed herewith.
11-1 Statement Re Computation of Per Share Earnings -- filed herewith.
27-1 Financial Data Schedule -- filed herewith.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated February 28, 1996, pursuant to
Item 5. Other Events, regarding the sale by the Company on February 16,
1996, of its regulated water utility operations and certain related assets.
-17-
<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: May 14, 1996 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: May 14, 1996 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
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<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 220,081,000
<OTHER-PROPERTY-AND-INVEST> 6,972,000
<TOTAL-CURRENT-ASSETS> 202,985,000
<TOTAL-DEFERRED-CHARGES> 35,398,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 465,436,000
<COMMON> 58,063,000
<CAPITAL-SURPLUS-PAID-IN> 56,108,000
<RETAINED-EARNINGS> 53,122,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 167,293,000
1,680,000
18,944,000
<LONG-TERM-DEBT-NET> 106,638,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 225,000
14,751,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 155,905,000
<TOT-CAPITALIZATION-AND-LIAB> 465,436,000
<GROSS-OPERATING-REVENUE> 74,087,000
<INCOME-TAX-EXPENSE> 5,905,000
<OTHER-OPERATING-EXPENSES> 57,959,000
<TOTAL-OPERATING-EXPENSES> 63,864,000
<OPERATING-INCOME-LOSS> 10,223,000
<OTHER-INCOME-NET> 791,000
<INCOME-BEFORE-INTEREST-EXPEN> 11,014,000
<TOTAL-INTEREST-EXPENSE> 3,040,000
<NET-INCOME> 7,609,000
637,000
<EARNINGS-AVAILABLE-FOR-COMM> 6,972,000
<COMMON-STOCK-DIVIDENDS> 3,186,000
<TOTAL-INTEREST-ON-BONDS> 4,837,000
<CASH-FLOW-OPERATIONS> 18,660,000
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
2
W6-NY960260.300
PENNSYLVANIA ENTERPRISES, INC., As Issuer
To
CHEMICAL BANK, As Trustee
______________________________
FIRST SUPPLEMENTAL INDENTURE
Dated as of February 15, 1996
to
Indenture, dated as of June 15, 1992
_______________________________________________
10.125% Senior Notes due June 15, 1999
FIRST SUPPLEMENTAL INDENTURE, dated as of February 15, 1996,
between PENNSYLVANIA ENTERPRISES, INC., a corporation duly
organized and existing under the laws of the Commonwealth of
Pennsylvania (herein called the "Company"), having its principal
office at Wilkes-Barre Center, 39 Public Square, Wilkes-Barre,
Pennsylvania, and CHEMICAL BANK, a corporation duly organized and
existing under the laws of the State of New York, as Trustee
(herein called the "Trustee"). (Capitalized terms used herein
without definition shall have the meanings ascribed to them in
the Original Indenture).
WHEREAS, the Company has heretofore executed and delivered
to the Trustee, an Indenture dated as of June 15, 1992 (the
"Original Indenture") providing for the issuance of its 10.125%
Senior Notes due June 15, 1999 (the "Securities"); and
WHEREAS, Section 1001 of the Original Indenture provides
that the Company, when authorized by a resolution of its Board of
Directors, and the Trustee may amend or supplement the Original
Indenture without notice to or consent of any Securityholder to
cure any ambiguity, defect or inconsistency; and
WHEREAS, all requirements of law and of the Restated
Articles of Incorporation, as amended, and By-Laws of the
Company, including all requisite action on the part of its Board
of Directors and officers, relating to the execution of this
First Supplemental Indenture have been complied with and
observed, and all things necessary to make this First
Supplemental Indenture, a valid and legally binding instrument in
accordance with its terms, have happened, been done and been
performed;
NOW THEREFORE, the Company and the Trustee hereby agree as
follows:
1. Section 904(1) of the Original Indenture is hereby
amended by adding the words "or redemption date" immediately
after the word "maturity" in the tenth line thereof.
2. All provisions of this First Supplemental Indenture shall
be deemed to be incorporated in, and made a part of the Original
Indenture, and the Original Indenture, as supplemented by this
First Supplemental Indenture shall be read, taken and construed
as one and the same instrument.
3. The Trustee accepts the trusts created by the Original
Indenture, as supplemented by this First Supplemental Indenture,
and agrees to perform the same upon the terms and conditions in
the Original Indenture, as supplemented by this First
Supplemental Indenture.
4. This First Supplemental Indenture may be executed in
counterparts, each of which when so executed shall be deemed to
be an original, but all such counterparts shall together
constitute but one and the same instrument.
5. This First Supplemental Indenture shall be construed in
accordance with the laws of the State of New York without
reference to its conflict of law provisions, and the obligations,
rights and remedies of the parties hereunder shall be determined
in accordance with such laws.
6. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the sufficiency of this First
Supplemental Indenture or for or in respect of the recitals
contained herein, all of which recitals are made solely by the
Company.
IN WITNESS WHEREOF, the parties hereto have caused this
First Supplemental Indenture to be duly executed, and their
respective corporate seals to be hereunto affixed and attested,
all as of the day and year first above written.
PENNSYLVANIA ENTERPRISES, INC.
By: /s/ John F. Kell, Jr.
Name: John F. Kell, Jr.
Title: Vice President,
Finance
[SEAL]
Attest:
/s/ Thomas J. Ward
CHEMICAL BANK, as Trustee
By: /s/ W.B. Dodge
Name: W.B. Dodge
Title: Vice President
[SEAL]
Attest:
/s/ Glenn G. McKeevey
COMMONWEALTH OF PENNSYLVANIA )
ss.:
COUNTY OF LUZERNE )
On the 29th day of February, 1996, before me personally came
John F. Kell, Jr., to me known who, being by me duly sworn, did
depose and say that he is Vice President, Finance of Pennsylvania
Enterprises, Inc., one of the corporations described in and which
executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by authority of the Board
of Directors of said corporation, and that he signed his name
thereto by like authority.
/s/ JoAnne McHale
[Notarial Seal]
Notarial Seal
JoAnne McHale, Notary
Public
Wilkes-Barre , Luzerne
County
My Commission Expires
Sept. 6, 1998
STATE OF NEW YORK )
ss.:
COUNTY OF NEW YORK )
On the 6th day of March, 1996, before me personally came
W.B. Dodge, to me known who, being by me duly sworn, did depose
and say that he is Vice President of Chemical Bank, one of the
corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the
seal affixed to said instrument is such corporate seal; that it
was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like
authority.
/s/ Emily Fayan
[Notarial Seal]
Emily Fayan
Notary Public, State of New
York
No. 24-4737006
Qualified in Kings County
Certificate Filed in New York
County
Commission Expires December
31, 1997
EXHIBIT 11-1
PENNSYLVANIA ENTERPRISES, INC.
Statement Re Computation of Per Share Earnings
[CAPTION]
Three Months Ended
March 31,
1996 1995
[S] [C] [C]
Income before subsidiary's preferred
stock dividends $ 7,609,000 $ 2,656,000
Subsidiary's preferred stock dividends 637,000 691,000
Net income $ 6,972,000 $ 1,965,000
Earnings per share of common stock $ 1.20 $ .35
Computations of additional common shares
outstanding
Average shares of common stock 5,790,812 5,653,003
Incremental common shares applicable to
options, based on the daily average
market price 6,754 -
Average common shares as adjusted 5,797,566 5,653,003
Average shares of common stock 5,790,812 5,653,003
Incremental common shares applicable to
options, based on the more dilutive of
daily average or ending market price 7,079 1,961
Average common shares fully diluted 5,797,891 5,654,964
Earnings per share of common stock
Average common shares as adjusted $ 1.20 $ .35
Average common shares fully diluted $ 1.20 $ .35
<PAGE>
