PART I
ITEM l. BUSINESS
GENERAL
Pennsylvania Enterprises, Inc. (the "Company") is a holding company formed
in 1974 whose principal subsidiary, PG Energy Inc. ("PGE"), a regulated public
utility formerly known as Pennsylvania Gas and Water Company, is engaged in the
distribution of natural gas. Until February 16, 1996, when its water utility
operations were sold, PGE was also engaged in the distribution of water (See
"-Sale of Water Utility Operations.") The Company's other subsidiaries consist
of Pennsylvania Energy Resources, Inc. ("PERI") and its wholly-owned subsidiary
Keystone Pipeline Services, Inc. ("Keystone"), which was acquired effective as
of December 4, 1995, Pennsylvania Energy Marketing Company ("PEM") and Theta
Land Corporation ("THETA"). These other subsidiaries, each of which is engaged
in non-regulated activities, have not constituted a significant portion of
either the Company's assets or operations.
PGE, incorporated in Pennsylvania in 1867 as Dunmore Gas & Water Company, is
regulated by the Pennsylvania Public Utility Commission ("PPUC"). As of
December 31, 1995, PGE had approximately 141,800 gas customers and 133,400 water
customers.
PGE's gas operating revenues are highly seasonal and depend on certain
factors that are beyond its control, such as the price of natural gas and the
availability of markets for natural gas. Other factors include the weather, the
effect of federal and state regulation, the effect of competition from other
forms of energy, including electricity and oil, and the switching of customers
from sales to transportation service. See "GAS BUSINESS-Transportation and
Storage Service."
As of December 31, 1995, the Company and its subsidiaries employed
approximately 1,080 persons. However, as a result of the sale of PGE's water
operations on February 16, 1996 (See "-Sale of Water Utility Operations"), and
the related transfer, early retirement and displacement of certain employees,
the Company and its subsidiaries employed only approximately 680 persons as of
March 1, 1996.
Sale of Water Utility Operations
On February 16, 1996, PGE sold its regulated water operations and certain
related assets to Pennsylvania-American Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American Water Works Company, Inc. ("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, subject to certain post-closing adjustments. (See Note 2,
Discontinued Operations, of the Notes to Consolidated Financial Statements in
Item 8 of this Form 10-K). Until February 16, 1996, PGE continued to operate
the water utility business.
The Company and PGE are using the $209.1 million of cash proceeds from the
sale, after the payment of an estimated $56.7 million of federal and state
income taxes, to retire debt, to repurchase stock and for working capital
purposes. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources-Sale of Water Utility
Operations" in Item 7 of this Form 10-K). With the sale of PGE's water utility
-1-
<PAGE>
operations, the principal assets of the Company and PGE now consist of PGE's gas
utility operations and approximately 46,000 acres of land.
-2-
<PAGE>
GAS BUSINESS
PGE distributes natural gas to an area in northeastern Pennsylvania lying
within the Counties of Lackawanna, Luzerne, Wyoming, Susquehanna, Columbia,
Montour, Northumberland, Lycoming, Union and Snyder, a territory that includes
116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and
Williamsport. The total estimated population of PGE's natural gas service area,
based on the 1990 U.S. Census, is 561,000.
Number and Type of Customers. At December 31, 1995, PGE had approximately
141,800 natural gas customers, from which it derived total natural gas revenues
of $152.8 million during 1995. The following chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1995:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.4% 63.0%
Commercial 8.2 24.0*
Industrial 0.2 11.6*
Other Users 0.2 1.4
Total 100.0% 100.0%
* Includes the 4.6% of total gas revenues derived from interruptible
customers.
During 1995, PGE delivered an estimated total of 44,800,000 thousand cubic
feet ("MCF") of natural gas to its customers, of which 54.9% was sold at normal
tariff rates, 43.8% represented gas transported for customers and 1.3% was sold
under the Alternate Fuel Rate (as described below).
PGE sells gas to "firm" customers with the understanding that it will not
interrupt their supply except during periods of supply deficiency or emergency
conditions. "Interruptible" gas customers are required to have equipment
installed capable of using an alternate energy form. Interruptible customers,
therefore, do not require a continuous supply of gas and their supply can be
interrupted by PGE at any time under the conditions set forth in their contracts
for gas service. In 1995, a total of 1,142,000 MCF of natural gas was sold by
PGE to interruptible customers and 4,168,000 MCF was transported for such
customers, which together represented 11.9% of the total deliveries of natural
gas by PGE to its customers during 1995.
PGE's largest natural gas customer accounted for approximately 2.0% of its
operating revenues in 1995. No other customer accounted for as much as 2.0% of
such revenues in 1995.
Transportation and Storage Service. PGE provides transportation service to
natural gas customers who consume at least 5,000 MCF of natural gas per year,
meet certain other conditions and execute a transportation agreement. In
addition, groups of up to ten customers, with a combined consumption of at least
5,000 MCF per year, are eligible for transportation service. Prior to March 25,
1993, transportation service was only provided to individual customers, or
groups of not more than three customers, who consumed at least 50,000 MCF of
natural gas per year. Transportation service is provided on both a firm and an
interruptible basis and includes provisions regarding over and under deliveries
of gas on behalf of the respective customer. In addition, PGE offers firm
transportation customers a "storage service" pursuant to which such customers
may have gas delivered to PGE during the period from April through October for
-3-
<PAGE>
storage and redelivery during the winter period. PGE also offers firm
transportation customers a "standby service" under the terms of which PGE will
supply the customer with gas in the event the customer's transportation service
is interrupted or curtailed by its broker, supplier or other third party.
Since April, 1995, PGE has also offered a Market Sensitive Sales Service
("MSSS") in conjunction with its transportation service. The MSSS, which was
approved by Order of the PPUC entered January 11, 1995, provides for the sale of
natural gas at contracted rates based on market prices and other specified terms
and conditions. The MSSS results in additional sales of natural gas by PGE and
less transportation of natural gas by it on behalf of third parties. PGE sold
1,388,000 MCF under the MSSS during 1995, and expects to sell approximately
2,344,000 MCF under MSSS in 1996.
Set forth below is a summary of the gas transported by PGE and the number of
its customers using transportation service from 1993 to 1995:
[CAPTION]
Number Volume of Gas Transported (MCF)
of Interstate Pennsylvania
Year Customers Gas Gas Total
[S] [C] [C] [C] [C]
1995 480 14,543,000 5,054,000 19,597,000
1994 574 13,411,000 4,744,000 18,155,000
1993 569 10,078,000 4,627,000 14,705,000
During 1996, PGE expects to transport approximately 20,000,000 MCF of
natural gas, of which it anticipates approximately 5,100,000 MCF will be
Pennsylvania gas.
The decrease in 1995 in the number of customers using transportation service
was the result of PGE requiring such customers to install telemetering equipment
so that PGE could monitor the usage by those customers on a daily basis and
thereby determine if the appropriate quantities of natural gas were being
delivered for them. This requirement for telemetering equipment caused a number
of customers, for whom relatively small quantities of natural gas were being
transported, to revert to sales service.
The rates charged by PGE for the transportation of interstate gas are
essentially equal to its tariff rates for the sale of gas with all gas costs
removed. As a result, the transportation of interstate gas has had no
significant adverse effect on earnings. However, the rate charged for the
transportation of gas produced in Pennsylvania yields considerably less revenue
than the gross margin (gas operating revenues less the cost of gas) that would
be realized from sales under normal tariff rates. This lower rate for the
transportation of Pennsylvania gas is the result of regulations adopted by the
PPUC to encourage the production of natural gas within the state.
Alternate Fuel Sales. In order to be more competitive in terms of price
with certain alternate fuels, PGE offers an Alternate Fuel Rate for eligible
customers. This rate applies to large commercial and industrial accounts that
have the capability of using No. 2, 4 or 6 fuel oil or propane as an alternate
source of energy. Whenever the cost of such alternate fuel drops below the cost
of natural gas at PGE's normal tariff rates, PGE is permitted by the PPUC to
lower its price to these customers so that PGE can remain competitive with the
alternate fuel. However, in no instance may PGE sell gas under this special
arrangement for less than its average commodity cost of gas purchased during the
month. PGE's revenues under the Alternate Fuel Rate amounted to $2.0 million in
1995, $3.7 million in 1994 and $4.6 million in 1993. These revenues reflected
-4-
<PAGE>
the sale of 603,000 MCF, 1,223,000 MCF and 1,541,000 MCF in 1995, 1994 and 1993,
respectively. It is anticipated that approximately 1,445,000 MCF will be sold
under the Alternate Fuel Rate in 1996. The change in volumes sold under the
Alternate Fuel Rate reflects the switching by certain customers between
alternate fuel service and transportation service as a result of periodic
changes in the relative cost of natural gas and alternate fuels.
FERC Order 636. On April 8, 1992, the Federal Energy Regulatory Commission
("FERC") issued Order No. 636 ("Order 636"), requiring interstate pipeline
suppliers to restructure their services and operations in an attempt to enhance
competition and maximize the benefits of wellhead price decontrol. The
objectives of Order 636 were to be accomplished primarily by unbundling the
services (i.e., the sale, transportation and storage of gas) provided by the
interstate pipeline suppliers and by making those services available to end
users on the same terms as local gas distribution companies, such as PGE.
Pursuant to Order 636, the interstate pipelines have been required to: (1)
unbundle transportation service from sales service; (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services; (3) provide a no-notice transportation service; (4) provide open
access storage service; (5) reallocate upstream pipeline capacity and upstream
storage for the benefit of downstream interstate pipeline suppliers; and (6)
implement a straight fixed-variable rate design to replace all modified fixed-
variable rate designs. The interstate pipelines have been granted a blanket
sales certificate to make unbundled sales in competition with non-pipeline
merchants and are being permitted recovery of all reasonable and prudent
transition costs incurred in order to comply with Order 636. Such transition
costs include: (1) the cost of renegotiating existing gas supply contracts with
producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included
in the interstate pipelines' purchased gas adjustment accounts at the time they
adopted market-based pricing for gas sales ("Account 191 Costs"); (3)
unrecovered costs of assets that cannot be assigned to customers of unbundled
services ("Stranded Costs"); and (4) costs of new facilities to physically
implement Order 636 ("New Facility Costs"). Additionally, the interstate
pipelines have been allowed pre-granted abandonment of sales and transportation
services to customers upon expiration of applicable contracts, subject to
customers' rights of first refusal.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding the recovery of Order 636 transition costs.
The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filing
made with the PPUC by PGE and other larger local gas distribution companies.
As of February 1, 1994, PGE began to recover the Gas Transition Costs that
are being billed to PGE by its interstate pipelines through an increase in its
PGC rate. As of December 31, 1995, PGE had been billed a total of $1.3 million
of Gas Transition Costs by its interstate pipelines, which is the entire amount
of such billings that PGE expects. 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 approved effective December 1, 1995, and the recovery of the
remaining $217,000 will be sought by PGE in its PGC rate that is effective
December 1, 1996.
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
-5-
<PAGE>
recovery by local distribution companies through the filing of a tariff pursuant
to either the existing surcharge or base rate provisions of the Pennsylvania
Public Utility Code (the "Code"). 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 Order 636 through the billing of a surcharge to
its customers effective September 12, 1994. It is currently estimated that $9.6
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 $6.1
million had been billed to PGE and $4.4 million had been recovered from its
customers as of December 31, 1995. PGE has recorded the estimated transition
costs that remained to be billed to it and the amounts remaining to be recovered
from its customers.
Sources of Supply. PGE purchases natural gas from marketers, producers, and
integrated energy companies, generally under the terms of supply arrangements
that extend for the heating season (i.e., November through March) or for periods
of one year or longer. These contracts typically provide for an adjustment each
month in the cost of gas purchased pursuant thereto based on the then current
market prices for natural gas. The largest individual supplier, an integrated
energy company, accounted for 20.8% of PGE's total purchases of natural gas in
1995. Two other suppliers accounted for 17.2% and 15.7% of PGE's total
purchases of natural gas in 1995. No other suppliers accounted for more than 7%
of PGE's purchases during 1995.
The purchases of natural gas by PGE during each of the years 1995, 1994 and
1993 are summarized below:
[CAPTION]
Volume Average
Year Purchased (MCF) Cost per MCF
[S] [C] [C]
1995 24,173,000 $2.62
1994 28,364,000 $2.82
1993 26,200,000 $2.98
During 1996, PGE expects to purchase a total of approximately 28,113,000 MCF
of natural gas under seasonal or longer-term contracts at a currently projected
average cost of $2.71 per MCF.
PGE presently has adequate supplies of natural gas to meet the demands of
existing customers through October, 1996, and the Company believes that PGE will
be able to obtain sufficient supplies to meet the demands of its existing
customers and to serve new customers (of which approximately 4,000 are expected
to be added in 1996) beyond October, 1996.
-6-
<PAGE>
Pipeline Transportation and Storage Entitlements. Pursuant to the terms of
Order 636, PGE has entered into agreements with its former interstate pipeline
suppliers providing for the firm transportation by those pipelines on a daily
basis of the following quantities of gas:
[CAPTION]
Daily Percentage of Total
Expiration Transportation Transportation
Pipeline Date (a) Entitlement (MCF) Entitlement
[S] [C] [C] [C]
Transco Various through 2015 74,100 (b) 55.5%
Tennessee 1999 and 2000 48,252 36.2
Columbia 2004 11,016 8.3
133,368 100.0%
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PGE agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Includes 3,300 MCF per day that PGE can transport during the period
December through February pursuant to an agreement with Transco that
extends through 2011.
PGE has also contracted with its former interstate pipeline suppliers for
the following volumes of gas storage and storage withdrawals:
[CAPTION]
Maximum
Expiration Total Storage Daily Withdrawal
Pipeline Date (a) (MCF) (b) From Storage (MCF)
[S] [C] [C] [C]
Transco Various through 2013 6,500,000 131,044
Tennessee November 1, 2000 3,500,000 23,031
Columbia October 31, 2004 1,100,000 16,036
11,100,000 170,111
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PGE agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Storage is utilized in order to meet peak day and seasonal demands.
Based on its present pipeline transportation and storage entitlements, PGE
is entitled to a maximum daily delivery of the following quantities of gas:
[CAPTION]
Firm Pipeline Withdrawals
Transportation From Storage Percentage
Pipeline (MCF) (MCF) Total (MCF) of Total
[S] [C] [C] [C] [C]
Transco 74,100 (a) 131,044 205,144 67.6%
Tennessee 48,252 23,031 71,283 23.5
Columbia 11,016 16,036 27,052 8.9
133,368 170,111 303,479 100.0%
(a) Includes 3,300 MCF that may be transported during the period
December through February.
-7-
<PAGE>
In accordance with the provisions of Order 636, PGE may release to its
customers and other parties the portions of its firm pipeline transportation and
storage entitlements which are in excess of its requirements. Such releases may
be made upon notice in accordance with the provisions of Order 636 and for a
consideration not in excess of PGE's cost of the respective entitlement.
Releases may be made for periods ranging from one day to the remaining term of
the entitlement.
Since September 1, 1993, PGE has released portions of its firm pipeline
transportation capacity to certain of its customers and third parties for
varying periods extending up to three years. The maximum capacity so released
on any one day in 1995 was 65,213 MCF. Through March 1, 1996, PGE had not,
however, released any of its storage capacity.
The Company believes that PGE has sufficient firm pipeline transportation
and storage entitlements to meet the demands of its existing customers and to
supply new customers.
Peak Day Requirements. PGE plans for peak day demand on the basis of a
daily mean temperature of 0 degrees Fahrenheit. Requirements for such a design
peak day, assuming the curtailment of service to interruptible customers, are
currently estimated to be 302,906 MCF. Based upon present pipeline
transportation and storage contracts, and assuming no curtailments by its
suppliers, PGE could meet a peak day requirement of 303,479 MCF. PGE's historic
maximum daily sendout is 293,683 MCF, which occurred on January 19, 1994, when
service to interruptible customers and select industrial users was curtailed.
The mean temperature in its gas service area on that day was -8 degrees
Fahrenheit.
Construction Expenditures. PGE's construction expenditures for gas utility
plant in 1995 totaled $21.1 million and are estimated to be $28.9 million for
1996. The higher level of expenditures estimated for 1996 reflects various
system improvements to permit PGE to meet future customer demands, as well as an
increased emphasis on new business development.
Regulation. PGE's natural gas utility operations are regulated by the PPUC,
particularly as to utility rates, service and facilities, accounts, issuance of
certain securities, the encumbering or disposition of public utility properties,
the design, installation, testing, construction, and maintenance of PGE's
pipeline facilities and various other matters associated with broad regulatory
authority.
In addition to those regulations promulgated by the PPUC, PGE must also
comply with federal, state and local regulations relating generally to the
discharge of materials into the environment or otherwise relating to the
protection of the environment. Compliance with such regulations has not had any
material effect upon the capital expenditures, earnings or competitive position
of PGE's gas business. Although it cannot predict the future impact of these
regulations, the Company believes that any additional expenditures and costs
made necessary by them would be fully recoverable by PGE through rates.
PGE, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of these
plants have been in operation since 1960, and several of the plant sites are no
longer owned by PGE. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PGE filed notices with the
Environmental Protection Agency (the "EPA") with respect to the former plant
sites. None of the sites is or was formerly on the proposed or final National
-8-
<PAGE>
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
laws, PGE does not believe that additional costs, if any, related to these
manufactured gas plant sites will be material to its financial position or
results of operations.
The Company is a "holding company" within the meaning of the Public Utility
Holding Company Act of 1935, as amended ("PUHCA"), but it is exempt, pursuant to
Section 3(a) of the PUHCA, from all the provisions of the PUHCA (except Section
9(a)(2) thereof) and the rules and regulations promulgated thereunder. The
Company files an annual exemption statement on Form U-3A-2 pursuant to Rule U-2
promulgated under the PUHCA. Pursuant to the PUHCA, certain acquisitions by the
Company or its subsidiaries of the stock or assets of gas or electric public
utilities are subject to prior approval by the Securities and Exchange
Commission.
PGE's gas distribution and transportation activities are not subject to the
Natural Gas Act, as amended.
Valve Maintenance. On November 16, 1993, the PPUC staff issued an Emergency
Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring 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. PGE 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.
Rates. As required by the Code, PGE files an annual purchased gas cost rate
with the PPUC. This rate is designed to recover purchased gas costs for the
period it will be in effect. The procedure includes a process for the
reconciliation of actual gas costs incurred and actual revenues received and
also provides for the refund of any overcollections, plus interest thereon, or
the recoupment of any undercollections of gas costs. The procedure is limited
to purchased gas costs, to the exclusion of other rate matters, and requires a
formal evidentiary proceeding conducted by the PPUC, the submission of specific
information regarding gas procurement practices and specific findings of fact by
the PPUC regarding the "least cost fuel procurement" policies of the utility.
In accordance with this procedure, PGE placed a purchased gas cost rate of $2.75
per MCF in effect on December 1, 1995, and is required to file a proposed annual
purchased gas cost rate on or before June 1, 1996, to be effective December 1,
1996. It is not presently possible to estimate how this proposed rate will
compare to the current purchased gas cost rate of $2.75 per MCF, which is
scheduled to remain in effect through November 30, 1996. The annual changes in
gas rates on account of purchased gas costs have no effect on PGE's earnings
since the change in revenues is offset by a corresponding change 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 PGE. Such adjustments are allowed when the
actual costs vary from the 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
-9-
<PAGE>
financial position or results of operations, and PGE will still be required to
file an annual purchased gas cost rate. As of March 1, 1996, no such quarterly
gas cost adjustments had been made to PGE's tariffs.
FERC Order 636, among other matters, requires that PGE contract for
sufficient gas supplies, pipeline capacity and storage for its annual needs.
These added responsibilities may result in increased scrutiny by the PPUC as to
the prudence of PGE's gas procurement and supply activities. Depending upon how
the PPUC views the cost effectiveness of such activities, PGE may not be
permitted to recover all of its gas supply costs in the rates charged to
customers. However, although it cannot be certain, the Company believes that
PGE will be able to demonstrate to the PPUC the prudence of its gas supply costs
and, therefore, will be allowed to recover all such costs in its purchased gas
cost rate.
Tax Surcharge Adjustments. Regulations of the PPUC provide for PGE to apply
a state tax adjustment surcharge tariff to its bills for gas service to recoup
any increased taxes or passthrough any decreased taxes resulting from changes in
the law with respect to the Pennsylvania Capital Stock Tax, Corporate Net Income
Tax, Gross Receipts Tax or Public Utility Realty Tax. In accordance with such
procedure, PGE filed a revised state tax adjustment surcharge tariff with the
PPUC which became effective August 1, 1995, to reflect the effect of tax
legislation enacted by the Commonwealth of Pennsylvania on June 30, 1995,
decreasing the Corporate Net Income Tax rate.
WATER BUSINESS
Prior to the sale of its water operations to Pennsylvania-American on
February 16, 1996, PGE distributed water to an area lying within the Counties of
Lackawanna, Luzerne, Susquehanna and Wayne, which included the Cities of
Scranton and Wilkes-Barre and 63 other municipalities. The total estimated
population of the water service area, based on the 1990 U.S. Census, was
373,000.
Number and Type of Customers. At December 31, 1995, PGE had approximately
133,400 water customers from which it derived total water revenues of $66.3
million during 1995. The following chart shows a breakdown of the types of
customers and the percentages of water revenues they generated in 1995:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.5% 63.0%
Commercial 7.2 18.6
Industrial 0.3 8.5
Municipal and Other Users 1.0 9.9
Total 100.0% 100.0%
Filtration of Water Supplies. All of PGE's water customers were supplied
with filtered water (except for several hundred who were supplied with ground
water from wells) which met all federal and state drinking water regulations.
The filtration of PGE's water supplies was performed at ten water treatment
plants, located throughout PGE's water service area, which had an aggregate
daily capacity of 101.1 million gallons.
Treatment and Testing of Water. All water entering PGE's distribution
system was filtered (except for the small quantity of ground water pumped from
wells), disinfected, and treated with chemicals to minimize corrosion of the
distribution system and customers' piping. Water samples were taken at each of
-10-
<PAGE>
the intake stations and at selected locations in PGE's service area, and
turbidity was monitored at each location at which the water entered the
distribution system.
Construction Expenditures. PGE's construction expenditures for water
utility plant in 1995 totaled $15.3 million.
NONREGULATED SUBSIDIARIES
Certain of the Company's operations are also conducted by Pennsylvania
Energy Resources, Inc. ("PERI") and its wholly-owned subsidiary Keystone
Pipeline Services, Inc. ("Keystone"), Pennsylvania Energy Marketing Company
("PEM") and Theta Land Corporation ("THETA"). Operating revenues and operating
income (after taxes on income) attributable to PERI, Keystone (from December 4,
1995, the effective date of its acquisition by PERI), PEM and THETA have not
been significant relative to the Company's regulated operations.
PERI. PERI sells materials and supplies used in the distribution of water
and natural gas and engages in service activities, primarily the maintenance of
gas heating appliances for PGE customers.
Keystone. Keystone is engaged in the construction, maintenance and
rehabilitation of natural gas distribution pipelines.
PEM. PEM is engaged in the marketing and brokering of natural gas directly
to large industrial and commercial users.
THETA. Theta owns a small amount of real estate which is being held for
sale or future development. Theta also periodically engages in the sale of
forest products.
-11-
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Positions and
Officer Offices with the
Name Age Since Company
Kenneth L. Pollock 75 1987 Chairman of the Board of
Directors
William D. Davis 64 1991 Vice Chairman of the
Board of Directors
Dean T. Casaday 64 1991 President and Chief
Executive Officer
Thomas F. Karam 40 1995 Executive Vice President
Vincent A. Bonaddio 46 1995 Vice President,
Operations and
Engineering Services
Harry E. Dowling 46 1984 Vice President, Customer
Services
John F. Kell, Jr. 58 1978 Vice President,
Financial Services
Joseph F. Perugino 57 1988 Vice President, Energy
Services
Thomas J. Ward 45 1988 Vice President,
Administrative Services,
and Secretary
Richard N. Marshall 38 1993 Treasurer and Assistant
Secretary
Thomas J. Koval 43 1992 Controller and Assistant
Treasurer
Each of the Executive Officers has been elected to serve until the first
meeting of the Board of Directors of the Company following the 1996 Annual
Meeting and until his successor has been duly elected. Also, each of these
Officers holds the same position with PGE. Other than with respect to Mr.
Casaday, who has an employment agreement with the Company as President and Chief
Executive Officer for a one-year period ending September 1, 1996, there are no
arrangements or understandings between any officer and any other person pursuant
to which he was selected as an officer.
-12-
<PAGE>
ITEM 2. PROPERTIES
Gas. PGE's gas system consists of approximately 2,221 miles of distribution
lines, nine city gate and 67 major regulating stations and miscellaneous related
and additional property. PGE believes that its gas utility properties are
adequately maintained and in good operating condition in all material respects.
Continued expenditures will, however, be required with regard to PGE's on-going
valve maintenance program. See "Business-Gas Business-Valve Maintenance."
Most of PGE's gas utility properties are subject to a first mortgage lien
pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15,
1946, as supplemented by thirty supplemental indentures (collectively, the
"Indenture") from PGE to First Trust of New York, National Association, as
Trustee.
Water. Prior to the sale of its water operations to Pennsylvania-American
on February 16, 1996, PGE's water system consisted principally of 36 active and
standby reservoirs and stream intakes, ten water treatment plants, five wells,
various distribution system storage tanks, approximately 1,730 miles of
aqueducts and pipelines, related watershed land and miscellaneous other
property. Approximately 8,000 acres of land representing reservoir sites and
land adjacent to such reservoirs, as well as the location of various water
facilities, were also sold by PGE to Pennsylvania-American on February 16, 1996,
as part of the sale of its water operations.
Land. As of March 1, 1996, PGE owned approximately 46,000 acres of
undeveloped land situated in northeastern Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to the business of the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting held on October 11, 1995, the common shareholders of
the Company approved the Asset Purchase Agreement among the Company, PGE,
Pennsylvania-American and American dated as of April 26, 1995, providing for the
sale by the Company and PGE of PGE's regulated water operations and certain
related assets to Pennsylvania-American for $413.5 million (including debt
assumed), subject to certain post-closing adjustments. Shareholders cast
3,669,946 votes for the proposal, 126,204 votes against it, and 36,297 abstained
from voting on the proposal.
-13-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol "PNT." Quotations are shown in the Wall Street Journal as "PennEntr"
and in The New York Times as "PennEnt." As of March 1, 1996, there were
approximately 7,861 holders of record of the Company's common stock.
Listed below are the price ranges of the Company's common stock and the
dividends per share of common stock paid during the years ended December 31,
1995 and 1994. The prices shown represent the high and low transaction prices
for the respective quarters without retail mark-up, mark-down or commission.
[CAPTION]
Price Range Cash
High Low Dividends
1995
[S] [C] [C] [C]
First quarter $31.375 $27.125 $ .55
Second quarter 34.000 30.625 .55
Third quarter 34.625 30.750 .55
Fourth quarter 38.125 34.250 .55
Total $ 2.20
1994
First quarter $33.000 $29.250 $ .55
Second quarter 30.875 29.000 .55
Third quarter 31.875 29.375 .55
Fourth quarter 30.125 26.875 .55
Total $ 2.20
Information relating to restrictions on the payment of dividends by the
Company is set forth in Note 8 of the Notes to Consolidated Financial Statements
in Item 8 of this Form 10-K.
-14-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Selected consolidated financial data for the Company and its subsidiaries for
each of the five years in the period ended December 31, 1995, is set forth below.
This data should be read in conjunction with the Consolidated Financial Statements
contained in Item 8 of this Form 10-K:
Year Ended December 31,
1995 1994(1) 1993(1) 1992(1) 1991(1)
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $152,756 $167,992 $153,325 $143,227 $138,465
Cost of gas 84,372 98,653 86,557 77,720 77,801
OPERATING MARGIN 68,384 69,339 66,768 65,507 60,664
OTHER OPERATING EXPENSES:
Operation 22,438 22,652 21,797 21,514 20,589
Maintenance 4,967 4,436 3,695 3,405 3,957
Depreciation 6,971 6,667 6,388 6,087 5,545
Income taxes 3,556 4,290 4,935 4,962 2,513
Taxes other than income
taxes 9,918 10,807 10,055 9,670 8,663
Total other operating
expenses 47,850 48,852 46,870 45,638 41,267
OPERATING INCOME 20,534 20,487 19,898 19,869 19,397
OTHER INCOME (DEDUCTIONS),
NET 763 258 (472) (92) 604
INTEREST CHARGES (2) (15,413) (13,793) (12,888) (13,164) (14,722)
INCOME FROM CONTINUING
OPERATIONS 5,884 6,952 6,538 6,613 5,279
DISCONTINUED OPERATIONS (3):
Income from discontinued
operations 2,127(4) 10,504 7,909 4,915 3,130
Estimated loss on disposal
of discontinued
operations, net of
anticipated income during
the phase-out period (5,961) - - - -
Income (loss) with respect
to discontinued
operations (3,834) 10,504 7,909 4,915 3,130
INCOME BEFORE SUBSIDIARY'S
PREFERRED STOCK DIVIDENDS 2,050 17,456 14,447 11,528 8,409
SUBSIDIARY'S PREFERRED STOCK
DIVIDENDS (2) 2,763 4,639 6,462 5,065 4,236
NET INCOME (LOSS) $ (713) $ 12,817 $ 7,985 $ 6,463 $ 4,173
</TABLE>
See page 16 for an explanation of footnotes.
-15-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994(1) 1993(1) 1992(1) 1991(1)
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
COMMON STOCK INFORMATION:
Weighted average number
of shares outstanding in
thousands 5,729 5,457 4,395 4,011 2,734
Earnings (loss) per share
of common stock:
Continuing operations (2)$ .55 $ .43 $ .02 $ .39 $ .38
Discontinued operations (.67) 1.92 1.80 1.22 1.15
Net income (loss) before
premium on redemption
of subsidiary's
preferred stock (.12) 2.35 1.82 1.61 1.53
Premium on redemption
of subsidiary's
preferred stock - (.18) - - -
Earnings (loss) per share
of common stock $ (.12) $ 2.17 $ 1.82 $ 1.61 $ 1.53
Cash dividends per share
of common stock $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20
CAPITALIZATION AT END
OF PERIOD:
Amounts -
Common shareholders'
investment $162,739 $172,012 $165,775 $135,144 $109,965
Preferred stock of PGE -
Not subject to mandatory
redemption, net 33,615 33,615 33,615 33,615 9,916
Subject to mandatory
redemption 1,680 1,760 31,840 41,920 42,000
Long-term debt 106,706 220,705 155,388 148,866 128,267
Total capitalization $304,740 $428,092 $386,618 $359,545 $290,148
Ratios -
Common shareholders'
investment 53.4% 40.2% 42.9% 37.6% 37.9%
Preferred stock of PGE -
Not subject to mandatory
redemption, net 11.0 7.8 8.7 9.3 3.4
Subject to mandatory
redemption 0.6 0.4 8.2 11.7 14.5
Long-term debt 35.0% 51.6 40.2 41.4 44.2
Total 100.0% 100.0% 100.0% 100.0% 100.0%
UTILITY PLANT AT END OF
PERIOD:
Total utility plant $295,895 $284,080 $269,819 $256,663 $246,323
Accumulated depreciation 76,882 74,408 70,954 65,318 61,628
Net utility plant $219,013 $209,672 $198,865 $191,345 $184,695
TOTAL ASSETS AT END OF
PERIOD:
Continuing operations $319,968 $321,236 $318,057 $257,458 $247,538
Discontinued operations,
net (5) 204,250 203,196 193,002 183,702 144,815
-16-
<PAGE>
Total $524,218 $524,432 $511,059 $441,160 $392,353
</TABLE>
See page 16 for an explanation of footnotes.
-17-
<PAGE>
(1) Restated to reflect discontinued operations.
(2) None of PEI's interest charges nor any of PGE's Preferred Stock dividends
have been allocated to the discontinued operations. Interest charges
relating to indebtedness of PGE have been allocated to the discontinued
operations based on the relationship of the gross water utility plant of
the discontinued operations to the total of PGE's gross gas and water
utility plant. This is the same method as had been utilized by PGE and the
PPUC in establishing the revenue requirements of its utility operations.
(3) All amounts are shown net of related income taxes.
(4) Reflects income only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
(5) Net of (i) liabilities being assumed by Pennsylvania-American (ii)
estimated liability for income taxes on sale of discontinued operations,
(iii) with respect to the year ended December 31, 1995, the anticipated
income from the discontinued operations during the phase-out period for
financial statement purposes of April 1, 1995, through February 15, 1996,
and (iv) with respect to periods ended in 1994 and earlier years, other net
assets of the discontinued operations (which were written off as of March
31, 1995). See Note 2 of Notes to Consolidated Financial Statements
included in Item 8 of this Form 10-K.
-18-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PGE 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 PGE's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American paid 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, to
PGE on the February 16, 1996, closing date for the sale. This price is subject
to certain post-closing adjustments. PGE continued to operate the water utility
business until the closing date.
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 the early retirement plan (see Note 10 of the Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K), the sale
resulted in an estimated after tax loss of $6.0 million, net of the expected
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 $209.1 million, net of
an estimated $56.7 million payable for income taxes, are being used by the
Company and PGE to retire debt, to repurchase stock and for working capital for
their continuing operations. After the sale, the principal assets of the
Company and PGE consist of PGE's gas utility operations and approximately 46,000
acres of land.
Operating revenues from water utility operations decreased $425,000 (0.6%)
from $66.7 million for 1994 to $66.3 million for 1995, primarily as a result of
a 1.2% decrease in consumption. Operating expenses related to the water utility
operations, excluding income taxes, increased $2.4 million (6.4%) from $36.7
million for 1994 to $39.0 million for 1995. This increase was principally
attributable to an increase in operation and maintenance expenses as a result of
higher levels of leak repairs and sludge removal costs in 1995 compared to 1994.
Income taxes with respect to the water utility operations decreased by $983,000
(14.4%) from $6.9 million in 1994 to $5.9 million in 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 $1.8 million (7.8%) from $23.2 million for 1994 to $21.4
million for 1995. After allocated interest and other charges (see Note 2 of the
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K), the
income from the water utility operations decreased $1.8 million (16.7%) from
$10.5 million in 1994 to $8.7 million in 1995.
Operating revenues from water utility operations increased by $13.4 million
(25.1%) from $53.4 million in 1993 to $66.7 million in 1994. This increase in
revenues was principally the result of various rate increases allowed by the
PPUC during 1993. Operating expenses related to the water utility operations,
-19-
<PAGE>
excluding income taxes, increased $3.6 million (11.0%) from $33.1 million in
1993 to $36.7 million in 1994. The major reasons for this increase were a $1.8
million (29.8%) increase in depreciation expense (primarily because of capital
additions and the change in December, 1993, from a 4% compound interest to a
straight-line method of depreciation with respect to certain water plant) and a
$1.9 million increase in other operating expenses, largely as a result of
increased payroll and other postemployment benefit costs, the effects of which
were partially offset by a decrease in the amortization of rate case expense.
Income taxes with respect to the water utility operations increased by $3.9
million from $2.9 million in 1993 to $6.9 million in 1994 due to a higher level
of income before income taxes (for this purpose, operating income net of
interest charges). As a result of the foregoing, operating income of the water
utility operations increased $5.8 million (33.6%) from $17.4 million in 1993 to
$23.2 million in 1994. After allocated interest charges (see Note 2 of the
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K), the
income from the water utility operations increased $2.6 million (32.8%) from
$7.9 million in 1993 to $10.5 million in 1994.
In accordance with generally accepted accounting principles, the Company's
consolidated financial statements for the periods prior to 1995 were restated to
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, which
consist primarily of PGE's gas utility operations. For additional information
regarding the discontinued operations, see Note 2 of the Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K.
-20-
<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
calendar years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0%
Cost of gas................................ 55.3 58.7 56.5
OPERATING MARGIN............................. 44.7 41.3 43.5
OTHER OPERATING EXPENSES:
Operation.................................. 14.7 13.5 14.2
Maintenance................................ 3.2 2.6 2.4
Depreciation............................... 4.6 4.0 4.2
Income taxes............................... 2.3 2.6 3.2
Taxes other than income taxes.............. 6.5 6.4 6.5
Total other operating expenses........... 31.3 29.1 30.5
OPERATING INCOME............................. 13.4 12.2 13.0
OTHER INCOME (DEDUCTIONS), NET............... 0.5 0.1 (0.3)
INTEREST CHARGES(1).......................... (10.1) (8.2) (8.4)
INCOME FROM CONTINUING OPERATIONS............ 3.8 4.1 4.3
INCOME (LOSS) WITH RESPECT TO DISCONTINUED
OPERATIONS................................. (2.5) 6.3 5.1
INCOME BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS............................ 1.3 10.4 9.4
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... 1.8 2.8 4.2
NET INCOME (LOSS)............................ (0.5)% 7.6% 5.2%
</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.
o Year Ended December 31, 1995, compared with year ended December 31, 1994
Operating Revenues. Operating revenues decreased $15.2 million (9.1%) from
$168.0 million for 1994 to $152.8 million for 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 the switching
of certain commercial and industrial customers from sales to transportation
service and a 179 million cubic feet (0.8%) decrease in sales to residential and
commercial heating customers, caused by a 133 (2.2%) decrease in heating degree
days. There were 6,029 heating degree days (95.8% of normal) during 1995
compared to 6,162 (97.9% of normal) during 1994.
Cost of Gas. The cost of gas decreased $14.3 million (14.5%) from $98.7
million for 1994 to $84.4 million for 1995, primarily because of the
aforementioned reduction in the gas cost rate effective May 16, 1995. See "-
-21-
<PAGE>
Rate Matters." Also contributing to the decrease was the reduced consumption by
residential and commercial heating customers.
-22-
<PAGE>
Operating Margin. The operating margin decreased $955,000 (1.4%) from $69.3
million in 1994 to $68.4 million in 1995, primarily because of the 179 million
cubic feet (0.8%) decrease in consumption by residential and commercial heating
customers. However, as a percentage of operating revenues, the margin increased
from 41.3% in 1994 to 44.7% in 1995 primarily as a result of the higher average
charge per cubic foot to residential and commercial heating customers because of
their lower consumption due to the warmer weather.
Other Operating Expenses. Other operating expenses decreased $1.0 million
(2.1%) from $48.9 million for 1994 to $47.9 million for 1995. This decrease was
partially the result of a $734,000 (17.1%) decrease in income taxes from $4.3
million in 1994 to $3.6 million in 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, which declined $214,000 (0.9%), and an $889,000 (8.2%)
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 and operation expenses was partially offset by
a $531,000 (12.0%) increase in maintenance expenses, principally as a result of
charges relative to the maintenance of gas valves, and a $304,000 (4.6%)
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 29.1% during 1994 to 31.3%
during 1995 because of the relatively greater decrease in revenues.
Operating Income. As a result of the above, total operating income of $20.5
million remained relatively unchanged, increasing $47,000 (0.2%) in 1995 from
1994. Total operating income also increased as a percentage of total operating
revenues for such periods from 12.2% in 1994 to 13.4% in 1995, primarily because
of the decrease in the cost of gas as a percentage of operating revenues.
Other Income (Deductions), Net. Other income (deductions), net increased
$505,000 from $258,000 in 1994 to $763,000 in 1995, primarily as a result of a
$256,000 increase in earnings of non-regulated subsidiaries, a $227,000 write-
off of expired advances related to income taxes and a $226,000 decrease in
amortization of preferred stock issuance costs.
Interest Charges. Interest charges increased by $1.6 million (11.7%) from
$13.8 million for 1994 to $15.4 million for 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 was allocated to the discontinued
operations.
Income From Continuing Operations. Income from continuing operations
decreased $1.1 million (15.4%) from $7.0 million for 1994 to $5.9 million for
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 $1.9 million (40.4%) from $4.6 million for 1994 to $2.8 million for
1995, as a result of the redemption by PGE on May 31, 1994, of 150,000 shares
($15.0 million) of its 9.50% cumulative preferred stock, $100 par value, and on
-23-
<PAGE>
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 were allocated
to the discontinued operations.
Net Income (Loss). The decrease in net income (loss) of $13.5 million from
income of $12.8 million for 1994 to a loss of $713,000 for 1995, as well as the
decrease in earnings per share of common stock of $2.29 from earnings of $2.17
per share for 1994 (after an $.18 per share charge for the premium on redemption
of subsidiary's preferred stock) to a loss of $.12 per share for 1995, were
largely the result of the estimated loss (equivalent to $1.04 per share) on the
disposal of PGE's water utility operations, as discussed above. Also
contributing to the decreases in net income and earnings per share for 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 and,
in the case of earnings per share, the absence of any premium on the redemption
of subsidiary's preferred stock.
o Year ended December 31, 1994, compared with year ended December 31, 1993
Operating Revenues. Operating revenues increased by $14.7 million (9.6%)
from $153.3 million for 1993 to $168.0 million for 1994, primarily as a result
of a price increase averaging 19.0% (designed to total $28.8 million on an
annual basis) effective December 1, 1993, due to increased costs of purchased
gas. See "-Rate Matters-Rate Filings." Also contributing to the increase in
operating revenues in 1994 was a 224 million cubic feet (1.0%) increase in sales
to residential and commercial heating customers. This increase was attributable
to the addition of approximately 2,200 new customers and occurred despite
heating degree days that were 2.1% lower than normal and 0.3% less than in 1993.
Additionally, the implementation of surcharges to recover FERC Order 636
transition costs (as more fully discussed below under "-Rate Matters-Rate
Filings") acted to increase gas operating revenues by $1.8 million in 1994. The
effects of the price increase and the surcharges on operating revenues were
partially offset by the switching of certain commercial and industrial customers
from sales to transportation service and a price decrease averaging 1.1%
(designed to total $1.8 million on an annual basis) effective December 1, 1994,
due to decreased costs of purchased gas, see"-Rate Matters-Rate Filings."
Cost of Gas. The cost of gas increased $12.1 million (14.0%) from $86.6
million for 1993 to $98.7 million for 1994. The effect of this increase, which
was the result of higher costs for purchased gas and the implementation of
surcharges to recover FERC Order 636 transition costs, see "-Rate Matters-Rate
Filings", was partially offset by a 9.0% (2.6 billion cubic feet) decrease in
the volume of gas sold during 1994 compared to 1993. This decreased volume was
largely attributable to the aforementioned switching of certain customers from
sales to transportation service.
Operating Margin. The operating margin increased $2.6 million or 3.9% from
$66.8 million in 1993 to $69.3 million in 1994, primarily as a result of the
increased sales to residential and commercial heating customers. However, as a
percentage of operating revenues, the margin decreased from 43.5% in 1993 to
41.3% in 1994 primarily because of the increased cost of purchased gas.
Other Operating Expenses. Other operating expenses increased $2.0 million
(4.2%) from $46.9 million for 1993 to $48.9 million for 1994. This increase was
largely attributable to a $729,000 increase in gross receipts tax as a result of
the higher level of gas revenues, an $855,000 increase in operation expenses
(primarily because of a $285,000 increase in payroll costs and increased
provisions for uncollectible accounts of $603,000) and a $741,000 increase in
-24-
<PAGE>
maintenance expenses (principally as a result of a $319,000 increase in payroll
costs and a $146,000 increase in maintenance of gas mains and services
attributable to the extremely cold weather experienced in January and February,
1994). Income taxes decreased by $645,000 (13.1%) from $4.9 million in 1993 to
$4.3 million in 1994 due to a lower level of income before income taxes (for
this purpose, operating income net of interest charges). Notwithstanding the
increase in other operating expenses, such expenses decreased as a percentage of
operating revenues, from 30.5% during 1993 to 29.1% during 1994 because of the
relatively greater increase in operating revenues.
Operating Income. As a result of the above, total operating income
increased by $589,000 (3.0%) from $19.9 million for 1993 to $20.5 million for
1994. However, as a percentage of operating revenues, operating income
decreased from 13.0% in 1993 to 12.2% in 1994 primarily as a result of the
increase in the cost of gas as a percentage of operating revenues.
Other Income (Deductions), Net. Other income (deductions), net increased
$730,000 from a deduction of $472,000 in 1993 to income of $258,000 in 1994,
primarily as a result of a $409,000 gain ($268,000 net of related income taxes)
on the sale of PGE's interest in an oil and gas joint venture, a $254,000
increase ($145,000 net of related income taxes) in gains on the sale of land and
other property and a $239,000 decrease in the net interest expense associated
with the unexpended portion of the proceeds from the issuance of certain debt
held in a construction fund.
Interest Charges. Interest charges increased by $905,000 (7.0%) from $12.9
million for 1993 to $13.8 million for 1994, primarily as a result of borrowings
under the Company's Term Loan Agreement, see "-Liquidity and Capital Resources-
Long-Term Debt and Capital Stock Financings." None of the interest expense on
borrowings under the Company's Term Loan Agreement or its 10.125% Senior Notes
due 1999 was allocated to the discontinued operations.
Income from Continuing Operations. Income from continuing operations
increased $414,000 (6.3%) from $6.5 million for 1993 to $7.0 million for 1994.
This increase was the result of the matters discussed above, principally the
increase in operating margin resulting from the higher level of sales to
residential and commercial heating customers, the effect of which was partially
offset by increases in other operating expenses and interest charges.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $1.8 million (28.2%) from $6.5 million for 1993 to $4.6 million for
1994, primarily as a result of the redemption by PGE on December 23, 1993, of
100,000 shares ($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0
million), of its 9.50% Cumulative Preferred Stock, $100 par value. No dividends
on preferred stock have been allocated to the discontinued operations.
Net Income. Net income increased $4.8 million (60.5%) from $8.0 million for
1993 to $12.8 million for 1994. The increased earnings in 1994 were the result
of a $2.6 million increase in income from discontinued operations and the
matters discussed above relating to the continuing operations, principally the
increase in operating margin resulting primarily from the higher level of sales
to residential and commercial heating customers, increases in other income
(deductions), net and the decrease in preferred stock dividends. The effects of
these factors were partially offset by the increase in other operating expenses.
-25-
<PAGE>
Before the $534,000 premium paid on the redemption of 150,000 shares of
PGE's 9.50% Cumulative Preferred Stock on May 31, 1994, and the $446,000 premium
paid on the redemption of 150,000 shares of PGE's 8.90% Cumulative Preferred
Stock on December 16, 1994, the earnings per share of common stock increased
$.53 (29.1%) from $1.82 per share for 1993 to $2.35 per share for 1994. This
improvement was the result of the 60.5% increase in net income and occurred
despite a 24.2% increase in the weighted average number of shares outstanding
during 1994 primarily as a result of the Company's offering of 1,250,000 shares
of common stock in October, 1993. While premiums on the redemption of preferred
stock are charged to retained earnings and are not a determinant of net income,
the premiums associated with any redemptions occurring subsequent to January 20,
1994, must be taken into account in calculating the earnings per share of common
stock. As a consequence, the premiums on the redemption of the 150,000 shares
of PGE's 9.50% Cumulative Preferred Stock and the 150,000 shares of PGE's 8.90%
Cumulative Preferred Stock acted to reduce PGE's earnings per share for 1994 by
$.18 per share, resulting in earnings of $2.17 per share of common stock for the
year, an increase of $.35 per share (19.2%) over the earnings of $1.82 per share
for the year ended December 31, 1993.
RATE MATTERS
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code (the "Code") which require that the tariffs of larger gas
distribution companies, such as PGE, be adjusted on an annual basis to reflect
changes in their purchased gas costs, the PPUC, by Order adopted November 10,
1994, authorized PGE 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 PGE
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 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 with such regulations. As of March 1, 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 (the "Gas
-26-
<PAGE>
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 (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.
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
approved effective December 1, 1995, and the recovery of the remaining $217,000
will be sought by PGE in its PGC rate that is 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 $9.6 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 $6.1 million had been
billed to PGE and $4.4 million had been recovered from its customers as of
December 31, 1995. 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.
Effects of Inflation. When utility property reaches the end of its useful
life and must be replaced, PGE will incur replacement costs in amounts that due
to the effects of inflation would materially exceed either the original cost or
the accrued depreciation of such property as reflected on its books of account.
However, the cost of such replacement property would be includable in PGE's rate
base, and PGE would be entitled to recover depreciation expense and earn a
return thereon, to the extent that its investment in such property was prudently
incurred and the property is used and useful in furnishing public utility
service.
LIQUIDITY AND CAPITAL RESOURCES
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, subject to
certain adjustments.
The Company and PGE are using the $209.1 million of cash proceeds from the
sale, after the payment of an estimated $56.7 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. Additionally, the
Company and PGE temporarily invested $152.0 million of the proceeds from the
sale pending the use of such funds for (i) the repurchase of approximately
2,000,000 shares of the Company's common stock in April, 1996, for an estimated
aggregate consideration of approximately $77.7 million including related
-27-
<PAGE>
expenses, (ii) the defeasance of the $30.0 million principal amount of the
Company's 10.125% Senior Notes on June 17, 1996, at a total estimated cost of
$31.5 million, (iii) the repurchase of an estimated 225,000 shares of PGE's 9%
cumulative preferred stock in April, 1996, for an estimated aggregate
consideration of $25.0 million including related expenses, (iv) the repurchase
of an estimated 80,000 shares of PGE's 4.10% cumulative preferred stock in
April, 1996, for an estimated aggregate consideration of $4.2 million including
related expenses and (v) for other working capital purposes. Because the
repurchases of the Company's common stock and PGE's 9% and 4.10% cumulative
preferred stock will involve voluntary sales by the holders of the respective
securities, the number and cost of the shares actually purchased may vary from
that estimated depending on market conditions at the time of the repurchases.
With the repayment of its term loan and all its bank borrowings on February
16, 1996, and the availability of the 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 four bank lines of credit with an aggregate borrowing capacity
of $17.5 million (See "-Liquidity"), which is deemed adequate for its immediate
needs. However, PGE plans to arrange additional bank lines of credit as the
proceeds from the sale of its water utility operations are fully utilized and as
it requires further borrowing capacity.
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
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 $17.5 million
of unsecured revolving bank credit and plans to arrange additional bank lines of
credit as its needs require (See "-Sale of Water Utility Operations").
Specifically, PGE currently has four bank lines of credit with an aggregate
borrowing capacity of $17.5 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 March 1, 1996, PGE had no borrowings outstanding
under these bank lines of credit.
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.
-28-
<PAGE>
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. Set forth below is a summary of such financings, exclusive of interim
bank borrowings and indebtedness that was assumed by Pennsylvania-American in
connection with its purchase of PGE's water utility operations, consummated by
the Company and PGE since the beginning of 1994.
On May 31, 1994, the Company borrowed $20.0 million pursuant to the Term
Loan Agreement, which matures on May 31, 1999. Borrowings under the Term Loan
Agreement bear interest at LIBOR ("London Interbank Offered Rates") plus
one-half of one percent (5.875% as of March 1, 1996). Under the provisions of
the Term Loan Agreement, the Company can choose interest rate periods of one,
two, three or six months. The Company utilized the proceeds from such loan to
purchase $20.0 million of PGE common stock. PGE used a portion of the proceeds
it so received to redeem $15.0 million of its 9.50% Cumulative Preferred Stock
and to fund the $534,375 premium in connection with such redemption. The
remaining $4.5 million of proceeds were used by PGE to repay a portion of its
bank borrowings and for working capital purposes.
On July 28, 1994, the Company implemented a Customer Stock Purchase Plan
(the "Customer Plan") which provided the residential customers of PGE with a
method of purchasing newly-issued shares of the Company's common stock at a 5%
discount from the market price. Under the terms of the Customer Plan, 88,231
shares ($2.4 million) and 59,537 shares ($1.7 million) of the Company's common
stock were issued in 1995 and 1994, respectively. The proceeds from the
issuance of shares through the Customer Plan were used by the Company to
purchase PGE common stock. Effective May 9, 1995, the Company suspended the
Customer Plan because of the significant reduction in its capital requirements
resulting from the sale of PGE'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 common stock of the Company. Under
the DRP, 116,505 shares ($3.3 million), 62,271 shares ($1.8 million) and 15,988
shares ($465,000) of common stock were issued during 1995, 1994 and 1993,
respectively. The Company uses the proceeds from the DRP to purchase PGE common
stock. The DRP was amended on May 5, 1994, to provide the Company's
shareholders with a method of reinvesting cash dividends and making cash
investments to purchase newly-issued shares of the Company's common stock at a
5% discount from the market price. Prior to such amendment, cash dividends were
reinvested at 100% of the market price in newly-issued shares and cash
investments were used to purchase shares of the Company's common stock on the
open market. Effective May 9, 1995, the Company suspended the cash investment
feature of the DRP and the 5% discount from the market price on the reinvestment
of dividends under the DRP because of the significant reduction in its capital
requirements resulting from the sale of PGE's water utility operations to
Pennsylvania-American.
Under the Company's Employees' Savings Plan (a section 401(k) plan) which
became effective January 1, 1992, the Company issued an additional 19,468 shares
($628,000) in 1995, 18,100 shares ($540,000) in 1994 and 16,478 shares
($481,000) in 1993.
-29-
<PAGE>
On October 12, 1995, PGE borrowed $50.0 million under a term loan agreement.
The proceeds from the term loan, along with other funds provided by PGE, were
utilized on October 13, 1995, to redeem the $50.0 million principal amount of
PGE's 9.57% Series First Mortgage Bonds due September 1, 1996, in connection
with the then-pending sale of PGE's water utility operations to Pennsylvania-
American.
On December 7, 1995, PERI borrowed $2.0 million pursuant to a five-year term
loan agreement, which matures November 30, 2000. Borrowings under the agreement
bear interest at a fixed rate of 6.54%. PERI used the proceeds it so received,
along with an equity investment from the Company, to acquire all of the
outstanding stock of Keystone Pipeline Services, Inc. (formerly known as Ford,
Bacon & Davis Sealants, Inc.) from Ford, Bacon & Davis Companies, Inc., a
wholly-owned subsidiary of Deutsche Babcock Technologies, Inc. Under the terms
of the agreement, PERI is required to make principal repayments of $200,000,
$300,000, $400,000, $500,000 and $600,000 during the years 1996, 1997, 1998,
1999 and 2000, respectively.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $21.1 million,
$19.6 million and $15.1 million in 1995, 1994 and 1993, respectively. Such
expenditures were financed with internally-generated funds and bank borrowings,
pending the periodic issuance of stock and long-term debt.
The Company currently estimates that PGE's capital expenditures will total
$28.9 million, $24.8 million and $25.3 million, respectively, for 1996, 1997 and
1998. It is anticipated that such expenditures will be financed with internally
generated funds and bank borrowings, pending the periodic issuance of stock and
long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of December 31, 1995, $115.8 million of PGE's long-term debt, $200,000 of
PERI's long-term debt and $80,000 of PGE's preferred stock was required to be
repaid within twelve months. The entire $115.8 million of PGE's long-term debt,
which consisted of borrowings of $60.0 million under its revolving bank credit
agreement, $5.8 million under three additional bank lines of credit and $50.0
under its term loan, had been repaid by February 16, 1996, primarily with
proceeds from the sale of PGE's water utility operations (See "Sale of Water
Utility Operations").
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
and the report of independent public accountants thereon are presented on pages
28 through 55 of this Form 10-K.
-30-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Pennsylvania Enterprises, Inc. (a Pennsylvania
corporation) and subsidiaries (the "Company") as of December 31, 1995 and 1994,
and the related consolidated statements of income, common shareholders'
investment, and cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pennsylvania
Enterprises, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Supplemental Schedule II,
Valuation and Qualifying Accounts for the three-year period ended December 31,
1995 (see index of financial statements) is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subject to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 23, 1996
-31-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1995* 1994* 1993*
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES $ 152,756 $ 167,992 $ 153,325
Cost of gas 84,372 98,653 86,557
OPERATING MARGIN 68,384 69,339 66,768
OTHER OPERATING EXPENSES:
Operation 22,438 22,652 21,797
Maintenance 4,967 4,436 3,695
Depreciation 6,971 6,667 6,388
Income taxes 3,556 4,290 4,935
Taxes other than income taxes 9,918 10,807 10,055
Total other operating expenses 47,850 48,852 46,870
OPERATING INCOME 20,534 20,487 19,898
OTHER INCOME (DEDUCTIONS), NET (Note 4) 763 258 (472)
INCOME BEFORE INTEREST CHARGES 21,297 20,745 19,426
INTEREST CHARGES:
Interest on long-term debt 13,663 12,591 11,636
Other interest 1,844 1,223 1,299
Allowance for borrowed funds used
during construction (94) (21) (47)
Total interest charges 15,413 13,793 12,888
INCOME FROM CONTINUING OPERATIONS 5,884 6,952 6,538
DISCONTINUED OPERATIONS (Note 2):
Income from discontinued operations 2,127 10,504 7,909
Estimated loss on disposal of discontinued
operations, net of anticipated income
during the phase-out period of $7,409,000
(net of related income taxes of $4,800,000) (5,961) - -
Income (loss) with respect to discontinued
operations (3,834) 10,504 7,909
INCOME BEFORE SUBSIDIARY'S
PREFERRED STOCK DIVIDENDS 2,050 17,456 14,447
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 2,763 4,639 6,462
NET INCOME (LOSS) $ (713) $ 12,817 $ 7,985
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations $ .55 $ .43 $ .02
Discontinued operations (.67) 1.92 1.80
Net income (loss) before premium on
redemption of subsidiary's preferred stock (.12) 2.35 1.82
Premium on redemption of subsidiary's
preferred stock - (.18) -
Earnings (loss) per share of common stock $ (.12) $ 2.17 $ 1.82
Weighted average number of shares outstanding 5,729,436 5,456,568 4,394,953
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1995* 1994*
(Thousands of Dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT:
At original cost, less acquisition
adjustments of $386,000 $295,895 $284,080
Accumulated depreciation (76,882) (74,408)
219,013 209,672
OTHER PROPERTY AND INVESTMENTS 7,142 3,481
CURRENT ASSETS:
Cash 629 330
Restricted cash - common stock subscribed (Note 5) - 2,532
Accounts receivable -
Customers 21,066 16,883
Others 815 1,474
Reserve for uncollectible accounts (788) (937)
Accrued utility revenues 10,319 9,004
Materials and supplies, at average cost 2,876 2,797
Gas held by suppliers, at average cost 15,140 20,025
Natural gas transition costs collectible 4,612 4,708
Deferred cost of gas and supplier refunds, net - 3,767
Prepaid expenses and other 3,486 1,483
58,155 62,066
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible 30,015 31,696
Natural gas transition costs collectible 497 4,099
Other 2,516 3,131
Unamortized debt expense 2,630 3,539
Other - 3,552
35,658 46,017
NET ASSETS OF DISCONTINUED OPERATIONS 204,250 203,196
TOTAL ASSETS $524,218 $524,432
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1995* 1994*
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements):
Common shareholders' investment (Notes 5 and 8) $162,739 $172,012
Preferred stock of PGE (Note 6) -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,680 1,760
Long-term debt (Note 7) 106,706 220,705
304,740 428,092
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption (Notes 6, 7 and 9) 116,081 3,290
Notes payable (Note 9) 10,180 -
Accounts payable 18,531 17,781
Deferred cost of gas and supplier refunds, net 434 -
Accrued general business and realty taxes 1,493 3,315
Accrued income taxes 526 3,136
Accrued interest 2,307 2,850
Accrued natural gas transition costs (Note 3) 2,278 2,356
Other 3,534 2,398
155,364 35,126
DEFERRED CREDITS:
Deferred income taxes 48,835 46,600
Accrued natural gas transition costs (Note 3) 1,144 3,250
Unamortized investment tax credits 4,938 5,110
Operating reserves 3,709 2,383
Other 5,488 3,871
64,114 61,214
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
TOTAL CAPITALIZATION AND LIABILITIES $524,218 $524,432
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995* 1994* 1993*
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends $ 3,121 $ 2,313 $ 76
Effects of noncash charges to income -
Depreciation 7,018 6,693 6,413
Deferred income taxes, net (251) 752 (2,472)
Provisions for self insurance 2,652 1,030 1,510
Other, net 5,572 3,074 2,418
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues (219) 1,435 (2,099)
Gas held by suppliers 4,885 6,625 (5,038)
Accounts payable 321 (4,375) (1,233)
Deferred cost of gas and supplier refunds, net 5,715 5,784 (13,307)
Other current assets and liabilities, net (6,509) (763) 1,187
Other operating items, net 2,628 (6,588) (4,014)
Net cash provided (used) by continuing
operations 24,933 15,980 (16,559)
Net cash provided (used) by discontinued
operations 3,764 552 (837)
Net cash provided (used) by operating
activities 28,697 16,532 (17,396)
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (20,615) (16,960) (14,011)
Investment in non-regulated business (3,169) - -
Other, net (4,934) 1,098 201
Net cash used for investing activities (28,718) (15,862) (13,810)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 4,045 3,887 32,807
Common stock subscribed, net (Note 5) - 2,515 -
Redemption of preferred stock of PGE (80) (30,080) (10,080)
Dividends on common stock (12,605) (12,002) (9,805)
Issuance of long-term debt 52,000 50,000 19,000
Repayment of long-term debt (53,535) (31,055) (30,678)
Net increase in bank borrowings 10,500 15,370 32,247
Other, net (5) (1,724) (599)
Net cash provided (used) for financing
activities 320 (3,089) 32,892
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 299 (2,419) 1,686
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 330 2,749 1,063
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 629 $ 330 $ 2,749
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 27,951 $ 24,622 $ 23,992
Income taxes $ 8,748 $ 7,460 $ 6,931
-35-
<PAGE>
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1995* 1994*
(Thousands of Dollars)
<S> <C> <C>
COMMON SHAREHOLDERS' INVESTMENT (Notes 5 and 8):
Common stock, no par value
(stated value $10 per share)
Authorized - 15,000,000 shares
Outstanding - 5,784,319 shares and
5,553,915 shares, respectively $ 57,843 $ 55,539
Common stock subscribed - 2,515
Additional paid-in capital 49,749 45,493
Retained earnings 55,147 68,465
Total common shareholders' investment 162,739 53.4% 172,012 40.2%
PREFERRED STOCK of PGE, par value $100 per share
Authorized - 997,500 shares (Note 6):
Not subject to mandatory redemption, net -
4.10% cumulative preferred,
100,000 shares issued 10,000 10,000
9% cumulative preferred,
250,000 shares outstanding, net of
issuance costs 23,615 23,615
Total preferred stock not subject to
mandatory redemption, net 33,615 11.0% 33,615 7.8%
Subject to mandatory redemption -
5.75% cumulative preferred, 17,600 and
18,400 shares outstanding, respectively 1,760 1,840
Less current redemption requirements (80) (80)
Total preferred stock subject to
mandatory redemption 1,680 0.6% 1,760 0.4%
LONG-TERM DEBT (Note 7):
First mortgage bonds 55,000 108,535
Notes 167,707 115,380
Less current maturities and sinking
fund requirements (116,001) (3,210)
Total long-term debt 106,706 35.0% 220,705 51.6%
TOTAL CAPITALIZATION $ 304,740 100.0% $ 428,092 100.0%
* See Note 2 regarding discontinued operations and restatement of consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Additional
Common Stock Paid-In Retained
Stock Subscribed Capital Earnings Total
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $41,315 $ - $ 23,023 $ 70,806 $135,144
Net income for 1993 - - - 7,985 7,985
Issuance of common stock 12,825 - 19,982 - 32,807
Premium on redemption of
preferred stock of PGE - - - (356) (356)
Cash dividends on common stock
($2.20 per share) - - - (9,805) (9,805)
Balance at December 31, 1993 54,140 - 43,005 68,630 165,775
Net income for 1994 - - - 12,817 12,817
Issuance of common stock 1,399 - 2,488 - 3,887
Common stock subscribed, net
(Note 5) - 2,515 - - 2,515
Premium on redemption of
preferred stock of PGE - - - (980) (980)
Cash dividends on common stock
($2.20 per share) - - - (12,002) (12,002)
Balance at December 31, 1994 55,539 2,515 45,493 68,465 172,012
Net loss for 1995 - - - (713) (713)
Issuance of common stock 2,304 - 4,256 - 6,560
Common stock subscribed, net
(Note 5) - (2,515) - - (2,515)
Cash dividends on common stock
($2.20 per share) - - - (12,605) (12,605)
Balance at December 31, 1995 $57,843 $ - $ 49,749 $ 55,147 $162,739
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-38-
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 remaining 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 have not been
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 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, from December 4,
1995, the date Keystone was acquired by PERI. All material intercompany
accounts have been eliminated in consolidation.
PGE, a wholly-owned subsidiary of Pennsylvania Enterprises, Inc., is a
regulated public utility subject to the jurisdiction of the Pennsylvania Public
Utility Commission ("PPUC") for rate and accounting purposes. The financial
statements of 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 or
regulatory agencies such as the PPUC.
The operations of PERI, including Keystone from its date of acquisition, PEM
and Theta, which are summarized in Note 4 to these consolidated financial
statements, were not significant to the operations of the Company as a whole and
are reflected in the consolidated financial statements in "Other Income
(deductions), net."
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors which are difficult to
predict and are beyond the control of the Company. Therefore, actual amounts
could differ from these estimates.
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll, administrative
and general costs, and an allowance for funds used during construction.
-39-
<PAGE>
The allowance for funds used during construction ("AFUDC") is defined as the
net cost during the period of construction of borrowed funds used and a
reasonable rate upon other funds when so used. Such allowance is charged to
utility plant and reported as a reduction of interest expense (with respect to
the cost of borrowed funds) in the accompanying consolidated statements of
income. AFUDC varies according to changes in the level of construction work in
progress and in the sources and costs of capital. The weighted average rate for
such allowance was approximately 8% in 1995, 7% in 1994 and 8% in 1993.
PGE provides for depreciation on a straight-line basis. Exclusive of
transportation and work equipment, the annual provision for depreciation, as
related to the average depreciable original cost of utility plant, was 2.75% in
1995, 2.77% in 1994 and 2.81% in 1993, respectively.
When depreciable property is retired, the original cost of such property is
removed from the utility plant accounts and is charged, together with the cost
of removal less salvage, to accumulated depreciation. No gain or loss is
recognized in connection with retirements of depreciable property, other than in
the case of significant involuntary conversions or extraordinary retirements.
Revenues and Cost of Gas. PGE bills its customers monthly based on
estimated or actual meter readings on cycles that extend throughout the month.
The estimated unbilled amounts from the most recent meter reading dates through
the end of the period being reported on are recorded as accrued revenues.
PGE generally passes on to its customers increases or decreases in gas costs
from those reflected in its tariff charges. In accordance with this procedure,
PGE defers any current under or over-recoveries of gas costs and collects or
refunds such amounts in subsequent periods.
Deferred Charges (Regulatory Assets). PGE generally accounts for and
reports its costs in accordance with the economic effect of rate actions by the
PPUC. To this extent, certain costs are recorded as deferred charges pending
their recovery in rates. These amounts relate to previously-issued orders of
the PPUC and are of a nature which, in the opinion of the Company, will be
recoverable in future rates, based on such rate orders. In addition to deferred
taxes collectible, which represent the probable future rate recovery of the
previously unrecorded deferred taxes primarily relating to certain temporary
differences in the basis of utility plant not previously recorded because of the
regulatory rate practices of the PPUC, and natural gas transition costs
collectible, the following deferred charges are included as "Other" regulatory
assets:
[CAPTION]
1995 1994
[S] [C] [C]
Early retirement plan charges $ 710 $ 756
Low income usage reduction program 429 441
Computer software costs 415 1,006
Corrosion control costs 341 489
Customer assistance program 109 5
Other 512 434
Total $ 2,516 $ 3,131
The Company also records, as deferred charges, the direct financing costs
incurred in connection with the issuance of long-term debt and redeemable
preferred stock and equitably amortizes such amounts over the life of such
securities.
-40-
<PAGE>
Cash and Cash Equivalents. For the purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt instruments
purchased, which generally have a maturity of three months or less, to be cash
equivalents. Such instruments are carried at cost, which approximates market
value.
Income Taxes. The Company provides for deferred taxes in accordance with
the provisions of FASB Statement 109. The components of the Company's net
deferred income tax liability relative to continuing operations as of December
31, 1995 and 1994, are shown below:
[CAPTION]
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Utility plant basis differences $51,822 $49,638
FERC Order 636 transition costs 700 1,371
Alternative minimum tax (1,947) (2,213)
Operating reserves (1,300) (1,020)
Other (440) (1,176)
Net deferred income tax liability $48,835 $46,600
The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Included in operating expenses:
Currently payable -
Federal $ 2,845 $ 1,654 $ 4,535
State 1,169 1,128 2,021
Total currently payable 4,014 2,782 6,556
Deferred, net -
Federal 198 1,785 (515)
State (463) (105) (934)
Total deferred, net (265) 1,680 (1,449)
Amortization of investment tax credits (193) (172) (172)
Total included in operating expenses 3,556 4,290 4,935
Included in other income, net:
Currently payable -
Federal 410 345 93
State 159 170 35
Total currently payable 569 515 128
Deferred, net -
Federal - 10 7
State - 12 6
Total deferred, net - 22 13
Total included in other income, net 569 537 141
Total provision for income taxes $ 4,125 $ 4,827 $ 5,076
-41-
<PAGE>
The components of deferred income taxes relative to continuing operations,
which are recorded consistent with the treatment allowed by the PPUC for
ratemaking purposes, are as follows:
[CAPTION]
1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Excess of tax depreciation over
depreciation for accounting purposes $ 1,587 $ 1,197 $ 1,023
FERC Order 636 transition costs (670) 1,371 -
Take-or-pay costs, net (281) (652) (1,126)
Other, net (901) (214) (1,333)
Total deferred taxes, net $ (265) $ 1,702 $(1,436)
Included in:
Operating expenses $ (265) $ 1,680 $(1,449)
Other income, net - 22 13
Total deferred taxes, net $ (265) $ 1,702 $(1,436)
The total provision for income taxes relative to continuing operations shown
in the accompanying consolidated statements of income differs from the amount
which would be computed by applying the statutory federal income tax rate to
income before income taxes. The following table summarizes the major reasons
for this difference:
[CAPTION]
1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Income before income taxes $10,009 $11,828 $11,687
Tax expense at statutory federal
income tax rate $ 3,503 $ 4,140 $ 4,090
Increases (reductions) in taxes
resulting from -
State income taxes, net of
federal income tax benefit 562 942 924
Amortization of investment tax
credits (193) (172) (172)
Other, net 253 (83) 234
Total provision for income taxes $ 4,125 $ 4,827 $ 5,076
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
implementation of FASB Statement 121 in 1996 is not expected to have any
significant impact on the Company or PGE since the carrying amount of all
assets, including regulatory assets, is considered recoverable.
-42-
<PAGE>
(2) DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PGE 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 PGE's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American paid 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, to
PGE on the February 16, 1996, closing date for the transaction. This price is
subject to certain post-closing adjustments. PGE continued to operate the water
utility business until the closing date.
The sale price reflects 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 the early retirement plan (see Note 10 of the Notes to
Consolidated Financial Statements), the sale resulted in an estimated after tax
loss of $6.0 million, net of the expected 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 $56.7 million.
The net cash proceeds from the sale of approximately $209.1 million, net of
the estimated $56.7 million payable for income taxes, are being used by the
Company and PGE to retire debt, to repurchase stock 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 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 have been 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
has been allocated to the discontinued operations.
-43-
<PAGE>
Selected financial information for the discontinued operations as of
December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994 and
1993 is set forth below:
[CAPTION]
Net Assets of Discontinued Operations
As of December 31,
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Net utility plant $ 368,742 $ 359,399
Current assets (primarily accounts
receivable and accrued revenues) 12,756 12,141
Deferred charges and other assets 25,752 31,103
Total assets being acquired by
Pennsylvania-American 407,250 402,643
Liabilities being assumed by
Pennsylvania-American
Long-term debt 141,097 141,420
Other 5,983 13,168
147,080 154,588
Net assets being acquired by
Pennsylvania-American 260,170 248,055
Estimated liability for income taxes on
sale of discontinued operations (56,710) (55,542)
Estimated net income of discontinued operations
during the remainder of the phase-out period 790 -
Other net assets of discontinued operations
(written off as of March 31, 1995) - 10,683
Total net assets of discontinued operations $ 204,250 $ 203,196
[CAPTION]
Income From Discontinued Operations
Years ended December 31,
1995* 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Operating revenues $ 15,640 $ 66,731 $ 53,363
Operating expenses, excluding income taxes
Depreciation 1,946 7,672 5,911
Other operating expenses 6,929 29,005 27,140
8,875 36,677 33,051
Operating income before income taxes 6,765 30,054 20,312
Income taxes 1,403 6,850 2,948
Operating income 5,362 23,204 17,364
Other income 9 49 71
Allocated interest charges (3,244) (12,749) (9,526)
Income from discontinued operations $ 2,127 $ 10,504 $ 7,909
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
-44-
<PAGE>
[CAPTION]
Net Cash Provided (Used) by Discontinued Operations
Years ended December 31,
1995* 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Income from discontinued operations $ 2,127 $ 10,504 $ 7,909
Noncash charges (credits) to income:
Depreciation 1,946 7,672 5,911
Deferred treatment plant costs, net 145 581 (3,560)
Deferred income taxes 447 5,146 4,170
Deferred water utility billings - (5,574) (582)
Changes in working capital, exclusive
of long-term debt 1,648 353 (2,041)
Additions to utility plant (2,276) (20,980) (32,515)
Utilization of restricted funds - 9,753 15,868
Net increase (decrease) in long-term
debt 1,010 (6,834) 1,640
Other, net (1,283) (69) 2,363
Net cash provided (used) for discontinued
operations $ 3,764 $ 552 $ (837)
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
(3) RATE MATTERS
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code, which require that the tariffs of gas distribution
companies, such as PGE, be adjusted on an annual basis, and on an interim basis
when circumstances dictate, to reflect changes in their purchased gas costs, the
PPUC ordered PGE to make the following changes during 1995, 1994 and 1993 to the
gas costs contained in its gas tariff rates:
[CAPTION]
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
[S] [C] [C] [C]
December 1, 1995 $2.42 $2.75 $ 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)
December 1, 1994 3.74 3.68 (1,800,000)
December 1, 1993 2.79 3.74 28,800,000
The changes in gas rates on account of purchased gas costs have no effect on
PGE's earnings since the change in revenue is offset by a corresponding change
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 March 1, 1996, no such quarterly gas cost
adjustments had been made to PGE's tariffs.
-45-
<PAGE>
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 (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filing.
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 approved effective
December 1, 1995, and the recovery of the remaining $217,000 will be sought by
PGE in its PGC rate that is effective December 1, 1996.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs are subject to full
recovery by local distribution companies through the filing of a tariff pursuant
to either the existing surcharge or base rate provisions of the Pennsylvania
Public Utility Code. 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 $9.6
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 $6.1
million had been billed to PGE and $4.4 million had been recovered from its
customers as of December 31, 1995. 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.
-46-
<PAGE>
(4) OTHER INCOME (DEDUCTIONS), NET
Other income (deductions), net was comprised of the following elements:
[CAPTION]
1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Earnings of non-regulated subsidiaries $ 651 $ 395 $ 316
Write-off of expired advances relating
to income taxes, net of related
income taxes 227 - -
Net interest income (expense) with respect
to proceeds from the issuance of debt
held in a construction fund 30 (91) (330)
Gain on sale of investment in joint
venture, net of related income taxes - 268 -
Gain on sale of land and other property,
net of related income taxes - 165 20
Holding company expenses, net of related
income tax benefits (189) (209) (203)
Premium on retirement/defeasance of debt (11) (40) (81)
Amortization of preferred stock issuance
costs, net of related income tax benefits (1) (227) (126)
Other 56 (3) (68)
Total $ 763 $ 258 $ (472)
Summary financial data for non-regulated
subsidiaries:
Revenues $ 8,479 $ 9,127 $ 6,574
Expenses 7,828 8,732 6,258
Net income $ 651 $ 395 $ 316
Total assets (including, $66,000,
$294,000 and $817,000, respectively,
eliminated in consolidation) $ 5,272 $ 1,753 $ 2,534
(5) COMMON STOCK
Customer Stock Purchase Plan. On July 28, 1994, the Company implemented a
Customer Stock Purchase Plan (the "Customer Plan") which provided the
residential customers of PGE with a method of purchasing newly-issued shares of
the Company's common stock at a 5% discount from the market price. Under the
terms of the Customer Plan, 88,231 shares ($2.4 million) and 59,537 shares ($1.7
million) of the Company's common stock were issued during 1995 and 1994,
respectively. Effective May 9, 1995, the Company suspended the Customer Plan
because of the significant reduction in its capital requirements resulting from
the sale of PGE's water utility operations to Pennsylvania-American.
On January 3, 1995, the Company issued 45,360 shares of its common stock for
an aggregate consideration of $1.2 million with respect to payments received
pursuant to the Customer Plan during the December, 1994, subscription period.
The payments so received during December are reflected under the captions
"Restricted cash - Common stock subscribed" and "Common shareholders' investment
- - Common stock subscribed" in these consolidated financial statements as of
December 31, 1994.
-47-
<PAGE>
Dividend Reinvestment and Stock Purchase Plan. Through the Company's
Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders of shares of the
Company's common stock may reinvest cash dividends and/or make cash investments
in the common stock of the Company. Under the DRP, 116,505 shares ($3.3
million), 62,271 shares ($1.8 million) and 15,988 shares ($465,000) of common
stock were issued during 1995, 1994 and 1993, respectively. The DRP was amended
on May 5, 1994, to provide the Company's shareholders with a method of
reinvesting cash dividends and making cash investments to purchase newly-issued
shares of the Company's common stock at a 5% discount from the market price.
Prior to such amendment, cash dividends were reinvested at 100% of the market
price in newly-issued shares and cash investments were used to purchase shares
of the Company's common stock on the open market. Effective May 9, 1995, the
Company suspended the cash investment feature of the DRP and the 5% discount
from the market price on the reinvestment of dividends under the DRP because of
the significant reduction in capital requirements resulting from the sale of
PGE's water utility operations to Pennsylvania-American.
On January 3, 1995, the Company issued 51,565 shares of its common stock for
an aggregate consideration of $1.3 million with respect to cash investments made
pursuant to the DRP during the fourth quarter of 1994. The investments made
during the fourth quarter are reflected under the captions "Restricted cash -
common stock subscribed" and "Common shareholders' investment - Common stock
subscribed" in these consolidated financial statements as of December 31, 1994.
Employees' Savings Plan. Under the Company's Employees' Savings Plan (a
section 401(k) plan) which became effective January 1, 1992, the Company issued
an additional 19,468 shares ($628,000) in 1995, 18,100 shares ($540,000) in 1994
and 16,478 shares ($481,000) in 1993.
Stock Option Plan. On June 3, 1992, the Company's shareholders approved the
Pennsylvania Enterprises, Inc. 1992 Stock Option Plan (the "Plan"). Under the
terms of the Plan, a total of 200,000 shares of authorized but unissued common
stock were reserved and made available for distribution to eligible employees.
Stock options awarded under the Plan may be either Incentive Stock Options or
Non-qualified Stock Options. On April 7, 1993, Non-qualified Stock Options to
purchase 45,000 shares of common stock were issued to eligible employees at an
exercise price of $30 per share (the fair market value of the common stock on
such date). These options, which expire on April 6, 2003, could not be
exercised prior to April 7, 1994. As of December 31, 1995, the options for 400
such shares had expired, 4,800 had been exercised and 39,800 options remained
outstanding. In addition, as of such date, 155,400 shares of authorized but
unissued common stock were reserved for distribution to eligible employees under
the terms of the Plan, including 400 shares for which previously granted options
had expired.
Shareholder Rights Plan. On April 26, 1995, the Company adopted a
Shareholder Rights Plan under the terms of which each shareholder of record at
the close of business on May 16, 1995, will receive a dividend distribution of
one right ("Right" or "Rights") for each share of common stock held.
Each Right will entitle shareholders to purchase from the Company one-half
of a share of common stock. No less than two Rights, and only integral
multiples of two Rights, may be exercised by holders of Rights at an exercise
price of $100 per share of common stock (equivalent to $50 for each one-half
share of common stock), subject to certain adjustments. The Rights will become
exercisable only if a person or group acquires 15% or more of the Company's
common stock, or commences a tender or exchange offer which, if consummated,
would result in that person or group owning at least 15% of the common stock.
Prior to that time, the Rights will not trade separately from the common stock.
-48-
<PAGE>
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 sale of PGE's water utility operations to Pennsylvania-
American), all other holders of Rights will then be entitled to purchase, by
payment of the $100 exercise price upon the exercise of two Rights, common stock
of the acquiring company with a value of twice the exercise price.
The Company may redeem the Rights at $.005 per Right at any time prior to
the time that a person or group has acquired 15% or more of its common stock.
The Rights, which expire on May 16, 2005, do not have voting or dividend rights
and, until they become exercisable, have no dilutive effect on the earnings per
share of the Company.
(6) PREFERRED STOCK
Preferred Stock of PGE Subject to Mandatory Redemption
On December 23, 1993, PGE redeemed 100,000 shares of its 9.50% 1988 series
cumulative preferred stock at a price of $103.5625 per share (plus accrued
dividends to the redemption date), which included a voluntary redemption premium
of $3.5625 per share ($356,250 in the aggregate). On May 31, 1994, PGE redeemed
the remaining 150,000 outstanding shares of its 9.50% 1988 series cumulative
preferred stock, $100 par value, at a price of $103.5625 per share, which
included a voluntary redemption premium of $3.5625 per share ($534,375 in the
aggregate), plus accrued dividends.
On December 16, 1994, PGE redeemed all 150,000 shares of its 8.90%
cumulative preferred stock at a price of $102.97 per share, which included a
voluntary redemption premium of $2.97 per share ($445,500 in the aggregate).
The holders of the 5.75% cumulative preferred stock have a noncumulative
right each year to tender to PGE and to require it to purchase at a per share
price not exceeding $100, up to (a) that number of shares of the 5.75%
cumulative preferred stock which can be acquired for an aggregate purchase price
of $80,000 less (b) the number of such shares which PGE may already have
purchased during the year at a per share price of not more than $100. Eight
hundred such shares were acquired and cancelled by PGE in each of the three
years in the period ended December 31, 1995, for an aggregate purchase price in
each year of $80,000.
As of December 31, 1995, the sinking fund requirements relative to PGE's
5.75% cumulative preferred stock (the only series of preferred stock subject to
mandatory redemption that was outstanding as of such date) were $80,000 for each
of the years 1996 through 2000.
-49-
<PAGE>
At PGE's option, the 5.75% cumulative preferred stock may currently be
redeemed at a price of $102.00 per share ($1,795,200 in the aggregate).
Preferred Stock of PGE Not Subject to Mandatory Redemption
On August 18, 1992, PGE issued 250,000 shares of its 9% cumulative preferred
stock, par value $100 per share, for aggregate net proceeds of approximately
$23.6 million. The 9% cumulative preferred stock is not redeemable by PGE prior
to September 15, 1997. Thereafter, it is redeemable at the option of PGE, in
whole or in part, upon not less than 30 days' notice, at $100 per share plus
accrued dividends to the date of redemption and at a premium of $8 per share if
redeemed from September 15, 1997, to September 14, 1998, and a premium of $4 per
share if redeemed from September 15, 1998, to September 14, 1999.
At PGE's option, the 4.10% cumulative preferred stock may currently be
redeemed at a redemption price of $105.50 per share or for an aggregate
redemption price of $10,550,000.
Dividend Information
The dividends on the preferred stock of PGE in each of the three years in
the period ended December 31, 1995, were as follows:
[CAPTION]
Series 1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
4.10% $ 410 $ 410 $ 410
5.75% 103 108 113
8.90% - 1,280 1,335
9.00% 2,250 2,250 2,250
9.50% 1988 series - 591 2,354
Total $2,763 $4,639 $6,462
Dividends on all series of PGE's preferred stock are cumulative, and if
dividends in an amount equivalent to four full quarterly dividends on all shares
of preferred stock then outstanding are in default and until all such dividends
have been paid, the holders of the preferred stock, voting separately as one
class, shall be entitled to elect a majority of the Board of Directors of PGE.
Additionally, PGE may not declare dividends on its common stock if any dividends
on shares of preferred stock then outstanding are in default.
-50-
<PAGE>
(7) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1995
and 1994:
[CAPTION]
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Indebtedness of the Company:
10.125% senior notes, due 1999, net of
unamortized discount $ 29,906 $ 29,880
Term loan, due 1999 20,000 20,000
Total long-term debt of the Company 49,906 49,880
Indebtedness of PGE:
First mortgage bonds -
8 % Series, due 1997 - 3,535
8.375% Series, due 2002 30,000 30,000
9.23 % Series, due 1999 10,000 10,000
9.34 % Series, due 2019 15,000 15,000
9.57 % Series, due 1996 - 50,000
55,000 108,535
Notes -
Term loan, due 1996 50,000 -
Bank borrowings, at weighted average interest
rates of 6.62% and 5.28%, respectively (Note 9) 65,801 65,500
115,801 65,500
Less current maturities and sinking
fund requirements (115,801) (3,210)
Total long-term debt of PGE 55,000 170,825
Indebtedness of PERI:
Term loan, due 2000 2,000 -
Less current maturities (200) -
Total long-term debt of PERI 1,800 -
Total consolidated long-term debt $106,706 $220,705
Term Loan Agreements. On May 31, 1994, the Company borrowed $20.0 million
pursuant to a five-year term loan agreement (the "Term Loan Agreement"), which
loan matures on May 31, 1999. Borrowings under the Term Loan Agreement bear
interest at LIBOR ("London Interbank Offered Rates") plus one-half of one
percent (5.875% as of March 1, 1996). Under the terms of the Term Loan
Agreement, the Company can choose interest rate periods of one, two, three or
six months. The Company utilized the proceeds from such loan to purchase $20.0
million of PGE common stock. PGE used a portion of the proceeds it so received
to redeem $15.0 million of its 9.50% cumulative preferred stock and to fund the
$534,375 premium in connection with such redemption. The remaining $4.5 million
of proceeds were used by PGE to repay a portion of its bank borrowings and for
working capital purposes.
On October 12, 1995, PGE borrowed $50.0 million pursuant to a term loan
agreement, which matures on November 1, 1996. Proceeds from the loan, along
with other funds provided by PGE, were utilized on October 13, 1995, to redeem
the $50.0 million principal amount of PGE's 9.57% Series First Mortgage Bonds
due September 1, 1996.
On December 7, 1995, PERI borrowed $2.0 million pursuant to a five-year term
loan agreement, which loan matures November 30, 2000. Borrowings under the
agreement bear interest at a fixed rate of 6.54%. PERI used the proceeds it so
received along with an equity investment from the Company to acquire all of the
outstanding stock of Keystone Pipeline Services, Inc. (formerly known as Ford,
-51-
<PAGE>
Bacon & Davis Sealants, Inc.) from Ford, Bacon & Davis Companies, Inc., a
wholly-owned subsidiary of Deutsche Babcock Technologies, Inc. Under the terms
of the term loan agreement, PERI is required to make principal repayments of
$200,000, $300,000, $400,000, $500,000 and $600,000 during the years 1996, 1997,
1998, 1999 and 2000, respectively.
-52-
<PAGE>
Maturities and Sinking Fund Requirements. As of December 31, 1995, the
aggregate annual maturities and sinking fund requirements of long-term debt for
each of the next five years ending December 31, were:
[CAPTION]
Year Amount
[S] [C]
1996 $116,001,000 (a)
1997 $ 300,000
1998 $ 400,000
1999 $ 60,500,000 (b)
2000 $ 600,000
(a) Includes $65.8 million of PGE bank borrowings outstanding as of December
31, 1995, and PGE's term loan in the principal amount of $50.0 million.
Such amounts were repaid on February 16, 1996, with proceeds from the
sale of PGE's water operations to Pennsylvania-American.
(b) Includes the $20.0 million of borrowings outstanding as of December 31,
1995, under the Company's Term Loan Agreement due May 31, 1999, the
Company's 10.125% Senior Notes in the principal amount of $30.0 million
due June 15, 1999, and PGE's 9.23% Series First Mortgage Bonds in the
principal amount of $10.0 million due September 1, 1999.
(8) DIVIDEND RESTRICTIONS
There are no dividend restrictions in the Restated Articles of Incorporation
of the Company. However, the preferred stock provisions of PGE's Restated
Articles of Incorporation and certain of the agreements under which the Company
and PGE have issued long-term debt provide for certain dividend restrictions.
As of December 31, 1995, $5,416,000 of the consolidated retained earnings of the
Company were restricted against the payment of cash dividends on common stock
under the most restrictive of these covenants.
(9) BANK NOTES PAYABLE
As of April 19, 1993, PGE entered into a revolving bank credit agreement, as
subsequently amended (the "Credit Agreement") with a group of six banks under
the terms of which $60.0 million was available for borrowing by PGE through May
31, 1996. The Credit Agreement was terminated on February 26, 1996, following
the sale of PGE's water operations to Pennsylvania-American on February 16,
1996, and repayment of all borrowings outstanding under the Credit Agreement
with proceeds from such sale. The interest rate on borrowings under the Credit
Agreement was generally less than prime. The Credit Agreement also required the
payment of a commitment fee of .195% per annum on the average daily amount of
the unused portion of the available funds. PGE currently has four additional
bank lines of credit with an aggregate borrowing capacity of $17.5 million which
provide for borrowings at interest rates generally less than prime. Borrowings
outstanding under two of these bank lines of credit with borrowing capacities of
$2.5 million and $5.0 million mature on May 31, 1996, and June 30, 1996,
respectively. Borrowings outstanding under the other two bank lines of credit
with borrowing capacities of $3.0 million and $7.0 million mature on March 31,
1996, and May 31, 1996, respectively. As of March 1, 1996, PGE had no
borrowings outstanding under these additional bank lines of credit.
Additionally, PGE had one other bank line of credit outstanding as of December
31, 1995, with a borrowing capacity of $3.0 million, which was terminated
following the sale of PGE's water operations. The commitment fees paid by PGE
with respect to its revolving bank credit agreements totaled $26,000 in 1995,
$97,000 in 1994 and $113,000 in 1993.
Because of limitations imposed by the terms of PGE's preferred stock, PGE is
prohibited, without the consent of the holders of a majority of the outstanding
shares of its preferred stock, from issuing more than $12.0 million of unsecured
debt due on demand or within one year from issuance. PGE had $10.0 million due
on demand or within one year from issuance outstanding as of December 31, 1995.
-53-
<PAGE>
Information relating to PGE's bank lines of credit and borrowings under
those lines of credit is set forth below:
[CAPTION]
As of December 31,
1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Borrowings under lines of credit
Short-term $ 10,000 $ - $ 2,000
Long-term 65,801 65,500 47,000
$ 75,801 $ 65,500 $ 49,000
Unused lines of credit
Short-term $ - $ - $ 5,000
Long-term 4,699 2,000 13,000
$ 4,699 $ 2,000 $ 18,000
Total lines of credit
Prime rate $ - $ - $ 2,000
Other than prime rate 80,500 67,500 65,000
$ 80,500 $ 67,500 $ 67,000
Short-term bank borrowings (a)
Maximum amount outstanding $ 10,000 $ 5,692 $ 5,666
Daily average amount outstanding $ 2,581 $ 441 $ 637
Weighted daily average interest
rate 6.513% 3.984% 4.046%
Weighted average interest rate at
year-end 6.334% - 4.208%
Range of interest rates 6.290- 3.700- 3.750-
6.660% 6.000% 6.000%
(a) PGE had no short-term bank borrowings outstanding as of December 31,
1994.
(10) POSTEMPLOYMENT BENEFITS
Pension Benefits
The Company's retirement plan is a trusteed, noncontributory, defined
benefit pension plan which covers substantially all employees of the Company
except those of Keystone. Pension benefits are based on years of service and
average final salary. The Company's funding policy is to contribute an amount
necessary to provide for benefits based on service to date, as well as for
benefits expected to be earned in the future by current participants. To the
extent that the present value of these obligations is fully covered by assets in
the trust, a contribution may not be made for a particular year.
Under the terms of the agreement regarding the sale of PGE's water utility
operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American
assumed the accumulated benefit obligations relating to employees of PGE who
accepted employment with Pennsylvania-American (the "Transferred Employees").
In this regard, plan assets in an amount equal to the actuarial present value of
accumulated plan benefits relative to the Transferred Employees will be
transferred to the American pension plan. In February, 1996, PGE began
terminating additional employees as a result of the sale of its water operations
and the transfer of fewer employees to Pennsylvania-American than originally
expected. As a result of these actions, the Company recognized an estimated
settlement loss of $200,000 ($117,000 net of the related income tax benefit) and
curtailment gain of $2.7 million ($1.6 million net of related income taxes) in
-54-
<PAGE>
its determination of the estimated loss on the disposal of PGE's water utility
operations.
-55-
<PAGE>
In December, 1995, as a result of the agreement to transfer fewer employees
to Pennsylvania-American in connection with the sale of PGE's water utility
operations than originally expected, the Company offered an Early Retirement
Plan ("ERP") to its employees who would be 59 years of age or older and have a
minimum of five years of service as of December 31, 1995. Of the 63 eligible
employees, 50 elected to accept this offer and retire as of December 31, 1995,
resulting in the recording, as of December 31, 1995, of an additional pension
liability of $1.6 million reflecting the increased costs associated with the
ERP. Such amount was charged to the estimated loss on the disposal of PGE's
water utility operations.
Net pension costs relative to continuing operations, including amounts
capitalized, were $353,000, $309,000 and $244,000 in 1995, 1994 and 1993,
respectively. The following items were the components of such net pension
costs:
[CAPTION]
1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Present value of benefits earned
during the year $ 430 $ 549 $ 470
Interest cost on projected benefit
obligations 1,459 1,400 1,321
Return on plan assets (1,502) 535 (1,720)
Net amortization and deferral (34) (55) (53)
Deferral of investment (loss) gain - (2,120) 226
Net pension cost $ 353 $ 309 $ 244
The funded status of the plan as of December 31, 1995 and 1994, was as
follows:
[CAPTION]
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Actuarial present value of the projected
benefit obligations:
Accumulated benefit obligations
Vested $ 29,100 $ 21,592
Nonvested 47 77
Total 29,147 21,669
Provision for future salary increases 7,841 7,565
Projected benefit obligations 36,988 29,234
Market value of plan assets, primarily
invested in equities and bonds 34,000 30,457
Plan assets in excess of (less than) projected
benefit obligations (2,988) 1,223
Unrecognized net transition asset as of
January 1, 1986, being amortized over 20 years (2,155) (2,528)
Unrecognized prior service costs 1,507 2,150
Unrecognized net (gain) loss 2,155 (1,644)
Accrued pension cost at year-end $ (1,481) $ (799)
The assumptions used in determining pension obligations were:
[CAPTION]
1995 1994 1993
[S] [C] [C] [C]
Discount rate 7.00 % 8.75 % 8.00 %
Expected long-term rate of return
on plan assets 9.00 % 9.00 % 9.00 %
Projected increase in future
compensation levels 5.00 % 5.50 % 5.50 %
-56-
<PAGE>
Other Postretirement Benefits
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees. All of the Company's
employees, except those of Keystone, may become eligible for those benefits if
they reach retirement age while working for the Company. The Company records
the cost of retiree health care and life insurance benefits as a liability over
the employees' active service periods instead of on a benefits-paid basis.
Under the terms of the agreement regarding the sale of PGE's water utility
operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American
assumed the accumulated benefit obligation relating to the Transferred
Employees, as well as 45% of PGE's retired employees as of that date. In this
regard, plan assets in an amount equal to the actuarial present value of
accumulated plan benefits relative to the Transferred Employees and 45% of the
retired employees as of February 16, 1996, will be transferred to trusts
established by Pennsylvania-American. In February, 1996, PGE began terminating
additional employees as a result of the sale of its water operations and the
transfer of fewer employees to Pennsylvania-American than originally expected.
As a result of the transfer, early retirement and displacement of employees, the
Company recognized an estimated settlement and curtailment loss of $385,000
($225,000 net of the related income tax benefit) as part of the loss on the
disposal of PGE's water utility operations.
As a result of the ERP offered by the Company to certain of its employees,
PGE recorded, as of December 31, 1995, an additional liability of $805,000,
($471,000 net of the related income tax benefit) reflecting the cost of future
health care benefits required to be recognized under FASB Statement 88 in
conjunction with the ERP. Such amount was charged to the estimated loss on
disposal of PGE's water utility operations.
The following items were the components of the net cost of postretirement
benefits other than pensions relative to continuing operations for the years
1995, 1994 and 1993:
[CAPTION]
1995 1994 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Present value of benefits earned during
the year $ 127 $ 148 $ 124
Interest cost on accumulated benefit
obligation 577 532 532
Return on plan assets (69) (4) -
Net amortization and deferral 391 360 339
Net cost of postretirement benefits other
than pensions 1,026 1,036 995
Less disbursements for benefits (555) (543) (540)
Increase in liability for postretirement
benefits other than pensions $ 471 $ 493 $ 455
-57-
<PAGE>
Reconciliations of the accumulated benefit obligation to the accrued
liability for postretirement benefits other than pensions as of December 31,
1995 and 1994, follow:
[CAPTION]
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Accumulated benefit obligation:
Retirees $ 6,514 $ 9,021
Fully eligible active employees 850 1,628
Other active employees 1,074 1,305
8,438 11,954
Plan assets at fair value - 839
Accumulated benefit obligation
in excess of plan assets 8,438 11,115
Unrecognized transition obligation
being amortized over 20 years (5,438) (11,108)
Unrecognized net gain (loss) (703) 885
Accrued liability for postretirement
benefits other than pensions $ 2,297 $ 892
The assumptions used in determining other postretirement benefit obligations
were:
[CAPTION]
1995 1994 1993
[S] [C] [C] [C]
Discount rate 7.00 % 8.75 % 8.00 %
Expected long-term rate of return
on plan assets 9.00 % 9.00 % 9.00 %
Projected increase in future
compensation levels 5.00 % 5.50 % 5.50 %
It was also assumed that the per capita cost of covered health care benefits
would increase at an annual rate of 9% in 1996 and that this rate would decrease
gradually to 5-1/2% for the year 2003 and remain at that level thereafter. The
health care cost trend rate assumption had a significant effect on the amounts
accrued. To illustrate, increasing the assumed health care cost trend rate by 1
percentage point in each year would increase the transition obligation as of
January 1, 1995, by approximately $394,000 and the aggregate of the service and
interest cost components of the net cost of postretirement benefits other than
pensions for the year 1995 by approximately $50,000.
Since PGE has not sought to increase its base gas rates, the $441,000
($258,000 net of related income taxes), $447,000 ($256,000 net of related income
taxes) and $407,000 ($232,000 net of related income taxes) of additional cost
incurred in 1995, 1994 and 1993, respectively, as a result of the adoption of
the provisions of FASB Statement 106 were expensed without any adjustment being
made to its gas rates.
Other Postemployment Benefits
In December, 1992, FASB Statement 112, "Employers' Accounting for
Postemployment Benefits," was issued. The provisions of this statement require
the recording of a liability for postemployment benefits (such as disability
benefits, including workers' compensation, salary continuation and the
continuation of benefits such as health care and life insurance) provided to
former or inactive employees, their beneficiaries and covered dependents. The
Company consistently recorded liabilities for benefits of this nature prior to
the effectiveness of FASB Statement 112, and included liabilities for employees
-58-
<PAGE>
scheduled to be terminated in 1996 as a result of the sale of water operations
in its estimate of accrued costs relative to such sale as of December 31, 1995.
The provisions of FASB Statement 112, which the Company adopted effective
January 1, 1994, did not have a material impact on its financial position or
results of operations.
(11) CONSTRUCTION EXPENDITURES
PGE estimates the cost of its 1996 construction program will be $28.9
million. It is anticipated that such expenditures will be financed with
internally generated funds and bank borrowings, pending the periodic issuance of
stock and long-term debt.
(12) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring 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. PGE
does not believe that compliance with the terms of such Order will have a
material adverse effect on its financial position or results of operations.
Environmental Matters
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.
-59-
<PAGE>
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 68,237 $ 25,184 $ 12,119 $ 47,216
Operating income 9,905 2,271 400 7,958
Income (loss) from continuing
operations 5,669 (2,133) (4,159) 3,744
Loss with respect to
discontinued operations (3,704) - - (130)
Net income (loss) 1,965 (2,133) (4,159) 3,614
Earnings (loss) per share
of common stock: (a)
Continuing operations 1.00 (.37) (.72) .65
Discontinued operations (.65) - - (.02)
Earnings (loss) per share of
common stock (a) .35 (.37) (.72) .63
QUARTER ENDED
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
(Thousands of Dollars, Except Per Share Amounts)
Operating revenues $ 80,233 $ 26,568 $ 14,356 $ 46,835
Operating income 10,884 2,192 515 6,784
Income (loss) from continuing
operations 6,469 (2,342) (4,038) 2,112
Income from discontinued
operations 2,079 2,757 2,915 2,865
Net income (loss) 8,548 415 (1,123) 4,977
Earnings (loss) per share
of common stock:
Continuing operations 1.20 (.43) (.74) .38
Discontinued operations .38 .51 .53 .52
Net income (loss) before
premium on redemption of
subsidiary's preferred stock 1.58 .08 (.21) .90
Premium on redemption of
subsidiary's preferred stock - (.10) - (.08)
Earnings (loss) per share of
common stock 1.58 (.02) (.21) .82
</TABLE>
(a) The total of the earnings per share for the quarters does not equal the
earnings per share for the year, as shown elsewhere in the consolidated
financial statements and supplementary data of this report, as a result
of the Company's issuance of additional shares of common stock at
various dates during the year.
Because of the seasonal nature of PGE's gas heating business, there are
substantial variations in operations reported on a quarterly basis.
-60-
<PAGE>
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
o Long-term debt. The fair value of both the Company's and PGE's long-term
debt has been estimated based on the quoted market price as of the
respective dates for the portion of such debt which is publicly traded and,
with respect to the portion of such debt which is not publicly traded, on
the estimated borrowing rate as of the respective dates for long-term debt
of comparable credit quality with similar terms and maturities.
o Preferred stock subject to mandatory redemption. The fair value of PGE's
preferred stock subject to mandatory redemption has been estimated based on
the market value as of the respective dates for preferred stock of
comparable credit quality with similar terms and maturities.
The carrying amounts and estimated fair values of the Company's and PGE's
financial instruments at December 31, 1995 and 1994, were as follows:
[CAPTION]
1995 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Long-term debt (including current
portion):
Company $ 49,906 $ 50,300 $ 49,880 $ 50,000
PGE 170,801 175,431 174,035 177,027
PERI 2,000 2,000 - -
Preferred stock of PGE subject to
mandatory redemption (including
current portion) 1,760 1,795 1,840 1,877
The Company believes that the regulatory treatment of any excess or
deficiency of fair value relative to the carrying amounts of these items, if
such items were settled at amounts approximating those above, would dictate that
these amounts be used to increase or reduce PGE's rates over a prescribed
amortization period. Accordingly, any settlement would not result in a material
impact on PGE's financial position or the results of operations of either the
Company or PGE.
-61-
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-62-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information required by this item concerning directors of the Company
has been omitted from this Form 10-K since the Company expects to file its
definitive proxy statement not later than 120 days after the close of its fiscal
year covered by this Form 10-K.
(b) Identification of Executive Officers
Information concerning the Company's executive officers is set forth in Part
I of this Form 10-K under the heading "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
-63-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements, notes to
consolidated financial statements and report of independent public
accountants for the Company and its subsidiaries are presented in Item
8 of this Form 10-K.
Page
Report of Independent Public Accountants . . . . . . . . . . . 28
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1995. . . . . . . . . . . . 29
Consolidated Balance Sheets as of December 31, 1995 and 1994 . 30
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1995. . . . . . . . . 32
Consolidated Statements of Capitalization as of December 31,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Common Shareholders' Investment
for each of the three years in the period ended December
31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Notes to Consolidated Financial Statements . . . . . . . . . . 35
2. Financial Statement Schedules
The following consolidated financial statement schedule for the
Company and its subsidiaries is filed as a part of this Form 10-K.
Schedules not included have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Schedule Number Page
II Valuation and Qualifying Accounts for the three-year
period ended December 31, 1995 . . . . . . . . . . . . 60
3. Exhibits
See "Index to Exhibits" located on page 62 for a listing of all
exhibits filed herein or incorporated by reference to a previously
filed registration statement or report with the Securities and Exchange
Commission.
-64-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1995.
(c) Executive Compensation Plans and Arrangements
The following listing includes the Company's executive compensation plans
and arrangements in effect as of December 31, 1995.
Exhibit
10-28 Form of Change in Control Agreement between the Company and certain
of its Officers -- filed as Exhibit 10-38 to the Company's Annual
Report on Form 10-K for 1989, File No. 0-7812.
10-29 First Amendment to Form of Change in Control Agreement, dated as of
May 24, 1995, between the Company and certain of its Officers --
filed herewith.
10-30 Agreement by and between the Company, PGE and Robert L. Jones dated
as of March 15, 1991 -- filed as Exhibit No. 10-44 to the Company's
Annual Report on Form 10-K for 1990, File No. 0-7812.
10-31 Employment Agreement effective September 1, 1995, between the
Company and Dean T. Casaday -- filed as Exhibit 10-2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 0-7812.
10-32 Supplemental Retirement Agreement, dated as of December 23, 1991,
between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
the Company's Common Stock Form S-2, Registration No. 33-43382.
10-33 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between the Company and Dean T. Casaday --
filed as Exhibit 10-37 to the Company's Annual Report on Form 10-K
for 1994, File No. 0-7812.
10-34 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to the Company's 1993 definitive
Proxy Statement, File No. 0-7812.
(d) Statements Excluded from Annual Report to Shareholders
Not applicable.
-65-
<PAGE>
SCHEDULE II
-66-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
Date: March 8, 1996 By: /s/ Dean T. Casaday
Dean T. Casaday
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 8, 1996 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Kenneth L. Pollock Chairman of the Board of March 8, 1996
Kenneth L. Pollock Directors
/s/ William D. Davis Vice Chairman of the Board March 8, 1996
William D. Davis of Directors
/s/ Dean T. Casaday Director, President and March 8, 1996
Dean T. Casaday Chief Executive Officer
/s/ Paul R. Freeman Director March 8, 1996
Paul R. Freeman
Director March 8, 1996
Robert J. Keating
/s/ John D. McCarthy Director March 8, 1996
John D. McCarthy
/s/ John D. McCarthy, Jr. Director March 8, 1996
John D. McCarthy, Jr.
Director March 8, 1996
Kenneth M. Pollock
Director March 8, 1996
Richard A. Rose, Jr.
/s/ James A. Ross Director March 8, 1996
James A. Ross
/s/ Ronald W. Simms Director March 8, 1996
Ronald W. Simms
-67-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2-1 Asset Purchase Agreement dated as of April 26, 1995, among the
Company, PGE, American Water Works Company, Inc., and Pennsylvania-
American Water Company -- filed as Exhibit 2-1 to PGE's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, File No.
1-3490.
(3) Articles of Incorporation and By Laws:
3-1 Restated Articles of Incorporation of the Company, as amended --
filed as Exhibit 3-1 to the Company's Senior Note Form S-2,
Registration No. 33-47581.
3-2 By-Laws of the Company, as amended and restated on January 18, 1995
-- filed as Exhibit 3-2 to the Company's Annual Report on Form 10-K
for 1994, File No. 0-7812.
(4) Instruments Defining the Rights of Security Holders, Including Debentures:
4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946,
between Scranton-Spring Brook Water Service Company (now PGE) and
First Trust of New York, National Association, as Successor Trustee
to Morgan Guaranty Trust Company of New York -- filed as Exhibit
2(c) to PGE's Bond Form S-7, Registration No. 2-55419.
4-2 Fourth Supplemental Indenture, dated as of March 15, 1952 -- filed
as Exhibit 2(d) to PGE's Bond Form S-7, Registration No. 2-55419.
4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as
Exhibit 2(e) to PGE's Bond Form S-7, Registration No. 2-55419.
4-4 Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed
as Exhibit 2(f) to PGE's Bond Form S-7, Registration No. 2-55419.
4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960 -- filed
as Exhibit 2(g) to PGE's Bond Form S-7, Registration No. 2-55419.
4-6 Fourteenth Supplemental Indenture, dated as of December 15, 1961 --
filed as Exhibit 2(h) to PGE's Bond Form S-7, Registration No.
2-55419.
4-7 Fifteenth Supplemental Indenture, dated as of December 15, 1963 --
filed as Exhibit 2(i) to PGE's Bond Form S-7, Registration No.
2-55419.
4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed
as Exhibit 2(j) to PGE's Bond Form S-7, Registration No. 2-55419.
4-9 Seventeenth Supplemental Indenture, dated as of October 15, 1967 --
filed as Exhibit 2(k) to PGE's Bond Form S-7, Registration No.
2-55419.
-68-
<PAGE>
Exhibit
Number
4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970 -- filed
as Exhibit 2(1) to PGE's Bond Form S-7, Registration No. 2-55419.
4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed
as Exhibit 2(m) to PGE's Bond Form S-7, Registration No. 2-55419.
4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed
as Exhibit 2(n) to PGE's Bond Form S-7, Registration No. 2-55419.
4-13 Twenty-first Supplemental Indenture, dated as of December 1, 1976 --
filed as Exhibit 4-16 to PGE's Annual Report on Form 10-K for 1982,
File No. 1-3490.
4-14 Twenty-second Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-22 to the Company's Annual Report on Form 10-K
for 1989, File No. 0-7812.
4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-23 to the Company's Annual Report on Form 10-K
for 1989, File No. 0-7812.
4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991,
-- filed as Exhibit 4-3 to the Company's Common Stock Form S-2,
Registration No. 33-43382.
4-17 Twenty-fifth Supplemental Indenture, dated as of September 1, 1992,
-- filed as Exhibit 4-17 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-18 Twenty-sixth Supplemental Indenture, dated as of December 1, 1992,
-- filed as Exhibit 4-18 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992,
-- filed as Exhibit 4-19 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-20 Twenty-eighth Supplemental Indenture, dated as of December 1, 1993,
-- filed as Exhibit 4-20 to PGE's Annual Report on Form 10-K for
1993, File No. 1-3490.
4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994,
-- filed as Exhibit 4-21 to PGE's Annual Report on Form 10-K for
1994, File No. 1-3490.
4-22 Thirtieth Supplemental Indenture, dated as of December 1, 1995, from
PGE to First Trust of New York, National Association, as Successor
Trustee to Morgan Guaranty Trust Company of New York -- filed as
Exhibit 4-22 to PGE's Annual Report on Form 10-K for 1995, File No.
1-3490.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth,
Eleventh and Thirteenth Supplemental Indentures merely convey
additional properties to the Trustee.
-69-
<PAGE>
Exhibit
Number
4-23 Indenture dated as of June 15, 1992, between the Company and
Chemical Bank, as Trustee, with respect to the Company's 10.125%
Senior Notes due June 15, 1999 -- filed as Exhibit 4-20 to the
Company's Annual Report on Form 10-K for 1992, File No. 0-7812.
4-24 Rights Agreement dated as of April 26, 1995, between the Company and
Chemical Bank, as Rights Agent -- filed as Exhibit 4-1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, File No. 0-7812.
(10) Material Contracts:
10-1 Service Agreement for storage service under Rate Schedule LGA, dated
August 6, 1974, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-3 to PGE's Annual Report on Form
10-K for 1984, File No. 1-3490.
10-2 Service Agreement for transportation service under Rate Schedule FT,
dated February 1, 1992, by and between PGE and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-4 to PGE's Annual
Report on Form 10-K for 1991, File No. 1-3490.
10-3 Service Agreement for storage service under Rate Schedule SS-2,
dated April 1, 1990, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-8 to the Company's Common Stock
Form S-2, Registration No. 33-43382.
10-4 Service Agreement for sales service under Rate Schedule FS, dated
August 1, 1991, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-6 to the Company's Annual Report
on Form 10-K for 1991, File No. 0-7812.
10-5 Service Agreement for transportation service under Rate Schedule FT,
dated August 1, 1991, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-10 to the Company's Common Stock
Form S-2, Registration No. 33-43382.
10-6 Service Agreement for transportation service under Rate Schedule IT,
dated January 31, 1992, between PGE and Transcontinental Gas
Pipeline Corporation -- filed as Exhibit 10-8 to the Company's
Annual Report on Form 10-K for 1991, File No. 0-7812.
10-7 Service Agreement for storage service under Rate Schedule LSS, dated
October 1, 1993, by and between PGE and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-7 to PGE's Annual Report on
Form 10-K for 1993, File No. 1-3490.
10-8 Service Agreement for storage service under Rate Schedule GSS, dated
October 1, 1993, by and between PGE and Transcontinental Gas
Pipeline Corporation Company -- filed as Exhibit 10-8 to PGE's
Annual Report on Form 10-K for 1993, File No. 1-3490.
-70-
<PAGE>
Exhibit
Number
10-9 Service Agreement for transportation service under Rate Schedule
FTS, dated November 1, 1993, by and between PGE and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-9 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-10 Service Agreement for transportation service under Rate Schedule
SST, dated November 1, 1993, by and between PGE and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-10 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-11 Service Agreement for storage service under Rate Schedule FSS, dated
November 1, 1993, by and between PGE and Columbia Gas Transmission
Corporation -- filed as Exhibit 10-11 to PGE's Annual Report on Form
10-K for 1993, File No. 1-3490.
10-12 Service Agreement for transportation service under Rate Schedule
FTS-1, dated November 1, 1993, by and between PGE and Columbia Gulf
Transmission Company -- filed as Exhibit 10-12 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-13 Service Agreement for transportation service under Rate Schedule
ITS-1, dated November 1, 1993, by and between PGE and Columbia Gulf
Transmission Company -- filed as Exhibit 10-13 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-14 Service Agreement for transportation service under Rate Schedule
ITS, dated November 1, 1993, by and between PGE and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-14 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-15 Service Agreement (Contract No. 946) for transportation service
under Rate Schedule FT-A, dated September 1, 1993, by and between
PGE and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1 to
PGE's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
10-16 Service Agreement (Service Package No. 171) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PGE and Tennessee Gas Pipeline Company -- filed as Exhibit
10-2 to PGE's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-17 Service Agreement (Service Package No. 187) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PGE and Tennessee Gas Pipeline Company -- filed as Exhibit
10-3 to PGE's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-18 Service Agreement (Service Package No. 190) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PGE and Tennessee Gas Pipeline -- filed as Exhibit 10-4 to
PGE's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
-71-
<PAGE>
Exhibit
Number
10-19 Service Agreement (Contract No. 2289) for storage service under Rate
Schedule FS, dated September 1, 1993, by and between PGE and
Tennessee Gas Pipeline -- filed as Exhibit 10-5 to PGE's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993, File
No. 1-3490.
10-20 Service Agreement for transportation service under Rate Schedule FT,
dated April 1, 1995, by and between PGE and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-1 to PGE's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, File No.
1-3490.
10-21 Service Agreement for storage service dated October 13, 1995, by and
between PGE and Avoca Natural Gas Storage -- filed as Exhibit 10-1
to PGE's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-3490.
10-22 Bond Purchase Agreement, dated September 1, 1989, relating to PGE's
First Mortgage Bonds 9.23% Series due 1999 and First Mortgage Bonds
9.34% Series due 2019 among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York and PGE -- filed as
Exhibit 10-34 to the Company's Annual Report on Form 10-K for 1989,
File No. 0-7812.
10-23 7% Bond Purchase Agreement, dated November 1, 1994, among the
Luzerne County Industrial Development Authority, PGE and Wheat First
Butcher Singer, as representative on behalf of itself and Legg Mason
Wood Walker Incorporated -- filed as Exhibit 10-28 to PGE's Annual
Report on Form 10-K for 1994, File No. 1-3490.
10-24 Amended and Restated Project Facilities Agreement dated as of
November 1, 1994, between PGE and the Luzerne County Industrial
Development Authority -- filed as Exhibit 10-29 to PGE's Annual
Report on Form 10-K for 1994, File No. 1-3490.
10-25 Term Loan Agreement, dated as of May 31, 1994, by and among
Pennsylvania Enterprises, Inc. and the Banks parties thereto and PNC
Bank, National Association, as Agent -- filed as Exhibit 10-1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1994, File No. 0-7812.
10-26 Credit Agreement, dated as of April 19, 1993, by and among PGE, the
Banks parties thereto and PNC Bank, Northeast PA, as Agent, and
CoreStates Bank, N.A. and NBD Bank, N.A. as Co-Agents -- filed as
Exhibit 10-1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993, File No. 0-7812.
10-27 First Amendment to Credit Agreement and Notes, dated as of December
16, 1994, by and among PGE, the Banks parties thereto and PNC Bank,
Northeast PA, as Agent, and CoreStates Bank, N.A. and NBD Bank, N.A.
as Co-Agents -- filed as Exhibit 10-31 to PGE's Annual Report on
Form 10-K for 1994, File No. 1-3490.
-72-
<PAGE>
Exhibit
Number
10-28 Form of Change in Control Agreement between the Company and certain
of its Officers -- filed as Exhibit 10-38 to the Company's Annual
Report on Form 10-K for 1989, File No. 0-7812.
10-29 First Amendment to Form of Change in Control Agreement, dated as of
May 24, 1995, between the Company and certain of its Officers --
filed herewith.
10-30 Agreement, dated as of March 15, 1991, by and between the Company,
PGE and Robert L. Jones -- filed as Exhibit 10-38 to the Company's
Annual Report on Form 10-K for 1990, File No. 0-7812.
10-31 Employment Agreement effective September 1, 1995, between the
Company and Dean T. Casaday -- filed as Exhibit 10-2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 0-7812.
10-32 Supplemental Retirement Agreement, dated as of December 23, 1991,
between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
the Company's Common Stock Form S-2, Registration No. 33-43382.
10-33 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between the Company and Dean T. Casaday --
filed as Exhibit 10-37 to the Company's Annual Report on Form 10-K
for 1994, File No. 0-7812.
10-34 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 - filed as Exhibit A to the Company's 1993 definitive
Proxy Statement, File No. 0-7812.
(11) Statement Re Computation of Per Share Earnings:
11-1 Statement Re Computation of Per Share Earnings -- filed herewith.
(21) Subsidiaries of the Registrant:
21-1 Subsidiaries of the Registrant -- filed herewith.
(23) Consents of Experts and Counsel:
23-1 Consent of Independent Public Accountants -- filed herewith.
-73-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I PAGE
Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 12
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 13
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 27
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 56
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . 57
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . 57
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 57
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 58*
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 61
________________________
* The "Index to Exhibits" is located on page 62.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
<S> <C>
Date: March 8, 1996 By:
Dean T. Casaday
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 8, 1996 By:
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer
and Principal Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
Chairman of the Board of March 8, 1996
Kenneth L. Pollock Directors
Vice Chairman of the Board March 8, 1996
William D. Davis of Directors
Director, President and March 8, 1996
Dean T. Casaday Chief Executive Officer
Director March 8, 1996
Paul R. Freeman
Director March 8, 1996
Robert J. Keating
Director March 8, 1996
John D. McCarthy
Director March 8, 1996
John D. McCarthy, Jr.
Director March 8, 1996
Kenneth M. Pollock
Director March 8, 1996
Richard A. Rose, Jr.
Director March 8, 1996
James A. Ross
Director March 8, 1996
Ronald W. Simms
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
Balance at Charged Charged Balance
beginning to to other at end
Description of year income accounts Deductions of year
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Deducted from the asset to which it applies:
Reserve for uncollectible accounts-
Year ended December 31, 1995 $ 937 $ 1,538 $ - $ 1,687(a) $ 788
Year ended December 31, 1994 $ 817 $ 1,776 $ - $ 1,656(a) $ 937
Year ended December 31, 1993 $ 1,103 $ 1,106 $ - $ 1,392(a) $ 817
Shown as operating reserves on the consolidated
balance sheets:
Insurance -
Year ended December 31, 1995 $ 2,383 $ 2,652 $ - $ 1,326(b) $ 3,709
Year ended December 31, 1994 $ 1,863 $ 1,695 $ - $ 1,175(b) $ 2,383
Year ended December 31, 1993 $ 1,565 $ 1,823 $ 75 $ 1,600(b) $ 1,863
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.
</TABLE>
<PAGE>
[CAPTION]
EXHIBIT 11-1
PENNSYLVANIA ENTERPRISES, INC.
Statement Re Computation of Per Share Earnings for the
Twelve Month Periods Ended December 31, 1995 and 1994
Twelve Months Ended
1995 1994
[S] [C] [C]
Income before subsidiary's
preferred stock dividends $ 2,050,000 $17,456,000
Subsidiary's preferred stock dividends 2,763,000 4,639,000
Net income $ (713,000) $12,817,000
Earnings per share of common stock* $ (.12) $ 2.17
Computations of additional common shares
outstanding
Average shares of common stock 5,729,436 5,456,568
Incremental common shares applicable to
options, based on the daily average
market price 2,604 1,152
Average common shares as adjusted 5,732,040 5,457,720
Average shares of common stock 5,729,436 5,456,568
Incremental common shares applicable to
options, based on the more dilutive of
daily average or ending market price 4,095 -
Average common shares fully diluted 5,733,531 5,456,568
Earnings per share of common stock*
Average common shares as adjusted $ (.12) $ 2.17
Average common shares fully diluted $ (.12) $ 2.17
* Earnings per share of common stock reflect the effect of premiums totaling
$979,875 on the redemption of subsidiary's preferred stock in May and
December, 1994, that were charged to retained earnings and not included in
the determination of net income.
<PAGE>
EXHIBIT 21-1
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
The following are subsidiaries of the Registrant. Their voting securities
are owned 100% by the Registrant. All of the subsidiaries are incorporated in
Pennsylvania.
PG Energy Inc.
Pennsylvania Energy Resources, Inc.
Theta Land Corporation
Pennsylvania Energy Marketing Company
Penn Gas Development Co.*
Keystone Pipeline Services, Inc.**
* A subsidiary of PG Energy Inc. accounted for on the equity method which has
not been consolidated since it is insignificant.
** A subsidiary of Pennsylvania Energy Resources, Inc. ("PERI") included in the
consolidation of PERI into the Registrant.
<PAGE>
Exhibit 23-1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included or incorporated by reference in this Form 10-K,
into the Company's previously filed Registration Statements (File No. 33-
53501, File No. 33-43838, File No. 33-53435 and File No. 33-62892).
ARTHUR ANDERSEN LLP
New York, N.Y.
March 8, 1996
<PAGE>
AMENDMENT NO. 1 TO
CHANGE IN CONTROL AGREEMENT
AMENDMENT NO. 1 (this "Amendment") dated as of May 24, 1995
between Pennsylvania Enterprises, Inc., a Pennsylvania corporation having
offices at Wilkes-Barre Center, 39 Public Square, Wilkes-Barre,
Pennsylvania 18711-0601 (the "Company") and <Executive> whose residence
address is <Address> (the "Executive").
WHEREAS, the Company and the Executive have heretofore entered
into a Change in Control Agreement dated as of October 26, 1989 (the
"Agreement"); and
WHEREAS, the Company and the Executive desire to amend the
Agreement;
NOW THEREFORE, the parties hereto agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings ascribed to
such terms in the Agreement.
2. Amendment. Section 1(w)(ii) of the Agreement is hereby
amended by adding the following proviso immediately following the word
"Company" in the last line thereof:
". provided however, that the Executive and the Company each
hereby agree that consummation of the transactions contemplated by
the Asset Purchase Agreement dated as of April 26, 1995 among the
Company, Pennsylvania Gas and Water Company, American Water Works
Company, Inc. and Pennsylvania-American Water Company, as amended
from time to time, shall not be deemed to constitute a "Change in
Control of the Company" for purposes of this Agreement."
3. Effectiveness. This Amendment shall become effective
immediately upon the execution and delivery of this amendment by the
parties hereto.
4. Governing Law. This Amendment shall be governed by, and
construed and interpreted in accordance with the laws of the Commonwealth
of Pennsylvania.
<PAGE>
5. Counterparts. This Amendment may be executed by the parties
hereto in any number of counterparts, all of which when taken together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the date first above written.
PENNSYLVANIA ENTERPRISES, INC.
By: __________________________
Title: President and CEO
__________________________
Executive
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS STATEMENT CONTAIN 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> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 219,013,000
<OTHER-PROPERTY-AND-INVEST> 7,142,000
<TOTAL-CURRENT-ASSETS> 58,155,000
<TOTAL-DEFERRED-CHARGES> 35,658,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 524,218,000
<COMMON> 57,843,000
<CAPITAL-SURPLUS-PAID-IN> 49,749,000
<RETAINED-EARNINGS> 55,147,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 162,739,000
1,680,000
33,615,000
<LONG-TERM-DEBT-NET> 106,706,000
<SHORT-TERM-NOTES> 10,180,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 116,001,000
80,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 93,217,000
<TOT-CAPITALIZATION-AND-LIAB> 524,218,000
<GROSS-OPERATING-REVENUE> 152,756,000
<INCOME-TAX-EXPENSE> 3,556,000
<OTHER-OPERATING-EXPENSES> 128,666,000
<TOTAL-OPERATING-EXPENSES> 132,222,000
<OPERATING-INCOME-LOSS> 20,534,000
<OTHER-INCOME-NET> 763,000
<INCOME-BEFORE-INTEREST-EXPEN> 21,297,000
<TOTAL-INTEREST-EXPENSE> 15,413,000
<NET-INCOME> 2,050,000
2,763,000
<EARNINGS-AVAILABLE-FOR-COMM> (713,000)
<COMMON-STOCK-DIVIDENDS> 12,605,000
<TOTAL-INTEREST-ON-BONDS> 13,824,000
<CASH-FLOW-OPERATIONS> 28,697,000
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
